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Reference ID Created Released Classification Origin
06MOSCOW9018 2006-08-18 14:31 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

DE RUEHMO #9018/01 2301431
P 181431Z AUG 06

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 009018 
E.O. 12958: DECL: 08/11/2016 
REF: A. KIEV 3184 
     B. MOSCOW 3510 
Classified By: Minister-Counselor for Political Affairs Alice Wells. Re 
asons: 1.4(B/D). 
1.  (C)  Summary:  Moscow was pleased that new Ukrainian PM 
Viktor Yanukovich made his first foreign trip to Russia to 
meet with President Putin and PM Fradkov in Sochi.  Observers 
here expect that the tone of the relationship will improve, 
but on substance, few saw Yanukovich as a pushover.  On the 
gas contract, Moscow may moderate the rate of increase in 
prices to provide a short-term boost to Yanukovich, but most 
expected prices to go up by next spring and did not believe 
Ukraine to be an exception to Russia's drive toward market 
prices in the former republics.  Moscow was heartened by the 
referendum requirement for NATO accession in Kiev's Universal 
Declaration because it is likely to delay forward movement on 
the issue.  While Russia will likely renew its push for 
Ukrainian participation in the Single Economic Space, few 
expect Kiev to move in that direction.  Moscow will exploit 
the question of Russian language usage in Ukraine to placate 
nationalist opinion here.  While Russia will seek tactical 
advantage with a Ukrainian PM who is favorably disposed to 
Moscow, Russia lacks a strategic approach to Ukraine that 
would make a broader partnership attractive.  End Summary. 
Positive Tone in Sochi 
2.  (C)  On August 15-16, PM Yanukovich met with PM Fradkov 
in Sochi to hold bilateral talks on energy and economic 
issues and then attended the Eurasian Economic Community 
(EurAsEc) "informal" summit as an observer.  He met with 
President Putin on the margins of the EurAsEc meeting. 
Details of the bilateral discussions are still not clear (see 
ref A), but Ukrainian Embassy poloff Myroslava Shcherbatyuk 
told us the meetings were aimed at restarting bilateral 
discussions that had been put on hold for months following 
the March elections.  On the Russian-Ukrainian gas deal, she 
understood the sides had agreed that prices would hold steady 
through the winter, but discussions would continue on prices 
for the remainder of 2007.  The Russians apparently urged the 
Ukrainians to deal directly with Turkmenistan on price and 
supply terms given their concerns about a sharp jump in 
prices next year. 
"Small Victory" 
3.  (SBU)  Yanukovich's Sochi meetings were preceded by 
intense press speculation about how accommodating the new 
government would be to Russian interests.  Given Putin's 
full-throated support for Yanukovich in the 2004 elections, 
most Kremlin-connected pundits not unexpectedly saw the 
formation of a Yanukovich-led government as likely to lead to 
a significant improvement in the tone of Ukrainian-Russian 
ties.  Gleb Pavlovskiy, President of the Effective Policy 
Foundation, told interviewers that Yanukovich's success was 
"revenge" for being "deprived of his 2004 victory" and hailed 
the new prime minister as a "pan-national politician" who 
would be a leading presidential candidate based on his desire 
for better relations with Russia.  Sergey Markov, who like 
Pavlovskiy had been a consultant for Yanukovich's 2004 
campaign, also blessed the new government for bringing 
Ukraine back "from the brink of national division."  However, 
Markov's triumphalist tone was muted; he considered 
Yanukovich's appointment as "a small victory" for Russia 
because Moscow's influence in Ukraine had dwindled.  He said 
Moscow shouldn't believe that Yanukovich would necessarily be 
a "pro-Moscow PM."  Other articles claimed that Yanukovich 
would be constrained by his Donetsk backers and by the terms 
of the Universal Declaration. 
A Man We Can Do Business With? 
