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February 2, 2009

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Reference ID Created Released Classification Origin
09KYIV228 2009-02-02 16:38 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

DE RUEHKV #0228/01 0331638
P 021638Z FEB 09

C O N F I D E N T I A L SECTION 01 OF 04 KYIV 000228 
E.O. 12958: DECL: 02/02/2019 
Classified By: Ambassador William Taylor.  Reasons 1.4 (b) and (d) 
 1. (C)  Summary and action request:  Prime Minister 
Tymoshenko during a February 2 meeting with the Ambassador 
asked for both economic and political support as she grapples 
with Ukraine,s current crisis.  She asked specifically for: 
1)  a USG bilateral budget support loan to help Ukraine 
address its budget deficit; 2)  an MCC-like assistance 
program to counteract Russian influence in Crimea; 3) USG 
diplomatic support for an agreement the GOU seeks with the EU 
to bolster,s Nafothaz,s financial prospects; 4) an 
assessment by U.S. experts of the gas price formula in the 
recent Ukraine-Russia agreement; 5) participation by U.S. 
firms in transportation, energy, and environmental projects; 
6) a U.S. organized initiative to ask President Yushchenko to 
refrain from interference in the GOU,s work; and 7) an 
invitation to Washington for high level meetings.  She may 
raise some of these proposals if she meets with the Vice 
President in Munich this weekend.  Embassy Kyiv would welcome 
Washington reaction and guidance concerning Tymoshenko,s 
2. (C)  Tymoshenko outlined plans to address the various 
aspects of Ukraine,s large budget deficit, especially those 
flowing from the GOU,s over-extended pension commitments and 
Naftohaz,s debt-ridden balance sheet. Tymoshenko expressed a 
wish to reduce Ukraine,s reliance on Russian gas supplies, 
noted that Russia had lost more than Ukraine from the recent 
gas dispute, and outlined PM Putin,s motivations during the 
gas standoff.  Stating that despite what has been said of 
her, she would not sell out Ukraine,s interests to Russia, 
and that she is a strong supporter of Ukraine,s European and 
Euro-Atlantic integrations. She also lamented the &harm8 
President Yushchenko,s actions have done to Ukraine, and 
assessed that his attacks against her have effectively ended 
his political career and so damaged her position that 
opposition leader Yanukovych must now be counted as the 
favorite in the next Presidential election. End Summary. 
Three Budget Problems 
3. (C)  Tymoshenko noted conditions will not allow Ukraine to 
borrow in international credit markets to cover its projected 
2009 government budget deficit of UAH 40 billion (USD 5 
billion).  Ukraine hopes to address the deficit in part with 
support from other governments, but letters to the U.S., 
Japan, China, EU, Saudi Arabia, and Russia asking for loans 
have gone unanswered, except for Russia which is ready to 
consider the GOU request.  Tymoshenko added another USD 5 
billion for bank recapitalization will be required, but the 
IMF will not count such funds in deciding whether Ukraine had 
met the IMF,s balanced budget condition.  Tymoshenko plans 
to bring up the possibility of USG bilateral budget support 
when she meets with Vice President Biden this week in Munich. 
4. (C) Tymoshenko added pensions are also a budget problem. 
One approach would be to stop pension benefits to those who 
continue to work and to increase the retirement age.  This 
would have been difficult in 2005, but now &in the midst of 
a Presidential campaign which has already begun8 is 
impossible politically.  The GOU instead will consider two 
schemes to address the pension shortfall.  Citizens working 
abroad and the self-employed in Ukraine (e.g. small merchants 
and some farmers) do not take part in the state pension plan. 
 The GOU is considering allowing such persons to contribute 
to and receive future pensions from the GOU.  Projections are 
Ukrainians working abroad might contribute some $3 billion 
annually, while the self-employed contributions might total 
$2.4 billion per year.  Tymoshenko cautioned that these plans 
have not yet been vetted by the IMF. 
Naftohaz,s Budget Situation 
5. (C) Naftohaz,s budget deficit, which Tymoshenko put at 
UAH 16 billion, is the third hole in the 2009 budget. This 
deficit could be addressed in part by doubling gas rates, but 
most households would not pay the higher rates, and 
centralized gas and heating systems make it difficult to cut 
off individual consumers.  Tymoshenko noted such increase 
would be akin to &throwing a burning match into a tank of 
gasoline8.  Instead, Tymoshenko will meet on February 7 with 
German Chancellor Merkel to discuss whether Europeans might 
pay for the technical gas used to move gas from Russia to the 
EU.  Were the EU to agree, half of Naftohaz,s deficit would 
be eliminated and its pipeline system could be maintained in 
a normal state.  Tymoshenko urged the USG to support Ukraine 
in its talks on this subject with key EU leaders, especially 
Merkel an
d Sarkozy, and believes such an agreement would do 
away with Russia,s &monopoly of gas transit8 with Ukraine 
and lead to future gas contracts between Ukraine and EU 
6. (C)  The other half of Naftohaz,s 2009 budget is 
attributable to short-term loans which are coming due. 
Tymoshenko argued that Naftohaz hopes to find a &bank pool8 
that would allow it to convert this short-term debt into 
long-term, ten-year debt, thus allowing the state owned 
energy company to overcome the difficulties it will face in 
2009 and 2010.  Tymoshenko stated she will want to discuss 
this possibility of restructuring Naftohaz,s debts "at the 
very highest levels8. 
7. (C) The Prime Minister added that she keeps hearing about 
a &consortium with Russia,8 presumably the suggestion that 
Russia and others take an interest in Ukraine,s gas 
