UKRAINE: PM YANUKOVYCH PROMISES CONTINUITY ON WTO,

C O N F I D E N T I A L SECTION 01 OF 03 KIEV 003905

SIPDIS

SIPDIS

DOE FOR LEKIMOFF, CCALIENDO
NSC ALSO FOR EFISHEL

E.O. 12958: DECL: 10/10/2016
TAGS: PGOV MARR ETRD ENRG EPET OVIP PREL PINR PL
MD, UP
SUBJECT: UKRAINE: PM YANUKOVYCH PROMISES CONTINUITY ON WTO,
ENERGY, TRANSNISTRIA; IMPLEMENTING NATO INFORMATION CAMPAIGN

REF: A. KIEV 3873

B. KIEV 3862

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


1. (C) Summary: Prime Minister Viktor Yanukovych assured EUR
DAS Kramer and Ambassador October 4 that he would continue to
make progress on WTO membership and European and
Euro-Atlantic integration. Funding for a NATO information
campaign was part of the 2007 draft budget. With the support
of the pro-presidential Our Ukraine bloc and the opposition
Bloc Yuliya Tymoshenko (BYuT),Yanukovych was confident of
securing passage of WTO-related legislation before year's
end, although he also recognized that unforeseen problems
could also arise. The Vanco production sharing agreement was
under discussion and should also be finalized by year's end.
Yanukovych said he was working to improve the financial
viability of the Odesa-Brody pipeline and moving toward
market pricing of natural gas in a way that would minimize
economic shocks. Yanukovych listened to Kramer's points on
Transnistria, but did not respond beyond nodding agreement
with Kramer that the policy would not change, and urged
Washington to schedule his visit in November, rather than
December. End summary.

Being a "Predictable Partner"
--------------


2. (U) EUR DAS David Kramer and the Ambassador met with Prime
Minister Viktor Yanukovych October 4 in a 2 1/2-hour meeting
that was supposed to be just one hour. PM Foreign Policy
Adviser Anatoliy Orel, MFA DFM Andriy Veselovsky, and PM
Chief of Staff Serhiy Lovochkin also joined the meeting.
This report covers Yanukovych's comments on economic and
bilateral issues; reftel reported his comments on domestic
politics.


3. (U) After a lengthy initial presentation, PM Yanukovych
wrapped up by stressing that he wished to be a predictable
partner who was known for always telling the truth. He was
anxious to settle political uncertainties so that he could
move Ukraine in a direction that included positive efforts to
combat corruption, which he called a serious disease, and
continue to make progress on WTO membership and European and
Euro-Atlantic integration. He hoped that, by the time of his
visit to the U.S., the coalition building process would have
been forgotten and he could engage his U.S. interlocutors on
a broad range of topics.

NATO Information Campaign
--------------


4. (SBU) Kramer congratulated Yanukovych for the peaceful and
democratic process that resulted in his selection as prime
minister. The Ukrainian government's unity in implementing
policy was in the interest not just of Ukraine but also
Ukraine's partners, including the U.S., the EU, and Russia.
The U.S. had no business making recommendations on forming a
coalition or running a government, but it did want to help on
a number of issues. Kramer said he was particularly
interested in an update on the Ukrainian government's NATO
information campaign and plans to pass WTO-related
legislation.


5. (U) Yanukovych said, when he had discussed the next annual
budget with the Minister of Finance, he had requested that
funding for a NATO information campaign be included. This
funding was now part of the 2007 budget. (Note: The current
2006 budget already included funding for MFA to carry out a
NATO information campaign. Yanukovych did not say whether
the next year's funding represented an increase or funded
broader participation by other ministries and agencies.)

WTO-related Legislation
--------------


6. (SBU) On WTO-related legislation, Yanukovych continued,
Minister of Economy Volodymyr Makukha was responsible for
carrying out the government's plan for reviewing the relevant
bills. The draft bills were being reviewed prior to being
submitted to the Rada. In parallel with this review, the
government was preparing measures to protect the Ukrainian
market and domestic manufacturers from the negative impacts
of WTO membership and identifying the most vulnerable sectors
and products. Yanukovych did not foresee a problem getting

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the bills passed. Since Our Ukraine and BYuT supported WTO
membership, Party of Regions could get the bills enacted even
without the votes of coalition partners Socialist and
Communist Parties. In response to Kramer's question,
Yanukovych said he was "99 percent" certain that the
legislation would be passed by the end of 2006, although he
noted unforeseen problems could also arise.