4.  (C)  Andrey Ryabov, a scholar with the Institute of World 
Economics and International Relations (IMEMO), agreed that 
the outward tone of the relationship would improve; 
rhetorically, at least, Yanukovich would avoid irritating 
Russian sensibilities.  However, on economic issues in 
particular, Yushchenko would likely drive a hard bargain.  He 
had to be "pro-Ukrainian" on these issues because the bulk of 
Yanukovich's Donetsk patrons were opposed to allowing Russian 
firms greater access to the Ukrainian market.  BBC 
correspondent Konstantin Eggert argued that thinking of 
Yanukovich as a Russian "puppet" was simplistic and the 
Kremlin did not view him that way.  Yanukovich was a 
Ukrainian nationalist of a different sort than Yushchenko; he 
seconded Ryabov's view that the Donestsk clan had their own 
problems with Russia.  Eggert went on to note that while the 
MOSCOW 00009018  002 OF 003 
Kremlin was quite comfortable dealing with a "soft 
authoritarian" backed up by business interests, Ukraine's 
ongoing transition to a functioning democracy in which fair 
elections were held and parties needed to bargain was deeply 
GOR:  Moving Beyond Wait-and-See 
5.  (C)  The GOR was not particularly effusive in its public 
comments about the new government in Kiev.  Putin made phone 
calls congratulating both Yushchenko and Yanukovich over the 
formation of the government (three days after the fact). 
Speaking before the Sochi meetings, MFA Ukraine Desk Senior 
Counselor Vyacheslav Yelagin underlined to us that Moscow had 
been patient with Ukraine as bargaining over the government 
had extended over more than four months.  Now that a new 
government was in place, Russia was willing to engage. 
Yelagin said that a meeting between Putin and Yushchenko was 
likely in the fall, with no venue identified yet.  (Note: 
Shcherbatyuk told us that Putin had been invited to the Babi 
Yar commemoration in late-September in Kiev but had not yet 
replied.  End Note.)  Yelagin said the Russians saw the fall 
meeting as the formal launch of the Yushchenko-Putin 
Commission, which had been agreed to last year but which had 
never met.  Both Yelagin and Shcherbatyuk said that the full 
range of bilateral subcommittees (on economic relations, 
humanitarian issues, international cooperation, security, the 
Black Sea Fleet and border delineation) would also begin to 
meet now that Ukraine had a new government.  Shcherbatyuk 
said another Yanukovich-Fradkov meeting was likely in Kiev in 
Gas Deal Remains in Place, but Prices Rise 
6.  (C)  While the details of any agreement at Sochi remain 
murky, the analysts and the MFA official we talked to thought 
it was clear that Kiev would face higher prices --  if not 
now, then soon.  BBC correspondent Eggert told us that gas 
prices were a double-edged sword for Russia.  Moscow clearly 
preferred Yanukovich in office, Putin also seemed intent on 
raising prices to market rates for many of Russia's 
neighbors.  However, too sharp an increase would negatively 
affect the outmoded heavy industry in eastern Ukraine and the 
businessmen who own it and who are Yanukovich's patrons. 
While a shock to the system caused by a precipitous increase 
in energy prices would threaten many of these "industrial 
dinosaurs," Eggert said, at the same time it would force 
Ukrainian businesses to move away from the remnants of the 
Soviet-style economy and move to a more energy efficient 
European model.  Ryabov pointed to the possibility for 
shortages in Ukraine because of insufficient storage of gas 
and thought that Russia would want to shore up support for 
Yanukovich and help Ukraine through a difficult winter. 
However, when spring arrives, he predicted that Moscow would 
take a harder line on prices. 
