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November 20, 2006

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Reference ID Created Released Classification Origin
06KYIV4313 2006-11-20 15:22 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

DE RUEHKV #4313/01 3241522
P 201522Z NOV 06

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 004313 
E.O. 12958: DECL: 11/20/2016 
REF: KYIV 4298 
Classified By: Ambassador for reasons 1.4(a,b,d). 
1. (C) Summary.  Love him or hate him, the Ukrainian 
political elite and intelligentsia agree that Prime Minister 
Yanukovych is the man to deal with right now.  Four months 
ago Yanukovych was painted variously as a puppet of oligarch 
Rinat Akhmetov, the Party of Regions, or the Kremlin, but he 
has come into his own as the center of decisionmaking, at 
least for now, in Kyiv.  A combination of wily political 
moves to grab power at President Yushchenko's expense and an 
effort to position himself as the moderating force in a 
coalition of radicals and recalcitrants have increased 
Yanukovych's status.  At the same time, Yanukovych appears to 
be under pressure from Moscow and from some in his own party 
to move Ukraine closer to Russia -- or at least, to resist 
the temptation to get to close to the West.  Even 
Yanukovych's detractors, such as opposition leader Tymoshenko 
and beleaguered Foreign Minister Tarasyuk, argued to EUR A/S 
Fried and the Ambassador last week that positive U.S. 
engagement with Yanukovych it the best way to maintain hope 
for continued political and economic reform at home, support 
Ukraine's Euro-atlantic direction, and keep the Kremlin at 
2. (C) This is a window of opportunity.  Yanukovych has asked 
us to judge him on his deeds, not his words.  He has said the 
right things in venues like the Washington Post, but made 
contradictory statements to his electorate in Eastern and 
Southern Ukraine.  His political instincts may not always be 
democratic, but he understands the political necessity of a 
positive relationship with the West, is eager to overcome the 
negative image he has in the West from the 2004 elections, 
and appears to be motivated to protect Ukrainian sovereignty 
from Russian encroachment.  Engaging him, as we have done 
since he came into office, has kept him restating his 
interest in WTO, the EU, NATO, and reform.  This repetition 
may be even paying off as the Rada finally moves to pass WTO 
legislation, apparently on Yanukovych's orders. As he travels 
to Washington in two weeks, the ball is now clearly in the 
PM's court. End summary and comment. 
Who is Yanukovych? 
3. (C) People favorably inclined to Regions, including MPs 
and academics, and now even his "orange" opponents on the 
other side of the political fence describe Yanukovych as the 
moderating center of the party.  They hold up the threat of 
the "radical" wing of Regions led by former Kharkiv governor 
Kushnarov as the reason why Yanukovych maintains tight 
control over the party.  Others see the PM as from the mold 
of the early post-Soviet leaders, more comfortable with 
issuing "ukazi" than trusting democracy.  And many were 
impressed by Yanukovych's ability to buckle down after his 
2004 political disaster, remake himself and his party into 
this country's first "post-Orange" politician and lead his 
party to political victory in the March 2006 elections. 
4.  (C)  Across the political spectrum here no one believes 
that Yanukovych would rather be a puppet of Moscow than the 
leader of his own country.  During his 18 months in political 
exile, Yanukovych transformed himself into a politician who 
understands how to work in post-Orange Revolution Ukraine and 
to take advantage of a loosely-defined political system. 
Tarasyuk confirmed to A/S Fried and the Ambassador that 
Yanukovych was not the man he had been two years before; he 
didn't want his image to be tarnished in the West, as 
Kuchma's had been, and was working hard to repair damage from 
the 2004 presidential campaign.  This is an opening that the 
West can use to engage Yanukovych and his team. 
