TYMOSHENKO ASKS FOR USG ASSISTANCE TO ADDRESS

C O N F I D E N T I A L SECTION 01 OF 04 KYIV 000228

DEPT FOR EUR, EUR/UMB, EEB/OMA
NSC FOR STERLING AND KVIEN
EEB/ESC/IEC FOR SGALLOGLY AND LWRIGHT
DOE FOR LEKIMOF, CCALIENDO, RBOUDREAU
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK

E.O. 12958: DECL: 02/02/2019
TAGS: EFIN ENRG EU PGOV PREL PU UP
SUBJECT: TYMOSHENKO ASKS FOR USG ASSISTANCE TO ADDRESS
CRISIS

Classified By: Ambassador William Taylor. Reasons 1.4 (b) and (d)


1. (C) Summary and action request: Prime Minister
Tymoshenko during a February 2 meeting with the Ambassador
asked for both economic and political support as she grapples
with Ukraine,s current crisis. She asked specifically for:
1) a USG bilateral budget support loan to help Ukraine
address its budget deficit; 2) an MCC-like assistance
program to counteract Russian influence in Crimea; 3) USG
diplomatic support for an agreement the GOU seeks with the EU
to bolster,s Nafothaz,s financial prospects; 4) an
assessment by U.S. experts of the gas price formula in the
recent Ukraine-Russia agreement; 5) participation by U.S.
firms in transportation, energy, and environmental projects;
6) a U.S. organized initiative to ask President Yushchenko to
refrain from interference in the GOU,s work; and 7) an
invitation to Washington for high level meetings. She may
raise some of these proposals if she meets with the Vice
President in Munich this weekend. Embassy Kyiv would welcome
Washington reaction and guidance concerning Tymoshenko,s
requests.


2. (C) Tymoshenko outlined plans to address the various
aspects of Ukraine,s large budget deficit, especially those
flowing from the GOU,s over-extended pension commitments and
Naftohaz,s debt-ridden balance sheet. Tymoshenko expressed a
wish to reduce Ukraine,s reliance on Russian gas supplies,
noted that Russia had lost more than Ukraine from the recent
gas dispute, and outlined PM Putin,s motivations during the
gas standoff. Stating that despite what has been said of
her, she would not sell out Ukraine,s interests to Russia,
and that she is a strong supporter of Ukraine,s European and
Euro-Atlantic integrations. She also lamented the &harm8
President Yushchenko,s actions have done to Ukraine, and
assessed that his attacks against her have effectively ended
his political career and so damaged her position that
opposition leader Yanukovych must now be counted as the
favorite in the next Presidential election. End Summary.

Three Budget Problems
--------------

3. (C) Tymoshenko noted conditions will not allow Ukraine to
borrow in international credit markets to cover its projected
2009 government budget deficit of UAH 40 billion (USD 5
billion). Ukraine hopes to address the deficit in part with
support from other governments, but letters to the U.S.,
Japan, China, EU, Saudi Arabia, and Russia asking for loans
have gone unanswered, except for Russia which is ready to
consider the GOU request. Tymoshenko added another USD 5
billion for bank recapitalization will be required, but the
IMF will not count such funds in deciding whether Ukraine had
met the IMF,s balanced budget condition. Tymoshenko plans
to bring up the possibility of USG bilateral budget support
when she meets with Vice President Biden this week in Munich.


4. (C) Tymoshenko added pensions are also a budget problem.
One approach would be to stop pension benefits to those who
continue to work and to increase the retirement age. This
would have been difficult in 2005, but now &in the midst of
a Presidential campaign which has already begun8 is
impossible politically. The GOU instead will consider two
schemes to address the pension shortfall. Citizens working
abroad and the self-employed in Ukraine (e.g. small merchants
and some farmers) do not take part in the state pension plan.
The GOU is considering allowing such persons to contribute
to and receive future pensions from the GOU. Projections are
Ukrainians working abroad might contribute some $3 billion
annually, while the self-employed contributions might total
$2.4 billion per year. Tymoshenko cautioned that these plans
have not yet been vetted by the IMF.

