UKRAINE: YUSHCHENKO DISCUSSES ENERGY, RUSSIA,

C O N F I D E N T I A L SECTION 01 OF 05 KIEV 000333

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E.O. 12958: DECL: 01/24/2016
TAGS: PREL PGOV ENRG EPET ETRD MARR MCAP RS UP
SUBJECT: UKRAINE: YUSHCHENKO DISCUSSES ENERGY, RUSSIA,
DEFENSE REFORM, DOMESTIC POLITICS

REF: 05 SECTO 9 (S-YUSHCHENKO DECEMBER 7)

Classified By: Ambassador, reason 1.4 (b,d)


1. (C) Summary: In a January 23 meeting with EUR Assistant
Secretary Fried, EB Assistant Secretary Wayne, Assistant

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Secretary of Defense for International Security Policy Flory,

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NSC Director Wilson, and Ambassador, President Yushchenko
Yushchenko said energy issues were at the center of his
agenda; he made a pitch for U.S. technical assistance on
energy policy, particularly with regard to nuclear energy and
energy conservation. He sought U.S. reaction to Ukrainian
aspirations to develop a closed nuclear fuel cycle as a means
to reduce dependency on Russia, which currently enjoys a
monopoly on nuclear fuel supply to Ukraine. Yushchenko
returned repeatedly to the topic of RosUkrEnergo (RUE)
throughout the 75-minute meeting, reviewing the history and
figures acting as middlemen between Russia and Ukraine on
natural gas supply and transit. He expressed confidence that
recent disputes with Russia over gas and the Black Sea Fleet
could be managed successfully. Defense reform was
progressing based on a move to a fully professional force by
2010, increased armed forces budgets and attention to social
needs of servicemen, and a drive to separate the military
from business. On domestic politics, Yushchenko
characterized the current Rada as a Kuchma-era legacy in its
dying days, described the pain of former ally Tymoshenko's
most recent barrage of attacks, and asked the delegation to
pass word to the President and the Secretary that he was
confident that the forces of democracy would prevail over the
"forces of revenge" in the March 26 elections and form the
next government.


2. (C) A/S Fried stressed that the U.S. was committed to
Ukraine's sovereignty and was ready to work with whichever
government emerged from democratic elections in March, that
Ukraine should not feel as if it stood alone in the face of
Russian pressure on gas, and that the U.S. had serious
concerns about RUE, a shadowy organization associated with
corruption and possibly criminal elements. A/S Flory
underscored Secretary Rumsfeld's commitment to a strong
defense relationship with Ukraine, commended Ukrainian
defense reform efforts, thanked Yushchenko for Ukrainian
contributions to international security, and emphasized U.S.
support for Ukraine's NATO and Euro-Atlantic aspirations.
A/S Wayne informed Yushchenko about USTR's restoration of GSP
privileges earlier January 23, expressed hope that a
U.S.-Ukraine WTO bilateral accession agreement could be
concluded in coming weeks, noted European awareness of the
importance of energy security, and raised concern about the
recent abrogation of an MOU to establish a securities
clearing mechanism. End summary.

U.S. supports Ukraine, worried about RUE
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3. (C) A/S Fried emphasized that the USG delegation came to
Ukraine to deliver a message of USG commitment to Ukraine's
sovereignty, its future as a free nation, and its right to
make its own choices about its place in the world. The Poles
and the Balts had succeeded in asserting such rights in the
face of Russian pressure and opposition, and Ukraine would as
well, as long as its leaders were strong enough to continue
reform. The U.S. supported the principles of the Orange
Revolution -- democratic choice and being the master of one's
own house -- while understanding that politics in newly
democratic countries could be messy at times, as we had seen
in countries like Poland and Hungary in the early 1990s. The
U.S. stood ready to work with the government chosen by the
Ukrainian people in the March parliamentary elections, even
as we hoped that the government would be a strong supporter
of reform.


4. (C) On the New Year's gas showdown with Russia, A/S Fried
referred to Secretary Rice's very strong and clear remarks
about U.S. views of Russia's actions. Ukraine should not
feel as if it stood alone in dealing with this challenge,
even if Russia attempted to create that impression. Both
Fried and A/S Wayne underscored that the Europeans had woken
up to the issue of energy security; the task ahead was to
keep them awake and focused. Fried stressed the importance
of working together -- Ukraine, the U.S., the EU, and Central
Asian countries -- to prevent a monopoly over gas and gas
transmission routes. As Secretary Rice had said publicly, a
medium-to-long-term strategy needed to be pursued. Solutions
such as additional pipelines would take time, but Ukraine had
partners ready to work with it. The U.S. also stood ready to
assist Ukraine in energy conservation and energy efficiency.
Wayne stressed the importance of diversification of sources,
increased domestic exploration, and efficiency. He expressed
optimism that two factors might temper Russia's hard-nosed
energy diplomacy in the coming months: 1) Russia's
aspiration to make energy security the centerpiece of its G8
chairmanship and the vigorous criticism it received over its
New Year's gambit, and 2) Gazprom's interest in selling
shares internationally and convincing investors that it acted
like a normal company.


