S E C R E T SECTION 01 OF 02 KYIV 004251

SIPDIS

SIPDIS

E.O. 12958: DECL: 11/13/2016
TAGS: PGOV PREL UP
SUBJECT: UKRAINE: YANUKOVYCH LAYS MARKERS FOR COOPERATION
WITH PRESIDENT. HRYTSENKO IMPERILED?

REF: A. 04 KIEV 3753

B. KIEV 3425

C. AMBASSADOR-A/S FRIED EMAIL OF OCT 13

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


1. (C) Summary. During a long Sunday afternoon lunch with
Ambassador November 12, Prime Minister Yanukovych said that
while President Yushchenko held up general, vague concepts
like the guarantee of Ukrainian independence as the benchmark
for cooperation with the Yanukovych government, the Prime
Minister was focused on concrete issues. In particular,
there were two issues standing between cooperation with the
President--a law on minority shareholders and alleged
corruption within the MOD. Yanukovych confirmed that there
was a three to four hour meeting scheduled for November 13
between Yanukovych and Yushchenko to decide whether
cooperation was possible. Yanukovych also described Russian
President Putin as uncomfortable with Yanukovych as Prime
Minister, because the latter's popularity with the Russian
people made it hard for Putin to be tough on Ukraine.


2. (C) Comment: Yanukovych invited Ambassador for tennis and
lunch on November 12. The PM was very relaxed and confident
in his tennis game, which he had only learned a couple of
years ago. The tennis and lunch, which included Yanukovych's
older son Oleksandr--a doctor in Donetsk--seemed primarily to
be a get-to-know you event, two days after Ambassador spent a
marathon session at President Yushchenko's dacha (septel).
But when Ambassador raised issues of government and
presidential cooperation, Yanukovych was eager to express his
views. Regarding his U.S. trip, Yanukovych confirmed that he
would arrive in Washington December 3, have meetings on
December 4 and part of December 5, before flying to New York
for meetings on December 5 and 6, before returning to Kyiv.
End comment.

Shareholder rights....
--------------


3. (C) Yanukovych described progress on two issues, both
related to possible corruption within the executive branch,
which he characterized as the litmus tests for cooperation

with Yushchenko. The first, according to Yanukovych, was a
bill that authorized the government to regulate minority
shareholders' ability to block the holding of shareholders'
meetings, raising the threshold for blocking a meeting from
40 percent of shares to 50 percent. The Rada had approved
the law on October 19, but Yushchenko had vetoed it on
November 3. (Note: Head of the Presidential Secretariat
Baloha told Ambassador on November 8 that they had been
offered two million dollars to ensure signature, but they had
refused the money. End note.) Yanukovych, however,
countered that the real reason for the veto was to shield
corrupt officials and businessmen close to the President.


4. (C) Comment: Yushchenko's public justification for the
veto was that the issue of authorizing shareholder meetings
should more properly be reviewed as part of an overall reform
of corporate governance. Most observers believe the change
in the regulation of shareholder meetings was rooted in an
attempt to gain control of UkrNafta, in which state-owned
NaftoHaz owns 50 percent plus one share, while most of the
rest is controlled by oligarch Ihor Kolomoyskiy's Pryvat
Group. The GOU has been trying to gain greater control of
UkrNafta, whose management is controlled by Pryvat. The
allegations of bribery seem improbable, at least if it
involves UkrNafta, since Kolomoyskiy, the only private
interest involved, would have wanted Yushchenko to veto, not
sign the law.

...And alleged corruption at MOD
--------------


5. (S) The second issue was that Yanukovych was convinced
that Defense Minister Hrytsenko had allowed over a billion
dollars in MOD property to be sold without proper
authorization. Yanukovych said that he had seen a large file
compiled by the Yekhanurov government on this. (Note:
Military Intelligence Chief Halaka also told us the week of
Nov. 6 that the Cabinet of Ministers' "control mechanism," a
probable reference to the Ministry of Finance's Audit-Control
Department, had a thick folder on activities within the MOD
over the past year and a half. End note.) While Hrytsenko
had done a lot of good work on defense reform, said
Yanukovych, corruption was unacceptable. Ambassador
commented that firing the pro-Western Hrytsenko could be
viewed as following orders from Moscow. Yanukovych replied
that he would not stand for corruption in his government, but
acknowledged that they would need to find a pro-reform
replacement for Hrytsenko.

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6. (C) Note: The charges of property manipulation have been
bubbling for several weeks, even before the Rada's November 4
move to call Hrytsenko to account; Hrytsenko has publicly
claimed that the issue is in part linked to the valuation of
properties sold, which is set by the State Property Fund, not
the MOD itself. A decision on Hrytsenko's future may come as
early as November 14; the Rada has mandated that Hrytsenko
and FM Tarasyuk address the Rada on their work, and the Rada
may then vote on whether to remove them. Yanukovych
suggested to the press over the weekend that he would like to
see Tarasyuk removed but would reserve opinion on Hrytsenko
until law enforcement bodies passed judgment.


7. (C) Comment: Control over military property has long been
subject to political interference, due to the large amount of
prime real estate inherited from Soviet times, particularly
in Crimea and greater Kyiv. Informed observers claimed that
President Kuchma's firing of Defense Minister Marchuk in
September 2004, when Yanukovych was PM, was related to the
Kuchma team's attempt at regaining control over choice real
estate, which Marchuk had resisted (ref A); Kuchma replaced
him with ex-Defense Minister Kuzmuk, related by marriage to
Kuchma. The Kuchma-Yanukovych era was also marked by many
below-market, long-term leases on choice property in exchange
for future promises to build housing for military officers,
buildings which often never materialized.


8. (C) Comment, continued: Hrytsenko has expended significant
energy since February 2005 to undo some of these questionable
property deals and sack corrupt generals and MOD civilians he
inherited; in fact, Hrytsenko has taken more visible
anti-corruption steps than any other minister since the
Orange Revolution. In September-October, Hrytsenko and his
First Deputy Polyakov told us separately that Yanukovych had
exerted no/no policy pressure on the MOD but had tried to
force his own candidate into the position of head of the
directorate in charge of the MOD's property (ref B). Failing
that, Yanukovych had tried to move the entire directorate
under the direct control of the PM's office, but Hrytsenko
said he had blocked the effort (ref C). Polyakov told us in
mid-October that dismissing officials suspected of corruption
was a double-edged sword, since they often sought revenge by
feeding information to Regions or going to work for them.
For instance, one of the problematic officials Hrytsenko
dismissed in mid 2006 offered his services to the new Regions
government, securing a job at the Ministry of Finance where
he now exerted control over the military budget.

The Russian Relationship: I'm popular north of the border
-------------- --------------


9. (C) Yanukovych claimed that Russian President Putin was
uncomfortable with Yanukovych as Prime Minister, because he
can no longer pursue the same hard-line policies towards
Ukraine as he could when "the Oranges" were in power.
Instead, Putin must take into account Yanukovych's popularity
with the Russian people and moderate his policies.


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