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October 30, 2008

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Reference ID Created Released Classification Origin
08KYIV2174 2008-10-30 15:33 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

DE RUEHKV #2174/01 3041533
P 301533Z OCT 08

E.O. 12958: N/A 
1. (SBU) Your November 8-10 visit to Ukraine comes during an 
unfolding domestic economic crisis and an ongoing struggle 
between President Yushchenko and Prime Minister Tymoshenko 
over whether to hold snap parliamentary elections. 
Yushchenko on October 8 dissolved Ukraine's parliament (the 
Rada) and asked for new elections.  Delays in passing 
required election-related legislation mean the date of the 
election is likely to slip into early 2009.  Tymoshenko has 
rejected the necessity for new elections, citing the 
unfolding economic crisis as requiring continuity and 
collective action.  The IMF has announced that it would 
support Ukraine with a $16.5 billion IMF package -- one of 
the largest in IMF history -- if Ukraine adopts a series of 
reform measures.  At the time of this writing, the Rada is 
debating a bill aimed at meeting IMF requirements. 
2. (SBU) Ukraine's relationship with Russia has remained 
tense following the Russia-Georgia conflict.  President 
Yushchenko strongly supported President Saakashvili and 
issued decrees that seek to more closely regulate Russia's 
Crimea-based Black Sea Fleet (BSF).  Ongoing Ukrainian 
political wrangling has not benefited President Yushchenko's 
aspiration to receive a NATO Membership Action Plan (MAP) at 
the NATO Foreign Ministers meeting in December.  End Summary. 
Major Themes and Talking Points 
3. (SBU) Your visit provides an opportunity to engage with 
key decision makers and underline our bilateral policy 
objectives.  We suggest the following main themes for your 
- Financial: the President, Prime Minister, and Rada need to 
unite to deal with Ukraine's financial crisis.  Providing 
examples of bipartisan solutions recently developed in the 
United States would help underline this point. 
- Energy: Ukraine needs to increase transparency in the 
energy sector, increasing competition, removing unnecessary 
middle-men (such as RosUkrEnergo), and establishing an open 
contracting system. 
- NATO: decisions regarding the pursuit of MAP and NATO 
membership are up to Ukraine -- the United States will 
support Ukraine's decision.  NATO does not drag countries 
into the Alliance against their will. 
Orange Coalition Falters 
4. (SBU) Orange Revolution allies Viktor Yushchenko and 
Yuliya Tymoshenko united forces following an unexpectedly 
strong showing by Tymoshenko's political bloc in the 
September 2007 pre-term parliamentary elections.  They formed 
a coalition and established a government in late 2007 with 
Tymoshenko as Prime Minister, recreating their post-Orange 
Revolution alliance.  Many hoped that they would work 
together better than they did in 2005, when Yushchenko 
dismissed Tymoshenko after seven months of infighting. 
Following an initial phase of cooperation, we again witnessed 
a string of mutual recriminations, including a charge by the 
Presidential Secretariat last August that Tymoshenko was 
guilty of high treason.  The allegation was that in return 
for securing lower energy prices from Russia, Tymoshenko had 
agreed to go slowly on NATO/MAP and keep open the option of 
Russia's Black Sea Fleet to remain in Crimea beyond the 2017 
withdrawal deadline.  Tymoshenko has denied all charges, but 
the Secretariat's actions clouded the prospects for future 
accommodation between the President and PM.  The split was 
finalized on October 8, when Yushchenko dissolved the Rada 
and called pre-term elections. 
Two Headstrong Leaders 
5.  (SBU) President Yushchenko has a reputation as a 
visionary.  Even his critics concede that his commitment to 
seeing Ukraine join NATO and the European Union is sincere 
and unwavering.  He has been the driving force behind 
Ukraine's request for a MAP and 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.  He 
has stated that recent events in Georgia reinforce the need 
for collective security arrangements for Ukraine.  Yushchenko 
has a close relationship with Georgian President Saakashvili, 
and is the godfather to Saakashvili's son.  Significantly 
KYIV 00002174  002 OF 004 
recovered from his 2004 dioxin poisoning, Yushchenko's 
scarred face continues to clear up and his health appears to 
have improved. 
