UKRAINE: SCENESETTER FOR A/S FRIED'S SEPT 6-7

C O N F I D E N T I A L SECTION 01 OF 03 KIEV 003371

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/23/2016
TAGS: PREL PGOV PARM ETRD ENRG UP
SUBJECT: UKRAINE: SCENESETTER FOR A/S FRIED'S SEPT 6-7
VISIT TO KYIV

Classified By: Charge a.i, reason 1.4 (b,d)


1. (C) Summary: Your visit comes at a critical moment in
Ukraine's post-Orange Revolution political development.
While the primary gains of the Orange Revolution in societal
attitudes, freedom of the press, and foreign and security
policy remain, the orange-dominated political season is
definitively over. The earthquake started by Rada Speaker
Moroz's July 6 defection from a putative Orange Coalition and
continued by President Yushchenko's August 3 appointment of
Viktor Yanukovych as Premier was temporarily stilled by the
August vacation season, but it will resume September 4 as
official Ukraine rumbles back to life. The three crucial
domestic political questions this autumn will be: a
triangular struggle for power and influence between
Yushchenko, Yanukovych, and Moroz; coalition reformulation
(how much of Our Ukraine will join the coalition and whether
the bloc itself will survive); and the development of a
Tymoshenko-led opposition, in terms of composition, tactics,
and targets. Three additional key issues for the fall agenda
mix domestic and external elements: the struggle underway to
define the outlines and tactics of Ukrainian foreign policy,
with Ukraine's attitudes towards NATO and a possible
Membership Action Plan (MAP) the most prominent; negotiations
with Russia over gas prices in the lead up to winter; and WTO
accession, with Yanukovych and his ministers sending
conflicting signals. End Summary.

A triangular struggle for power and influence
--------------


2. (C) Much attention will be focused on the dynamics between
Yushchenko and Yanukovych as the institutions of the
Presidency and Premiership/Cabinet struggle to define power
and influence under the new rules of post-constitutional
reform. For now, the initiative seems to be firmly in the
hands of Yanukovych. While Yushchenko formally on paper
still has more power than President Kwasniewski had in
Poland--a point Kwasniewski has made privately and publicly
on numerous occasions--there is widespread belief, including
among his dwindling supporters, that Yushchenko simply does
not have the will to assert himself in a way which would
serve the interests of his personal political fortunes, the
institution of the Presidency, and Ukraine in general.


3. (C) In advance of naming Yanukovych PM, Yushchenko
revoked a 2005 Presidential decree which gave the MFA the
lead on foreign policy, including NATO and EU integration;
Yanukovych followed the next week by abolishing the Cabinet
subcommittee on foreign policy which Tarasyuk chaired,
folding it under his own responsibilities. On August 28, the
Cabinet of Ministers passed a resolution "forbidding" the
President from directing the CabMin's work. Yanukovych is
reconfiguring the staff of the Cabinet of Ministers to run
political and security issues previously firmly in the domain
of the President, and Donetsk clan lieutenants are taking
over key economic slots throughout state enterprises and
agencies. In contrast, Orange Ministers and their staff are
looking over their shoulders, expecting eventual moves to
unseat them.


4. (C) Wily fox Rada Speaker Moroz should not be
underestimated or counted out of the mix, however. Moroz
proved his skill in both the 1990s and earlier this summer in
being able to maximize his leverage and pursue his own
agendas. Unlike the communists, Moroz will not be completely
at Regions' command, despite persistent rumors that his July
switch was secured with a massive payoff. Moroz will
initially focus on his pet agenda of completing the second
stage of constitutional reform via a bill to decentralize
power and budgetary authority, but he will also look for
opportunities to increase both his own influence and the Rada
itself, not just the Regions-dominated parliamentary
majority. Some argue that Moroz intends to use his skills
and position as Speaker to complete Ukraine's transformation
into a state with a purely parliamentary form of government,
eliminating the office of president or ensuring that the
president is elected by the parliament, before the scheduled
2009 Presidential elections take place.