5. (C)  Yanukovych has been clear in his recent conversations 
with us that he wants to shake the image of authoritarianism 
and corruption that dogged him in 2004.  As the head of the 
government now, no longer just a Kuchma lackey, Yanukovych is 
trying to take responsibility for his actions and the actions 
of his government.  Yanukovych wants respect, to polish his 
image, and to protect Ukraine's sovereignty.  It may be 
difficult to appeal to his moral or ethical code, but he may 
respond to sound practical arguments.  He is aware that a 
good relationship with the West strengthens his hand with 
Russia.  And he is interested in economic reforms that would 
increase trade and investments that benefit Ukraine--and his 
financial partners. 
New Behaviors - Seeing the Light 
6. (C) In no area has there been a bigger turnaround than 
with regard to WTO accession.  Soon after taking office in 
KYIV 00004313  002 OF 003 
August, Yanukovych and his team initially sounded as if they 
might be having second thoughts about WTO accession, which in 
retrospect may have been more political caution than a change 
in policy (septel).  Once consultations with industry showed 
that there was little opposition to WTO and the President 
continued to signal the importance of keeping the accession 
on schedule, Yanukovych appeared to have made the po
calculation that there was nothing to be gained by delaying 
WTO.  It is clear from our recent discussions with Rada 
deputies that Regions has orders to pass WTO legislation and 
with relatively few changes, and the Socialists are on board 
as well.  Still, we sense Yanukovych's government has moved 
on WTO not because of some conversion to free trade, although 
there are clearly Regions businessmen who know the advantages 
that WTO membership will bring, but rather for the pragmatic 
reason they believe it will benefit them. 
7. (C) In other policy areas, Yanukovych's government has 
also proven to be more flexible about resorting to old-style 
policies, although this flexibility comes short of a 
commitment to market principles.  When they came into office, 
Yanukovych and DPM Azarov signaled their desire to re-install 
the Special Economic Zones (SEZs).  However, in practice they 
have moved cautiously, making some modifications to the SEZ 
proposals, and recently agreeing to allow the SEZ proposals 
to be considered separately from the budget.  Similarly, 
Yanukovych has moved away from any major change in economic 
relations with Russia, including maintaining a polite silence 
on the Single Economic Space and on Russia's suggestions to 
"synchronize" the timing of WTO accession. 
Checks on Yanukovych's Power 
8. (C) As the rapid movement on WTO in the last month has 
demonstrated, Yanukovych can pull key decisions and order 
votes when they are needed.  At these times, he seems to be 
firmly in control over the general policy direction of the 
country.  At other times, however, there is more internal 
government squabbling now than the last time Yanukovych was 
PM. For example, there is an open fissure between Energy 
Minister Boyko and Deputy Prime Minister Kluyev on energy 
policy.  Rumblings within Regions suggest that some level of 
dissent is tolerated in the party too. But Hrytsenko caveated 
that while Yanukovych may not oversee every decision taken, 
he selected the people who make them and he is aware of their 
policies, thereby suggesting that Yanukovych was tacitly 
approving them. 
9. (C) There are also societal constraints on Yanukovych now 
that were not there before the Orange Revolution that may 
moderate some of his impulses.  The press is now freer to 
criticize him or to expose mistakes or corruption if they 
find them.  Yanukovych is now responsible to an electorate 
that may feel more empowered to vote politicians out of 
office than they did before.  The opposition, led by 
Tymoshenko, has a strong base of popular support.  Ukraine 
still has a long way to go on democratic development, but 
Yanukovych is taking these factors into account as he 
formulates his strategies. 
But Old Habits Die Hard... 
10. (C) Nevertheless, there have been instances already when 
it is clear that Yanukovych and his circle have fallen back 
on their old ways, such as inserting government controls in 
the economy and tolerating corruption.  Internal Affairs 
Minister Lutsenko told the Ambassador on November 17 that 
contract killings have started up again, not because the PM 
is involved, but because organized crime feels safe that 
there will be no follow up from the government.  NSDC 
Secretary Haiduk told Fried and Ambassador the Cabinet is 
using economic policies to pressure businessmen in the Rada 
to support the coalition and a number of contacts, including 
Tymoshenko, have passed on complaints of pressure on 
non-Donetsk businesses.  On November 16, Defense Minister 
Hrytsenko told us there was less accountability and 
transparency now and described his fight against Regions's 
property grab attempts within the MOD (reftel). 
