WESTERN UKRAINE VIEWS ON ECONOMY, EUROPE, AND

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000865

SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 05/20/2019
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: WESTERN UKRAINE VIEWS ON ECONOMY, EUROPE, AND
YATSENYUK

REF: A. KYIV 605

B. KYIV 590

Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4 (B) AND (D)


1. (C) Summary. Remittances from abroad are falling and
banks are still shaky, but the economy in western Ukraine has
stabilized in recent weeks, the Ambassador heard in
Ivano-Frankivsk and Chernivtsi on May 13-15. On his final
trip outside Kyiv before departing post, the Ambassador met
with governors and mayors, toured a gas transport and storage
facility, and took the political pulse of what is arguably
Ukraine's most Europe-oriented population. Local leaders
told us that flood damage required greater central government
funding, and that Romania was posing potential trans-boundary
problems. The Ambassador heard that hometown favorite
Arseniy Yatsenyuk will likely receive significant support in
the upcoming Presidential vote, while the recent success of
the nationalist Svoboda party in Ternopil oblast council
elections "by no means shows the real picture" in the west.
End summary.

Regional Economy
--------------


2. (SBU) On the back of remittances from young adults, who
have left behind what one observer called an "unruly,
parentless generation of children," western Ukraine's
economic growth rates are top in the country, according to
Chernivtsi Governor Volodymyr Kulish. Both Kulish and his
fellow Governor Mykola Palichuk of Ivano-Frankivsk (I-F) told
the Ambassador that Western Union and bank transfers are
fueling the construction industry and provide revenue for
local budgets. However, Governor Kulish said that
remittances are down 40 percent this year, as many from the
Bukovina region, which straddles the Ukrainian-Romanian
border, have returned from abroad due to decreased demand for
labor in Western and Central European countries. Kulish said
there was a net inflow of migrants into his region for the
first time in years.


3. (SBU) U.S. observers we spoke with confirmed that both
towns and villages in western Ukraine continue to see new
multi-story houses built amidst dachas and garden plots,
albeit more slowly than in recent years. Such homes are both
a store of wealth and a mark of prestige for workers sending
money from abroad, even if they have no access to electricity
or running water. Governor Kulish stated that there had been
19 percent growth in the construction sector in 2008, with no
fall recorded thus far in 2009. Very little rural housing
development had been driven by bank loans, he said, as
property owners and builders operate on a "pay-as-you-go"
basis.


4. (SBU) I-F's Governor Palichuk commented that significant
problems remain in the banking sector, where loans are not
being issued and trust has not been fully restored after
panicky depositors rushed to withdraw savings in January and
February. He expressed concern that consumption would
continue to fall, with urban dwellers unable to finance new
cars, housing, or purchases of durable goods. Palichuk told
the Ambassador that he had intervened personally as a
"guarantor" between banks and enterprises to secure loan
prolongations, maintain low interest rates, and extend grace
periods, ultimately allowing businesses to stop short of
firing employees. But he worried that with home safes sold
out in stores and depositors only interested in very
short-term deposits, the local banking sector's problems were
far from resolved.


5. (SBU) I-F's Palichuk stated that his oblast had overcome
a sharp decline in industrial production, in part due to
Presidential intervention. Palichuk credited Yushchenko with
brokering an arrangement with an importer in Azerbaijan to
buy cement from the largest plant in Ivano-Frankivsk, which
had stood idle in the first weeks of 2009. Also heading a
relatively non-industrialized oblast, Governor Kulish said
that over 70 percent of families in the Chernivtsi region
rely on land plots bigger than a hectare (2.5 acres) for
sustenance and small-scale trade. Kulish hoped to assist
farmers by attracting investment in food processing for

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export to Europe.


6. (SBU) Palichuk said that the I-F oblast had no public
arrears owed to teachers or hospital workers, due to "manual
management" of budget expenditures. He described a fiscal
scenario where local governments were "on the edge" of not
meeting non-discretionary payments and he confirmed that the
oblast was spending no money this year on capital projects.
Kulish stated that Chernivtsi had over 2 million UAH
($260,000) in public sector wage arrears. Other observers we
spoke with indicated that employees in Chernivtsi oblast had
also seen a rise in private sector wage arrears and that
there had been talk about whether future payments would be
made in alcohol or in-kind services.

Gas Transit and Storage
--------------


7. (SBU) The Ambassador visited the Bogorodchany gas
transportation hub, a critical way station for gas shipments
to Europe located 20 kilometers outside of Ivano-Frankivsk.
The hub consists of an underground gas storage facility
(UGS),five gas compressor stations, a gas distribution
station, and a currently unused gas conditioning complex that
had been built during the Soviet era to improve the quality
of exported gas. Deputy Director of Ukrtransgaz's local
subsidiary Prykarpattiatransgaz (PTG),Yevtakhiy Kovaliv,
said the system handles 80-90 percent of all Russian gas
transit to Europe. According to Kovaliv, there had not been
a single transit disruption via spurs into Hungary, Slovakia,
Romania, and Moldova that could be attributed to Ukraine.


8. (SBU) Bogorodchany compressor stations can ship up to 240
million cubic meters of gas per day, but they are currently
running at 40 percent capacity, due to decreased downstream
demand in Europe. The hub's UGS is actively pumping excess
gas into natural basins over 1000 meters deep that can be
extracted during the winter peak consumption period.


9. (SBU) PTG experts told the Ambassador that they had been
surprised by Gazprom's decision to shut off supplies during
the January gas crisis. The abrupt fall in pressure forced
technicians to design and implement an emergency plan to
reverse gas flows, ultimately supplying all industrial and
household demand in Ukraine. Prior to the January crisis,
the last time gas flowed eastward was in the 1980s, before
local fields ran dry and when Russian gas fields in Siberia
came fully online.

Flood Relief
--------------


10. (SBU) I-F Mayor Viktor Anushkevychus told us that the
city had provided an adequate response to the summer 2008
flooding and had "liquidated" the problem. His staff was now
attending to future flood prevention, but the city was not
able to finance the cost of needed dam reinforcements. Both
the city ($460,000) and the oblast ($15.8 million) still owed
construction companies considerable sums, but promised
assistance from the central government had not been
forthcoming. I-F Governor Palichuk corroborated the mayor's
story, adding that the GOU did not budget flood relief and
reconstruction funds for 2009.

Concerns of Romanian Nationalism
--------------


11. (C) Chernivtsi Governor Kulish told the Ambassador that
he had noticed a recent regression in relations with Romania
(Ref A). Whereas he had once met frequently with Romanian
senators and governors representing neighboring districts,
his invitations for talks had gone unanswered over the past
4-5 months. Kulish said that Romania had officially fostered
a simplified citizenship process for Bukovinans, and that
roughly 40,000 passports had been issued, demanded by
Ukrainian citizens mostly to facilitate cross-border
commerce. Kulish said he did not rule out the possibility
that Romania could use its foothold to support what he called
a trans-boundary autonomy movement for a greater Romania,
especially in light of recent events in Moldova.


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Political Winds of Change?
--------------


12. (SBU) Kulish explained that Chernivtsi's political
stability had allowed for unity across party lines, which he
said reflected the sentiments of the local population.
Citizens in western Ukraine share aspirations for EU and NATO
membership, said I-F Mayor Anushkevychus, noting that
"right-center" parties with "coinciding views on major
questions" had a strong majority. I-F's Governor Palichuk
said that the President, Prime Minister Tymoshenko, and
former Rada Speaker Yatsenyuk enjoyed similar levels of
popularity.


13. (SBU) Echoing what Lviv Governor Kmit had previously
told the Ambassador (Ref B),I-F Governor Palichuk stated
emphatically that the March 15 victory of nationalist Svoboda
party in the Ternopil oblast elections "by no means shows the
real picture" of regional political dynamics. Palichuk
recalled that Yatsenyuk and Tymoshenko-affiliated parties did
not participate in the Ternopil polling and that BYuT
representatives had tried unsuccessfully to cancel the snap
elections. Palichuk noted that "people will support
something new and with good quality" but have no interest in
right-wing slogans of Svoboda.


14. (SBU) Several young Chernivtsi politicians pointed out
their personal and generational ties to Yatsenyuk, whose
rhetoric and fresh face were compared to President Obama.
The oblast head of Yatsenyuk's NGO Front of Changes, Oleksiy
Kaspruk, said that an eponymous party soon would be formed in
parallel with the NGO, and that Yatsenyuk had told him the
party and NGO would co-exist with separate political and
social goals. Oblast council Party of Regions representative
Oleg Ungurian emphasized his longstanding friendship with
Yatsenyuk, but stated that each was "working in opposite
directions." Ungurian commented that Yatsenyuk was
"excellent, clearly a stand out" as a student at the
Chernivtsi university, but that Yatsenyuk was making the same
mistakes as Yushchenko, Tymoshenko, and Yanukovich by forming
a personality-driven party supported by business tycoons.
United Center oblast council representative Mykhailo Senychak
said that he lived 30 meters from Yatsenyuk's parents and
went to school with Yatsenyuk's family members, but that he
would "wish Yatsenyuk success in five years" when he would be
more seasoned.

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


15. (SBU) The entrepreneurial dynamism and pro-European
sentiment is palpable in western Ukraine, with construction
visible in the cities and countryside, coffee houses full of
students, and European Union flags proudly displayed and
dreams of NATO accession unabashedly uttered. Unlike other
parts of Ukraine, the biggest topic of conversation was not
the economic crisis, but politics, and whether Yatsenyuk had
what it takes to win the presidency. Among those who know
him best, true believers outnumber the doubters, but perhaps
only just.
TAYLOR