UKRAINE: NSDC SECRETARY KINAKH: STABLE

C O N F I D E N T I A L SECTION 01 OF 02 KIEV 001445

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/11/2016
TAGS: PGOV ECON EINV UP
SUBJECT: UKRAINE: NSDC SECRETARY KINAKH: STABLE
PARLIAMENTARY COALITION KEY TO ECONOMIC GROWTH

Classified By: Ambassador for reasons 1.4 (b,d).


1. (C) Summary: In an April 11 meeting, National Security
and Defense Council (NSDC) Secretary Anatoliy Kinakh told
Ambassador that a stable majority coalition in Parliament
(Rada) and the formation of a new government had to happen
quickly in order to address critical economic issues. In
order to avoid further aggravating divisions within Ukraine,
Kinakh opined, neither Party of Regions leader Viktor
Yanukovych nor Tymoshenko bloc leader Yuliya Tymoshenko
should become prime minister. An important task in building
a Rada majority coalition would be the establishment of an
agreement that deputies would sign, in accordance with
constitutional reforms. Such an agreement would set forth
the ruling coalition's priorities and program of work; the
coalition and its deputies would be required to implement the
agreement. One of the new Rada's first tasks would be to
adopt the outlines of the 2007 budget, which needs to be done
by the end of June. End summary.

Coalition Tasks: Reunify Ukraine, Reinvigorate Economy
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2. (C) NSDC Secretary Kinakh said negotiations on the
formation of a ruling coalition in Parliament (Rada)
continued, but were contentious. The timely formation of a
coalition was an important task not just on political grounds
but also due to the numerous socio-economic problems
confronting the nation, Kinakh declared. The electoral
campaign had artificially aggravated divisions in the
country, especially the east-west divide, a situation that
had been evident during the 2004 presidential election. By
bringing in the right partners, a Rada coalition and a new
government could work to heal this rift. In addition, a
coalition needed to address Ukraine's serious economic
stagnation. In Kinakh's view, in order to avoid further
aggravating divisions within Ukraine, a new government with
Party of Regions should not have party leader Viktor
Yanukovych as prime minister, and one with the Yuliya
Tymoshenko Bloc (BYuT) should not have Tymoshenko as prime
minister.


3. (C) Kinakh said a coalition had to be formed on the basis
of principles that would address fundamental issues such as
Ukraine's official language and whether Ukraine should have a
federal structure. Kinakh noted that the constitutional
amendments that took effect January 1, and which enhanced the
Rada's power, required deputies in a majority coalition to
sign a coalition agreement. The agreement would detail the
coalition's "parameters, principles, and priorities" and set
forth its program of work. Kinakh's Party of Industrialists
and Entrepreneurs (a member of the Our Ukraine electoral
bloc) wanted the coalition agreement to declare a halt to
reprivatizations and include goals such as entry into WTO and
movement toward NATO membership. Once the agreement were
signed, the coalition would be required to implement its
terms. A Rada coalition should also stay in place at least
until the next presidential election (2009) and not just
survive for 5-6 months, if it was to be successful in moving
Ukraine out its economic doldrums.


4. (C) Kinakh said President Yushchenko had not yet
considered the possibility of using his power to dissolve
Rada if a majority coalition were not established within 30
days of the convening of the first session of the
newly-elected Rada. Such a step would heighten economic
uncertainty and aggravate the already poor economy. The
government needed to deal with pressing economic policy
issues, such as establishment of an energy security policy
that would incorporate structural reforms and market-based
energy prices. Political parties involved in negotiations on
formation of a coalition needed to avoid taking extreme
positions. In particular, Party of Regions, which included
numerous businessmen in its ranks, had to agree to regulation
of business practices and movement toward a European-style
market economy. In response to Ambassador's question, Kinakh
said Regions financier Rinat Akhmetov and parliamentarian
Andriy Klyuyev were closer to this view than to the offical
position of the party.

Passing the Budget
--------------


5. (C) As another reason speedy action on a coalition was
necessary, Kinakh noted that the Cabinet had to submit its
draft 2007 budget policy to the Rada by May 15, and Rada had
until the end of June to approve it. If a coalition were not
formed until the (potential and soft -- see septel) deadline
of June 15, the Rada would have very little time to take the
necessary action, although it could be done. Kinakh was
vague on what exactly would happen if the budget were not

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passed. (Comment: The consequences of tardiness are not
likely to be dire, as this is only the first step in the
budget process, in which the government sets out broad
parameters such as projected total spending and revenues as
well as economic assumptions about growth and inflation. The
deadline for submitting the actual draft budget with detailed
expenditures and receipts is September 15. Typically, the
final budget is not passed until December. Though Kinakh did
not mention it, of far more consequence is whether the Rada
will be able to pass revisions to the 2006 budget to prevent
a fiscal crisis this year. End Comment.) He again stressed
the important economic tasks that a new government needed to
address, including implementation of a 25-percent increase in
electricity and natural gas prices for domestic consumers.
He noted that the economy would suffer greatly if inaction on
a Rada coalition meant that 2006 was a lost year.


6. (U) Visit Embassy Kiev's classified website:
www.state.sgov.gov/p/eur/kiev.
Herbst