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S E C R E T SECTION 01 OF 05 KIEV 000604 
 
SIPDIS 
 
E.O. 12958: DECL: 02/14/2016 
TAGS: PREL NATO
SUBJECT: UKRAINE ON THE ROAD TO NATO:  A STATUS REPORT 
 
REF: A. STATE 7173 
 
     ¶B. KIEV 408 
     ¶C. KIEV 520 
     ¶D. 05 KIEV 4097 
     ¶E. 05 KIEV 5174 
 
Classified By: Ambassador, reason 1.4 (b,d) 
 
¶1. (C) Summary:  Ukraine's 2004 Orange Revolution revitalized 
Ukraine's aspirations to join Euro-Atlantic institutions such 
as NATO and the EU, but significant challenges in 
transforming the institutions, conditions, and mentalities 
inherited from the Soviet Union at independence in 1991 
remain.  The launching of the NATO-Ukraine Intensified 
Dialogue in 2005 highlighted three major challenges on the 
road to membership in NATO: low public support for 
membership; security sector reform; and intelligence reform. 
Ukraine's reform agenda touches on many other issues as well, 
including areas where much progress has been made, such as 
defense reform, and others where it will be a continual 
process, such as political and economic reforms.  The planned 
high-level interagency road show team (ref A) should stress 
U.S. support for Ukraine's aspirations while emphasizing the 
need for Ukrainian leaders to deliver on implementation of 
their ambitious reform agenda and to become more actively 
involved in the public outreach and education campaign about 
NATO and why it is in Ukraine's national interests to join 
the Alliance.  End summary. 
 
Political transformation 
------------------------ 
 
¶2. (C) If the Orange Revolution and the election of Viktor 
Yushchenko as President in 2004 reopened Ukraine's stalled 
drive towards Europe, a successful free and fair election 
March 26 for the Verkhovna Rada (national parliament) and for 
regional and local councils is the mandatory next step 
forward for Ukrainian hopes to secure approval for a 
Membership Action Plan (MAP) in the spring-summer of 2006. 
Six weeks prior to the election, the pre-election environment 
is completely different from 2004:  unfettered freedom of 
speech and access to the media; no systematic use of 
administrative resources to favor pro-government parties (ref 
B).  The fluid political dynamics and the possibility that as 
many as nine parties might make it over the three-percent 
threshold into the next Rada -- six appear to be shoo-ins -- 
precludes exact predictions about the form and policies of 
the next government.  Still, the overall direction of 
policies will likely remain the same, though the pace may 
depend on the configuration of the coalition formed (see ref 
C for more details). 
 
¶3. (SBU) Perhaps Ukraine's greatest political challenge on 
the near-term horizon, after the elections and coalition 
government formation, is implementing judicial and law 
enforcement reform (for the latter, see para 14).  Yushchenko 
announced judicial reform as one of the government's top five 
priorities for 2006 and hopes to lock in Euro-Atlantic 
directions in both sectors through concept papers to be 
adopted by Presidential decree prior to the March 26 
elections.  Yushchenko signed a wide-ranging Presidential 
decree January 20 with specific taskings to bring Ukrainian 
legislation, regulations, and institutions such as the 
General Prosecutor's Office (GPO) and the Security Service of 
Ukraine (SBU) in compliance with EU norms, based on 
recommendations from the Council of Europe, the Parliamentary 
Assembly of the Council of Europe (PACE), the EU, and the 
Venice Commission.  Justice Minister Holovaty's Rule of Law 
and Democracy Commission will produce a Judicial Reform 
Concept Paper and redraft the Criminal Code.  It remains 
unclear whether implementation will be overseen by the 
National Security and Defense Council (NSDC) or the Cabinet 
of Ministers; given turf battles in the aftermath of 
constitutional reform transferring certain powers of the 
President to the Cabinet/Rada, institutional rivalries could 
slow down implementation. 
 
¶4. (SBU) Tackling corruption was one of the defining issues 
of Yushchenko's successful Presidential candidacy.  While 
certain progress was made in 2005, as reflected by a better 
Transparency International rating, the expectations of 
Ukrainian citizens were not met.  Ukraine failed to receive a 
sufficient score on corruption to qualify as a Millennium 
Challenge Account (MCA) country; its threshold country 
application for MCA assistance focuses on addressing 
institutional shortcomings hampering anti-corruption action. 
As with judicial reform, there are institutional rivalries 
and differences of opinion about likely post-election 
political realities between the NSDC, which has the support 
of law enforcement and security services, the Cabinet 
(Ministries of Interior and Justice), and the GPO on the best 
way to proceed on anti-corruption.  There are also differing 
opinions on what mechanisms should be created to investigate 
and prosecute high-level corruption.  Yushchenko set a 
February 15 deadline for the GOU National Anti-Corruption 
Concept Paper, though two parallel processes continue to work 
on the issue. 
 