5. (C) A/S Fried stressed that while the U.S. had sympathy
for Ukraine during the gas crisis and felt the price
compromise at $95 per thousand cubic meters seemed
reasonable, we did not understand or support the enhanced
role for RosUkrEnergo, a suspect, nontransparent firm. The
U.S knew that Ukraine did not invite RUE to the table, but
the U.S. also hoped Ukraine did not feel obligated to
conclude arrangements that might give criminal, corrupt
elements access to the Ukrainian market. Electorates across
Central Europe had responded well to anti-corruption
policies, and the energy sector and RUE in particular were
notorious in that regard.

Yushchenko on RUE and middlemen
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6. (C) Yushchenko, accompanied by FM Borys Tarasyuk and
Foreign Policy Adviser Kostyantyn Tymoshenko, returned
repeatedly to the topic of RUE throughout the 75-minute
meeting. From the day Ukraine had first contracted Turkmen
gas, securing transit through Russia had presented a
challenge. Initially Gazprom, through Gaztransit, handled
transit arrangements directly. Then Gazprom passed such
services to "purely commercial structures," the first being
Itera. Yushchenko professed not to know who had founded
Itera "in some islands near the U.S." but presumed Russian
officials at the highest level were the beneficiaries;
certainly there were no Ukrainians involved now, neither GOU
structures nor individuals. After apparent struggles between
competing Russian interests, EuralTransGas took over, again
without GOU partners, since Gazprom would not allow that.


7. (C) Finally, Yushchenko continued, RosUkrEnergo was
established in 2003, again without formal GOU involvement.
While he could guarantee that Naftohaz had not formally
lobbied for RUE, he could not rule out the possibility that
the idea behind RUE had started at the initiative of
then-President Kuchma in 2002. One version of the ultimate
beneficiaries had Putin and ex-chief of staff Medvedev on the
Russian side and Kuchma and (then-Naftohaz Chair) Yuriy Boyko
on the Ukrainian side, though Yushchenko doubted the scheme
was that simple. Regarding the oft-mentioned role of
(organized crime figure) Semyon Mogilievich, Yushchenko noted
stories in the Russian press suggesting that Mogilievich had
sold his shares in RUE to a high-ranking Russian official.


8. (C) Yushchenko said he had raised a series of questions
about RUE with Putin in Astana January 11. Putin had
professed not to know who was behind RUE, but indicated
Russia was ready to change Gazprombank as the primary listed
shareholder of RUE to Gazprom itself. That changed nothing
for Ukraine, said Yushchenko, beyond serving as confirmation
that Russia was firmly committed to RUE's role as part of its
strategy.


9. (C) Yushchenko repeated his earlier pledge to Ambassador
to hand over GOU documents about RUE. Yushchenko had tasked
the Security Services (SBU) to find out who on the Ukrainian
side was associated with RUE. The investigation continued;
the SBU had uncovered seven to eight persons and different
structures, but no definitive proof of who was genuinely
behind the effort. According to the materials the GOU had,
it could characterize RUE's capital, the amount of shares,
who stood behind the shares, who was the management, who sat
on the board, and what the affiliated structures were. On
the Ukrainian side, representing CentralGasHolding, were
ex-Naftohaz Chair Yuriy Boyko and deputy Naftohaz Chair Ihor
Voronin, plus (UK citizen) Robert Shetler-Jones, (Austrian)
Wolfgang Putschek, "and some Americans." Russian officials
included Gazprom Chair Aleksey Miller, Gazprom UK Chair Yuriy
Komarov, Gazprombank CEO Andrey Akimov, and Gazprom deputy
Chair Aleksandr Medvedev.

Renewed pitch on nuclear energy cooperation
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10. (C) Yushchenko repeated his December pitch to the
Secretary for developing enhanced bilateral cooperation on

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nuclear energy issues (reftel). Russia was very active with
its own nuclear strategy, including a proposed 30 new
reactors. RosAtom had visited Kiev January 21 to explore
related joint activities with Ukraine, including uranium
mining, production of turbines and other equipment (with
KharkivTurboAtom) and power plant IT equipment traditionally
produced in Ukraine. Despite such cooperation, Ukraine felt
frustrated; as Europe's largest producer of uranium, it still
needed to purchase all of its nuclear fuel from Russia, even
if the raw uranium came from Ukraine initially.