Coalition reformulation: Whither Our Ukraine?
--------------


5. (SBU) Yushchenko's patchwork election and parliamentary
bloc Our Ukraine (OU) has long been the unruliest problem
child on the Ukrainian political scene, beset by infighting,
the total lack of party or bloc discipline, and repeated
self-inflicted tactical mistakes. Both the narrower People's
Union Our Ukraine (PUOU) party and the six-party OU
parliamentary fraction have been badly divided since the
March 26 elections over whether working with Tymoshenko and

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her bloc BYuT or lining up with Yanukovych and Regions was
better for the party and Yushchenko's reelection prospects
for 2009.


6. (SBU) Even after Yushchenko made his decision August 3 to
nominate Yanukovych as PM and form a blue-orange-pink
government, however, an expected new blue-orange coalition
agreement failed to materialize, and only 30 of 80 OU MPs
followed Yushchenko's lead in the votes for Yanukovych and
the new cabinet. OU heavyweight Petro Poroshenko, denied a
deputy premiership by Regions, scuttled the new coalition
deal and kept his supporters out of August 4 votes. The
entire Rada and most of official KYIV then decamped for the
August vacation season.


7. (C) OU is scheduled to meet September 1 to consider
formally joining the coalition. Presidential Chief of Staff
Rybachuk told us in early August that Poroshenko was so angry
about losing a DPM slot that he might block any OU movement
towards joining the coalition. The size of the OU contingent
willing to join a coalition will be crucial in terms of
balancing the Socialists and Communists in the coalition over
certain policy issues. It now appears most likely that there
will be an expansion of the existing Anti-Crisis Coalition
rather than a separate new OU-Regions coalition agreement.
Now that Regions has succeeded in obtaining the premiership
for Yanukovych, there would be little to gain in abandoning
the Socialists and Communists in favor of the divided and
potentially unreliable Our Ukraine faction. An OU minority
is guaranteed to refuse to join and could move instead into
opposition -- although not out of the bloc itself in order to
maintain their Rada seats.

Opposition: To what? How? And By Whom?
--------------


8. (C) Tymoshenko remains out of KYIV on an extended vacation
as of August 31. Even her party associates profess not to
know what strategy and tactics she will bring back to the
fray in September, though she told them August 10 to get a
good rest, because she was convinced there still could be a
dissolution of the Rada and new elections by the end of the
year. Tymoshenko will certainly be in hard opposition to
Yanukovych's government and the Regions-led Rada majority.
Her party members have been instructed to be present in the
Rada when the session opens September 5 and BYuT removes the
huge Ukrainian flag that has covered their seats since July.
It is still unclear whether she will take active aim at
Yushchenko as well, with an eye towards burnishing her
credentials as the sole Presidential candidate for 2009 who
has remained faithful to the promise of the Maidan.


9. (SBU) A minority of OU MPs and three Socialist MPs will
join Tymoshenko in opposition, but the egos amongst the OU
princelings and enduring rancor towards Tymoshenko will
likely prevent emergence of a unified opposition. Talk of a
potential single national-patriotic force died as soon as
Yushchenko decided not to dissolve parliament, but some young
OU MPs and leaders like Mykola Katerynchuk are likely to
start working very closely with Tymoshenko. Tymoshenko will
also be guarding her flank, since she expects a number of her
BYuT deputies to defect to the ruling coalition soon after
the session opens.

NATO and MAP
--------------


10. (C) The struggle to define who controls Ukrainian foreign
policy will largely focus on NATO and the GOU's desire for a
MAP. While Yushchenko has notably upped the tempo of his NATO
related public commentary in recent weeks, the key to going
forward is now Yanukovych. Yanukovych's planned September
14-15 trip to Brussels will be crucial in this regard.
Notwithstanding what Yushchenko thought was his agreement
with Yanukovych for the latter to send a positive signal to
NATO in August regarding MAP, something he made a
precondition to nominating Yanukovych as Premier, Yanukovych
did not do so. While Yanukovych as PM has publicly stressed
the need for deeper cooperation with NATO and wider public
education about NATO, he has avoided mention of a MAP.


