Identifier
Created
Classification
Origin
06KIEV3129
2006-08-11 13:45:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

UKRAINE: FIRST DEPUTY PM AZAROV COMMITTED TO WTO

Tags:  PREL PHUM ECON EFIN MCC UP 
pdf how-to read a cable
VZCZCXRO8207
PP RUEHDBU
DE RUEHKV #3129/01 2231345
ZNY CCCCC ZZH
P 111345Z AUG 06
FM AMEMBASSY KIEV
TO RUEHC/SECSTATE WASHDC PRIORITY 0908
INFO RHEHNSC/NSC WASHDC PRIORITY
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
C O N F I D E N T I A L SECTION 01 OF 03 KIEV 003129 

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/11/2016
TAGS: PREL PHUM ECON EFIN MCC UP
SUBJECT: UKRAINE: FIRST DEPUTY PM AZAROV COMMITTED TO WTO
ACCESSION BY YEAR'S END

Classified By: A/DCM Michelle Logsdon for reasons 1.4(a,b,d).

C O N F I D E N T I A L SECTION 01 OF 03 KIEV 003129

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/11/2016
TAGS: PREL PHUM ECON EFIN MCC UP
SUBJECT: UKRAINE: FIRST DEPUTY PM AZAROV COMMITTED TO WTO
ACCESSION BY YEAR'S END

Classified By: A/DCM Michelle Logsdon for reasons 1.4(a,b,d).


1. (C) Summary: First Deputy PM and Finance Minister Azarov
told the Ambassador that by the end of 2006, Ukraine would
join the WTO. He pledged that the government would have a
careful and well-balanced policy in place to deal with
Ukraine's large negative trade balance. On the energy
situation, Azarov said that Ukraine would invite investors,
including Russia, to help manage the natural gas pipeline
transit system, but only in return for substantial new
investment in the system and on the condition that Ukraine
always maintain a minimum 51 percent share. Ukraine's
challenge would be to develop energy-efficient industries
over the next 5-7 years. Azarov was interested in the
Ambassador's presentation of how Ukraine might qualify for a
full Millennium Challenge Account program and gratefully
accepted the USG offer of a macroeonomic expert to be
attached to the Prime Minister's office. On politics, Azarov
said that negotiations on "Our Ukraine" joining the coalition
would continue in September when the Rada resumed work. End
Summary.


2. (C) Comment. Azarov, who was First Deputy PM and
Minister of Finance from 2002-2005, looked relaxed and happy
to be back in his old office in the Cabinet of Ministers, and
the audible buzz of visitors in his outer office testified to
his key role in the new Yanukovych government. Speaking in
Russian, Azarov made a definite impression as a man focused
on the future and finding practical solutions to current
problems, only criticizing his predecessors for leaving him a
difficult situation with regard to gas ("when I handed over
the office to then-PM Tymoshenko NaftoHaz had no debts and 21
million cubic meters of gas in our storage facilities") and
questioning several last-day decisions made by the Yekhanurov
government just before Regions took office ("they took ten
decisions on the last day that involved more than 1 billion
USD and I put a hold on these decisions until we could

evaluate them"). Azarov was particularly attentive to the
discussion of MCC and promised to appoint someone in his
office to work with the USG on the program. End Comment.

WTO - In By the End of 2006
--------------

3. (SBU) In response to the Ambassador's question about
different comments coming from the Government about when
Ukraine might join WTO, Azarov stated plainly that Ukraine
wanted to be in the WTO by the end of 2006. Azarov thanked
the Ambassador for past USG support on this issue and
expressed hope that the USG would also provide the same kind
of support to this government. Azarov said that Ukraine
still needed to adopt several laws and then reach agreement
with Kyrygzstan on a bilateral agreement, but both of these
problems could be resolved. In fact, in Azarov's view, the
problem with the Kyrygz wasn't WTO-related at all. The
Ambassador noted that the USG would be happy to help, we had
already made efforts with the Kyrgyz, and that Washington
would be pleased with Azarov's commitment to wrap up WTO
accession by year's end.


4. (SBU) Regarding possible increases in import tariffs,
Azarov noted that Ukraine had a big problem with a negative
trade balance. In the first six months of 2006, the trade
deficit stood at USD 3 million; by year's end it could easily
be USD 6 billion. In addition, Ukraine's currency reserves
stood at just USD 18 billion. It was critical for the
Government to find a way to reestablish a balance in trade.
Azarov noted that a strategy was needed -- it would clearly
involve increasing exports and thinking about the exchange
rate, and while utilizing the opportunities allowed within
the WTO, to limit imports, especially non-critical and
non-energy products. There were six countries with which
Ukraine had a negative trade balance of nearly USD 7 billion
-- more than USD 1.6 billion with China (all non-energy),USD
3 billion with Russia and USD 1 billion with Germany. Azarov
stressed that he was not talking about increasing customs
duties - this had been a media distortion - but instead was
committed to finding a careful and well-balanced policy.
"Business should not be afraid." He acknowledged the WTO's
"standstill principle" (that while applying for membership, a
country should take no steps to restrict trade) and said that
Ukraine was aware of what it could do while it was in this
"transition period."


