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06KIEV604 2006-02-15 13:36:00 SECRET Embassy Kyiv
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					  S E C R E T SECTION 01 OF 05 KIEV 000604 


E.O. 12958: DECL: 02/14/2016

REF: A. STATE 7173

B. KIEV 408

C. KIEV 520

D. 05 KIEV 4097

E. 05 KIEV 5174

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

1. (C) Summary: Ukraine's 2004 Orange Revolution revitalized
Ukraine's aspirations to join Euro-Atlantic institutions such
as NATO and the EU, but significant challenges in
transforming the institutions, conditions, and mentalities
inherited from the Soviet Union at independence in 1991
remain. The launching of the NATO-Ukraine Intensified
Dialogue in 2005 highlighted three major challenges on the
road to membership in NATO: low public support for
membership; security sector reform; and intelligence reform.
Ukraine's reform agenda touches on many other issues as well,
including areas where much progress has been made, such as
defense reform, and others where it will be a continual
process, such as political and economic reforms. The planned
high-level interagency road show team (ref A) should stress
U.S. support for Ukraine's aspirations while emphasizing the
need for Ukrainian leaders to deliver on implementation of
their ambitious reform agenda and to become more actively
involved in the public outreach and education campaign about
NATO and why it is in Ukraine's national interests to join
the Alliance. End summary.

Political transformation


2. (C) If the Orange Revolution and the election of Viktor
Yushchenko as President in 2004 reopened Ukraine's stalled
drive towards Europe, a successful free and fair election
March 26 for the Verkhovna Rada (national parliament) and for
regional and local councils is the mandatory next step
forward for Ukrainian hopes to secure approval for a
Membership Action Plan (MAP) in the spring-summer of 2006.
Six weeks prior to the election, the pre-election environment
is completely different from 2004: unfettered freedom of
speech and access to the media; no systematic use of
administrative resources to favor pro-government parties (ref
B). The fluid political dynamics and the possibility that as
many as nine parties might make it over the three-percent
threshold into the next Rada -- six appear to be shoo-ins --
precludes exact predictions about the form and policies of
the next government. Still, the overall direction of
policies will likely remain the same, though the pace may
depend on the configuration of the coalition formed (see ref
C for more details).

3. (SBU) Perhaps Ukraine's greatest political challenge on
the near-term horizon, after the elections and coalition
government formation, is implementing judicial and law
enforcement reform (for the latter, see para 14). Yushchenko
announced judicial reform as one of the government's top five
priorities for 2006 and hopes to lock in Euro-Atlantic
directions in both sectors through concept papers to be
adopted by Presidential decree prior to the March 26
elections. Yushchenko signed a wide-ranging Presidential
decree January 20 with specific taskings to bring Ukrainian
legislation, regulations, and institutions such as the
General Prosecutor's Office (GPO) and the Security Service of
Ukraine (SBU) in compliance with EU norms, based on
recommendations from the Council of Europe, the Parliamentary
Assembly of the Council of Europe (PACE), the EU, and the
Venice Commission. Justice Minister Holovaty's Rule of Law
and Democracy Commission will produce a Judicial Reform
Concept Paper and redraft the Criminal Code. It remains
unclear whether implementation will be overseen by the
National Security and Defense Council (NSDC) or the Cabinet
of Ministers; given turf battles in the aftermath of
constitutional reform transferring certain powers of the
President to the Cabinet/Rada, institutional rivalries could
slow down implementation.

4. (SBU) Tackling corruption was one of the defining issues
of Yushchenko's successful Presidential candidacy. While
certain progress was made in 2005, as reflected by a better
Transparency International rating, the expectations of
Ukrainian citizens were not met. Ukraine failed to receive a
sufficient score on corruption to qualify as a Millennium
Challenge Account (MCA) country; its threshold country
application for MCA assistance focuses on addressing
institutional shortcomings hampering anti-corruption action.
As with judicial reform, there are institutional rivalries
and differences of opinion about likely post-election
political realities between the NSDC, which has the support
of law enforcement and security services, the Cabinet
(Ministries of Interior and Justice), and the GPO on the best
way to proceed on anti-corruption. There are also differing
opinions on what mechanisms should be created to investigate
and prosecute high-level corruption. Yushchenko set a
February 15 deadline for the GOU National Anti-Corruption
Concept Paper, though two parallel processes continue to work
on the issue.