Energy - Vanco
--------------


6. (SBU) Responding to Kramer's question on the status of
U.S. oil-and-gas company Vanco's Kerch Block production
sharing agreement (PSA),Yanukovych said the Ministry of Fuel
and Energy had provided a written commitment and awarded
exploration rights to the company. The draft PSA was being
reviewed and should be finalized by December.

Energy - Caspian Oil
--------------


7. (C) Kramer noted that, during their meeting in July,
Yanukovych had stated the three elements undergirding his
approach on energy issues -- diversification, transparency,
and elimination of middlemen. Was this still Yanukovych's
approach? Yanukovych replied in the affirmative, but then
focused his remarks on diversification, thus sidestepping
issues of transparency and the status of middlemen like
RosUkrEnergo.


8. (C) Yanukovych said he had discussed the option of
reversing the flow of the Odesa-Brody pipeline with Polish
officials at the September 6-8 Economic Forum in Krynica,
Poland, since there had been almost no progress in developing
a Polish market for the pipeline. He had agreed with Polish
Prime Minister Jaroslaw Kacynski to form a working group on
the issue.


9. (C) Yanukovych said Ukraine and Poland planned to meet
with counterparts from Azerbaijan and Kazakhstan to consider
various options to fully utilize Odesa-Brody. If the working
group succeeded in bringing together crude oil producers with
oil refineries in Poland, this could stimulate further
progress on the oil pipeline and potentially bring an
additional 7 million tons of Caspian oil to Europe.
Yanukovych said Russian companies were interested in
participating. An analysis of a combination of Caspian and
Russian oil had established that both could be used together
in Polish refineries. This was essential, since Caspian
producers alone could not provide sufficient volumes. The
Russian Minister of Energy and Russian oil company Transnafta
were interested in the project. If shipment of this volume
of oil to Poland could be realized, then extension of
Odesa-Brody to Plock and onward to Gdansk would be feasible.
(Yanukovych also referred to the possibility that light
Caspian crude could be shipped to the Polish PKN Orlen
refinery in Kralupy, Czech Republic.)


10. (C) Yanukovych said Ukraine was also considering a North
Sea export option that appeared attractive and could involve
a U.S. company working in partnership with a German one. The
German port of Wilhelmshaven, Yanukovych said, had water deep
enough to locate a large terminal from which oil could be
shipped to the U.S.

Energy - Natural Gas
--------------


11. (C) Yanukovych said the Ukrainian government was working
on obtaining natural gas supplies from Kazakhstan and Russia.
Ukrainian companies were interested in investing in the
exploration and development of natural gas fields with
Russian partners and with Russian GazProm.


12. (U) Yanukovych said whether Ukraine is able to survive a
natural gas price of $135 per thousand cubic meters would
depend largely on Ukraine. Ukraine had to reach market
prices for gas in a short period of time, but, to do so, it
had to eliminate government subsidies while simultaneously
implementing energy conservation measures and protecting
low-income families. The government was working to install
energy efficient systems and technologies in factories and
homes. Increases in gas prices would also force greater
economies in gas usage. Another tactic would be to
substitute the use of coal for natural gas in electricity

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production. This could allow for lower electricity tariffs,
since the price of coal was three times lower than for
natural gas.

Transnistria
--------------


13. (U) As the meeting drew to a close, Kramer said he wanted
to raise two final issues -- Transnistria and the timing of
Yanukovych's visit to Washington. He said he hoped Ukraine
would remain committed to its customs agreement with Moldova
and its support for the EU Border Assistance Mission. The
U.S. strongly supports Ukraine's actions, which was the right
approach for Ukraine in both areas. Yanukovych nodded, but
offered no comment.

Washington Visit
--------------


14. (C) Kramer continued that the Secretary had recently said
she wanted Yanukovych to visit Washington sooner rather than
later. As a practical matter, however, the visit could not
happen before the U.S. Congressional elections in November.
While Washington wanted the visit to take place before the
end of the year, December looked to be more of a possibility
than November. Yanukovych responded that, while he would
accept any timing, he would prefer that a visit take place
sometime in the last ten days of November. December was
always a busy time, with finalizing the government budget and
the government plan of action. He would also probably be
busy shepherding WTO-related legislation through parliament.


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