Identifier
Created
Classification
Origin
09KYIV1434
2009-08-21 15:10:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

IMF MAY EXPAND IN UKRAINE, DESPITE LACK OF REFORMS

Tags:  EFIN EREL ETRD PGOV PREL UP XH 
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RR RUEHDBU RUEHSL
DE RUEHKV #1434/01 2331510
ZNY CCCCC ZZH
R 211510Z AUG 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8303
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 02 KYIV 001434 

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 08/20/2019
TAGS: EFIN EREL ETRD PGOV PREL UP XH
SUBJECT: IMF MAY EXPAND IN UKRAINE, DESPITE LACK OF REFORMS

Classified By: CDA James Pettit for reasons 1.4 (b) and (d)

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 001434

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 08/20/2019
TAGS: EFIN EREL ETRD PGOV PREL UP XH
SUBJECT: IMF MAY EXPAND IN UKRAINE, DESPITE LACK OF REFORMS

Classified By: CDA James Pettit for reasons 1.4 (b) and (d)


1. (C) Summary. With Ukraine's sovereign debt reaching 30
percent of GDP, primarily in short- to medium-term
instruments, and doubts increasing about Ukraine's intentions
to implement macroeconomic reforms, many in Kyiv are
predicting the need for continued IMF lending beyond the
current program. Even the IMF's Kyiv-based resident
representative Max Alier mused that an expansion of the
Fund's program for Ukraine could occur in 2010, "not
necessarily because Ukraine would need the money," but in
order to boost market confidence. Separately, private sector
analysts predicted such an expansion of the IMF program was
inevitable, given that macroeconomic imbalances were
projected to last through next year. British counterparts
are reviewing Ukraine's commitments and IMF flexibility and
may suggest greater U.S.-U.K. coordination to push through
reform. End summary.


IMF Considers Expanding Program?
--------------


2. (C) The IMF's Alier told us on August 19 that he could
envision an extension of the IMF program after the current
one ends in 2010, "not necessarily because Ukraine would need
the money," but rather to bolster the confidence of investors
and the international community. Alier's statement was
consistent with previous informal comments made to us, in
which he had noted that the IMF would have to wait until
after presidential elections to negotiate an expansion of the
program, due to the lack of credible interlocutors among
Ukraine's authorities. Alier confirmed that the IMF had not
initiated any discussions with the GOU on a program
expansion.


3. (C) Separately, analysts at the Kyiv offices of Russian
investment bank Troika Dialog told us on August 19 that the
IMF would have to establish a precautionary lending program
after the current 11 billion SDR ($17.1 billion at August
2009 exchange rates) Stand-By Arrangement concludes. Reforms
in the energy sector will be too "sluggish" to have much
effect on the fiscal deficit, and the exchange rate and

banking sector would remain volatile due to the country's
2009 GDP decline, forecast by the IMF to be 14 percent. The
Troika analysts said recent equity market optimism was "not
justified," and that there was a strong likelihood of another
correction in the stock market, given the skittish, herd-like
behavior of investors who have disproportionately reacted to
IMF signals.


4. (C) Troika analysts also expected a second wave of
banking sector defaults in Ukraine and throughout Eastern
Europe, pointing to recent comments made to their investors
by Raiffeisen International CEO Herbert Stepich. Stepich
apparently stated that Austria-based Raiffeisen expected the
wave to come after September 2009, due to a "6-8 month lag
after the underlying macroeconomic event" (i.e. a 20.3
percent real GDP decline year-on-year in the first quarter of
2009). On the positive side, Troika analysts believed
Ukraine could grow out of its budget problems by 2012 without
drastic structural reforms if the IMF were to stay beyond

2010. They also said that investors were looking to the IMF
to co-draft Ukraine's 2010 state budget to avoid excess
populist spending and push pension reform. Alier confirmed
to us that IMF experts will, in fact, assist the GOU in
formulating the 2010 budget.


5. (C) Mounting market expectations of a longer-term Fund
presence, combined with IMF representative Alier's comments
about a program expansion, have led to speculation about how
tough the IMF will be on Ukraine's current authorities in
this pre-election period. Alier admitted that the next
mission review would be very difficult and that IMF officials
were "not looking forward" to future negotiations.

U.K Proposes Review of Ukraine Economic Policy
-------------- -


6. (C) Concerned about the "extraordinary flexibility" the
IMF has shown with Ukraine and the possibility of further
fiscal and banking problems, British Embassy counterparts
said that their Foreign Office and Treasury in London are
reviewing the U.K.'s economic policy toward Ukraine and may
be looking for coordination with the United States on an
approach to the IMF. British Embassy officials have picked

KYIV 00001434 002 OF 002


up on general concerns voiced in Kyiv that it could be
considered "meddling" in Ukraine's presidential elections if
Western powers were not to demand the implementation of
already-promised reforms from the Tymoshenko government over
the next six months.

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


7. (C) Upcoming presidential elections next January,
combined with expected parliamentary elections later in 2010,
mean few in Ukraine foresee implementation of serious
economic reforms, such as budget tightening or increases in
consumer gas prices. As a result, key IMF conditionalities
are likely to be largely unmet in the next six months.
Looking down the road, this leaves Ukraine with a sovereign
debt burden of as much as 30 percent of GDP and the
possibility of continued budgetary shortfalls. Although some
remain optimistic that Ukraine can "grow" itself out of its
macroeconomic troubles, current Ukrainian authorities may be
missing an opportunity to correct fiscal imbalances as well
as display leadership for a population that is already
hardened for tougher anti-crisis measures.

PETTIT