11. (C) On economic issues, Yanukovych and his government 
have shown a predilection to reach for familiar policy tools. 
  Yanukovych (and his economic team led by Azarov) came into 
office with the conviction that they, unlike the "orange" 
teams, already knew how to manage the economy.  After all, 
they would note, hadn't they obtained 12 percent GDP growth 
in their last year in office?  When there was uncertainty 
about the availability of budget revenues, they went back to 
accumulating arrears in the payment of VAT refunds, a tried 
and true policy.  Similarly, when faced with a somewhat weak 
harvest and soaring prices on the international grain market 
KYIV 00004313  003 OF 003 
that threatened to raise the cost of the GOU's bread 
subsidies, the GOU intervened in the market and used 
licensing and quotas to halt exports.  Both of these 
solutions had the added benefit of helping friendly interests 
and the latter offered good opportunities for rent-seeking 
behavior (allocating quotas).  Yanukovych almost certainly 
did not design these policies, but he has shown little 
ability or will to change them. 
Russian Pressure 
12. (C) There are concerns among "orange" forces in and out 
of the government, as well as among think tankers, that the 
Russians are taking a much more activist approach with 
Yanukovych than they did with Kuchma, possibly holding good 
gas prices and a stable energy relationship hostage to a 
variety of demands, such as coordinated WTO accession, the 
removal of Tarasyuk and Hrytsenko from the government, or a 
toning down of language on NATO membership.  There also seems 
to be a lot of agreement that there are some in Yanukovych's 
circle, including Azarov and Boyko as well as Foreign Policy 
Advisor Orel, who are very close to Russia and are nudging 
the PM to move in that direction. 
13. (C) All agreed that the best way to keep Yanukovych from 
sliding towards Moscow was to remind him that he had options. 
 Tarasyuk and Tymoshenko argued to Fried and Ambassador that 
this meant regular contact with Washington officials.  There 
seems to be agreement that Yanukovych does not want to be the 
governor of the Russian province of Ukraine and his business 
allies do not want to compete directly with Russian big 
business.  Yanukovych himself made a pitch to A/S Fried to be 
understanding about the Russia factor.  For example, the West 
needed to understand that until Ukraine could diversify its 
energy supplies, Kyiv needed to be mindful not to provoke 
Moscow.  Strong statements on NATO now could only lead to 
high gas prices. 
The Ball is in Yanukovych's Court? 
14. (C) Many in opposition to Yanukovych talk about either 
undoing the constitutional reforms that gave him his power or 
holding early elections next spring.  The question is whether 
either of these options is good for the country; or whether 
ensuring political stability might be the better alternative. 
 In large part, it depends on which direction Yanukovych 
takes Ukraine in the next six months.
  At a November 17 
meeting with Fried, Presidential Secretariat Chief Baloha, 
and to a lesser extent Yushchenko, were clear that it was too 
soon to assess Yanukovych's intentions, but that all options 
were still on the table.  The President, who is averse to 
confrontation, is clearly still looking for cooperation, but 
he has said that he will not accept cooperation at the price 
of Ukraine's sovereignty or sacrifice of its European course. 
15.  (C)  Yanukovych's U.S. visit will be his chance to show 
and convince us that he is different, that he has changed, 
and that he is serious about a real relationship with the 
West that balances his long-standing ties with Russia.  His 
audience will be senior USG officials and western public 
opinion, but it will also be his critics and skeptics here in 
Ukraine who will pay attention to his every statement and 
every meeting.  At this point, Ukrainians of all political 
stripes agree that Yanukovych is the man of the moment and 
that successful engagement with him is the best way to 
maintain the gains of the Orange Revolution in terms of 
democracy, free speech and media, and integration with 
Europe.  Whether or not he can deliver is up to him. 
16. (U) Visit Embassy Kyiv's classified website: 




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