UKRAINE: ENGAGING YANUKOVYCH, THE MAN OF THE MOMENT

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 004313

SIPDIS

SIPDIS

E.O. 12958: DECL: 11/20/2016
TAGS: PGOV PREL UP
SUBJECT: UKRAINE: ENGAGING YANUKOVYCH, THE MAN OF THE MOMENT

REF: KYIV 4298

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


1. (C) Summary. Love him or hate him, the Ukrainian
political elite and intelligentsia agree that Prime Minister
Yanukovych is the man to deal with right now. Four months
ago Yanukovych was painted variously as a puppet of oligarch
Rinat Akhmetov, the Party of Regions, or the Kremlin, but he
has come into his own as the center of decisionmaking, at
least for now, in Kyiv. A combination of wily political
moves to grab power at President Yushchenko's expense and an
effort to position himself as the moderating force in a
coalition of radicals and recalcitrants have increased
Yanukovych's status. At the same time, Yanukovych appears to
be under pressure from Moscow and from some in his own party
to move Ukraine closer to Russia -- or at least, to resist
the temptation to get to close to the West. Even
Yanukovych's detractors, such as opposition leader Tymoshenko
and beleaguered Foreign Minister Tarasyuk, argued to EUR A/S
Fried and the Ambassador last week that positive U.S.
engagement with Yanukovych it the best way to maintain hope
for continued political and economic reform at home, support
Ukraine's Euro-atlantic direction, and keep the Kremlin at
bay.


2. (C) This is a window of opportunity. Yanukovych has asked
us to judge him on his deeds, not his words. He has said the
right things in venues like the Washington Post, but made
contradictory statements to his electorate in Eastern and
Southern Ukraine. His political instincts may not always be
democratic, but he understands the political necessity of a
positive relationship with the West, is eager to overcome the
negative image he has in the West from the 2004 elections,
and appears to be motivated to protect Ukrainian sovereignty
from Russian encroachment. Engaging him, as we have done
since he came into office, has kept him restating his
interest in WTO, the EU, NATO, and reform. This repetition
may be even paying off as the Rada finally moves to pass WTO
legislation, apparently on Yanukovych's orders. As he travels
to Washington in two weeks, the ball is now clearly in the
PM's court. End summary and comment.

Who is Yanukovych?
--------------


3. (C) People favorably inclined to Regions, including MPs
and academics, and now even his "orange" opponents on the
other side of the political fence describe Yanukovych as the
moderating center of the party. They hold up the threat of
the "radical" wing of Regions led by former Kharkiv governor
Kushnarov as the reason why Yanukovych maintains tight
control over the party. Others see the PM as from the mold
of the early post-Soviet leaders, more comfortable with
issuing "ukazi" than trusting democracy. And many were
impressed by Yanukovych's ability to buckle down after his
2004 political disaster, remake himself and his party into
this country's first "post-Orange" politician and lead his
party to political victory in the March 2006 elections.


4. (C) Across the political spectrum here no one believes
that Yanukovych would rather be a puppet of Moscow than the
leader of his own country. During his 18 months in political
exile, Yanukovych transformed himself into a politician who
understands how to work in post-Orange Revolution Ukraine and
to take advantage of a loosely-defined political system.
Tarasyuk confirmed to A/S Fried and the Ambassador that
Yanukovych was not the man he had been two years before; he
didn't want his image to be tarnished in the West, as
Kuchma's had been, and was working hard to repair damage from
the 2004 presidential campaign. This is an opening that the
West can use to engage Yanukovych and his team.


5. (C) Yanukovych has been clear in his recent conversations
with us that he wants to shake the image of authoritarianism
and corruption that dogged him in 2004. As the head of the
government now, no longer just a Kuchma lackey, Yanukovych is
trying to take responsibility for his actions and the actions
of his government. Yanukovych wants respect, to polish his
image, and to protect Ukraine's sovereignty. It may be
difficult to appeal to his moral or ethical code, but he may
respond to sound practical arguments. He is aware that a
good relationship with the West strengthens his hand with
Russia. And he is interested in economic reforms that would
increase trade and investments that benefit Ukraine--and his
financial partners.

New Behaviors - Seeing the Light
--------------


6. (C) In no area has there been a bigger turnaround than
with regard to WTO accession. Soon after taking office in

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August, Yanukovych and his team initially sounded as if they
might be having second thoughts about WTO accession, which in
retrospect may have been more political caution than a change
in policy (septel). Once consultations with industry showed
that there was little opposition to WTO and the President
continued to signal the importance of keeping the accession
on schedule, Yanukovych appeared to have made the political
calculation that there was nothing to be gained by delaying
WTO. It is clear from our recent discussions with Rada
deputies that Regions has orders to pass WTO legislation and
with relatively few changes, and the Socialists are on board
as well. Still, we sense Yanukovych's government has moved
on WTO not because of some conversion to free trade, although
there are clearly Regions businessmen who know the advantages
that WTO membership will bring, but rather for the pragmatic
reason they believe it will benefit them.


7. (C) In other policy areas, Yanukovych's government has
also proven to be more flexible about resorting to old-style
policies, although this flexibility comes short of a
commitment to market principles. When they came into office,
Yanukovych and DPM Azarov signaled their desire to re-install
the Special Economic Zones (SEZs). However, in practice they
have moved cautiously, making some modifications to the SEZ
proposals, and recently agreeing to allow the SEZ proposals
to be considered separately from the budget. Similarly,
Yanukovych has moved away from any major change in economic
relations with Russia, including maintaining a polite silence
on the Single Economic Space and on Russia's suggestions to
"synchronize" the timing of WTO accession.