6. (SBU) Returning to political center stage after two years 
in opposition with her trademark braided hairstyle intact, PM 
Tymoshenko hit the ground running after her December 2007 
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, and made some 
progress in fulfilling campaign promises, such as to return 
lost savings from the defunct Soviet-era state savings bank. 
Tymoshenko joined Yushc
henko and Rada Speaker Yatsenyuk in 
signing a letter requesting a NATO Membership Action Plan 
(MAP) and spoke in favor of MAP during private meetings with 
the NATO SYG and North Atlantic Council during their June 
visit to Kyiv.  In recognition of the public's ambivalence 
about NATO membership for Ukraine, Tymoshenko has avoided 
taking a public stance.  She was conspicuously involved in 
the response to summer floods in western Ukraine, but 
initially remained silent when the conflict in Georgia 
erupted.  Tymoshenko has since made statements in support of 
Georgia's territorial integrity and sovereignty. 
Elections Called, IMF Package Delayed 
7. (SBU) On October 8, Yushchenko announced a decree 
disbanding the Rada and calling for pre-term parliamentary 
elections.  In his address, Yushchenko once again blamed the 
Tymoshenko Bloc (BYuT) for the collapse of the coalition, 
pointing to BYuT's votes with Regions in the current Rada 
session.  Without naming her, Yushchenko cast the blame on 
Tymoshenko, saying that he was "absolutely certain" that the 
democratic coalition was destroyed because of the "personal 
ambition of one person." 
8. (SBU) PM Tymoshenko opposed the decision to call pre-term 
elections, citing the unfolding  domestic economic crisis as 
requiring political continuity and stability.  The call for 
elections, which require passage of laws both on 
administering and funding the vote, has become intertwined 
with the financial legislative package required for the $16.5 
billion IMF support program.  The inability to consider the 
issues (and legislation packages) independently stalled 
progress on both fronts.  On October 29 the Rada passed a 
first reading of the financial package (a second reading/vote 
is still required). 
Economic Challenges 
9. (SBU) Ukraine's current financial crisis stems from a 
sharp decrease in international credit due to the global 
financial crisis and Ukraine's precarious balance of payments 
situation.   Ukraine will have to finance $50 to $60 billion 
in foreign commitments due in 2009.  Ukraine's banking 
sector, which grew rapidly in recent years thanks to 
aggressive foreign borrowing, is of chief concern.  The main 
issue is the ability of banks to roll over short term 
external debt (currently totaling approximately $13 billion) 
which will come due in next few months.  The current account 
deficit has ballooned in recent years and could exceed 
$15-$20 billion next year.  Ukraine's foreign exchange 
reserves, which totaled $37 billion at the start of the 
crisis, will not cover all of the country's expected 
financing needs.  The Ukrainian currency, the hyrvnia, 
continues to fall and trade outside of the official exchange 
rate band. 
Challenges to the Real Economy 
10. (SBU) A downturn in global demand for steel and chemicals 
(Ukraine's chief exports), along with rising prices expected 
for gas imports and a downturn in credit conditions has led 
analysts to revise downward growth forecasts radically, with 
most now expecting zero or even negative real GDP growth in 
2009, after about 6 percent this year.  In addition to a 
failing banking sector and an already apparent sharp 
contraction in the steel industry, we expect sharp 
corrections in Ukraine's overheated construction and real 
estate sectors, an overall decline in investment, increased 
capital flight and rising energy prices and inflation. 
Policy Responses to Financial Crisis 
11. (SBU) The National Bank of Ukraine (NBU), pressed to stop 
a run on deposits in commercial banks, sharply tightened 
capital controls on October 13.  The measures effectively 
KYIV 00002174  003 OF 004 
prevent Ukraine's banking system, which has relied heavily on 
foreign borrowing to fuel its breakneck growth in recent 
years, from expanding any further in the short term.  The 
action comes after an estimated $3 billion, or 4% of total 
deposits, were withdrawn from the banking system in mid to 
late October.  The October 13 measures are the first taken by 
the NBU to preempt capital flight and stabilize the country's 
financial system.  Both the President and Prime Minister have 
submitted stabilization packages to the parliament.  They are 
aimed at securing IMF support and focus on recapitalizing the 
banking sector and introducing stricter fiscal discipline, as 
liberal public spending and salary/pension policies have been 
a main cause of Ukraine's galloping inflation. 