¶5. (C) Ukraine is one of the most tolerant societies in 
Europe, scoring as high as Germany on the Bogdarus scale (ref 
D).  Nevertheless, Ukrainian leaders must remain vigilant 
about the potential for a spike in anti-Semitism.  The 
Inter-Regional Academy of Personnel Management, a large, 
Mid-East-funded commuter university known by its Ukrainian 
acronym MAUP, is the leading purveyor of anti-Semitic 
material in Ukraine.  President Yushchenko and FM Tarasyuk 
have both distanced themselves from any connection with MAUP 
and have strongly condemned MAUP's anti-Semitic views, most 
recently in December and January, respectively.  Interior 
Minister Lutsenko told EUR A/S Fried February 9 that he was 
working with the Education Ministry to deregister MAUP if the 
legal case could be made; although the GPO ultimately would 
be the organization to take action, Lutsenko remained 
optimistic the effort would prevail. 
 
Economic Reforms:  WTO, energy security, investment climate 
--------------------------------------------- -------------- 
 
¶6. (SBU) Ukraine is financially solid with low external 
indebtedness, large foreign exchange reserves ($19 billion), 
and acceptable fiscal performance.  The GOU achieved 
significant reforms in 2005; it 1) eliminated tax and tariff 
privileges for well-connected businessmen, thus reducing 
opportunities for corruption, raising tax revenues, and 
enhancing competition; 2) lowered tariffs; 3) liberalized 
restrictions on hard currency flows; 4) improved protection 
of intellectual property rights; and 5) began open and fair 
privatization and procurement tenders.  The EU granted 
Ukraine Market Economy Status December 1; the U.S. Department 
of Commerce plans to announce its decision in mid-February. 
However, Yushchenko failed to achieve his stated top policy 
objective in 2005 -- accession to the WTO -- due to a 
combination of disorganization and infighting within the 
governing coalition and a recalcitrant parliament (Rada) 
focused on the personal business interests of its members and 
a desire to obstruct GOU goals. 
 
¶7. (SBU) The recent standoff with Russia over gas has put 
energy source diversification, increased efficiency, and 
domestic exploration back at the top of the policy agenda; 
energy security is an issue Ukraine is eager to explore with 
NATO.  The most energy-inefficient economy in Europe, Ukraine 
has a transition economy that has shown strong GDP growth in 
recent years, with a balanced mix of industry, agriculture, 
and services, low wages, a shrinking state sector, a 
relatively stable currency, and growing foreign investment. 
In the wake of the recent rise in the price of natural gas 
imports, most analysts predict economic growth of between 
1.5-3.5 percent in 2006.  Thereafter, if Ukraine manages its 
fiscal and monetary policies properly, the IMF believes it 
can sustain 3-to-5-percent annual growth over the medium 
term. 
 
¶8. (SBU) Net foreign investment per capita remains low 
relative to other Central European countries and a limiting 
factor in growth and modernization prospects.  The business 
climate suffers from gaps and contradictions in the legal 
base, inadequate capital markets, corruption, and unreliable 
courts, though the GOU is seeking improvements.  Oligarchic 
groupings that gained control of the country's heavy 
industries and holdings in other sectors through suspect 
privatizations at cut-rate prices dominate Ukrainian 
business.  Discord about the degree to which previous 
privatizations should be annulled discouraged additional 
investment in 2005, though the single successful 
reprivatization, of the Krivoryzhstal steel mill (sold to 
international steel conglomerate Mittal Steel), successfully 
doubled total foreign direct investment since independence. 
 
Defense Reform:  Much progress, challenges remain 
--------------------------------------------- ---- 
 
¶9. (SBU) Defense reform, launched in earnest by former 
Defense Minister Marchuk in the Kuchma era, has been 
accelerated since February 2005 by President Yushchenko and 
Defense Minister Hrytsenko.  The MoD will soon release a 
Defense White Book detailing the current state of the Armed 
Forces and future development plans, a landmark step forward 
in public transparency.  Downsizing continues (currently at 
245,000 troops, to be reduced by 20,000 annually through 
2010); the conscription term has been cut to 12 months, with 
a target to transition to an all-contract professional force 
by 2010.  The MOD overhauled Annual Target plans to reflect 
reform priorities and are now transitioning in form to a 
MAP-like action plan. 
 