Checks on Yanukovych's Power
--------------


8. (C) As the rapid movement on WTO in the last month has
demonstrated, Yanukovych can pull key decisions and order
votes when they are needed. At these times, he seems to be
firmly in control over the general policy direction of the
country. At other times, however, there is more internal
government squabbling now than the last time Yanukovych was
PM. For example, there is an open fissure between Energy
Minister Boyko and Deputy Prime Minister Kluyev on energy
policy. Rumblings within Regions suggest that some level of
dissent is tolerated in the party too. But Hrytsenko caveated
that while Yanukovych may not oversee every decision taken,
he selected the people who make them and he is aware of their
policies, thereby suggesting that Yanukovych was tacitly
approving them.


9. (C) There are also societal constraints on Yanukovych now
that were not there before the Orange Revolution that may
moderate some of his impulses. The press is now freer to
criticize him or to expose mistakes or corruption if they
find them. Yanukovych is now responsible to an electorate
that may feel more empowered to vote politicians out of
office than they did before. The opposition, led by
Tymoshenko, has a strong base of popular support. Ukraine
still has a long way to go on democratic development, but
Yanukovych is taking these factors into account as he
formulates his strategies.

But Old Habits Die Hard...
--------------


10. (C) Nevertheless, there have been instances already when
it is clear that Yanukovych and his circle have fallen back
on their old ways, such as inserting government controls in
the economy and tolerating corruption. Internal Affairs
Minister Lutsenko told the Ambassador on November 17 that
contract killings have started up again, not because the PM
is involved, but because organized crime feels safe that
there will be no follow up from the government. NSDC
Secretary Haiduk told Fried and Ambassador the Cabinet is

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using economic policies to pressure businessmen in the Rada
to support the coalition and a number of contacts, including
Tymoshenko, have passed on complaints of pressure on
non-Donetsk businesses. On November 16, Defense Minister
Hrytsenko told us there was less accountability and
transparency now and described his fight against Regions's
property grab attempts within the MOD (reftel).


11. (C) On economic issues, Yanukovych and his government
have shown a predilection to reach for familiar policy tools.
Yanukovych (and his economic team led by Azarov) came into
office with the conviction that they, unlike the "orange"
teams, already knew how to manage the economy. After all,
they would note, hadn't they obtained 12 percent GDP growth
in their last year in office? When there was uncertainty
about the availability of budget revenues, they went back to
accumulating arrears in the payment of VAT refunds, a tried
and true policy. Similarly, when faced with a somewhat weak
harvest and soaring prices on the international grain market

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that threatened to raise the cost of the GOU's bread
subsidies, the GOU intervened in the market and used
licensing and quotas to halt exports. Both of these
solutions had the added benefit of helping friendly interests
and the latter offered good opportunities for rent-seeking
behavior (allocating quotas). Yanukovych almost certainly
did not design these policies, but he has shown little
ability or will to change them.

Russian Pressure
--------------


12. (C) There are concerns among "orange" forces in and out
of the government, as well as among think tankers, that the
Russians are taking a much more activist approach with
Yanukovych than they did with Kuchma, possibly holding good
gas prices and a stable energy relationship hostage to a
variety of demands, such as coordinated WTO accession, the
removal of Tarasyuk and Hrytsenko from the government, or a
toning down of language on NATO membership. There also seems
to be a lot of agreement that there are some in Yanukovych's
circle, including Azarov and Boyko as well as Foreign Policy
Advisor Orel, who are very close to Russia and are nudging
the PM to move in that direction.


13. (C) All agreed that the best way to keep Yanukovych from
sliding towards Moscow was to remind him that he had options.
Tarasyuk and Tymoshenko argued to Fried and Ambassador that
this meant regular contact with Washington officials. There
seems to be agreement that Yanukovych does not want to be the
governor of the Russian province of Ukraine and his business
allies do not want to compete directly with Russian big
business. Yanukovych himself made a pitch to A/S Fried to be
understanding about the Russia factor. For example, the West
needed to understand that until Ukraine could diversify its
energy supplies, Kyiv needed to be mindful not to provoke
Moscow. Strong statements on NATO now could only lead to
high gas prices.

The Ball is in Yanukovych's Court?
--------------


14. (C) Many in opposition to Yanukovych talk about either
undoing the constitutional reforms that gave him his power or
holding early elections next spring. The question is whether
either of these options is good for the country; or whether
ensuring political stability might be the better alternative.
In large part, it depends on which direction Yanukovych
takes Ukraine in the next six months. At a November 17
meeting with Fried, Presidential Secretariat Chief Baloha,
and to a lesser extent Yushchenko, were clear that it was too
soon to assess Yanukovych's intentions, but that all options
were still on the table. The President, who is averse to
confrontation, is clearly still looking for cooperation, but
he has said that he will not accept cooperation at the price
of Ukraine's sovereignty or sacrifice of its European course.


15. (C) Yanukovych's U.S. visit will be his chance to show
and convince us that he is different, that he has changed,
and that he is serious about a real relationship with the
West that balances his long-standing ties with Russia. His
audience will be senior USG officials and western public
opinion, but it will also be his critics and skeptics here in
Ukraine who will pay attention to his every statement and
every meeting. At this point, Ukrainians of all political
stripes agree that Yanukovych is the man of the moment and
that successful engagement with him is the best way to
maintain the gains of the Orange Revolution in terms of
democracy, free speech and media, and integration with
Europe. Whether or not he can deliver is up to him.


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