5. (C) Ukraine is one of the most tolerant societies in
Europe, scoring as high as Germany on the Bogdarus scale (ref
D). Nevertheless, Ukrainian leaders must remain vigilant
about the potential for a spike in anti-Semitism. The
Inter-Regional Academy of Personnel Management, a large,
Mid-East-funded commuter university known by its Ukrainian
acronym MAUP, is the leading purveyor of anti-Semitic
material in Ukraine. President Yushchenko and FM Tarasyuk
have both distanced themselves from any connection with MAUP
and have strongly condemned MAUP's anti-Semitic views, most
recently in December and January, respectively. Interior
Minister Lutsenko told EUR A/S Fried February 9 that he was
working with the Education Ministry to deregister MAUP if the
legal case could be made; although the GPO ultimately would
be the organization to take action, Lutsenko remained
optimistic the effort would prevail.

Economic Reforms: WTO, energy security, investment climate



6. (SBU) Ukraine is financially solid with low external
indebtedness, large foreign exchange reserves ($19 billion),
and acceptable fiscal performance. The GOU achieved
significant reforms in 2005; it 1) eliminated tax and tariff
privileges for well-connected businessmen, thus reducing
opportunities for corruption, raising tax revenues, and
enhancing competition; 2) lowered tariffs; 3) liberalized
restrictions on hard currency flows; 4) improved protection
of intellectual property rights; and 5) began open and fair
privatization and procurement tenders. The EU granted
Ukraine Market Economy Status December 1; the U.S. Department
of Commerce plans to announce its decision in mid-February.
However, Yushchenko failed to achieve his stated top policy
objective in 2005 -- accession to the WTO -- due to a
combination of disorganization and infighting within the
governing coalition and a recalcitrant parliament (Rada)
focused on the personal business interests of its members and
a desire to obstruct GOU goals.

7. (SBU) The recent standoff with Russia over gas has put
energy source diversification, increased efficiency, and
domestic exploration back at the top of the policy agenda;
energy security is an issue Ukraine is eager to explore with
NATO. The most energy-inefficient economy in Europe, Ukraine
has a transition economy that has shown strong GDP growth in
recent years, with a balanced mix of industry, agriculture,
and services, low wages, a shrinking state sector, a
relatively stable currency, and growing foreign investment.
In the wake of the recent rise in the price of natural gas
imports, most analysts predict economic growth of between
1.5-3.5 percent in 2006. Thereafter, if Ukraine manages its
fiscal and monetary policies properly, the IMF believes it
can sustain 3-to-5-percent annual growth over the medium

8. (SBU) Net foreign investment per capita remains low
relative to other Central European countries and a limiting
factor in growth and modernization prospects. The business
climate suffers from gaps and contradictions in the legal
base, inadequate capital markets, corruption, and unreliable
courts, though the GOU is seeking improvements. Oligarchic
groupings that gained control of the country's heavy
industries and holdings in other sectors through suspect
privatizations at cut-rate prices dominate Ukrainian
business. Discord about the degree to which previous
privatizations should be annulled discouraged additional
investment in 2005, though the single successful
reprivatization, of the Krivoryzhstal steel mill (sold to
international steel conglomerate Mittal Steel), successfully
doubled total foreign direct investment since independence.

Defense Reform: Much progress, challenges remain



9. (SBU) Defense reform, launched in earnest by former
Defense Minister Marchuk in the Kuchma era, has been
accelerated since February 2005 by President Yushchenko and
Defense Minister Hrytsenko. The MoD will soon release a
Defense White Book detailing the current state of the Armed
Forces and future development plans, a landmark step forward
in public transparency. Downsizing continues (currently at
245,000 troops, to be reduced by 20,000 annually through
2010); the conscription term has been cut to 12 months, with
a target to transition to an all-contract professional force
by 2010. The MOD overhauled Annual Target plans to reflect
reform priorities and are now transitioning in form to a
MAP-like action plan.

