RUSSIA AND UKRAINE: TWO CHEERS FOR YANU?

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 009018

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/11/2016
TAGS: PREL PGOV ENRG ETRD UP RS
SUBJECT: RUSSIA AND UKRAINE: TWO CHEERS FOR YANU?

REF: A. KIEV 3184

B. MOSCOW 3510

Classified By: Minister-Counselor for Political Affairs Alice Wells. Re
asons: 1.4(B/D).


1. (C) Summary: Moscow was pleased that new Ukrainian PM
Viktor Yanukovich made his first foreign trip to Russia to
meet with President Putin and PM Fradkov in Sochi. Observers
here expect that the tone of the relationship will improve,
but on substance, few saw Yanukovich as a pushover. On the
gas contract, Moscow may moderate the rate of increase in
prices to provide a short-term boost to Yanukovich, but most
expected prices to go up by next spring and did not believe
Ukraine to be an exception to Russia's drive toward market
prices in the former republics. Moscow was heartened by the
referendum requirement for NATO accession in Kiev's Universal
Declaration because it is likely to delay forward movement on
the issue. While Russia will likely renew its push for
Ukrainian participation in the Single Economic Space, few
expect Kiev to move in that direction. Moscow will exploit
the question of Russian language usage in Ukraine to placate
nationalist opinion here. While Russia will seek tactical
advantage with a Ukrainian PM who is favorably disposed to
Moscow, Russia lacks a strategic approach to Ukraine that
would make a broader partnership attractive. End Summary.

Positive Tone in Sochi
--------------


2. (C) On August 15-16, PM Yanukovich met with PM Fradkov
in Sochi to hold bilateral talks on energy and economic
issues and then attended the Eurasian Economic Community
(EurAsEc) "informal" summit as an observer. He met with
President Putin on the margins of the EurAsEc meeting.
Details of the bilateral discussions are still not clear (see
ref A),but Ukrainian Embassy poloff Myroslava Shcherbatyuk
told us the meetings were aimed at restarting bilateral
discussions that had been put on hold for months following
the March elections. On the Russian-Ukrainian gas deal, she
understood the sides had agreed that prices would hold steady
through the winter, but discussions would continue on prices
for the remainder of 2007. The Russians apparently urged the
Ukrainians to deal directly with Turkmenistan on price and
supply terms given their concerns about a sharp jump in
prices next year.

"Small Victory"
--------------


3. (SBU) Yanukovich's Sochi meetings were preceded by
intense press speculation about how accommodating the new
government would be to Russian interests. Given Putin's
full-throated support for Yanukovich in the 2004 elections,
most Kremlin-connected pundits not unexpectedly saw the
formation of a Yanukovich-led government as likely to lead to
a significant improvement in the tone of Ukrainian-Russian
ties. Gleb Pavlovskiy, President of the Effective Policy
Foundation, told interviewers that Yanukovich's success was
"revenge" for being "deprived of his 2004 victory" and hailed
the new prime minister as a "pan-national politician" who
would be a leading presidential candidate based on his desire
for better relations with Russia. Sergey Markov, who like
Pavlovskiy had been a consultant for Yanukovich's 2004
campaign, also blessed the new government for bringing
Ukraine back "from the brink of national division." However,
Markov's triumphalist tone was muted; he considered
Yanukovich's appointment as "a small victory" for Russia
because Moscow's influence in Ukraine had dwindled. He said
Moscow shouldn't believe that Yanukovich would necessarily be
a "pro-Moscow PM." Other articles claimed that Yanukovich
would be constrained by his Donetsk backers and by the terms
of the Universal Declaration.

A Man We Can Do Business With?
--------------


4. (C) Andrey Ryabov, a scholar with the Institute of World
Economics and International Relations (IMEMO),agreed that
the outward tone of the relationship would improve;
rhetorically, at least, Yanukovich would avoid irritating
Russian sensibilities. However, on economic issues in
particular, Yushchenko would likely drive a hard bargain. He
had to be "pro-Ukrainian" on these issues because the bulk of
Yanukovich's Donetsk patrons were opposed to allowing Russian
firms greater access to the Ukrainian market. BBC
correspondent Konstantin Eggert argued that thinking of
Yanukovich as a Russian "puppet" was simplistic and the
Kremlin did not view him that way. Yanukovich was a
Ukrainian nationalist of a different sort than Yushchenko; he
seconded Ryabov's view that the Donestsk clan had their own
problems with Russia. Eggert went on to note that while the

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Kremlin was quite comfortable dealing with a "soft
authoritarian" backed up by business interests, Ukraine's
ongoing transition to a functioning democracy in which fair
elections were held and parties needed to bargain was deeply
disturbing.

GOR: Moving Beyond Wait-and-See
--------------


5. (C) The GOR was not particularly effusive in its public
comments about the new government in Kiev. Putin made phone
calls congratulating both Yushchenko and Yanukovich over the
formation of the government (three days after the fact).
Speaking before the Sochi meetings, MFA Ukraine Desk Senior
Counselor Vyacheslav Yelagin underlined to us that Moscow had
been patient with Ukraine as bargaining over the government
had extended over more than four months. Now that a new
government was in place, Russia was willing to engage.
Yelagin said that a meeting between Putin and Yushchenko was
likely in the fall, with no venue identified yet. (Note:
Shcherbatyuk told us that Putin had been invited to the Babi
Yar commemoration in late-September in Kiev but had not yet
replied. End Note.) Yelagin said the Russians saw the fall
meeting as the formal launch of the Yushchenko-Putin
Commission, which had been agreed to last year but which had
never met. Both Yelagin and Shcherbatyuk said that the full
range of bilateral subcommittees (on economic relations,
humanitarian issues, international cooperation, security, the
Black Sea Fleet and border delineation) would also begin to
meet now that Ukraine had a new government. Shcherbatyuk
said another Yanukovich-Fradkov meeting was likely in Kiev in
November.

