Identifier
Created
Classification
Origin
09KYIV1878
2009-10-27 15:54:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

IMF AT ANOTHER UKRAINE IMPASSE

Tags:  EFIN EREL ETRD PGOV PINR UP XH 
pdf how-to read a cable
VZCZCXRO1508
RR RUEHDBU RUEHSL
DE RUEHKV #1878/01 3001554
ZNY CCCCC ZZH
R 271554Z OCT 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8691
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 03 KYIV 001878 

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 10/26/2019
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: IMF AT ANOTHER UKRAINE IMPASSE

REF: A. KYIV 1835

B. KYIV 1760

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 03 KYIV 001878

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 10/26/2019
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: IMF AT ANOTHER UKRAINE IMPASSE

REF: A. KYIV 1835

B. KYIV 1760

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


1. (C) Summary. Negotiations between the IMF and Ukrainian
authorities appear to have stalled over a bloated budget and
the uncertain fate of a new social spending law which, if
signed by the President, would represent a "red line" for the
Fund. According to the IMF's Kyiv-based resident
representative Max Alier, who briefed G-7 ambassadors on
October 27, IMF mission head Ceyla Pazarbasioglu departed
from Kyiv without reaching agreement on terms for disbursing
the fourth tranche.


2. (C) Alier noted that the political situation was
"difficult" and the IMF and senior Ukrainian officials were
"still negotiating". President Yushchenko had thus far
declined to sign a letter of intent (LOI) regarding
conditions for a fourth tranche, with NBU leadership also
withholding support. Although PM Tymoshenko had signaled she
was prepared to sign the LOI, she had not reached an
agreement with the IMF on problems with the draft 2010
budget. End summary.

SOCIAL BENEFITS LAW IS "RED LINE"
--------------


3. (C) According to Alier, the IMF is most concerned about
the "social benefits" law adopted by the Rada (Ukraine's
parliament) on October 20 (Ref A). President Yushchenko thus
far had not signaled his intentions on whether he would sign
the law. He apparently had failed to respond to a meeting
request from IMF envoy Pazarbasioglu after the law's passage,
although Pazarbasioglu waited two days for the appointment.


4. (C) Meanwhile, the IMF had strongly pushed for a veto
with representatives from the Presidential Secretariat, who
have given indications that they would oppose the law. Alier
told G-7 ambassadors that he would meet with Deputy Head of
the Presidential Secretariat Oleksandr Shlapak on October 27
to again press for a veto. (Note: The deadline for a
Presidential veto is on/around November 5).


5. (C) In the Fund's estimation, Yushchenko allegedly "does
not see the purpose" of a LOI with the presidential election

looming and politics dominating economic policy making.
Although staff from the Finance Ministry and National Bank of
Ukraine (NBU) had a good understanding of what needs to be
done to maintain the loan program, the IMF mission was
puzzled by the President's actions and could not determine
whether he understood the full extent of Ukraine's economic
problems.


6. (C) Alier argued that while the Fund had required fiscal
discipline for neighboring countries, notably Hungary, it had
previously taken a more lenient position with Kyiv
authorities, allowing for the effects of Ukraine's
significant 2009 GDP decline. In particular, the IMF already
had shown significant flexibility by allowing wage and
pension increases to occur in line with inflation. But the
new social benefits law represented a "red line" that
required a Presidential veto. According to Alier, if the IMF
were to "cave" on the social benefits law, then "everything
would go."

FLABBERGASTED OVER THE BUDGET(S)
--------------


7. (C) Even if the social benefits law were to be vetoed,
Alier stated the 2009 fiscal situation was very tight. He
projected that the GOU would run out of money within three
weeks if the IMF did not disburse its fourth tranche.
Revenues were collapsing, as tax payers had lost confidence
in the authorities. Alier surmised that "if you don't give
(VAT) refunds, they don't pay taxes," and sizeable wage and
pension arrears would become the order of the day. Alier
noted the "car was already sputtering" and that transfer
payments to local budgets already had been delayed.


8. (C) The IMF was "flabbergasted" at the draft 2010 budget
that the Cabinet of Ministers had submitted to the Rada.
With a projected 8% of GDP deficit, the draft 2010 budget was
"in contempt" of the IMF program. Alier noted that
Tymoshenko had tried to reassure the IMF mission, reasoning
that the draft 2010 budget would not pass the Rada in any

KYIV 00001878 002 OF 003


case, and that submitting a more austere budget would damage
her politically prior to the election.


9. (C) There had been an internal debate within the IMF
mission as to whether it would require Tymoshenko to resubmit
the draft 2010 budget (which the Prime Minister has refused
to do thus far),or whether the GOU could commit itself to
cut the budget by administrative means. Alier indicated that
resubmission of the budget would be a complicated process.
Moreover, under Ukrainian law and regulations, resubmitting
the budget would not be technically possible until the latter
part of November at the earliest.

