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March 21, 2008

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Reference ID Created Released Classification Origin
08KYIV606 2008-03-21 13:27 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv


DE RUEHKV #0606/01 0811327
P 211327Z MAR 08

C O N F I D E N T I A L KYIV 000606 
E.O. 12958: DECL: 03/19/2018 
Classified By: Ambassador for reasons 1.4(a,b,d). 
1. (C) Summary. Your visit to Kyiv provides a historic 
opportunity to acknowledge the democratic transformation that 
has occurred in Ukraine since the Orange Revolution and to 
encourage further steps to consolidate reform and bring 
Ukraine fully into Europe.  You will encounter intense 
interest in the position of the United States and NATO's 
response regarding the Ukrainian request for a Membership 
Action Plan (MAP) at the Bucharest Summit.  The January 15 
publication of a letter to the NATO Secretary General 
requesting a Membership Action Plan at the April 2007 
Bucharest Summit, signed by President Yushchenko, Prime 
Minister Tymoshenko and Rada Speaker Yatsenyuk, has brought 
NATO issues to the forefront in Kyiv.  If Allies agree to 
grant Ukraine a MAP at Bucharest, your visit will spark new 
confidence among Ukraine's elite that Ukraine's westward 
course is assured; this would be a major personal victory for 
President Yushchenko who has staked Ukraine's future security 
on eventual NATO membership.  If NATO does not agree at 
Bucharest to give Ukraine a MAP, your visit will be critical 
to reassure Ukraine's elite, particularly President 
Yushchenko, that we will continue to demonstrate our strong 
support for Ukraine moving closer to NATO and Europe. 
Although united on NATO, orange allies Yushchenko and 
Tymoshenko have sparred over everything from Russian gas to 
personnel appointments leading to strains in the coalition. 
2. (SBU) Your visit can do much to validate the President and 
Prime Minister's commitment to ensure that Ukraine is a part 
of Europe, has a realistic goal in eventual NATO membership, 
and is ready to pursue further economic and political 
reforms.  You will also be able to encourage former PM 
Yanukovych to lead a constructive opposition and have a 
chance to meet one of Ukraine's young political stars -- 
33-year old Speaker of the Parliament Arseniy Yatsenyuk.  You 
will see Ukraine's main UNESCO heritage site, St. Sophia's 
Cathedral, and get a taste of Ukrainian culture before 
meeting young Ukrainian students working with the Peace Corps 
to spread the message of the danger of HIV/AIDS.  Your visit 
will also help us reach agreement on a Road Map for our 
bilateral relationship, an agreement on cooperation in space, 
approval of a new Trade and Investment Framework Agreement, 
the return of the Overseas Private Investment Corporation 
(OPIC) to Ukraine, and the conclusion of two commercial 
contracts with U.S. firms on nuclear fuel supply and spent 
fuel storage that will break two long-standing Russian 
monopolies.   We suggest the following main messages for your 
--  We applaud Ukraine's democratic development and progress 
in political and economic reform and support Ukraine's 
movement toward Europe and NATO. 
--  There will be a positive outcome for Ukraine at 
Bucharest, whether or not Allies agree to support Ukraine's 
request for MAP. 
--  We want to see the President, Prime Minister, and Rada 
work together to ensure an effective government. 
End summary. 
United on MAP, but Strains in Other Areas 
3. (C) Orange Revolution allies President Yushchenko and 
Prime Minister Tymoshenko united forces following an 
unexpectedly strong showing by Tymoshenko's political bloc in 
the September pre-term parliamentary elections.  They formed 
a coalition and established a government with Tymoshenko at 
the head as Prime Minister, recreating their post-Orange 
Revolution alliance.  All eyes are on whether Prime Minister 
Tymoshenko and President Yushchenko can work together better 
than they did in 2005, when Tymoshenko was dismissed after 
seven months of infighting; thus far, Tymoshenko has been 
particularly cooperative in responding to presidential 
initiatives.  Ukraine's complicated constitution divides 
executive power between the President and Prime Minister, 
with the President taking the lead for foreign and security 
policy and the Prime Minister having responsibility for the 
economy and social programs.  Although the three main 
political forces advocate similar approaches to economic 
reform and a foreign policy that calls for greater 
integration into Europe, all the players are also keeping 
their eye on the next presidential election in early 2010. 