Gas Deal Remains in Place, but Prices Rise
--------------


6. (C) While the details of any agreement at Sochi remain
murky, the analysts and the MFA official we talked to thought
it was clear that Kiev would face higher prices -- if not
now, then soon. BBC correspondent Eggert told us that gas
prices were a double-edged sword for Russia. Moscow clearly
preferred Yanukovich in office, Putin also seemed intent on
raising prices to market rates for many of Russia's
neighbors. However, too sharp an increase would negatively
affect the outmoded heavy industry in eastern Ukraine and the
businessmen who own it and who are Yanukovich's patrons.
While a shock to the system caused by a precipitous increase
in energy prices would threaten many of these "industrial
dinosaurs," Eggert said, at the same time it would force
Ukrainian businesses to move away from the remnants of the
Soviet-style economy and move to a more energy efficient
European model. Ryabov pointed to the possibility for
shortages in Ukraine because of insufficient storage of gas
and thought that Russia would want to shore up support for
Yanukovich and help Ukraine through a difficult winter.
However, when spring arrives, he predicted that Moscow would
take a harder line on prices.

NATO
--------------


7. (C) Russian analysts parsed the NATO language in the
Universal closely to determine Kiev's direction. Most public
commentary pointed to the Universal's referendum language as
a roadblock to NATO hopes, but some in the nationalist press
speculated that a "well funded brainwashing campaign" would
begin soon to persuade Ukrainians of the benefits of
membership. Reflecting the depth of feeling here on the
issue, Council on Foreign and Defense Policy head Sergey
Karaganov stressed to us that Ukraine's admission into NATO
would be a "poison pill" for U.S.-Russian relations. The
BBC's Eggert pointed out that while FM Tarasyuk and MOD
Hrytsenko would undoubtedly pursue Yushchenko's goal of
membership, those who support NATO in Ukraine face an uphill
challenge. Russia sees the majority of Ukrainians as either
skeptical about the value of NATO or opposed outright to
membership; the Kremlin is counting on the referendum
requirement to slow the process down.


8. (C) Ryabov thought that Yanukovich took a completely
instrumental view of the NATO issue. In any event,
Yanukovich would be focused on the more immediate task of
making sure his Donetsk supporters "grabbed the commanding
heights" of the Ukrainian economy. The NATO question could
be put off until later, when Yanukovich could make an
assessment of the leverage that pursuing NATO membership
could provide in the bilateral relationship with Moscow.
Russia wanted any decision put off for as long as possible.

EU vs. SES?
--------------


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9. (C) Most of our interlocutors attributed limited
significance to Universal language on Ukrainian intentions
toward the EU and the Russian-backed Single Economic Space
(SES). Given the EU's "enlargement fatigue," none thought
that the distant prospects for EU admission would be
sufficient to persuade Ukraine to make the difficult economic
choices needed to prepare for admission (which might threaten
Russian interests). On the SES, Ryabov claimed that the
Kremlin was pessimistic about the likelihood of Ukraine ever
being interested in joining the type of SES that Moscow
envisioned. Kiev wanted a free trade area so it could sell
in Russia's vast and growing market, but did not want the
supranational controls over customs and economic decision
making that Moscow was pushing. In any event, Russia was
paying more attention to the EurAsEc than to the SES. The
MFA's Yelagin acknowledged that Ukraine was not as committed
to the SES concept as were Russia, Kazakhstan and Belarus and
said that at some point a decision would need to be made
about whether Ukraine fit into the SES.

RUSSIAN LANGUAGE USAGE
--------------


10. (C) Yelagin stressed that the issue of Russian language
usage in Ukraine was a concern at the highest levels of the
Russian government and that Moscow did not view this as
solely an internal issue for the Ukrainians to sort out. He
argued that "preventing" the use of Russian in schools and in
the professions was discriminatory and noted acidly that if
Ukraine was so intent on endorsing "European values," then it
should consider allowing people to speak their own language.
Ryabov thought that Yanukovich used the language issue to
appeal to his political base and that Moscow used it to
placate nationalists here, but was skeptical that it would
have much bearing on the bilateral relationship.

COMMENT
--------------


11. (C) While Moscow undoubtedly was pleased that
Yanukovich eventually ended up as PM (given the
alternatives),we were struck by the widespread
acknowledgment among our interlocutors that the relationship
could not return to its cozy, pre-Orange Revolution days.
From Russia's perspective, the tone will improve, but most we
talked to thought that ties would be pragmatic and
business-like. This will likely be reflected in the ongoing
gas discussions, where it seems that the only question
remaining is how sharply gas prices will rise. NATO
membership remains a hot-button issue that dominates any
discussion of Russian-Ukrainian relations, although Russia
sees the referendum requirement as a substantial roadblock
and will hope for delay. While the bilateral consultative
machinery with its raft of commissions will creak back into
gear, few substantive results should be expected, given the
divisions between Ukraine and Russia. We assess that Moscow
has been unable to identify a positive strategy for turning
Ukraine back towards Russia and will try to use the
Yanukovich era to seek what tactical advantages it can.
RUSSELL