A LONELY FRIEND
--------------


10. (C) With the World Bank and EBRD saying "goodbye" to the
GOU until further reforms had been made, IMF management was
uncomfortable that the Fund was the "only game in town".
Alier observed that the IMF now found itself in a "no-win"
situation: either it would disburse the fourth tranche and be
accused of "choosing a candidate," or it would not disburse
and "see the country go up in flames." Alier added that he
had worked as an IMF official in other crisis situations
(such as Argentina, Brazil, and Indonesia),but that
Ukraine's political situation was "as dysfunctional as it
gets, with politicians willing to bring down the entire
country in order to bring each other down."


11. (C) Alier dismissed oft-repeated Party of Regions'
claims that the IMF had endorsed Tymoshenko's candidacy via
its loan program, arguing that Ukraine's economic situation
was such that whoever won the presidential election would be
calling the IMF the next day.

NUMBERS UNDETERMINED
--------------


12. (C) Alier could not say whether the IMF, if it chose to
release a fourth tranche, would support disbursement of the
full $3.8 billion as scheduled. If the GOU had been in
compliance with prior actions and structural benchmarks, then
full disbursement would be in order. The IMF official
cautioned that if implementation of conditionalities was
"backloaded", then disbursements logically would be
backloaded as well, though the IMF had no mechanism for
spreading out the disbursement of a particular tranche in
steps/stages.


13. (C) The IMF had considered it might "recalibrate" and
disburse a lesser amount than what had been previously
scheduled. In any case, if it were to disburse, the IMF
would want monies directed to the NBU, which in turn could
transfer funds to the GOU. Alier acknowledged that difficult
relations between the NBU and GOU complicated such a scheme
(Ref B).

GAS PAYMENTS AND PRICES
--------------


14. (C) On gas payments to Russia, Alier estimated that $400
million would come due on November 6, while Ukraine would
need to transfer just short of $1 billion on December 6.
Alier maintained that Ukraine's foreign reserves of $26
billion were more than sufficient to meet monthly gas
obligations. But an ongoing "stupid family argument" could
scuttle plans for the NBU to monetize GOU treasury bills for
gas payments (Ref B). In any event, it would be impossible
for the IMF to disburse before November 6.


15. (C) Alier displayed considerable skepticism about the
GOU's stated rationale for not implementing previously
promised gas price increases. Labor unions (currently
picketing the IMF's Kyiv offices) never before had garnered a
role in such decisions, he said. Alier expressed similar
doubt about municipalities' reluctance to increase gas prices
for utilities.


16. (C) The IMF official noted that if it came to it, he
could see the Ukrainians "closing the tap" on gas imports
this winter. In the event the country was unable to make
payments to Gazprom, it would consider using its sufficient
reserves in storage for domestic consumption during the
winter heating season. Alier said he expected Russian
officials would pressure the IMF on disbursement of the next
tranche, as Russia wanted to ensure that revenues from

KYIV 00001878 003 OF 003


Ukrainian gas purchases would continue.

NEXT STEPS
--------------


17. (C) Alier indicated that the IMF team had returned to
Washington and, at present, saw no reason to come back to
Ukraine. The Fund was working on a communications strategy,
recognizing that if it does not disburse the fourth tranche,
then severe economic consequences for Ukraine could follow.
Alier underscored the possibility of significant hryvnia
depreciation and another round of destabilization in the
banking system.


18. (C) Alier indicated the situation had moved past his
technical, civil servant status, and was now a political
issue for more senior officials. He invited capitals to
provide policy input.

COMMENT
--------------


19. (C) One diplomatic colleague likened Ukraine's current
situation to "being in a hole and digging," with the
President now wielding the spade. On its merits, Yushchenko
-- who has made it a point to speak out against populist
public spending -- should veto the bill. However,
Yushchenko's desire to harm Tymoshenko could, as it has so
often in the past, get the better of him. It is notable that
the remnant in the Rada that still backs Yushchenko voted in
favor of the bill )- along with Yanukovych, the Communists
and Speaker Lytvyn,s bloc -- and against Tymoshenko.


20. (C) Ukraine's pit could grow deeper soon. Information
about the IMF's self-described "no-win" situation has yet to
hit the market, and analysts are still predicting that the
Fund will disburse the entire tranche as soon as the social
benefits law is vetoed. A leak about the program's
indefinite delay and ultimate recalibration may have an
immediate impact on the exchange rate, with knock-on effects
for the banking sector.


21. (C) While dramatic, this situation resembles the
scenario after the first formal review, when the Fund walked
out for a lengthy period, only to return with a display of
heightened flexibility. A key difference now may be that the
Fund no longer has room to give on the budget. Additionally,
with the election looming, it must carefully tread among
critics who claim it has unduly favored a particular
presidential candidate.

PETTIT