Ukraine and Energy 
12. (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.  Ukraine remains heavily 
dependent on gas and oil imports from Russia and Central 
Asia, and is the main transit country for Russian gas 
shipments to central and western Europe.  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 
to achieve these goals. 
13. (SBU) The USG has 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.  Recent moves by the GOU 
to undercut its first-ever Production Sharing Agreement 
(PSA), signed with the U.S. company Vanco in 2007, are 
raising doubts about the GOU's sincerity in attracting 
foreign investment to develop domestic energy resources. 
There are some bright spots, however.  Within the framework 
of the USG-supported Nuclear Fuels Qualification Project, 
Westinghouse has signed a contract to initially supply three 
Ukrainian reactors with fuel starting in 2011.  This will 
help Ukraine diversify its sources of fuel for its nuclear 
power plants, all of which currently get their fuel from 
Russia.  Russia also currently takes back spent nuclear fuel, 
but New Jersey-based Holtec has a contract to build a 
facility to store spent fuel within the country. 
14.  (SBU)  The NATO Bucharest Summit did not grant a 
Membership Action Plan (MAP) to Ukraine.   However, the 
Alliance declared it sees Ukraine as a member in the future, 
urged intensified dialogue, and set a December 2008 date for 
an initial re-evaluation by Foreign Ministers.  A NATO Public 
Information Campaign targeted at providing information on 
MAP/Membership issues was recently launched by the 
government.  Public opinion remains highly skeptical of the 
prospect of NATO membership, with less than 25 percent in 
favor and more than 50 percent opposed.  The GOU information 
paign remains under-funded at $2 million a year, but we 
understand that additional resources are being committed in 
parallel with the government's effort.  One example is 
notable -- a series of pro-NATO commercials were shown during 
half-time of the recent European Soccer Championship.  The 
spots highlighted the dates of NATO and EU membership of the 
contestants (when applicable), portraying NATO as a grouping 
of democratic, progressive countries. 
15.  (SBU) Following Russia's actions in Georgia, Ukraine on 
August 18 requested emergency consultations with NATO allies 
to discuss threats to Ukraine's national security arising 
from that crisis.  FM Volodymyr Ohryzko has stated that 
events in Georgia argue strongly for even closer integration 
of Ukraine into the Euroatlantic community and for NATO 
membership.  Yushchenko made a high-profile visit to Tbilisi 
on August 12 and, on the same day, signed two decrees meant 
to 1) regulate border crossing for Russia's Black Sea Fleet 
(BSF) personnel, ships, and planes, and 2) require GOU 
permission for future BSF deployments.  Yushchenko's move 
triggered a sharp exchange between Kyiv and Moscow.  The MFA 
recently reconfirmed Ukraine's intention to hold Russia to 
the 2017 BSF withdrawal date agreed to in the 1997 basing 
agreement.  The basing agreement requires either signatory to 
inform the other at least one year prior to the 2017 
withdrawal deadline of its intention to enforce the agreement 
-- otherwise an automatic 5-year extension applies. 
16.  (SBU) Leading politicians from other parties have spoken 
of taking a less confrontational approach to the situation in 
Georgia.  PM Tymoshenko has spoken of supporting the 
KYIV 00002174  004 OF 004 
territorial integrity of Georgia, but warned of exacerbating 
regional tensions.  She opposed Yushchenko's decrees to 
regulate the Black Sea Fleet as unenforceable and liable to 
further increase tensions with Russia.  The Lytvyn Bloc, 
which advocates Ukrainian neutrality, released a statement 
urging Ukraine to give up its intentions to join NATO any 
time soon.  The Party of Regions, headed by former PM 
Yanukovych was critical of Yushchenko's support for 
Saakashvili and Ukraine's provision of arms to Georgia. 
Yanukovych spoke in favor of recognizing the "independence" 
of South Ossetia and Abkhazia. 


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