4. (C) President Yushchenko has a reputation as a visionary 
and is the one Ukrainian leader who has had a solid 
unwavering commitment to seeing Ukraine in NATO and the 
European Union.  He has been the driving force behind 
Ukraine's request for a MAP at Bucharest and has been 
tireless in making the case both at home and abroad.  In 
Yushchenko's view, NATO membership is the only thing that can 
guarantee Ukrainian sovereignty and territorial integrity for 
the long run.  Nearly recovered from his 2004 dioxin 
poisoning, Yushchenko's scarred face continues to clear up 
and his health appears to have improved dramatically. 
Yushchenko remains the country's best-known
 symbol and 
proponent of a democratic future for Ukraine.  However, his 
detached leadership style and willingness to engage in 
backroom political deals have resulted in low poll ratings 
and this visionary president is now worried about his chances 
for reelection.  With  presidential elections less than two 
years away, Yushchenko does not trust his populist, ambitious 
and increasingly popular Prime Minister.  This has led to 
tensions within the coalition and a lack of cooperation on 
many issues -- although both sides continue to profess 
publicly that the orange coalition is viable and functioning. 
5. (C) Firebrand Yuliya Tymoshenko, returning to political 
center stage after two years in opposition with her trademark 
braided hairstyle intact, hit the ground running after her 
December 18 confirmation as Prime Minister in a restored 
orange coalition.  She got a budget passed in eight days, 
completed her government program for the upcoming year, which 
was sent to the Parliament for approval, and is making 
progress in fulfilling campaign promises, such as to return 
lost savings from the defunct Soviet-era state savings bank. 
As a result, her popularity in the country continues to grow. 
 Tymoshenko signed the joint letter with the President asking 
for a MAP, has lobbied European leaders in support of 
Ukraine's request, and shares Yushchenko's opinion that in 
the long term, only NATO membership can guarantee Ukraine's 
sovereignty.  However, she has been more cautious about 
making strong public statements in favor of MAP, arguing 
privately that President Yushchenko and his team in the 
Secretariat will use her support for MAP against her if the 
coalition collapses and she decides to run for president 
6. (C) Former Prime Minister Yanukovych, Yushchenko's 
unsuccessful rival in the 2004 fraudulent presidential 
election that led to the Orange Revolution, remains in the 
wings, adopting a public anti-NATO stance that plays well to 
his Russo-centric electoral base in the east while 
negotiating hard behind the scenes to return to power in 
alliance with the President.  After the MAP letter was 
disclosed, Yanukovych and his opposition Party of Regions 
used the NATO issue as a pretext to block the Parliament's 
work for most of February.  In its turn, the coalition 
criticized Yanukovych for his about-face on the NATO issue, 
rightly pointing out that in his most recent turn as Prime 
Minister, his government openly supported closer ties with 
NATO, although stopped short of requesting a MAP.  Yanukovych 
has argued that he made a deal with Yushchenko to support 
pre-term elections in exchange for a coalition between his 
Regions Party and the President's party.  However, 
Tymoshenko's strong showing scuttled those plans, leaving 
Yanukovych on the political sidelines. 
7. (C) Rada Speaker Yatsenyuk represents Ukraine's political 
future.  Although only 33 years old, he has been head of 
Ukraine's National Bank, the Minister of Economy and the 
Minister of Foreign Affairs.  A Yushchenko loyalist, 
Yatsenyuk was rumored to have been a reluctant candidate to 
be the Speaker of the Parliament, arguably the third-most 
important political job in the country after the President 
and Prime Minister, accepting the job only after the 
President asked him to do so.  Although having little prior 
parliamentary experience, Yatsenyuk is a quick study and 
appears to be making progress in forcing a strongly divided 
legislature to function.  With his commitment to western ways 
of doing business and his flawless English, Yatsenyuk is an 
example of Ukraine's impressive new generation of political 
leaders.  Some already see him as a future presidential 
A Booming Economy with Worrisome Inflation Numbers 
--------------------------------------------- ----- 
8. (SBU) Despite the political uncertainty of the past three 
years since the Orange Revolution, the overall economy has 
been growing strongly. The economy remains buoyant with real 
GDP growth in 2007 of 7.2%. Growth has been fueled by higher 
prices for steel (Ukraine's chief export), and strong private 
consumption spurred by rising pensions and wages.  The 
consumption boom has kept inflation above 10% for the past 
four years, reaching 16.6% in 2007 and up to 21% in February 
2008, and led to a surge in imports.  The Tymoshenko 
government has continued the practice of previous governments 
in budgeting generous wage and pension increases that far 
outstrip growth in labor productivity.  Ukrainian banks are 
expanding rapidly, and their aggressive lending policies are 
fueling a real estate boom of questionable sustainability.  A 
major drop in world steel and chemical prices, possibly 
abetted by contagion from the worldwide credit crisis that 
might threaten foreign borrowing by Ukrainian banks and 
companies, poses the main risk to the economy in the mid-term. 
