C O N F I D E N T I A L SECTION 01 OF 02 KIEV 003552

SIPDIS

SIPDIS

E.O. 12958: DECL: 09/18/2016
TAGS: ETRD ENRG EPET UP
SUBJECT: UKRAINE: A/S FRIED'S DISCUSSIONS OF ECONOMIC
TOPICS: WTO, ENERGY, REFORM

REF: A. KIEV --- [YANU CABLE]

B. KIEV 2804

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


1. (C) Summary: Speaker of Parliament Moroz told A/S Fried
the parliament (Rada) had begun work on remaining WTO
legislation, but notably made no predictions about when it
would pass. Opposition leader Tymoshenko, on the other hand,
expected Yanukovych's government to significantly slow down
the WTO accession process. On gas, prominent journalist
Yuliya Mostova expressed concerns that Ukraine might focus on
low prices to protect industrialists' interests, to the
detriment of other national interests. She highlighted the
geo-strategic threat if Russia gained control of Ukraine's
gas markets and infrastructure. Speaker Moroz, however, felt
gas negotiations with Russia were going well. Yanukovych
himself showcased the role of Western advice in his economic
program, in which he had a strong focus on business tax
reductions. End Summary.

WTO ACCESSION
--------------


2. (C) In A/S Fried's discussion with Speaker Oleksandr Moroz
September 7, Moroz reported that the Cabinet of Ministers had
already submitted a series of WTO draft laws to the Rada.
The Committees were now working hard on the laws because they
are not simple for the Ukrainian economy. There was the
desire among the Ukrainian leadership to accede to WTO, Moroz
noted, but accession would be hard for Ukraine. Ukraine
needs to be careful to make sure accession didn't adversely
affect trade or production. A/S Fried said he was pleased
that the bilateral was concluded, he hoped the legislation
would pass, and reassured Moroz that accession would be
positive for the Ukrainian economy, so don't let
protectionist influences stop this progress.


3. (C) Comment: Moroz's comments echoed those Yanukovych
made on Tuesday in his speech to the Rada and hinted at the
possibility of a slow down in progress. There was no target
date for accession mentioned. Moroz's take on WTO today
differed from his July meeting with the Ambassador, when he

said he strongly supported WTO accession because it was good
for Ukraine, although he raised concerns about Russian
accession at that time (see ref b).


4. (C) Opposition leader Yulia Tymoshenko predicted to Fried
that Yanukovych would slow down WTO. Regions, she stated,
would slow Ukraine's progress toward WTO membership once it
gained over 300 deputies for the coalition. Tymoshenko noted
that, in his September 5 speech to the Rada, Yanukovych had
said Ukraine should address its membership in WTO "calmly,
without haste, and taking into consideration the interests of
domestic producers." In plain language, Tymoshenko
commented, Yanukovych was saying the process of WTO accession
would be dragged out "endlessly."

GAS AND POLITICS
--------------


5. (C) Yuliya Mostova, Ukraine's leading political
journalist, suggested that Yanukovych would have little
opportunity to renegotiate the gas deal with Russia. Energy
Minister Boiko initially took a tough position in early
August with the Russians, but something changed during the
month, and Boiko and his ministry seem to be taking
instructions from Regions financier Rinat Akhmetov, though
the two never were close in the past. Akhmetov's personal
business interests were in securing as low a gas price as
possible, which could come to the detriment of Ukraine's
national interests, since he would trade political
concessions for cheap gas. Mostova felt Ukraine needed
expensive gas in order to become independent. Even at
$95/tcm, the Ukrainian chemical industry was heading towards
bankruptcy, leading Gazprom to negotiate with individual
firms, offering lower gas for equity. (Comment: Although
higher gas prices have reduced margins and profits at
Ukraine's chemical companies, published financial reports so
far do not suggest the situation is quite as dire as Mostova
states.)