11. (C) Furthermore, Yanukovych's foreign policy adviser Orel
engineered a press statement allegedly quoting Yanukovych
that that the GOU would not pursue a MAP at this time. Later
Orel told the Charge that he was committed to closer and
deeper coordination with NATO, but that a decision on MAP was
a matter for the members of the coalition to consider -- and
the Socialists and Communists had problems with the idea.
Even Regions support could become shaky. Key Akhmetov
associate and purported Donetsk clan political brain Borys
Kolesnykov recently told the press that Regions was against

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NATO membership. However, thus far, the party has not made a
definitive statement on MAP.


12. (C) In terms of gaining wide political consensus outside
the communists about the need to move forward on relations
with NATO via a MAP, and reaching out to Regions' blue base
in the east and the south, having Regions inside the
government rather than in angry opposition to an orange
coalition makes the process potentially more likely to
succeed. The question is the extent and speed with which
Yanukovych will back away from the rhetoric used in the 2004
and 2006 election cycles and return to the decisions made
when he was previously Prime Minister which brought Ukraine
closer to NATO. This included the passage of the 2003 law on
foreign policy and national security which clearly stated
that aspiration to NATO and EU membership served as the basis
for Ukrainian foreign policy.

Gas and Russia
--------------


13. (C) New Minister of Fuels and Energy Yuriy Boyko has
visited Moscow on working visits three times during August to
discuss gas supply, but he is not sharing any details on a
possible new deal. Yanukovych also started engagement with
Russia in Sochi mid-August, but the path forward will not be
easy, even for ministers more inclined to foster closer
relations with Moscow than their Orange predecessors. Boyko
has repeatedly stressed the positive role RosUkrEnergo (RUE)
plays in affording Ukraine cheap energy, suggesting the
non-transparent middleman, which Boyko helped create, likely
will continue its role in any future deal. Public comments
indicate the Ukrainians and Russians are still working on
yearly protocols (rather than a multi-year deal),and the
winter brinkmanship they entail may again be in the offing.
Yanukovych and Azarov have said publicly that Ukraine's 2006
gas price will not change, but that prices in 2007 could
reach $135-170/tcm. Since these price predictions are higher
than those posited by their Orange predecessors, it could
mean Yanukovych's government is trying to dampen public
expectations, or may be facing a very hard line from the
Russians.


14. (C) Boyko recently spoke out in favor of swapping local
assets for access to Russian resources through the
NaftoHaz-RUE JV UkrHazEnergo, thus picking up on a common
refrain heard in European capitals. This UkrHazEnergo
activity may be another aspect of "strategic cooperation"
Boyko has previously mentioned, aimed at providing eastern
Ukraine with cheap energy and those behind RUE with
hyper-profits from Russian gas re-export contracts to Europe.
To strengthen its position in negotiations with Gazprom, the
GOU repeatedly has emphasized that it is filling its gas
storage facilities with 130 mcm/day so that, come winter,
Ukraine will have enough gas both to meet its needs and to
provide reliable transit to Europe.

WTO and domestic lobbies
--------------


15. (SBU) Yanukovych and his ministers have sent mixed
signals on the commitment to pursue WTO membership at the
earliest possible date. Yanukovych, in apparent
contradiction to the Universal (national unity) agreement
signed August 3, has raised the possibility of delaying the
country's WTO accession until after 2006 to allow for
additional consultations with domestic industry on
WTO-related legislation. Deputy PM and Finance Minister
Mykola Azarov raised alarm bells on August 7 by arguing for
an increase in some tariff rates reduced by previous
governments. The new government's plan to reinstate Special
Economic Zones (SEZs) could also prove problematic for
Ukraine's WTO aspirations.


16. (U) Foreign Minister Boris Tarasyuk, meanwhile, has
continually stressed that all members of the coalition had
already agreed to the end of 2006 as the goal for WTO
accession, and that this goal remained GOU policy. In
meetings with the Ambassador, both Azarov and Speaker Moroz
have said that Ukraine would be a member of WTO by year's
end. Minister of Economy Volodymyr Makukha also reaffirmed
the 2006 date on August 29, saying that revision of past
WTO-related commitments was "absolutely unrealistic" and that
the GOU must instead turn its attention to passage of the
legislation that remains outstanding.


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