¶10. (SBU) While the 2006 defense budget was significantly 
larger than 2005 (up 30 percent to 8 billion hryvnyas, or 
roughly $1.6 billion, 2.0 percent of GDP), adequate funding 
remains the biggest barrier to quicker implementation of 
reform and to reaching desired standards of NATO 
compatibility and interoperability.  Roughly 90 percent of 
the 2005 budget went to sustainment.  The 2006 target is 70 
percent for sustainment and 30 percent for modernization.  A 
Joint Rapid Reaction Force based around PARP units, along 
with interoperability and deployability, are improving but 
are not yet up to NATO standards.  The MoD is beginning to 
deploy intact units for peacekeeping operations rather than 
forming ad hoc units, a practice that in the past resulted in 
operational inefficiency and corruption.  Ukraine has a 
strong desire to participate in and contribute to NATO 
operations -- currently providing personnel to NATO Training 
Teams in Iraq, airlift for Afghanistan, and operations in 
Kosovo and Africa. 
 
¶11. (SBU) Despite considerable progress, Soviet legacy 
challenges continue to bedevil Ukraine, including:  excess 
facilities and equipment; excess/expiring munitions 
stockpiles; housing shortages; the lack of an NCO corps and 
civilian capacity at MoD; hazing of conscripts; and 
corruption.  Hrytsenko has been one of the most aggressive 
ministers in fighting corruption by firing/demoting 
officials, both civilian and military; he has vowed to 
separate the military from the 600-odd commercial enterprises 
currently associated with the military in order to reduce 
opportunities for graft and increase resources for 
operations.  Progress has also been slow on headquarters 
staff restructuring (positions, roles, missions, operational 
planning procedures, joint interoperability). 
 
Legal impediments to accession:  referendum 
------------------------------------------- 
 
¶12. (C) There are no known legal impediments to Ukraine's 
accession to NATO.  However, some Ukrainians, not just NATO 
opponents, maintain that a popular referendum on accession 
should be held; President Yushchenko has on several occasions 
suggested that he supports holding a referendum.  Opponents 
point to the July 1990 Declaration of Sovereignty by the 
(Soviet) Ukrainian Rada, which predated Ukraine's 1991 
independence; the Declaration included a stated intent to 
become a neutral state that did not participate in military 
blocs.  A referendum may be called by the President, the 
Rada, or through popular initiative involving 3 million 
signatures, including at least 100,000 from at least 
two-thirds of Ukraine's 25 provinces; several fringe 
political parties against NATO accession are attempting to 
collect enough signatures to force a referendum before the 
March 26 election.  Such a referendum could alter accession 
dynamics (and might draw out more base supporters for 
pro-Russian parties), given the current state of popular 
support for accession (see below) and the prospect for heavy 
Russian intervention, through media coverage (Russian 
channels are prevalent throughout Ukraine and primary news 
sources in eastern and southern Ukraine) and covert 
activities (sponsorship of anti-NATO NGOs and provocations). 
 
¶13. (C) Ukraine does not consider Russia's lease for Black 
Sea Fleet (BSF) facilities in Sevastopol and elsewhere in 
Crimea and along the Black Sea Coast as a legal impediment to 
move forward on NATO accession; the current BSF lease runs 
through 2017.  Ukraine under Yushchenko has adopted a more 
vigorous approach to clarifying the terms of the BSF presence 
in Ukraine and resolving a series of unauthorized activities 
and unfulfilled obligations.  Ukraine also currently hosts 
two radar sites, in Sevastopol and Mukacheve, which are part 
of Russia's early warning radar net.  With the transfer of 
control of the sites from the MoD to the National Space 
Agency of Ukraine (NSAU), recent public disclosure that 
Russia only covers 20 percent of the operating costs, and 
suggestions from Russian officials that it should establish 
new radar sites on Russian territory in the next three-five 
years, the fate of the radar sites has become a subject of 
public speculation.  In early February, Ukrainian officials 
reached out to working-level U.S. counterparts, attempting to 
gauge potential NATO/U.S. interest in the sites. 
 
Security/Intel Challenges:  reform, oversight, sharing 
--------------------------------------------- --------- 
 
¶14. (C) Reform of the wider security sector is one of the 
three greatest challenges identified in the Ukraine-NATO 
Intensified Dialogue.  Security sector reform lags the 
progress made to date in defense reform and involves more 
politicized institutions.  That said, the GOU has established 
an ambitious schedule for security sector reform, led by an 
NSDC Working Group, which hopes to produce a White Paper in 
November 2006, the culmination of a year-long review process 
involving detailed reviews agency-by-agency to determine 
roles, missions, resources, and interaction with other 
agencies and elimination of redundant responsibilities (ref 
E). 
 