9. (SBU) One of our primary goals has been to support 
Ukraine's integration into the world economic system, and 
Ukraine is in the final stages of acceding to the World Trade 
Organization; only formal ratification by the Parliament 
remains, and is expected to occur within months.   Although 
all major political parties advocate reform, the pace of 
structural economic reform remains slow and political leaders 
have resorted to administrative measures, such as restricting 
exports of grain and sunflower oil and seeds to combat rising 
bread and edible oil prices.  The World Bank recently ranked 
Ukraine 139th out of 178 countries as a place to do business. 
 The U.S. Overseas Private Investment Corporation (OPIC) 
suspended business in Ukraine over the GOU's failure to pay 
compensation for an insurance claim.  The GOU has now said it 
wants to bring OPIC back into Ukraine quickly, yet concrete 
progress to solve the issue has been slow.  State 
administration of the economy is still heavy-handed, and both 
the tax system and commercial law are in need of a major 
overhaul.  The failure of the tax authorities to refund 
value-added-tax to U.S. firms on a timely basis, for example, 
is causing some companies to rethink their investment 
strategies in Ukraine.  State regulation of the economy is 
sometimes openly corrupt.  Although the overwhelming majority 
of companies are now in private hands, the privatization of 
remaining state-owned enterprises is politicized and often 
corrupt.  The main obstacles to accelerated reform are 
universally understood in Ukraine, however, and looking 
forward, the ongoing modernization of commercial life and the 
opening of the economy to the outside world will likely lead 
to a continuation of gradual, if uneven, economic reform. 
Russia and Energy Security 
10. (SBU) The geopolitics and economics of energy continue to 
play a central role in Ukraine.  Energy consumption per 
capita remains the highest in the world, and the energy 
infrastructure is decaying, yet every government
to date has 
struggled to reform the mismanaged, corrupt and 
non-transparent energy sector.  The problems facing the 
sector are well-understood, however, and the most recent gas 
deal with Russia, which foresees the removal of a 
particularly questionable and non-transparent intermediary is 
a noteworthy accomplishment of the Tymoshenko government. 
The Ukrainian private sector, particularly the steel 
industry, has begun to invest in energy efficiency.  Ukraine 
remains heavily dependent on gas and oil imports from Russia 
and Central Asia, and is the main transit country for Russian 
gas and oil shipments to central and western Europe. Ukraine 
has traditionally charged Russia an extremely low rate for 
gas transit in return for Russian willingness to sell it gas 
below world prices.  Nominal import prices for gas have 
increased from $50/thousand cubic meters (tcm) in 2005 to 
$179.50/tcm and beyond in 2008, and Russia has signaled it 
wants to eventually move to price levels charged to Western 
European customers.  Russia clearly wants to take control of 
Ukrainian energy infrastructure, and has been putting 
pressure on Ukraine by proposing new pipelines in the Baltic 
and Black Seas that could circumvent Ukraine's pipelines. 
Most Ukrainian policymakers agree that Ukraine must diversify 
its sources of energy and move towards a market-based energy 
relationship with Russia, but Kyiv has yet to develop a long 
term strategy on how to achieve these goals. 
11. (SBU) We have encouraged Ukraine to open its energy 
market to more foreign investment.  Few Ukrainian energy 
companies have the technical and financial resources to bring 
domestic production up to potential, but foreign direct 
investment levels remain low.  There are some bright spots, 
however: Houston-based Vanco in October 2007 signed Ukraine's 
first-ever production sharing agreement for oil and gas 
exploration in the Black Sea, and New Jersey-based Holtec 
hopes to sign a contract amendment in the near future for 
certification and deployment of spent fuel management systems 
to store used fuel from Ukrainian reactors.  Within the 
framework of the USG-supported Nuclear Fuels Qualification 
Project, Westinghouse is finalizing a contract to supply 
nuclear fuel to Ukrainian reactors, all of which currently 
receive their fuel solely from Russia.  Forces within the 
Ukrainian energy establishment, likely acting at the behest 
of Russian interests, had been trying to torpedo both the 
Westinghouse and Holtec projects, but Tymoshenko's government 
is moving to complete these contracts before your visit. 
These projects' success, or lack thereof, will be important 
signals whether Ukraine has the will to move towards more 
energy diversity in the face of Russian geopolitical and 
economic interests. 
12. (U) Visit Embassy Kyiv's classified website: 




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