UKRAINE FINANCE MINISTER'S PECULIAR AVOWALS

C O N F I D E N T I A L KYIV 002412

SIPDIS

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

E.O. 12958: DECL: 12/09/2018
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE FINANCE MINISTER'S PECULIAR AVOWALS

Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4(B) AND (D)


1. (C) Summary. Ukraine's Minister of Finance Viktor
Pynzenyk told the Ambassador on December 4 that a change of
leadership at the National Bank of Ukraine (NBU) is necessary
to stabilize the country's faltering economy. Alluding to
what he said was an inept inter-agency anti-crisis team, he
decried the lack of policy coordination between the Ministry
and the NBU, blaming NBU Governor Stelmakh for the impasse.
At the same time, his own grasp of details appeared weak, as
he couldn't comment in depth on Ukraine's financing gap,
seemed to dismiss a previous conversation on loan
"hryvniazation," and admitted to being left out of recent
high-profile negotiations between the GOU and Morgan Stanley.
Pynzenyk ventured into obscure musings on Russia and
"non-standard times," giving the overall impression of an
anxious and even overwhelmed actor in Ukraine's developing
financial crisis. End summary.


Policy Dis-Coordination
--------------


2. (C) At a meeting he requested with the Ambassador on
December 4, Finance Minister Pynzenyk was notably cogent
while offering scathing criticism of the NBU and Governor
Stelmakh. Describing his December 3 meeting with President
Yushchenko and Stelmakh, Pynzenyk said the President had been
compelled "to force" the NBU to fulfill its obligations.
While Pynzenyk said he did not want to interfere with the
NBU, action was needed to ensure that the NBU performed its
vital role. In particular, he noted the NBU had failed to
keep the exchange rate in a "correct range" that the markets
could understand. Pynzenyk said the NBU should stop pumping
excess liquidity into the banking system. It should also
raise interest rates, make its interventions more
transparent, and audit purchases of foreign exchange to
ensure that buyers used foreign currencies for their stated
purposes. Pynzenyk repeated three times that he planned to
put these demands in a letter to Stelmakh.


3. (C) In response to the Ambassador's comments on the
difficulty of changing the NBU's leadership during a time of
crisis, Pynzenyk said he would have agreed with that argument
a month ago, but he now felt the markets would welcome
Stelmakh's dismissal. At the mention of former Rada Speaker
Arseniy Yatsenyuk being out of a job, Pynzenyk smiled and
quipped that he would not wish the NBU job on him.


4. (C) As the subject matter shifted, Pynzenyk wistfully
detailed his views on the need for "non-standard policies"
during today's "non-standard times." According to Pynzenyk,
methods of regulating banks need to change, since banks are
not transferring the support they receive into the wider
economy. He told the Ambassador that capital adequacy levels
for banks should be "changed" -- presumably to a lower level
-- so that "banks are not sitting on their money."
Otherwise, Pynzenyk was not specific about how "countries of
the world should respond to the problem." He passed to the
Ambassador an open letter to world governments and central
banks, in which he suggested that governments' attempts to
revive the financial sector will not resolve the global
crisis alone. He gave no further concrete examples in his
letter or in his discussion with the Ambassador.


Financing Gap
--------------


5. (C) The Ambassador asked Pynzenyk to explain in more
detail PM Tymoshenko's assertion, made in a November 4 letter
to Treasury Secretary Paulson, that Ukraine's financing gap
could reach $27 billion. Pynzenyk claimed that the IMF
derived this figure based on the Fund's calculations of
Ukraine's external exposure. Later, Pynzenyk said the $16.4
billion IMF program was never intended to cover the entire
financing gap, and the GOU was now in discussions with the
World Bank and EBRD for additional loans to help cover the
shortfall. (Comment: On November 28, the resident IMF
representative confirmed to us that the $16.4 billion
stand-by loan was calibrated to cover the projected gap over
the next three years, based on needs of $4.3 billion in 2008,
$10.07 billion in 2009 and roughly $2.3 billion in 2010.)