¶15. (S) Reform of the intelligence sector, particularly the 
Security Service of Ukraine (SBU), poses a special challenge. 
 In his February 9 "State of the Republic" speech before the 
Rada, President Yushchenko emphasized that the guiding 
principle for the security services should be protection of 
citizens' rights, not the application of state power; he 
called for the establishment of a citizen's control board. 
While intelligence budgets are approved by the Rada, there is 
currently no effective Rada oversight of intelligence 
activities.  There is also a need for stronger executive 
branch control, since the intelligence board authorized under 
the aegis of the NSDC is currently nonfunctional/nonstaffed; 
NSDC First Deputy Secretary Krutov is committed to 
reestablishing this body.  Current SBU chief Dryzhchany 
appears genuinely committed to reform.  A separate foreign 
intelligence service was established in 2004; Dryzhchany is 
committed to give up the SBU's current law enforcement powers 
in line with European norms.  Still, lingering personal 
relationships with former KGB colleagues in the region make 
intel reform an issue of ongoing concern. 
 
¶16. (C) The U.S. and Ukraine have signed a General Security 
of Defense Information Agreement (GSODIA), which addresses 
protection of classified material, and continue to craft a 
supporting implementing agreement.  The Main Military 
Intelligence Directorate (HUVR) favors the reinvigoration of 
the intelligence board under the NSDC to coordinate 
intelligence activities and sharing between different 
services.  Ukraine does not currently have effective 
interagency intelligence cooperation; setting up an 
implementing mechanism for Operation Active Endeavor-related 
intel-sharing requirements, with the Ukrainian Navy and the 
6th fleet in Naples serving as the primary points of contact, 
could serve as a pilot project in this regard. 
 
Public Support/Education:  perhaps the biggest challenge? 
--------------------------------------------- ------------ 
 
¶17. (C) The low level of public support for NATO membership 
may well prove to be the Achilles' Heel of Ukraine's 
ambitions to be invited sooner (in 2008) rather than later to 
join NATO.  There is an unusual chasm between the views of 
Ukraine's policy- and opinion-making elite, which 
overwhelmingly supports NATO membership, and the general 
population, which currently does not.  While Ukrainian polls 
often suffer from imprecise questioning and dubious 
coefficient massaging, it would safe to say that 25-30 
percent of Ukrainians are in favor of NATO membership, 30-35 
strongly opposed, and the remainder uncertain.  (Note:  One 
of the most extensive polls on this subject, conducted by the 
independent Razumkov Center in November 2004 during the week 
of the falsified second round Presidential vote, indicated 
that 70 percent of government officials, military officers, 
journalists, and academics were in favor of eventual NATO 
membership, compared to just 30 percent of ordinary 
Ukrainians.) 
 
¶18. (C) These numbers reflect the enduring legacy of both 
Soviet-era stereotypes and Kuchma-era cynical manipulation of 
media coverage of alleged "NATO" aggression in Serbia and 
Iraq.  While an aggressive public education campaign about 
the "new NATO" and Ukrainian national security interests is 
clearly needed, pro-NATO Ukrainian officials to date have 
been tentative in their public outreach, given competing 
priorities in the run-up to the March elections and concerns 
that marginal political forces like Natalya Vitrenko's 
Progressive Socialists and Viktor Medvedchuk's SPDU(o) are 
manipulating a virulently anti-NATO stance as their best hope 
to make it over the three-percent threshold to be seated in 
the next Rada. 
 
¶19. (C) The October 2005 visit and provincial public outreach 
activities of NATO PermReps helped initiate a public dialogue 
process on NATO and Ukraine's Euro-Atlantic aspirations that 
needs to be built upon by official visitors, unofficial 
NGO/academic experts, Ukrainian government activities, and 
support from other Ukrainian interest groups, whether from 
civil society or the business sector.  While some new NATO 
members like Slovakia, Hungary, and Slovenia successfully 
overcame similarly low numbers of public support for NATO, 
and others like the Baltics shared the legacy of Soviet 
domination and strong Russian resistance to their NATO 
aspirations, no other previous aspirant country had Ukraine's 
centuries-long close cultural, religious, and identity 
affiliation with Russia, complicating the public education 
process.  That said, Bulgaria has historically had friendly 
relations with Moscow, and that was no impediment to its 
public's embrace of NATO. 
 
¶20. (C) Moreover, as Yushchenko Security Policy Adviser 
Horbulin (a former close associate of ex-President Kuchma) 
notes, several years ago there was much higher (approaching 
50 percent) support in Ukraine for NATO membership.  That 
changed when Kuchma's relations with the West became 
troublesome, and the Ukrainian media started to report 
negatively about NATO.  If the March 26 elections vote in a 
government interested in NATO membership, there will likely 
be the necessary information campaign to build up public 
support.  The situation would look different if the next 
government did not share that enthusiasm for NATO. 
 
¶21. (U) Visit Embassy Kiev's classified website at: 
www.state.sgov.gov/p/eur/kiev. 
HERBST