10. (SBU) While the 2006 defense budget was significantly
larger than 2005 (up 30 percent to 8 billion hryvnyas, or
roughly $1.6 billion, 2.0 percent of GDP), adequate funding
remains the biggest barrier to quicker implementation of
reform and to reaching desired standards of NATO
compatibility and interoperability. Roughly 90 percent of
the 2005 budget went to sustainment. The 2006 target is 70
percent for sustainment and 30 percent for modernization. A
Joint Rapid Reaction Force based around PARP units, along
with interoperability and deployability, are improving but
are not yet up to NATO standards. The MoD is beginning to
deploy intact units for peacekeeping operations rather than
forming ad hoc units, a practice that in the past resulted in
operational inefficiency and corruption. Ukraine has a
strong desire to participate in and contribute to NATO
operations -- currently providing personnel to NATO Training
Teams in Iraq, airlift for Afghanistan, and operations in
Kosovo and Africa.

11. (SBU) Despite considerable progress, Soviet legacy
challenges continue to bedevil Ukraine, including: excess
facilities and equipment; excess/expiring munitions
stockpiles; housing shortages; the lack of an NCO corps and
civilian capacity at MoD; hazing of conscripts; and
corruption. Hrytsenko has been one of the most aggressive
ministers in fighting corruption by firing/demoting
officials, both civilian and military; he has vowed to
separate the military from the 600-odd commercial enterprises
currently associated with the military in order to reduce
opportunities for graft and increase resources for
operations. Progress has also been slow on headquarters
staff restructuring (positions, roles, missions, operational
planning procedures, joint interoperability).

Legal impediments to accession: referendum


12. (C) There are no known legal impediments to Ukraine's
accession to NATO. However, some Ukrainians, not just NATO
opponents, maintain that a popular referendum on accession
should be held; President Yushchenko has on several occasions
suggested that he supports holding a referendum. Opponents
point to the July 1990 Declaration of Sovereignty by the
(Soviet) Ukrainian Rada, which predated Ukraine's 1991
independence; the Declaration included a stated intent to
become a neutral state that did not participate in military
blocs. A referendum may be called by the President, the
Rada, or through popular initiative involving 3 million
signatures, including at least 100,000 from at least
two-thirds of Ukraine's 25 provinces; several fringe
political parties against NATO accession are attempting to
collect enough signatures to force a referendum before the
March 26 election. Such a referendum could alter accession
dynamics (and might draw out more base supporters for
pro-Russian parties), given the current state of popular
support for accession (see below) and the prospect for heavy
Russian intervention, through media coverage (Russian
channels are prevalent throughout Ukraine and primary news
sources in eastern and southern Ukraine) and covert
activities (sponsorship of anti-NATO NGOs and provocations).

13. (C) Ukraine does not consider Russia's lease for Black
Sea Fleet (BSF) facilities in Sevastopol and elsewhere in
Crimea and along the Black Sea Coast as a legal impediment to
move forward on NATO accession; the current BSF lease runs
through 2017. Ukraine under Yushchenko has adopted a more
vigorous approach to clarifying the terms of the BSF presence
in Ukraine and resolving a series of unauthorized activities
and unfulfilled obligations. Ukraine also currently hosts
two radar sites, in Sevastopol and Mukacheve, which are part
of Russia's early warning radar net. With the transfer of
control of the sites from the MoD to the National Space
Agency of Ukraine (NSAU), recent public disclosure that
Russia only covers 20 percent of the operating costs, and
suggestions from Russian officials that it should establish
new radar sites on Russian territory in the next three-five
years, the fate of the radar sites has become a subject of
public speculation. In early February, Ukrainian officials
reached out to working-level U.S. counterparts, attempting to
gauge potential NATO/U.S. interest in the sites.

Security/Intel Challenges: reform, oversight, sharing



14. (C) Reform of the wider security sector is one of the
three greatest challenges identified in the Ukraine-NATO
Intensified Dialogue. Security sector reform lags the
progress made to date in defense reform and involves more
politicized institutions. That said, the GOU has established
an ambitious schedule for security sector reform, led by an
NSDC Working Group, which hopes to produce a White Paper in
November 2006, the culmination of a year-long review process
involving detailed reviews agency-by-agency to determine
roles, missions, resources, and interaction with other
agencies and elimination of redundant responsibilities (ref