Hryvniazation
--------------


6. (C) The December 4 meeting came just five days after
Pynzenyk hastily called the Ambassador for an impromptu
Saturday appointment to discuss the financial crisis. Among
the topics mentioned during the weekend meeting, which took
place in the Minister's office on November 29, Pynzenyk
voiced particular enthusiasm for converting hard currency
loans into hryvnia. Pynzenyk asserted that such a measure
would spread risk and enhance loan performance. On December
4, the Ambassador returned to the subject, passing the U.S.
Treasury Department%s strong concerns about the scheme.
Referring only to media rumors, Pynzenyk sharply denounced
the notion of hryvniazation. He blamed journalists for
fanning public worries, and he stated that Ukraine had no
intention of introducing such a plan. As he backed away from
speculation about the Ministry's role in converting dollar
loans to hryvnia, Pynzenyk gave the impression he wanted to
forget his previous endorsement to the Ambassador. Without
being specific, Pynzenyk then said the NBU was discussing
other voluntary actions "of a different measure." (Comment:
Pynzenyk's reversal corresponded to President Yushchenko's
public denial that his Secretariat was working on a
hryvniazation scheme. It appears the idea of hryvniazation
is dead for now, although NBU Council Chairman Petro
Poroshenko suggested in recent days that borrowers be able to
service at least the interest payments on dollar-based loans
in hyrvnia. End comment.)


Stabilization and Reconstruction Fund
--------------


7. (C) Pynzenyk revealed that little progress has been made
in creating an institutional framework to deal with bank
recapitalization and resolution. He said it was difficult to
get any traction with the NBU, rehashing the fact that
"philosophical differences" exist between the Ministry of
Finance and the central bank. He commented on being "afraid
when the state manages banks," particularly since the NBU's
capacity to oversee nationalized banking assets and
liabilities was "problematic." The Ambassador passed on to
Pynzenyk that the Treasury Department was securing funding to
work in tandem with the international donor community to
provide technical assistance.


Anti-Crisis Legislation and the 2009 Budget
--------------


8. (C) Pynzenyk could not provide details on draft
legislation now pending in the Rada that reportedly clarifies
the GOU's anti-crisis regulations. He joked about the need
for drugs to cope with the volume and array of bills
apparently circulating among parliamentary committees. The
Minister was doubtful about passage of a new budget before
the beginning of the year. Not only was the Rada unable to
deliver legislation due to the vacant speaker's position,
there were, according to Pynzenyk, political curbs on many of
the possible spending reductions. Pynzenyk suggested that
only two copies of a draft budget have been circulated (at
the Ministry and the IMF),but he dodged the Ambassador's
questions on a projected revenue shortfall and whether the
GOU's 2009 budget would meet the IMF's fiscal policy
conditionalities. Pynzenyk appeared certain the GOU would
stay afloat with a mechanism akin to the U.S. government's
continuing resolution, though he did not explain how a
decline in revenues might adequately fund flat-lined
government spending for 2009.


Morgan Stanley Loan
--------------


9. (C) Pynzenyk could not comment on the status of
discussions between Morgan Stanley and the Government of
Ukraine that had been prompted by a rating downgrade and loan
call on the state highway company Ukravtodor. The Minister
stated he was not involved with Morgan Stanley, but he
believed "things were moving in the proper direction."
(Comment: Prime Minister Tymoshenko's office apparently has
the lead on the Morgan Stanley negotiations. The Minister's
remarks suggest information flow between Pynzenyk and
Tymoshenko on this issue is limited. End comment.)

Russia's Economy

--------------


10. (C) Reiterating comments made in his November 28
discussion with the Ambassdor, Pynzenyk insisted that the
economic situation in Russia was severe, and that a weakened
Russia would have strong negative repercussions for Ukraine.
Pynzynyk said that statements by Russian officials about
Ukraine needing to pay $400/tcm for gas in 2009 were
politically motivated. Russian leaders would have difficulty
justifying cuts in state salaries and pensions, according to
Pynzenyk, if Gazprom charged Ukraine less than $400/tcm. But
Ukraine "can't feed Russia." In an odd side comment,
Pynzenyk said that killers were being trained in camps
outside Moscow to murder people on Moscow's metro. The
Russian government was performing such acts to divert
people's attentions from real problems in society. Such
Russian tactics presaged difficulties for Ukraine, especially
if the Russian economy worsened.


Comment
--------------


11. (C) Minister Pynzenyk appeared stressed and unfocused,
and he was less in command of his core policy issues than we
have observed in the past. Coupled with blistering comments
on the NBU's incapacity and poor coordination, Pynzenyk's
mushy philosophical musings on the need for international
collaboration, his digressions on Russian killers in the
metro, and his lack of access on the Morgan Stanley case are
all troubling portents of GOU problems in the face of a
growing crisis. Pynzenyk's words and deeds are clearly those
of a man in the hot seat.
TAYLOR