VZCZCXRO5783
RR RUEHDBU RUEHSL
DE RUEHKV #0244/01 0481502
ZNY CCCCC ZZH
R 171502Z FEB 10
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 9332
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHDC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

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 
 
--------------------------------------------- ------- 
Inauguration: Confident That It Will Be February 25 
--------------------------------------------- ------- 
 
¶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. 
 
--------------------------------------------- -------------- 
Expect a New Parliamentary Coalition After the Inauguration 
--------------------------------------------- --------------- 
 
¶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. 
 
-------------------------------- 
Prime Minister Azarov? Maybe Not 
-------------------------------- 
 
¶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.) 
 
-------------------------------------------- 
President,s Phone Call/ HEU/ Nuclear Energy 
 
KYIV 00000244  002 OF 003 
 
 
-------------------------------------------- 
 
¶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. 
 
--------------------------- 
Economic Reform Cannot Wait 
---------------------------- 
 
¶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 
 
KYIV 00000244  003 OF 003 
 
 
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. 
 
------- 
Comment 
------- 
 
¶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