pipelines system.  Tymoshenko claimed she would never allow 
such a consortium to be set up, regardless of its packaging. 
Business Opportunities for U.S. Firms 
--------------------------------------------- - 
8. (C) Tymoshenko claimed that Ukraine hopes to reduce its 
dependence on Russian gas by one half.  The GOU is developing 
a two-year program that will diversify its sources of energy, 
including renewables.  The program will result in a dramatic 
reduction in Kyoto Protocol greenhouse gas emissions, and 
Ukraine will then become a seller of "as8 to interested 
firms.  The GOU is starting a small scale pilot project in 
this regard with a Japanese firm, but believes eventually 
Ukraine might have &2 billion greenhouse gas units8 to 
sell. Tymoshenko would welcome participation by U.S. firms in 
its emission program, either by providing technology to 
reduce emissions or as buyers of "as8. 
9. (C) Tymoshenko also would welcome the participation of 
U.S. firms in transportation and energy infrastructure 
projects in Ukraine.  She envisions U.S. firms as general 
contractors for the projects, which could be financed by U.S. 
banks.  The GOU would provide sovereign guarantees for 
long-term debt to finance the projects, which would be 
undertaken on sound, commercial principles. The GOU has 
already had discussions with China and Japan regarding such 
projects, but Tymoshenko wants to see U.S. firms more fully 
integrated into Ukraine,s economy. 
Tymoshenko on Russia-Ukraine Gas Crisis 
--------------------------------------------- ------- 
10. (C) The Prime Minister noted that despite what might be 
said about her &pro-Russia moods,, she remains a strong 
advocate of Ukraine,s European and Euro-Atlantic 
integration.  She swore that she would never make a 
commitment, not even a short-term compromise, which would be 
contrary to Ukraine,s national interests.  She does not 
understand why Europe abandoned Ukraine during the recent gas 
crisis and did not publicly indicate that Ukraine had not 
stolen gas. 
11. (C) In terms of the gas negotiations themselves, 
Tymoshenko characterized her role as &calming the 
situation8.  The contract formula for setting the gas price 
is a new approach, and Tymoshenko indicated she would welcome 
U.S. experts assessing the formula and advising whether it 
should be revised, which Tymoshenko implied could be as early 
as 2010.  Tymoshenko wishes the EU had been more forthcoming 
in revealing the terms of its gas agreements with Russia, 
which would have assisted the Ukrainian side in the 
negotiations.  Poland had provided information regarding its 
contract, and Ukraine had been able to negotiate a price that 
is only 74 percent of the price Poland pays.  Overall, 
according to GOU calculations, it achieved a &fifteen 
percent discount8 in the negotiations with Russia. 
Tymoshenko claimed that only Belarus pays less than Ukraine, 
but she &hadn,t given away a single square centimeter of 
Ukraine8 to reach a deal.  She also noted as a success the 
elimination of the intermediary RUE, which was not just a 
corrupt organization, but one which spent money on political 
Putin,s Motivation 
12. (C)  Tymoshenko stated that multi-faceted motivations 
underpinned Russian Prime Minister Putin,s actions during 
the gas crisis.  In particular, he wanted: 1)  to show 
Europe, especially those who have supported the U.S. missile 
defense initiative, that Europe is dependent on Russia; 2) he 
wanted to build support for the Nord and South Stream gas 
pipelines; and 3) he wanted to take revenge on Ukraine for 
its policy during the conflict in Georgia, including 
provoking sentiment against the current Ukrainian government. 
 Tymoshenko assessed that Putin had not achieved any of his 
goals, and that he realized such in the days following 
Russia,s January 7 gas cutoff.  While the gas crisis had 
harmed both Ukraine and Russia, the bigger loss was suffered 
by Russia. 
Russian Influence in Crimea 
13. (C) Tymoshenko expressed concern that Russia, via the 
Moscow mayor and the companies he owns and influences, is 
investing &billions of dollars8 each year in Crimea. 
Ukraine cannot compete with Russia in this regard, and the 
attitudes of the residents of Crimea are becoming more 
pro-Russia and more anti-Ukraine each year. Tymoshenko called 
for a Millennium Challenge Corporation-like program to invest 
in Ukraine to counteract Russia,s activities. 
The Ukrainian Political Situation 
14. (C)  Calling her relations with President Yushchenko a 
&SOS situation8, Tymoshenko asked that the Ambassador 
organize a meeting with President Yushchenko at the highest 
possible level &so that he would stop ruining the country 
and interfering with the National Bank of Ukraine and the 
government,s work8.  She expressed concern about 
Yushchenko's attempt to have to the SBU and Prosecutor,s 
Office begin criminal prosecutions again her and Naftohaz 
officials for their involvement in the gas negotiations.  She 
also did not discount the possibility that the President 
might attempt to impose &martial law8 in the event of a 
financial default or social unrest.  The Prime Minister added 
that the President,s political life was coming to an end and 
that he needed to stop having a negative effect on the 
country,s life.  Tymoshenko vowed further that she would no 
longer respond to the President,s accusations against her. 
15. (C) Tymoshenko argued that President Yushchenko,s 
negative actions, which had first started in mid-2005, had 
effectively ended his political career and with regard to the 
Tymoshenko Bloc had &killed us by half8.  Opposition and 
Regions Party head Yanukovych had benefited by the conflict 
between the two former orange coalition allies, and 
Tymoshenko assessed Yanukovych,s chances of beating her in a 
Presidential election at 70 percent if the situation develops

