IMF SET TO APPROVE UKRAINE PACKAGE, DESPITE

C O N F I D E N T I A L KYIV 002198

SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA
TREASURY PASS TO TTORGERSON

E.O. 12958: DECL: 11/04/2018
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: IMF SET TO APPROVE UKRAINE PACKAGE, DESPITE
UNRESOLVED TECHNICALITIES

REF: KYIV 2191

Classified By: ECONOMIC COUNSELOR EDWARD KASKA, REASONS 1.4(B) AND (D)


1. (C) Summary. The IMF and the government of Ukraine (GOU)
"have agreement" on the provisions of a $16.5 billion
stand-by package. The IMF's Kyiv-based resident
representative is "relatively positive" Ukraine's anti-crisis
legislation will pass muster for the IMF Executive Board,
when it considers the Request for Stand-By Arrangement on
November 5. Nonetheless, some elements of Ukraine's
anti-crisis law do not strictly adhere to IFM
recommendations, and "prior actions" must still be worked out
with the GOU, specifically on the fate of Prominvest Bank and
technical mechanisms for bank resolution. End Summary.


President Signs Anti-Crisis Legislation
--------------


2. (C) Late on November 3, President Yushchenko signed into
law an anti-crisis package that had been passed by the Rada
on October 31 (reftel). The law contains nearly all of the
165 amendments tagged onto an original bill that had passed a
first reading. One politically charged add-on -- funding for
snap parliamentary elections -- was left out. Other
amendments reflected the IMF team's desire to clarify rules,
procedures, and authorities for bank recapitalization and
resolution. Still others highlighted contentious internal
debates on fiscal policy. Rada members removed the IMF's
suggested two-year moratorium on minimum wage increases to
the subsistence level, choosing instead to peg increases to
the inflation rate. Even after the bill was passed and
signed, the Lytvyn bloc announced the legislation had been
falsified, a charge denied by Rada Speaker Yatseniuk.


3. (C) IMF contacts shared with us memos that reveal the Rada
considered numerous revised drafts, which were then sent to
the IMF team for comments and technical suggestions. In
turn, the IMF team would hasten to translate the draft
legislation and query its advisors (who included banking
resolution experts from the World Bank and the U.S.
Department of Treasury) on each draft's merits. This series
of events recurred throughout the week of October 27, during
which time Rada members, foreign and domestic bankers, and
analysts ) virtually all those with whom we spoke ) were in
the dark about exact tweaks proposed.


IMF Action Imminent
--------------


4. (C) According to the IMF's internal Request for Stand-By
Arrangement, submitted by its European Department to the
Executive Board on November 3, the approved anti-crisis
legislation clears the way for the Board to conclude a
package, possibly by November 5, when it begins deliberations
in Washington. Once the Request for Stand-By Arrangement is
approved, according to the document's proposed decision, the
first tranche could be disbursed immediately.


5. (C) IMF resident representative Balazs Horvath told us on
November 4 that, although the IMF is still discussing details
with the GOU, the IMF and the GOU "have agreement" regarding
the terms of a standby package. He requested USG support at
the November 5 Executive Board meeting. Separately, Rada
Speaker Yatseniuk traveled to the United States on November 4
for working meetings with IMF and World Bank officials.


6. (C) Horvath described the Rada's anti-crisis legislation
as "relatively positive," insinuating that no provisions
included in the legislation would be a deal breaker for the
IMF Board. When asked specifically about the planned removal
of the two-year moratorium on bringing the minimum wage to
the subsistence level, Horvath revealed that the government's
focus should be on the overarching IMF goal of fiscal
discipline, regardless of the measures it takes to get there.
Ukrainian officials have gotten the message that they will
need to put the brakes on growth of public sector salaries
and pensions, which have grown in double-digits in recent
years. Regions shadow Minister of the Economy Akimova
conceded to the Ambassador that making this happen will be
difficult politically, particularly if elections loom, but
possible if given room to maneuver.


7. (C) Horvath told us that additional legislation is "not
required," but "prior actions are needed" before the IMF
Board can finalize a deal. He specifically mentioned the
need to resolve the fate of Prominvest Bank, now under the
NBU's provisional authority. (Note: Natalie Jaresko,
managing Partner at Horizon Capital, told EconOff on November
3 that brothers Andriy and Sergiy Klyuev, industrialists and
Regions MPs, had positioned themselves to buy the bank at an
undisclosed price. The November 4 edition of Korrespondent,
a Kyiv business magazine, confirmed this rumor based on
unnamed sources. End Note.) Horvath also stated that the
NBU lacked "the necessary power" to deal with bank
recapitalization and resolution, and he foresaw the need for
the Cabinet of Ministers to issue decrees clarifying the
NBU's mandate. Horvath said the IMF is "working around the
clock" and that a deal this week and IMF board action is
"within the cards."


Implementing the Legislation
--------------


8. (C) After the IMF reviews the Stand-By Arrangement,
perhaps even agreeing to its provisions on November 5, the
most pressing issue is how the government of Ukraine will
implement its legislation. Minister of Finance Penzenyk
hastily called a meeting with the Ambassador late on October
31, during which he requested U.S. help kick starting
investment, as well as U.S. technical assistance on banking
recapitalization and resolution. During the meeting,
Penzenyk stated that the National Bank of Ukraine (NBU)
lacked a cadre of working level technocrats, able to
provisionally administer failed banks. He pointed to the
case of Prominvest Bank, where an NBU Deputy Governor has
taken the reins, and he speculated that the NBU lacks
resources to deploy in the event of further, and seemingly
inevitable, failures. Penzenyk lamented that neither the IMF
Stand-By Arrangement nor the anti-crisis legislation
envisions clear roles for the Ministry of Finance or the NBU
in administering failed banks and liquidating assets.


9. (C) Comment. The IMF appears to have been poised for
final Rada passage and ready to consider the Stand-By
Arrangement at the earliest possible date. Coming so soon
after the October 31 passage and Presidential signing of the
anti-crisis legislation, it is not clear that back-and-forth
discussions between the Kyiv-based IMF team and GOU officials
on the draft bills negatively influenced IMF opinion in
Washington. The IMF's swift consideration of the Arrangement
appears to favor addressing Ukraine's sources of economic
instability, rather than prolonging debate over mechanisms to
satisfy conditionalities. End Comment.
TAYLOR