11. (C) Yushchenko said that Ukraine's fuel diversification
strategy in the nuclear sector away from complete dependence
on Russia had a two-pronged approach: possible U.S. sources,
along with pursuit of Ukraine's ability to complete the
entire fuel cycle domestically. Nuclear power generated 52
percent of Ukraine's energy; while two-thirds of its reactors
would end their intended life span within eight-ten years,
Ukraine felt confident that it had the technology to safely
extend the life span another 20-30 years. A/S Fried pledged
to take Yushchenko's interest back to Washington for
discussion with DOE and other interested parties; he stressed
that the current standoff with Iran over its own nuclear
program made the issues of enrichment and closed cycle
capabilities very sensitive, even if Ukraine's interest were
purely in the energy generation field. Yushchenko expressed
understanding of the sensitivities of the issue and stood
ready to hear further USG thoughts on the issue. A/S Wayne
added that in the wake of Yushchenko's January 10 phone
conversation with Secretary Rice, she had asked Wayne and
others to look again at the nuclear energy issues Yushchenko
had raised in December (reftel).

Energy Sector problems
--------------


12. (C) FM Tarasyuk intervened to explain to Yushchenko the
efforts at cooperation with Westinghouse on the nuclear fuel
qualification project dating back to the 1990s, noting that
the project had not yet been completed. Ambassador
interjected that Westinghouse had been stymied by a lack of
reform in the energy sector; this was a problem not only in
the nuclear power sector, but also in oil and gas. The
Embassy's nuclear expert had recently met with Presidential
chief of staff Rybachuk and a GOU expert; Rybachuk had passed
some Ukrainian ideas, which we would examine for ways we
could help. Ambassador recounted one example of the
frustrating nature of how energy development issues were
handled in Ukraine: a tender to explore offshore Black Sea
oil/gas fields, a very positive concept in general, had been
issued on Christmas Eve and was slated to close just prior to
the March 26 elections. With this timing, the tender was not
designed for success in terms of attracting Western bids, and
laws regarding exploration continued to be problematic;
Ambassador suggested vested domestic interests wanted to keep
it that way. Ambassador added that while U.S. energy
advisers enjoyed productive meetings with PM Yekhanurov,
others in the energy sector continued to refuse to talk to
them.


13. (C) Yushchenko asked if Energy and Fuels Minister
Plachkov and Naftohaz Chair Ivchenko were not being
cooperative. Ambassador replied that while he had enjoyed a
good meeting with Plachkov, Plachkov expressed no interest in
meeting the U.S. advisers. Yushchenko suggested making a
joint request for a group meeting the week of January 30 to
discuss a wide range of energy issues. Due to absence of the
U.S. expert on nuclear issues that week, Ambassador suggested
two separate meetings, the first on gas and oil, and the
second on nuclear issues a week later. Yushchenko agreed.


14. (C) Yushchenko highlighted progress in the domestic
energy sector. When he became PM in 1999, payment for gas by
users totalled around seven percent of the amount owed; it
had been 99 percent in December and was now 100 percent. The
next sensitive issue would be the liberalization of gas and
energy prices.
Relations with Russia
--------------


15. (C) On the current state of negotiations with Russia,
Yushchenko mentioned the amicable nature of his discussions
with Putin in Astana January 11 and characterized the current
round of discussions with Russian representatives on the
formation of a joint venture between Naftohaz and RUE as very
important to establish the basis for future cooperation
regarding gas. On the Black Sea Fleet (BSF),the relevant
subcommittee of the Yushchenko-Putin Commission would meet in
the near future (note: February 14) with the goal of
executing additional agreements on a series of unresolved
issues, including the lighthouses at the center of the most
recent controversy, other navigational aids, use of radio
frequencies, mitigation of environmental damage due to fleet
activities, and the rules for Russian BSF entry/egress
into/out of Ukrainian territorial waters.


16. (C) A/S Fried acknowledged the U.S. did not fully
understand what animated Russian President Putin. He assured
Yushchenko that while the U.S. sought to work with the
Kremlin on important international challenges in the Balkans
and concerning Iran, the U.S. would not sacrifice our
principles or our friends in order to maintain that
relationship. We would work with the Russians as much as we
could, but when we needed to, we would speak out, as shown by
the Secretary's remarks in the aftermath of the New Year's
gas showdown.