 as it appears to be doing.  Tymoshenko indicated that she 
wants to protect against such a scenario, but that if 
Yanukovych should win, the &strategy of the democratic 
team8 would be lost and might be regained only in two 
Interest in a Visit to the United States 
--------------------------------------------- --- 
16.(C)  Tymoshenko also expressed interest in an invitation 
to the United States to meet with U.S. government officials 
to discuss how the USG might support her government in the 
challenges it faces.  (Note:  Deputy Prime Minster Nemyrya 
told the Ambassador after the meeting that he wants to go to 
the U.S. in a few weeks to prepare Tymoshenko,s visit. 
Nemyrya indicated that during such trip he hopes to finally 
resolve the long-standing OPIC issue, and that the Economy 
and Defense Ministries had been directed to find a solution 
to the problem.  End note.) 
17. (C) Ukraine,s economic crisis has put Tymoshenko in a 
tough spot.  The Prime Minister,s perception is that 
straightforward measures like decreased pension benefits and 
gas price increases that would allow the GOU to meet the 
IMF,s conditions on a &balanced budget8 would be 
politically unpalatable to large numbers of Ukrainians.  In 
that light, many of the measures the Prime Minister proposed 
seek to delay the hard steps that need to taken or to have 
others bear at least part of the  associated financial burden. 
18.  (C) Nonetheless, Tymoshenko,s government is attempting 
to play what at this point is a very bad economic hand.  The 
President,s political attacks and lack of support for his 
former coalition partner have made the Prime Minister,s task 
all the more difficult.  The crisis Ukraine faces is real and 
severe, and we should give serious consideration to which of 
Tymoshenko,s proposals we might support and to what other 
U.S. support might be available to assist Ukraine.  End 




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