Naftohaz,s Budget Situation
--------------

5. (C) Naftohaz,s budget deficit, which Tymoshenko put at
UAH 16 billion, is the third hole in the 2009 budget. This
deficit could be addressed in part by doubling gas rates, but
most households would not pay the higher rates, and
centralized gas and heating systems make it difficult to cut
off individual consumers. Tymoshenko noted such increase
would be akin to &throwing a burning match into a tank of
gasoline8. Instead, Tymoshenko will meet on February 7 with
German Chancellor Merkel to discuss whether Europeans might
pay for the technical gas used to move gas from Russia to the
EU. Were the EU to agree, half of Naftohaz,s deficit would
be eliminated and its pipeline system could be maintained in
a normal state. Tymoshenko urged the USG to support Ukraine
in its talks on this subject with key EU leaders, especially
Merkel and Sarkozy, and believes such an agreement would do
away with Russia,s &monopoly of gas transit8 with Ukraine
and lead to future gas contracts between Ukraine and EU
companies.


6. (C) The other half of Naftohaz,s 2009 budget is
attributable to short-term loans which are coming due.
Tymoshenko argued that Naftohaz hopes to find a &bank pool8
that would allow it to convert this short-term debt into
long-term, ten-year debt, thus allowing the state owned
energy company to overcome the difficulties it will face in
2009 and 2010. Tymoshenko stated she will want to discuss
this possibility of restructuring Naftohaz,s debts "at the
very highest levels8.


7. (C) The Prime Minister added that she keeps hearing about
a &consortium with Russia,8 presumably the suggestion that
Russia and others take an interest in Ukraine,s gas
pipelines system. Tymoshenko claimed she would never allow
such a consortium to be set up, regardless of its packaging.

Business Opportunities for U.S. Firms
-------------- -

8. (C) Tymoshenko claimed that Ukraine hopes to reduce its
dependence on Russian gas by one half. The GOU is developing
a two-year program that will diversify its sources of energy,
including renewables. The program will result in a dramatic
reduction in Kyoto Protocol greenhouse gas emissions, and
Ukraine will then become a seller of "as8 to interested
firms. The GOU is starting a small scale pilot project in
this regard with a Japanese firm, but believes eventually
Ukraine might have &2 billion greenhouse gas units8 to
sell. Tymoshenko would welcome participation by U.S. firms in
its emission program, either by providing technology to
reduce emissions or as buyers of "as8.


9. (C) Tymoshenko also would welcome the participation of
U.S. firms in transportation and energy infrastructure
projects in Ukraine. She envisions U.S. firms as general
contractors for the projects, which could be financed by U.S.
banks. The GOU would provide sovereign guarantees for
long-term debt to finance the projects, which would be
undertaken on sound, commercial principles. The GOU has
already had discussions with China and Japan regarding such
projects, but Tymoshenko wants to see U.S. firms more fully
integrated into Ukraine,s economy.

Tymoshenko on Russia-Ukraine Gas Crisis
-------------- --------------

10. (C) The Prime Minister noted that despite what might be
said about her &pro-Russia moods,, she remains a strong
advocate of Ukraine,s European and Euro-Atlantic
integration. She swore that she would never make a
commitment, not even a short-term compromise, which would be
contrary to Ukraine,s national interests. She does not
understand why Europe abandoned Ukraine during the recent gas
crisis and did not publicly indicate that Ukraine had not
stolen gas.


11. (C) In terms of the gas negotiations themselves,
Tymoshenko characterized her role as &calming the
situation8. The contract formula for setting the gas price
is a new approach, and Tymoshenko indicated she would welcome
U.S. experts assessing the formula and advising whether it
should be revised, which Tymoshenko implied could be as early
as 2010. Tymoshenko wishes the EU had been more forthcoming
in revealing the terms of its gas agreements with Russia,
which would have assisted the Ukrainian side in the
negotiations. Poland had provided information regarding its
contract, and Ukraine had been able to negotiate a price that
is only 74 percent of the price Poland pays. Overall,
according to GOU calculations, it achieved a &fifteen
percent discount8 in the negotiations with Russia.
Tymoshenko claimed that only Belarus pays less than Ukraine,
but she &hadn,t given away a single square centimeter of
Ukraine8 to reach a deal. She also noted as a success the
elimination of the intermediary RUE, which was not just a
corrupt organization, but one which spent money on political
schemes.