Bilateral security relations strong, reform progressing
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17. (C) A/S Flory stressed that Secretary Rumsfeld was
committed to a strong defense relationship with Ukraine and
to supporting Ukrainian defense reform. He thanked
Yushchenko for Ukrainian contributions to international
security, beginning with troop contributions to Balkans
peacekeeping operations in the 1990s, and continuing through
the present with deployments to Iraq and Kosovo, support to
Operation Active Endeavor, airlift of the Southeastern Europe
Brigade (SEEBRIG) to Afghanistan, and humanitarian assistance
after Hurricane Katrina and the Pakistan earthquake. Defense
Minister Hrytsenko had impressed Rumsfeld and other NATO
ministers with his vision, competence, and commitment to
thorough reform of the defense and security sectors. The
U.S. remained a strong supporter of Ukraine's NATO and
Euro-Atlantic aspirations.


18. (C) Yushchenko referenced Ukraine's military strategy
through 2010. The ongoing experiment with three
non-conscript, contract-based brigades had raised many
problems; Yushchenko had visited one of the units in
December. He remained confident that Ukraine would find a
formula that would make possible the transition to a fully
professional force by 2010. Recalling his own conscription
experience with 150 soldiers crowded into a single barracks,
he said that the military was refitting such barracks to
serve as hostels suitable for families; the Defense Ministry
had created more new housing in 2005 than in the previous
five years combined. The 2006 budget gave the armed forces 8
billion hryvnia (roughly $1.6 billion),the first full
funding since independence, Yushchenko claimed. Most
critical was the adoption of NATO standards, a task to which
Ukraine's leadership was fully committed.


19. (C) Ukraine faced a significant challenge in pruning away
the structural deadwood inherited from Soviet security
structures, Yushchenko continued. Up to 40 percent of
existing military structures were unnecessary and redundant,
lowering the efficiency of what needed to be retained. One
of the next steps on the agenda was getting the military out
of the business world; an estimated 600 enterprises involved
in all sorts of production, repair, and real estate
management needed to be spun away from the formal military
structures. Yushchenko joked that if current patterns
remained in place, Ukraine would need to throw five to ten
generals in jail every year.

Bilateral economic issues
--------------


20. (C) A/S Wayne informed Yushchenko that USTR had announced
earlier January 23 the restoration of Ukraine's GSP
privileges as a result of progress on intellectual property
rights, including both legislative and enforcement
activities; this was an important step forward. The U.S. and
Ukraine were very close to a bilateral WTO accession
agreement, with a handful of issues remaining to be worked
out between Economy Minister Yatsenyuk and USTR. Yatsenyuk
had told Wayne earlier January 23 that he hoped to conclude
the process in several weeks (septel); the U.S. remained
hopeful this would be possible. Ukraine still had several
other bilateral agreements outstanding, and the Rada still
needed to pass additional bills before Ukraine could join the
WTO. Wayne raised one new troubling issue: PM Yekhanurov
had recently signed an order canceling an MOU on establishing
a securities clearing mechanism without consulting with the
World Bank and U.S. beforehand. In most other countries, the
system was industry-owned, not government directed.
Ambassador said he would follow up with relevant Ukrainian
officials. (Note: Ambassador handed Yushchenko a non-paper
on the subject.)

Politics: Rada's final days, democracy will prevail
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21. (C) On the fluid domestic political scene, A/S Fried
repeated the Secretary's counsel in December: coalition
politics could be difficult, but we hoped Yushchenko would
keep his options open. Yushchenko replied that the U.S.
should not be worried about the drama of recent days in the
Rada (parliament); this Rada, elected in 2002 and very much a
creation of former President Kuchma, was staggering through
its final days. It was regrettable that the Rada had proven
unwilling in 2005 after Yushchenko's inauguration to help
consolidate the country and support reform, despite the
presence of some good personalities in the Rada. The tragedy
of the Rada's composition and direction, said Yushchenko, was
that it had been an undemocratic body in its inner workings,
a Kuchma-era leftover not reflective of the real political
needs or moods of the Ukrainian populace.


22. (C) Yushchenko stressed that he had no doubts that the
forces of democracy would prevail in the March elections. He
asked the delegation to pass a message to the President and
the Secretary that the "forces of revenge," which he defined
as the Party of Regions, the Communists, the SPDU(o),and
Natalya Vitrenko, would poll no more than 30-35 percent
combined. The post-election issue facing Ukraine would be
not which parties won, but how to forge a democratic
coalition with a reform agenda. Yushchenko said that it had
been very painful when the "loved by all" Yuliya Tymoshenko
had unleashed a new barrage of accusations in the wake of the
January 4 gas deal and had supported the January 10 Rada vote
to dismiss the Yekhanurov government. Regardless, he
concluded, the winners of the March 26 elections would have
to find common ground.


23. (U) The delegation cleared this cable.


24. (U) Visit Embassy Kiev's classified website at
www.state.sgov.gov/p/eur/kiev.
HERBST