5. (U) Azarov was enthusiastic about the Ambassador's offer
of help from a full-time USG macroeconomic expert who had
worked with previous Prime Ministers and was ready to be of
service to Azarov and PM Yanukovych. Noting that he had
"always had help from the U.S." in this position, Azarov said
that Ukraine was facing a number of challenges, especially in
the steel sector, from the expected increases in energy

KIEV 00003129 002 OF 003


prices. He was "ready to sign an official letter" to ask the
USG for his help and suggested that he meet with our USG
expert on August 15.

Energy Sector - Ukraine to Hold 51 Percent
--------------

6. (SBU) Referring to his August 10 meeting with Deputy PM
Kluyev and discussion of energy security issues, the
Ambassador asked Azarov how he planned to manage NaftoHaz
Ukraine's huge debt and the terms of its repayment to
RosUkrenergo and Gasprom. Azarov said that when he left
office in January 2005 (he was acting PM at that time) and he
turned over NaftoHaz's USD 3.5 billion balance sheet to
then-PM Tymoshenko, the company had no debts and 21 million
cubic meters of natural gas in its storage facilities. Plus
Ukraine had contracts for the supply of natural gas with both
Turkmenistan and Russia, valid until 2011. Today, NaftoHaz's
debt stood at USD 2.5 billion and was a large burden for the
budget. He bemoaned the fact that all of this had happened
in just 18 months, and stressed the need for an international
audit and the use of international accounting standards in
order to make NaftoHaz more transparent.


7. (C) Noting that he had raised our concern about control
of pipelines with DPM Kluyev, the Ambassador asked how
Ukraine would deal with Russian interest in gaining control
over the pipeline system in exchange for lower prices for
natural gas or debt forgiveness. Azarov said that Ukraine
had a different formula in mind. Ukraine would allow Russian
investors (and others) to get involved in the management of
the pipeline system in exchange for substantial investment.
However, Azarov stressed, Ukraine would always control at
least 51 percent of the operation. Otherwise Ukraine would
lose control of the system and soon be paying USD 230 to 250
per cubic meter for gas. "We understand this very well."


8. (C) Azarov said that Ukraine's long-term dilemma was the
need to restructure its industries to be prepared to pay
world prices for natural gas. However, a 5-7 year transition
period was critical for the Government to institute a serious
energy-savings program and prepare the economy to deal with
international prices. The Ambassador noted that the U.S. was
ready to help in this area - we had a USD one million pilot
energy savings program and advice from experts that would be
offered to a large industrial firm through a competitive
selection process. Azarov bemoaned the fact that Ukraine was
not seizing these opportunities, noting that the World Bank
had long tried to implement more than USD one billion dollars
in energy savings projects. There were also opportunities to
raise money for these projects from the international
financial markets - USD 2.5 billion could be attracted
annually. If Ukraine used these opportunities, the
Government would be able to restructure much of its
industrial base within the next five years.

VAT Refunds - Critical for U.S. Business
--------------

9. (SBU) The Ambassador asked Azarov about an August 9
statement that the Government planned to freeze the payment
of all VAT refunds, arguing that this was an important issue
for U.S. investors. Azarov acknowledged the concern and
pledged that within a week this problem would be resolved.
According to Azarov, on August 2, the last day of its
existence, the Yekhanurov Government had taken nine decisions
that involved more than USD one billion. The Yanukovych
Government was concerned about the possibility of corruption,
given the large sums of money involved, and had frozen all
nine decisions until they could be studied. Azarov told the
Ambassador that he could reassure the U.S. investors involved
that the VAT refund system would be reinstituted within a
week.

Interest in MCC
--------------

10. (SBU) In response to the Ambassador's short description
of the MCC program, Azarov expressed great interest in the
program and listened attentively to the details about the MCC
Threshold Program and the importance of progress on
anti-corruption. Azarov told the Ambassador that he would
appoint someone from his office to be involved with the USG
on the MCC program.

Coalition Politics - Still Talking to Our Ukraine
-------------- --------------

11. (SBU) Azarov confirmed that negotiations with Our
Ukraine about forming a new coalition would continue in
September when the Rada reconvened. At this point, the
Anti-Crisis Coalition, that had brought Yanukovych to power,
consisted of 244 deputies from the Party of Regions,
Socialists, Communists and a number of MP's from Our Ukraine

KIEV 00003129 003 OF 003


and BYuT. Regions had worked hard on a coalition agreement
with Our Ukraine, but it was "a different kind of
organization." Even though most "Our Ukraine" deputies were
in favor of establishing a coalition, others did not think it
was a good idea. Azarov said that Regions welcomed an
expansion of the coalition because it would strengthen the
government's foundation. However, if it didn't happen, "we
will simply continue to cooperate with Our Ukraine." As
Azarov noted, in spite of the lack of a formal coalition
agreement, Our Ukraine was well-represented in the Cabinet.
He also mentioned that during the period of negotiations,
Regions had stayed in close touch with President Yushchenko
to ensure that he wanted to cooperate --"we are interested in
the support of the President (Yushchenko),and we are ready
for compromise."


12. (SBU) In Azarov's view, the recently-signed "Universal"
would not be the basis for a new coalition agreement. The
Universal was a declaration of the vision for the country.
Regions and Our Ukraine had agreed on a good coalition
agreement back in the May/June time frame. The Socialists
had signed on, but the Communists had disagreed with a number
of points. According to Azarov, there had been no time to
finalize negotiations in August and the negotiating process
would continue again in September.


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