Putin,s Motivation
--------------

12. (C) Tymoshenko stated that multi-faceted motivations
underpinned Russian Prime Minister Putin,s actions during
the gas crisis. In particular, he wanted: 1) to show
Europe, especially those who have supported the U.S. missile
defense initiative, that Europe is dependent on Russia; 2) he
wanted to build support for the Nord and South Stream gas
pipelines; and 3) he wanted to take revenge on Ukraine for
its policy during the conflict in Georgia, including
provoking sentiment against the current Ukrainian government.
Tymoshenko assessed that Putin had not achieved any of his
goals, and that he realized such in the days following
Russia,s January 7 gas cutoff. While the gas crisis had
harmed both Ukraine and Russia, the bigger loss was suffered
by Russia.

Russian Influence in Crimea
--------------

13. (C) Tymoshenko expressed concern that Russia, via the
Moscow mayor and the companies he owns and influences, is
investing &billions of dollars8 each year in Crimea.
Ukraine cannot compete with Russia in this regard, and the
attitudes of the residents of Crimea are becoming more
pro-Russia and more anti-Ukraine each year. Tymoshenko called
for a Millennium Challenge Corporation-like program to invest
in Ukraine to counteract Russia,s activities.

The Ukrainian Political Situation
--------------

14. (C) Calling her relations with President Yushchenko a
&SOS situation8, Tymoshenko asked that the Ambassador
organize a meeting with President Yushchenko at the highest
possible level &so that he would stop ruining the country
and interfering with the National Bank of Ukraine and the
government,s work8. She expressed concern about
Yushchenko's attempt to have to the SBU and Prosecutor,s
Office begin criminal prosecutions again her and Naftohaz
officials for their involvement in the gas negotiations. She
also did not discount the possibility that the President
might attempt to impose &martial law8 in the event of a
financial default or social unrest. The Prime Minister added
that the President,s political life was coming to an end and
that he needed to stop having a negative effect on the
country,s life. Tymoshenko vowed further that she would no
longer respond to the President,s accusations against her.


15. (C) Tymoshenko argued that President Yushchenko,s
negative actions, which had first started in mid-2005, had
effectively ended his political career and with regard to the
Tymoshenko Bloc had &killed us by half8. Opposition and
Regions Party head Yanukovych had benefited by the conflict
between the two former orange coalition allies, and
Tymoshenko assessed Yanukovych,s chances of beating her in a
Presidential election at 70 percent if the situation develops
as it appears to be doing. Tymoshenko indicated that she
wants to protect against such a scenario, but that if
Yanukovych should win, the &strategy of the democratic
team8 would be lost and might be regained only in two
generations.

Interest in a Visit to the United States
-------------- ---
16.(C) Tymoshenko also expressed interest in an invitation
to the United States to meet with U.S. government officials
to discuss how the USG might support her government in the
challenges it faces. (Note: Deputy Prime Minster Nemyrya
told the Ambassador after the meeting that he wants to go to
the U.S. in a few weeks to prepare Tymoshenko,s visit.
Nemyrya indicated that during such trip he hopes to finally
resolve the long-standing OPIC issue, and that the Economy
and Defense Ministries had been directed to find a solution
to the problem. End note.)

Comment
--------------

17. (C) Ukraine,s economic crisis has put Tymoshenko in a
tough spot. The Prime Minister,s perception is that
straightforward measures like decreased pension benefits and
gas price increases that would allow the GOU to meet the
IMF,s conditions on a &balanced budget8 would be
politically unpalatable to large numbers of Ukrainians. In
that light, many of the measures the Prime Minister proposed
seek to delay the hard steps that need to taken or to have
others bear at least part of the associated financial burden.


18. (C) Nonetheless, Tymoshenko,s government is attempting
to play what at this point is a very bad economic hand. The
President,s political attacks and lack of support for his
former coalition partner have made the Prime Minister,s task
all the more difficult. The crisis Ukraine faces is real and
severe, and we should give serious consideration to which of
Tymoshenko,s proposals we might support and to what other
U.S. support might be available to assist Ukraine. End
Comment.

TAYLOR