Identifier
Created
Classification
Origin
09KYIV1888
2009-10-29 15:05:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

PRESIDENT UNWILLING TO VETO BUDGET-BUSTING BILL

Tags:  EFIN EREL PREL PGOV UP 
pdf how-to read a cable
VZCZCXRO3708
RR RUEHDBU RUEHSL
DE RUEHKV #1888/01 3021505
ZNY CCCCC ZZH
R 291505Z OCT 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8701
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 KYIV 001888 

SIPDIS

STATE FOR EUR/UMB AND EEB/OMA

E.O. 12958: DECL: 10/28/2034
TAGS: EFIN EREL PREL PGOV UP
SUBJECT: PRESIDENT UNWILLING TO VETO BUDGET-BUSTING BILL

REF: A. KYIV 1835

B. KYIV 1878

Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and
(d)

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 001888

SIPDIS

STATE FOR EUR/UMB AND EEB/OMA

E.O. 12958: DECL: 10/28/2034
TAGS: EFIN EREL PREL PGOV UP
SUBJECT: PRESIDENT UNWILLING TO VETO BUDGET-BUSTING BILL

REF: A. KYIV 1835

B. KYIV 1878

Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and
(d)


1. (C) Summary and comment: Putting the next IMF tranche in
greater jeopardy, President Yuschenko indicated October 28
that he would not veto a pensions and wages spending bill
that would add another $337 million to the government deficit
in 2009 and $4.7 billion (or about 4% of GDP) in 2010, by NGO
estimates. In response, Prime Minister Tymoshenko's
government plans to block implementation of the law, possibly
through a Constitutional Court challenge. The President has
also indicated that he is disinclined to sign a letter of
intent with the IMF concerning conditions for disbursement of
the fourth tranche of money. The President's unwillingness
to work with the Prime Minister and the IMF will undoubtedly
put the economy under greater pressure and result in
heightened negative sentiment toward the ruling elite in
advance of the January presidential elections. End Summary
and comment.

--------------
Budget-busting Bill Likely to Pass into Law
--------------


2. (SBU) While travelling in rural Ukraine, President
Yuschenko stated that he "agreed with Parliament" concerning
the controversial social spending bill that was passed by the
Rada (Ukraine's parliament) on October 20 (Ref A).
Yuschenko's unwillingness to veto the Party of
Regions-sponsored bill comes despite the negative impact on
the budget and IMF's insistence that the bill be vetoed as a
condition for disbursement of the fourth tranche under its
Stand-by Arrangement with Ukraine (Ref B).


3. (C) Presidential Economic Advisor Shlapak further
confirmed that the President was disinclined to sign the
letter of intent required by the IMF for additional
disbursements, according to IMF resident representative Max
Alier. Alier reported that IMF Managing Director
Strauss-Kahn is attempting to reach President Yuschenko to
discuss the implications of allowing the bill to come into
law. G-7 Ambassadors in Kyiv are also seeking a meeting with
President Yuschenko to discuss the issue.


4. (C) During a conversation with PolCouns on October 29,

former national security advisor Volodymyr Horbulin said that
he had given up trying to divine Yuschenko's motives. A veto
of the social spending bill was clearly in order from the
perspective of national interest. Valeriy Chaliy, Director
of the Razumkov Center and former advisor in Yuschenko's
Presidential Secretariat, commented that a decision by
Yuschenko not to veto the bill would make it clear that he
was driven entirely by political considerations, particularly
the desire to undermine Tymoshenko.

-------------- --------------
Tymoshenko Supporters Looking to Block Implementation
-------------- --------------


5. (SBU) Trying to find a way to undo the damagQ Prime
Minister Tymoshenko's government has stated that it will
block implementation of the bill should it come into law.
For example, Finance Minister Umanskiy said that the bill
could not be implemented because it raises spending without
making the required amendments to the Rada-approved budget.
He also said that the government would search out other legal
means to block implementation. The Minister of Labor and
Social Policy announced that the government did not have the
money to support the spending increase and that the Cabinet
of Ministers would file a court case to challenge the
constitutionality of the bill if the President signs it into
law or chooses not to explicitly veto it.


6. (C) BYuT MP Valeriy Pysarenko told us that the party is
also examining how to prevent the law from being enacted
after the President signs it, including the possibility of
appealing it to the Constitutional Court based on procedural
or other grounds. The Court would then have one month to
decide whether to accept the appeal and, if accepted, three
more months to rule on the appeal. Politically, Pysarenko
does not believe that Yuschenko or Yanukovych would be able
to place all the blame on Tymoshenko and told us that, in his

KYIV 00001888 002 OF 002


opinion, Ukrainian voters have stopped differentiating among
the three and see them all jointly as the cause of the
country,s economic problems. He conceded that the
worse-case scenario -- an enacted spending bill and a
withheld fourth tranche of IMF funding -- would be
economically and politically disastrous for the country, but
he stressed that such a scenario would not benefit any of the
triad.

-------------- --------------
Opposition: Blocking Implementation Will Backfire
-------------- --------------


7. (C) Not unexpectedly, Regions Deputy Faction leader and
MP Volodomyr Makeyenko welcomed Yuschenko's support for the
social expenditure legislation and said that it showed that
there was broad support across political boundaries for
raising pensions, wages and welfare payments. He told us
that this would only complicate Tymoshenko's ability to block
implementing the legislation and that ultimately court
appeals to strike down the law would fail. Makeyenko
explained that politically Tymoshenko's best option was to
find a way to fund the higher social payments because if she
challenges the law's legitimacy or refuse to implement it,
then she alone will bear the political fallout. He said that
telling voters that there was no money in the budget for
"modest increases" for Ukraine,s poorest would backfire
because voters see the "opulent" lifestyle of the country,s
political leadership.


8. (C) Makeyenko, who is also the First Deputy Chairman of
the Rada budget committee, said that with "proper fiscal
management" Ukraine can live without IMF money. He asserted
that much of the first three tranches were improperly used
for currency speculation, profligate spending, and to finance
Tymoshenko,s presidential campaign. Makeyenko claimed that
the government has still not taken the most basic steps to
create an economic crisis plan, including rapid bank
recapitalization, direct financial support for major
industries, and economic relief for tax payers. Makeyenko
asked what had Tymoshenko done with the 10 billion USD
already borrowed from the IMF. He predicted that if the IMF
does not give Tymoshenko the next tranche to "prop up her
campaign" then Yanukovych could have a chance to win the
January presidential election in the first round.

--------------
Economic Impact
--------------


9. (C) While hard to predict the impact of a delayed fourth
IMF tranche, analysts speculate that postponement of the IMF
installment would put mounting pressure on PM Tymoshenko to
keep government spending under control. This could take the
form of wage and pension arrears but also should damper her
promises of additional spending for special interests in the
run-up to the election. Analysts have commented that the
public would react to the news of an IMF delay by demanding
hard currency, which in turn would put downward pressure on
the exchange rate and on the banking system. However, an
advisor to the Ministry of Finance notes that the banking
system is already under water and argues that the impact on
the real economy of further banking problems could be minimal
since lending is already next to zero.

PETTIT