VZCZCXRO9375
RR RUEHDBU RUEHSL
DE RUEHKV #2165/01 3511531
ZNY CCCCC ZZH
R 171531Z DEC 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8989
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 04 KYIV 002165 
 
SIPDIS 
 
STATE FOR EUR/UMB AND EEB/OMA 
 
E.O. 12958: DECL: 12/16/2019 
TAGS: ECON PGOV ENGR PREL EFIN UP
SUBJECT: UKRAINE: TYMOSHENKO RUNS ON POPULIST ECONOMIC 
POLICIES 
 
REF: A. KYIV 2124 
     ¶B. KYIV 2110 
     ¶C. KYIV 1874 
 
Classified By: Classified By: Economic Counselor Edward Kaska for Reaso 
ns 1.4 (b, d). 
 
¶1. (SBU) Summary.  Although the presumed heir of the Orange 
Revolution's reform banner, Prime Minister Tymoshenko has not 
made a liberal economic platform a part of her current 
campaign for Ukraine's presidency.  Instead, her platform 
promises a strong role for the state, both in the social 
sector and in economic development.  While trumpeting her 
success in negotiating long-term gas contracts with Russia, 
the Prime Minister simultaneously sees subsidies to support 
the coal sector as the way to Ukraine's energy security.  As 
part of a promised war against corruption, Tymoshenko would 
renationalize assets privatized under previous governments, 
although as Prime Minister she has done little in that 
regard.  While Tymoshenko claims she has ably managed the 
GOU's response to Ukraine's economic crisis, her critics 
claim otherwise, and point to the Prime Minister's management 
style and economic populism as key factors in the GOU's 
failure to undertake the reforms needed to create conditions 
for the recovery and long-term health of Ukraine's economy. 
End summary. 
 
¶2. (U) This is the third in our series reporting on the 
economic platforms of Ukraine's presidential candidates (Ref 
A and B). 
 
Crisis Management and the IMF 
----------------------------- 
 
¶3. (SBU) Prime Minister Tymoshenko has framed her election 
campaign with the slogan "she works," and her advisors point 
to her claimed able management of the financial crisis as 
proof of her capabilities.  Election campaign chairman 
Yaroslav Fedorchuk told us on November 24 that Tymoshenko had 
prevented a complete collapse of the banking sector, despite 
the many difficulties she had encountered.  "We saved the 
banks," Fedorchuk said.  He claimed that while there are 
still some problems in the banking sector, including interest 
rates that are "too high," the system is working. 
 
¶4. (SBU) Asked about the IMF program, Fedorchuk said that 
Tymoshenko faced a stark choice: either to borrow from the 
IMF or see the economy collapse.  He said that "rational and 
realistic" voters, in contrast to Party of Regions and 
Communist voters, will understand the benefits of Ukraine's 
cooperation with the IMF.  Tymoshenko's victory would 
demonstrate that there are more rational voters in Ukraine 
than irrational ones, according to Fedorchuk. 
 
¶5. (SBU) Under a Tymoshenko presidency, cooperation with the 
IMF would continue, although the government would try to 
limit the number of "negative features" of the program, 
Fedorchuk stated.  He added that the IMF money should go to 
economic programs that would spur economic recovery, such as 
developing the aviation and agricultural sectors. 
 
¶6. (SBU) The IMF and many in the international community, 
however, have criticized Tymoshenko for not following the 
conditions of the IMF program.  Tymoshenko has not enacted 
reforms called for by the IMF, including increasing gas 
prices and reforming Ukraine's unsustainable pension system. 
Tymoshenko's political opponents charge that the nearly $11 
billion disbursed by the IMF has been wasted by Tymoshenko's 
government. 
 
Role for the State 
------------------ 
 
¶7. (SBU) Fedorchuk stated that as president, Tymoshenko would 
guide Ukraine's economy with a strong hand.  According to 
him, Ukrainian society had formed under socialism, and 
Ukrainians are not yet able to fight for themselves in a 
market economy.  The state needs to intervene in the market 
to protect the welfare of its citizens.  Fedorchuk added that 
the state should participate in the development of the 
economy itself, pointing toward U.S. economic policy during 
the Great Depression and economic policy in the U.S. and 
Europe today as rationale for Tymoshenko's approach.  The 
bottom line, according to Fedorchuk, is that Ukraine is not 
prepared for a liberal market economy now. 
 