15. (S) Reform of the intelligence sector, particularly the
Security Service of Ukraine (SBU), poses a special challenge.
In his February 9 "State of the Republic" speech before the
Rada, President Yushchenko emphasized that the guiding
principle for the security services should be protection of
citizens' rights, not the application of state power; he
called for the establishment of a citizen's control board.
While intelligence budgets are approved by the Rada, there is
currently no effective Rada oversight of intelligence
activities. There is also a need for stronger executive
branch control, since the intelligence board authorized under
the aegis of the NSDC is currently nonfunctional/nonstaffed;
NSDC First Deputy Secretary Krutov is committed to
reestablishing this body. Current SBU chief Dryzhchany
appears genuinely committed to reform. A separate foreign
intelligence service was established in 2004; Dryzhchany is
committed to give up the SBU's current law enforcement powers
in line with European norms. Still, lingering personal
relationships with former KGB colleagues in the region make
intel reform an issue of ongoing concern.

16. (C) The U.S. and Ukraine have signed a General Security
of Defense Information Agreement (GSODIA), which addresses
protection of classified material, and continue to craft a
supporting implementing agreement. The Main Military
Intelligence Directorate (HUVR) favors the reinvigoration of
the intelligence board under the NSDC to coordinate
intelligence activities and sharing between different
services. Ukraine does not currently have effective
interagency intelligence cooperation; setting up an
implementing mechanism for Operation Active Endeavor-related
intel-sharing requirements, with the Ukrainian Navy and the
6th fleet in Naples serving as the primary points of contact,
could serve as a pilot project in this regard.

Public Support/Education: perhaps the biggest challenge?



17. (C) The low level of public support for NATO membership
may well prove to be the Achilles' Heel of Ukraine's
ambitions to be invited sooner (in 2008) rather than later to
join NATO. There is an unusual chasm between the views of
Ukraine's policy- and opinion-making elite, which
overwhelmingly supports NATO membership, and the general
population, which currently does not. While Ukrainian polls
often suffer from imprecise questioning and dubious
coefficient massaging, it would safe to say that 25-30
percent of Ukrainians are in favor of NATO membership, 30-35
strongly opposed, and the remainder uncertain. (Note: One
of the most extensive polls on this subject, conducted by the
independent Razumkov Center in November 2004 during the week
of the falsified second round Presidential vote, indicated
that 70 percent of government officials, military officers,
journalists, and academics were in favor of eventual NATO
membership, compared to just 30 percent of ordinary

18. (C) These numbers reflect the enduring legacy of both
Soviet-era stereotypes and Kuchma-era cynical manipulation of
media coverage of alleged "NATO" aggression in Serbia and
Iraq. While an aggressive public education campaign about
the "new NATO" and Ukrainian national security interests is
clearly needed, pro-NATO Ukrainian officials to date have
been tentative in their public outreach, given competing
priorities in the run-up to the March elections and concerns
that marginal political forces like Natalya Vitrenko's
Progressive Socialists and Viktor Medvedchuk's SPDU(o) are
manipulating a virulently anti-NATO stance as their best hope
to make it over the three-percent threshold to be seated in
the next Rada.

19. (C) The October 2005 visit and provincial public outreach
activities of NATO PermReps helped initiate a public dialogue
process on NATO and Ukraine's Euro-Atlantic aspirations that
needs to be built upon by official visitors, unofficial
NGO/academic experts, Ukrainian government activities, and
support from other Ukrainian interest groups, whether from
civil society or the business sector. While some new NATO
members like Slovakia, Hungary, and Slovenia successfully
overcame similarly low numbers of public support for NATO,
and others like the Baltics shared the legacy of Soviet
domination and strong Russian resistance to their NATO
aspirations, no other previous aspirant country had Ukraine's
centuries-long close cultural, religious, and identity
affiliation with Russia, complicating the public education
process. That said, Bulgaria has historically had friendly
relations with Moscow, and that was no impediment to its
public's embrace of NATO.

20. (C) Moreover, as Yushchenko Security Policy Adviser
Horbulin (a former close associate of ex-President Kuchma)
notes, several years ago there was much higher (approaching
50 percent) support in Ukraine for NATO membership. That
changed when Kuchma's relations with the West became
troublesome, and the Ukrainian media started to report
negatively about NATO. If the March 26 elections vote in a
government interested in NATO membership, there will likely
be the necessary information campaign to build up public
support. The situation would look different if the next
government did not share that enthusiasm for NATO.

21. (U) Visit Embassy Kiev's classified website at: