YANUKOVYCH CONFIDANT AZAROV PROMISES NEW COALITION

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000244

SIPDIS

STATE FOR EUR/UMB AND EEB/OMA

E.O. 12958: DECL: 02/16/2030
TAGS: PGOV ECON EFIN ENRG UP
SUBJECT: YANUKOVYCH CONFIDANT AZAROV PROMISES NEW COALITION
AND ECONOMIC REFORM

REF: 2009 KYIV 2124

Classified By: Ambassador John F. Tefft for Reasons 1.4 (b) and (d)


1. (C) Summary. Yanukovych confidant and close economic
advisor Mykola Azarov predicted that the President-elect
would be in a stronger position to negotiate a new governing
parliamentary coalition after the February 25 inauguration.
Yanukovych was determined to build a stable coalition to
enable budgetary and economic reforms that would bring
Ukraine out of economic crisis. Azarov was adamant that
Yanukovych would work to avoid early parliamentary elections,
as another four months of campaigning would cause the economy
to fully collapse. On economic reform, Yanukovych would
prioritize budgetary reform, including renegotiating gas
prices with Russia. Reduced expenditures in some areas would
allow Yanukovych to raise wages and pensions as required by
the social spending law passed late in 2009 and to bring the
IMF back to Ukraine. Further reform geared at improving the
business climate would follow. In addition, the Ambassador
stressed the importance of removing highly-enriched uranium
(HEU) from Ukraine to eliminate any possibility of terrorist
access to the material. End Summary

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Inauguration: Confident That It Will Be February 25
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2. (C) Yanukovych campaign chairman, Rada Finance and
Banking Committee chairman, and former Deputy Prime Minister,
Minister of Finance, and State Tax Administrator, Mykola
Azarov, told the Ambassador on February 16 that
President-elect Yanukovych was as confident as one can be in
Ukraine that the inauguration would be February 25. This
would allow the courts time to review and issue decisions on
any fraud cases filed by Yanukovych's opponent, Yulia
Tymoshenko. Yanukovych wanted the inauguration on February
25, although by law he had 30 days from the February 14
Central Election Commission decision on the election, so that
he could begin much needed reforms. Azarov said it was
important to start reform as soon as possible given the
serious economic and social situation in the country. Azarov
estimated that the economy had already declined 37% since
2007 and continued on a downward trend.

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Expect a New Parliamentary Coalition After the Inauguration
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3. (C) Azarov said that it was far more difficult to form a
new parliamentary coalition than to overcome accusations of
falsifications in the election. Nonetheless, Yanukovych and
his Party of Regions would expend every effort to form a new
coalition and avoid early parliamentary elections. Azarov
predicted that Yanukovych would be in a stronger position to
negotiate after the inauguration and that a new coalition
would come together within a week after the inauguration.
Yanukovych would need the Our Ukraine-People's Self Defense
(OU-PSD) faction in the parliament to be able to form a new
coalition; however, Azarov complained of the difficulty of
negotiating with the various components of OU-PSD.
Yanukovych,s condition for new coalition partners would be
that the coalition should remain stable for at least two
years. If others could not agree to maintain a coalition for
2 years, Azarov predicted Yanukovych would want new
parliamentary elections. Azarov said that another four
months in campaign mode would cause the economy to fully
collapse, however, and should be avoided.

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Prime Minister Azarov? Maybe Not
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4. (C) Responding to the Ambassador's question about where
Azarov would end up in the new government, Azarov said we
should talk directly with Yanukovych. (Comment: Although
Azarov in the past has openly said he hoped to be the next
Prime Minister, his chances appear to be dropping. Azarov
admitted that negotiations to bring OU-PSD into the coalition
have been difficult. Yanukovych may need to offer the
position to others to bring them in. End Comment.)

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President,s Phone Call/ HEU/ Nuclear Energy

KYIV 00000244 002 OF 003


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5. (C) The Ambassador noted that the February 11
congratulatory phone call between President Obama and
Yanukovych had gone well and could be considered a good first
step to establishing a positive relationship between the two
leaders. In particular, the Ambassador highlighted the
importance of Ukraine making a decision on the issue of
eliminating stored HEU before Yanukovych traveled to
Washington for the nuclear security summit in April. Nuclear
security was a priority for President Obama. In response,
Azarov said that Yanukovych was grateful for the President's
phone call, which Yanukovych had taken as moral support.
Azarov said that he was well aware of the HEU problem;
however, he turned the conversation to issues related to
Ukraine's civil nuclear power generation. Azarov said that
Ukraine possessed natural uranium deposits that it hoped to
use, including in its own nuclear energy reactors. He
emphasized the need to modernize Ukraine's old nuclear energy
plants and build new reactors. Azarov promised that the new
team expected to work with the United States as a partner in
this modernization. The Ambassador assured Azarov that the
United States and Westinghouse stood ready to work closely
with Ukraine to help it modernize, expand, and diversify its
nuclear energy sector. The Ambassador underscored that on
the separate issue of HEU we also needed to work together to
remove and safeguard stockpiles to prevent any possibility of
terrorist access to the material.

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Economic Reform Cannot Wait
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6. (C) Azarov stressed that Yanukovych would quickly start
to work on reform that would bring economic growth back to
Ukraine. Azarov was critical of Prime Minister Tymoshenko's
management of the economy and said Yanukovych and his team
were taking over at one of the most difficult times in the
economic history of Ukraine. The government is broke;
economic decline continues; lack of reform in the
agricultural sector has left farmers to face higher prices
for inputs without access to credit; and gas payments to
Russia would continue to be a drain on the economy. Reform
under these conditions would be painful, but necessary,
according to Azarov.


7. (C) As a first priority, Yanukovych would implement
budgetary reform. Budgetary savings in some areas would
allow the Party of Regions to raise wages and pensions as
required by the social spending law passed late in 2009.
Azarov estimated that UAH 1.8 billion ($225 million) per
month was needed to fund the social spending law. He pointed
out that Tymoshenko had unjustly spent UAH 5.5 billion in the
last throes of the presidential campaign to issue land titles
to the public. While the Party of Regions wanted to
systemically address land reform issues, Azarov said that
Yanukovych would end this land titling program, reducing
government expenditures. Azarov believes there are many more
programs like this that could be slashed. Azarov reiterated
that Yanukovych would seek to renegotiate gas prices with
Russia to help reduce the burden on the Treasury. Azarov
expected that budgetary reform would be carried out over the
next two years. As a second step, the new President would
address issues that improve the business climate to attract
investment; these would include deregulation, tax reform,
energy efficiency, and ending the moratorium on agricultural
land sales.


8. (C) Ambassador Tefft mentioned that the business community
had impressed upon him, as they have on each of his
predecessors, the importance of establishing a predictable
mechanism for value-added tax (VAT) refunds. Displaying
familiarity with the issue -- Azarov had been instrumental
in establishing the current system -- Azarov said he was
conducting meetings with the local Ukrainian business
community to consider VAT reform. Azarov noted that VAT
claims in 2009 had more than doubled over claims in 2008 and
accused the Tymoshenko government of corruption in the
system. He agreed to meet with U.S. and other foreign
stakeholders to discuss reform. Azarov also stressed that
Yanukovych would tackle corruption in Ukraine to attract
investment.


9. (C) Azarov said that Yanukovych and his government would

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be ready to work with the IMF to bring stability back to the
country so that investors would return. He criticized
Tymoshenko for wasting the $10.6 billion and the extra $2
billion in Special Drawing Rights received from the IMF over
the past year. Azarov, who has extensive experience dealing
with the IMF, hoped to negotiate to ensure a good package for
Ukraine.

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Comment
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9. (C) Azarov is intimately familiar with Ukraine's economic
problems and continues to make notably orthodox arguments
promoting economic reform. Although it is too early to know
whether Yanukovych and his new team will be able to deliver
on their promises to bring the budget under control and make
changes that will attract business, their pragmatic plans for
reform are encouraging. Much will depend on Yanukovych's
ability to build a strong and stable coalition within the
parliament. As we have seen over the past year, the
President and the Prime Minister need to work together or
progress will continue to be stymied.

TEFFT