 
KYIV 00002165  002 OF 004 
 
 
¶8. (SBU) Fedorchuk specifically pointed to Ukraine's health 
care and pension systems as inadequate social protection 
systems.  Tymoshenko, if elected president, would work to 
create a health insurance system that would provide all 
Ukrainians with coverage and lower health care spending, 
according to Fedorchuk.  Asked if Tymoshenko would act to 
annul a recently passed increase in minimum wages and 
pensions, Fedorchuk stated that the Block of Yulia Tymoshenko 
(BYuT) supports the increases to pensions and wages. Pensions 
and wages should be raised based on GDP growth, he said. 
Tymoshenko's platform promises that as president she would 
enact a law requiring minimum wages be raised to at least 60% 
of companies' cost of production.  (Note: The weekly magazine 
"Kommentari" included this campaign promise in its list of 
the ten oddest presidential campaign promises.  End note.) 
Fedorchuk repeated "We cannot be a liberal economy.  We need 
to be realistic." 
 
Privatization Policy to Ensure State Wealth Protected 
-------------------------------------------- 
 
¶9. (SBU) The state's role would also extend to ensuring 
fairness and transparency in the privatization of state 
assets, Fedorchuk told us.  The development of Ukraine's 
economy cannot be talked about as long as the wealth of the 
state is being "stolen," he said.  Fedorchuk complained that 
post-independence economic policies created a "mafia-like 
environment" in Ukraine.  In her campaign platform, 
Tymoshenko calls Ukraine's oligarchs a "cancer on modern 
Ukraine."  (Note: Given the fact that Tymoshenko's campaign 
is also financed by oligarchs, this is a rather incongruous 
campaign promise aimed at the oligarchs who support 
opposition leader Viktor Yanukovych.  End note.) 
 
¶10. (SBU) Fedorchuk pointed to the June 2004 privatization of 
Kyrvoizhstal under then-President Kuchma as an example of 
this "mafia" environment.  The steel company was sold to 
Rinat Akhmetov's Systems Capital Management and Victor 
Pinchuk's (Kuchma's son-in-law) Interpipe for $800 million, 
well under what international analysts had stated was the 
value of the company.  Under PM Tymoshenko's government in 
2005, the privatization deal was cancelled.  A new bid 
process for the plant concluded in October 2005 with Mittal 
Steel paying $4.81 billion for the company.  As president, 
Tymoshenko would continue her efforts to ensure that Ukraine 
receives top dollar for state assets, Fedorchuk promised. 
 
¶11. (SBU) Fedorchuk stated that Tymoshenko would not take 
away property based on personal vendettas.  On December 4, 
the Prime Minister stated she had a list of businessmen "that 
one must begin with in starting the fight against 
corruption."  She said that Ukraine needs to finish with them 
for what "they have done to the country over the past 18 
years."  In 2005, Tymoshenko announced that she planned on 
renationalizing 3,000 businesses that had been privatized 
since Ukraine's independence, but has done little in that 
regard as Prime Minister.  Fedorchuk also stressed that 
investors should implement privatization commitments. 
 
Conditions for Foreign Investment Must be Created 
--------------------------------------------- ----- 
 
¶12. (SBU) Fedorchuk welcomed the direct investment of 
foreign, and especially American, companies in Ukraine. 
However, he said, before foreign investment would be 
attracted to Ukraine, order must be established inside the 
country.  Fedorchuk stated that Tymoshenko would work to 
create attractive conditions for investors, although he did 
not offer specific steps that Tymoshenko would take to 
attract investment.  In her campaign platform, Tymoshenko 
proposes tax holidays for investments in depressed regions 
and new production facilities.  Fedorchuk also proposed that 
Ukraine's value added tax (VAT) be replaced with a 
"turnover," or sales, tax.  Fedorchuk claimed that such a 
change would significantly reduce the cost of selling goods 
in Ukraine. 
 
Ukraine's Energy Independence Brought to You by Coal 
--------------------------------------------- ------- 
 
¶13. (SBU) Energy independence and improved gas relations with 
Russia are key points of Tymoshenko's campaign platform.  The 
platform promises to introduce energy-saving technologies and 
reduce Ukraine's dependence on foreign energy sources.  The 
key to energy independence, as Tymoshenko outlined in her 
campaign kick-off speech on October 24 (Ref C), is greater 
 
KYIV 00002165  003 OF 004 
 
 
reliance on Ukrainian coal.  Fedorchuk stated that Ukraine 
needs to develop the coal sector and switch its electric 
generation and municipal heating facilities from Russian gas 
to domestically produced coal.  While Ukraine's domestically 
produced energy grade coal is more expensive than coal from 
Poland or Russia, Fedorchuk stated, it is better to subsidize 
the coal sector than pay a high price for Russian gas. 
 
¶14. (SBU) To support the development of the coal sector, 
Tymoshenko proposes a UAH 12.6 billion subsidy to the coal 
sector and an additional UAH 5.6 billion in state loan 
guarantees for 2010.  The total allocation of UAH 18.2 billon 
for the coal sector is almost double the value of expected 
2009 production from state-owned coal mines (production in 
the first half of 2009 was UAH 5.5 billion). 
 