7.  (C)  Russian analysts parsed the NATO language in the 
Universal closely to determine Kiev's direction.  Most public 
commentary pointed to the Universal's referendum language as 
a roadblock to NATO hopes, but some in the nationalist press 
speculated that a "well funded brainwashing campaign" would 
begin soon to persuade Ukrainians of the benefits of 
membership.  Reflecting the depth of feeling here on the 
issue, Council on Foreign and Defense Policy head Sergey 
Karaganov stressed to us that Ukraine's admission into NATO 
would be a "poison pill" for U.S.-Russian relations.  The 
BBC's Eggert pointed out that while FM Tarasyuk and MOD 
Hrytsenko would undoubtedly pursue Yushchenko's goal of 
membership, those who support NATO in Ukraine face an uphill 
challenge.  Russia sees the majority of Ukrainians as either 
skeptical about the value of NATO or opposed outright to 
membership; the Kremlin is counting on the referendum 
requirement to slow the process down. 
8.  (C)  Ryabov thought that Yanukovich took a completely 
instrumental view of the NATO issue.  In any event, 
Yanukovich would be focused on the more immediate task of 
making sure his Donetsk supporters "grabbed the commanding 
heights" of the Ukrainian economy.  The NATO question could 
be put off until later, when Yanukovich could make an 
assessment of the leverage that pursuing NATO membership 
could provide in the bilateral relationship with Moscow. 
Russia wanted any decision put off for as long as possible. 
EU vs. SES? 
MOSCOW 00009018  003 OF 003 
9.  (C)  Most of our interlocutors attributed limited 
significance to Universal language on Ukrainian intentions 
toward the EU and the Russian-backed Single Economic Space 
(SES).  Given the EU's "enlargement fatigue," none thought 
that the distant prospects for EU admission would be 
sufficient to persuade Ukraine to make the difficult economic 
choices needed to prepare for admission (which might threaten 
Russian interests).  On the SES, Ryabov claimed that the 
Kremlin was pessimistic about the likelihood of Ukraine ever 
being interested in joining the type of SES that Moscow 
envisioned.  Kiev wanted a free trade area so it could sell 
in Russia's vast and growing market, but did not want the 
supranational controls over customs and economic decision 
making that Moscow was pushing.  In any event, Russia was 
paying more attention to the EurAsEc than to the SES.  The 
MFA's Yelagin acknowledged that Ukraine was not as committed 
to the SES concept as were Russia, Kazakhstan and Belarus and 
said that at some point a decision would need to be made 
about whether Ukraine fit into the SES. 
10.  (C)  Yelagin stressed that the issue of Russian language 
usage in Ukraine was a concern at the highest levels of the 
Russian government and that Moscow did not view this as 
solely an internal issue for the Ukrainians to sort out.  He 
argued that "preventing" the use of Russian in schools and in 
the professions was discriminatory and noted acidly that if 
Ukraine was so intent on endorsing "European values," then it 
should consider allowing people to speak their own language. 
Ryabov thought that Yanukovich used the language issue to 
appeal to his political base and that Moscow used it to 
placate nationalists here, but was skeptical that it would 
have much bearing on the bilateral relationship. 
11.  (C)  While Moscow undoubtedly was pleased that 
Yanukovich eventually ended up as PM (given the 
alternatives), we were struck by the widespread 
acknowledgment among our interlocutors that the relationship 
could not return to its cozy, pre-Orange Revolution days. 
From Russia's perspective, the tone will improve, but most we 
talked to thought that ties would be pragmatic and 
business-like.  This will likely be reflected in the ongoing 
gas discussions, where it seems that the only question 
remaining is how sharply gas prices will rise.  NATO 
membership remains a hot-button issue that dominates any 
discussion of Russian-Ukrainian relations, although Russia 
sees the referendum requirement as a substantial roadblock 
and will hope for del
ay.  While the bilateral consultative 
machinery with its raft of commissions will creak back into 
gear, few substantive results should be expected, given the 
divisions between Ukraine and Russia.  We assess that Moscow 
has been unable to identify a positive strategy for turning 
Ukraine back towards Russia and will try to use the 
Yanukovich era to seek what tactical advantages it can. 


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