6. (C) The Donetsk clan was attempting to impose its control
over the entire economy, but the energy and fuel industry for
now was not a single integrated entity, Mostova said. Boiko
had tried to bring NaftoHaz under his control, but the head
of NaftoHaz said that he would answer to the PM only.
NaftoHaz had ceased to be profitable. Having delivered 10
billion hryvna ($2 billion) to the state budget in 2005, it
had gone 15 billion hryvnia in the hole in 2006. Partly that
was because it no longer controlled domestic gas

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distribution; RUE and the new joint venture did. Partly it
was due to looting by former NaftoHaz chief Ivchenko. After
becoming PM, Yanukovych invited SBU Chief Dryzhchany to
explain what the SBU had done since last September to prevent
the theft of 13.2 billion hryvnia ($2.6 billion) from
Naftohaz' assets. Mostova noted that under Kuchma, Naftohaz
had a reliable structure contributing to the state budget,
even if Kuchma demanded a 5% cut which netted him $300
million. "There's a difference between corruption and
looting," said Mostova, "and Ivchenko demonstrated the
difference between a nationalist and a patriot."

GAS: THE STRATEGIC ELEMENT
--------------


7. (C) Mostova and her husband DefMin Hrytsenko stressed the
geostrategic threat posed by Russia's gas diplomacy. If
Gazprom/RUE were to conquer Ukraine, it would enjoy unchecked
control over Europe. The U.S. understood this reality much
better than western Europe; what Ukraine needed was for U.S.
energy companies to become involved in the process, such as
realizing the idea floated by former Economics Minister
Yatseniuk of forming a new international consortium to manage
an additional pipeline which could be built. A/S Fried
stressed that the U.S. was supportive of any new projects
that were transparent and commercially viable; the key was to
engage U.S. industry players.


8. (C) Mostova claimed that after Moscow raised the price of
gas to Belarus, Belarusian President Lukashenko had begged
Yushchenko to work together against Russian pressure on gas,
leveraging their common transit grip on Russia, but that
Tarasyuk had convinced Yushchenko to rebuff Lukashenko out of
fear of the U.S. reaction. A/S Fried noted that Lukashenko
was unpredictable and increasingly desperate.


9. (C) Speaker Moroz, on the other hand, argued gas
negotiations with Russia were proceeding well. Russia's
decision to raise gas prices was not a political decision, he
claimed. Ukrainian agreement on gas prices would add a new
economic aspect to foreign policy -- Ukraine would be seen as
a sovereign and independent country. There were ongoing
Ukrainian government consultations on how to reduce energy
dependence on Russia, which was a good sign for Ukrainian
foreign policy. A/S Fried said that he was glad Ukraine was
working on decreasing energy dependence on Russia, but Russia
would always be a major supplier. The key was that energy
relations be based on transparency and market principles, not
the interests of a small group of people.

YANUKOVYCH: STUDENT OF WESTERN REFORMS?
--------------


10. (C) In addition to his comments in ref a, PM Yanukovych
highlighted to A/S Fried his plans for Ukraine's development
up to 2011. The consultancy McKinsey was helping the GOU,
and Yanukovych felt McKinsey's experience in other CIS
countries was applicable to Ukraine, with some modifications.
Yanukovych also claimed his government was closely studying
recommendations of the World Bank, which he stated were
largely in line with his government's basic line. (Comment:
We interpreted Yanukovych's repeated citing of McKinsey and
the World Bank as an attempt to establish his economic bona
fides with us.)


11. (C) While he bewailed the UAH 6 billion (approximately
USD 1.2 billion) budget deficit he had inherited, Yanukovych
specifically focused on reducing the business tax burden. He
promised to repeal an indirect 7 percent tax on manufacturers
that resulted in declining production and thus cut budget
revenues. Similarly, he argued that the previous government
had forced state monopolies to increase their contributions
to the budget by 25 percent, and the state monopolies had in
turn financed this by increasing rates for business, so
business was really paying. Yanukovych said he would end
this squeezing of state monopolies, so they in turn could
reduce rates. (Comment: We expect rail freight rates would
be a key item among the state monopolies.)


12. (U) A/S Fried has cleared this cable.


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