¶15. (SBU) Tymoshenko heralds the January 19, 2009 gas supply 
and transit contracts with Russia as important steps forward 
in Ukraine's relationship with Russia.  The contracts cut out 
shady gas-intermediary RosUkrEnergo and established a fixed 
formula for gas prices.  Although the contracts have been 
widely criticized by President Yushchenko and Party of 
Regions' leader Viktor Yanukovych, Tymoshenko has stated that 
the contracts provide stable relations with Russia and do not 
need to be revised.  Fedorchuk, however, stated that Ukraine 
is taking less gas than envisioned by the contracts not only 
because of the drop in demand caused by the economic crisis 
but also to reduce Ukraine's energy dependence on Russia. 
 
¶16. (SBU) Tymoshenko has placed less emphasis on the 
development of Ukraine's oil and gas reserves than on coal 
sector development during her campaign.  In her campaign 
kick-off speech on October 24, Tymoshenko pledged to protect 
the Black Sea's oil and gas deposits from foreign hands (Ref 
C).  Fedorchuk repeated Tymoshenko's pledge and charged that 
the tender that awarded a Black Sea block to the American 
firm Vanco International would have deprived Ukraine of 
production revenues.  Fedorchuk claimed that President 
Yushchenko was linked to this "corrupt" deal. 
 
¶17. (SBU) Although Tymoshenko has pledged to the EU and 
several international financial institutions that she would 
reform the gas sector, her government has not yet taken steps 
forward on reform.  Fedorchuk explained that energy sector 
reform will be part of a larger reform effort of the economy. 
 He also acknowledged that without energy reform, Ukraine 
will not become independent from outside actors. 
Tymoshenko's true intentions on gas sector reform, however, 
are hard to read.  On November 25, the Prime Minister said 
that the gas price for industry would not increase in the 
first quarter of 2010.  However, the January 2009 gas supply 
contract with Russia stipulates that as of January 1, 2010, 
Ukraine will no longer receive a 20% discount on 
Gazprom-supplied gas.  Tymoshenko has also pledged to keep in 
place discounts on the gas price paid by Ukraine's struggling 
chemical sector. 
 
Criticism of Tymoshenko's Management Style 
------------------------------------------ 
 
¶18. (C) Although Tymoshenko's campaign has stressed that she 
has effectively managed the economic crisis, Tymoshenko and 
her economic policies have not escaped criticism, even from 
within her party.  Yuriy Poluneev, a BYuT MP, told us on 
November 27 that Tymoshenko and BYuT do not have an economic 
policy or any formal decision-making system.  Rather, 
according to Poluneev, the Prime Minister takes an ad hoc 
approach and makes decisions by herself.  Poluneev said that 
the budget has been "manually" controlled by the Prime 
Minister since the summer. 
 
¶19. (C) Poluneev's comments mirror critiques of the Prime 
Minister from other analysts.  Oleksandr Todiichuk, former 
chairman of UkrTransNafta, described Tymoshenko as very 
emotional.  He said that a top complaint at Naftohaz for 
several months has been the Prime Minister's "manual control" 
of the company.  Economics and energy reporter Alla 
Yeryomenko from the weekly paper "Dzerkalo Tizhnya" told us 
that Tymoshenko's character is at its essence authoritarian. 
While Yushchenko or Yanukovych can be influenced by their 
advisors, Tymoshenko takes decisions on her own, she said. 
Ivan Yurik, an Alfa Bank executive and economic advisor to 
former Minister of Finance Pynzenyk and former Minister of 
Economy Shpek, shared a similar appraisal with us on December 
¶2.  According to Yurik, Tymoshenko has deliberately avoided 
having an advisor on macroeconomic issues and makes all 
 
KYIV 00002165  004 OF 004 
 
 
economic decisions on her own, usually without any counsel 
from experts. 
 
¶20. (C) Aside from her management style, Tymoshenko is also 
criticized for her seeming lack of a basic understanding of 
economics fundamentals.  Tymoshenko routinely states that the 
exchange rate has been artificially manipulated by 
conspirators.  On December 14, Tymoshenko again promised that 
the exchange rate will rise to UAH 6: USD 1 within two months 
after she is elected president.  Most experts, however, 
believe that the current rate (UAH 8: USD 1) is near 
equilibrium. 
 
¶21. (C) Comment. Although Tymoshenko has painted herself as 
the heir to the Orange Revolution's reform agenda, her 
economic platform signals her underlying economic populism. 
Tymoshenko has formed policy positions, such as support for 
the development of the coal sector, to court key 
constituencies.  Her repeated promises to nationalize assets 
worry the business community.  In addition, many business 
leaders are worried that Tymoshenko's continued "manual 
control" of the economy will thwart economic development and 
the conditions necessary to foster investment and trade. 
Given her past performance and underlying populist beliefs, 
Tymoshenko's promises to implement needed economic reforms as 
President do not ring true, and should be viewed with 
considerable skepticism.  End comment. 
TEFFT