Identifier
Created
Classification
Origin
09KYIV1920
2009-11-06 13:53:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

UKRAINE BUDGET MEASURE: A DARKER SHADE OF RED

Tags:  EFIN EREL ETRD PGOV PINR UP XH 
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VZCZCXRO1366
RR RUEHDBU RUEHSL
DE RUEHKV #1920/01 3101353
ZNY CCCCC ZZH
R 061353Z NOV 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8741
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 001920 

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 11/05/2019
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: UKRAINE BUDGET MEASURE: A DARKER SHADE OF RED

REF: A. KYIV 1916

B. KYIV 1878

C. KYIV 1835

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 001920

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 11/05/2019
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: UKRAINE BUDGET MEASURE: A DARKER SHADE OF RED

REF: A. KYIV 1916

B. KYIV 1878

C. KYIV 1835

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


1. (SBU) Summary. The Rada (Ukraine's parliament) adopted
amendments to the 2009 budget that will allow implementation
of the so-called social standards law. The move is likely to
further destabilize Ukraine's partnership with the IMF, whose
mission team had walked away from Kyiv in October, demanding
that the law's increases for pension and wage increases not
go forward. Prime Minister Tymoshenko's BYuT faction
abstained from voting on the budget amendment. Her
government will now face severe difficulties avoiding the new
spending obligations. Ukraine's growing budget deficit will
not get much help from special IMF SDR allocations, already
allotted to cover gas purchases from Russia during the
balance of 2009. End summary.

BUDGET AMENDMENT PASSES, NEW GOU LIABILITY
--------------


2. (SBU) The Rada adopted a budget amendment on November 6
that will allow for key elements of the so-called social
standards law to take effect (Ref C). The budget amendment
served to raise Ukraine's subsistence minimum, thereby
increasing minimum pension allotments and assistance
payments. The amendment did not include provisions for
increasing public sector wages as envisioned in the social
standards law. Support for the budget amendment was
consistent with previous voting on the social standards law
(Party of Regions -- 169, BYuT -- 0, OU/PSD -- 33, CPU -- 25,
Lytvyn Bloc -- 19, Non-Affiliated -- 0).


3. (SBU) The total cost to the 2009 budget envisioned by the
law's sponsors is UAH 817 million ($100 million),though this
estimation was a last minute downward revision made without
clarification. A previous, also hastily made cost estimation
suggested the law would total UAH 1.2 billion ($146 million),
including UAH 1.1 billion in new pension transfers and UAH
100 million for additional assistance payments to the poor
and disabled.


4. (SBU) Parliament Speaker Volodymyr Lytvyn was out of the

Rada when the budget amendment proposal came up for a floor
vote, apparently because he was meeting with visiting Belarus
President Aleksandr Lukashenko. In his absence, Deputy
Speaker Oleksandr Lavronovych (Party of Regions) took up the
gavel and allowed the budget amendment to be considered by
the floor in one vote without Rada budget committee approval.
Because the Rada budget committee never voted to bring the
budget amendment to the floor, BYuT deputy Oleh Lyashko was
moved to claim that the amendment should not be considered
valid.


5. (SBU) Yushchenko had submitted the amendment to the Rada
budget committee earlier this week. His justification for
how the social spending law would be funded was based on
unused allocations for domestic debt payments, totalling
roughly UAH 3.3 billion ($400 million). According to
Yushchenko, Ukraine cancelled plans to issue certain
short-term debt after it received IMF budget support.


6. (SBU) Although Party of Regions' deputies ultimately
voted in favor of the budget amendment, some analysts
believed a split had emerged in POR on this issue, with the
pro-business wing suggesting the social spending increases
would be bad for their interests and the economy as a whole.
Shadow economy minister Iryna Akimova had even told one of
our contacts last week that she opposed the social spending
legislation.


7. (SBU) Prior to the budget amendment vote, Tymoshenko
stated repeatedly that she opposed the social spending law,
suggesting it would ruin the economy. Her BYuT faction
maintained strong voting discipline on the issue, again
falling in line behind the Prime Minister on the November 6
vote.

LITTLE RECOURSE FOR THE PM
--------------


8. (SBU) The social spending legislation can now legally
take effect, as the minimum subsistence level has been reset

KYIV 00001920 002 OF 002


by an amendment to the budget law. Tymoshenko's primary
avenue for blocking the budget amendment (and thus the social
spending legislation) is gone, since the Rada budget
committee was bypassed and her faction did not protest the
vote on the Rada floor by blocking the rostrum.


9. (SBU) The budget amendment is now awaiting the
President's signature. There is no pocket veto in Ukraine.
The only way to block this would be for the President to
expressly veto his own budget amendment.


10. (SBU) Even if Tymoshenko were to try to block the law by
legal means, such as through a Constitutional Court hearing
or an injunction, it is unclear whether such an action would
bear fruit. If the Constitutional Court took up the case,
most analysts believe it would almost certainly rule in favor
of implementation. An appeal to the Court could take up to
four months, however, with one month (maximum) for the Court
to decide whether it would hear the case and three months
(maximum) for a decision to be made.


11. (SBU) In the meantime, even if an appeal were to be
filed with the Constitutional Court, the social spending law
would still take effect. Tymoshenko could seek a temporary
injunction, but it is unclear which lower court would have
jurisdiction over such a matter. (Note: Competing
jurisdictional primacy is a wholesale problem throughout the
country's legal system. End note.)


12. (SBU) Up until the vote in the Rada on November 6,
Tymoshenko could have admitted that 2009 budget targets had
not been met (i.e. that revenues had fallen behind
expenditures),something she has not yet done publicly. By
making such a public statement, she would have taken away the
President's argument that there was money available for the
social spending law and a revised budget.


13. (SBU) Tymoshenko could still decide to underfund
articles in the amended budget that relate to pensions and
assistance transfers. She would need to instruct the state
treasury not to pay any budget increases, but this would lead
to wage and pension arrears that the GOU would ultimately be
legally obliged to pay.

IMF SDR ALLOCATION -- ONLY ENOUGH FOR GAS
--------------


14. (SBU) Tymoshenko will not be able to count on the IMF
SDR allocation (Ref A) for her now growing budget deficit.
Most observers speculate that Ukraine's October-December gas
purchases from Russia will equal short of $2 billion, nearly
the amount available to Ukraine through the SDR program.


15. (U) According to his official website, President
Yushchenko told European Commission President Barroso over
the phone that he had instructed the National Bank of Ukraine
(NBU) to cooperate with the IMF on the transfer of SDR funds
to the GOU treasury. As the government's banker, the NBU
would act to transfer the money from the treasury, likely to
a state-owned bank such as Oshchadbank or UkrExIm, which
would then lend to Naftohaz.

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


16. (C) Out of money for her budget, and with a new spending
obligation that the IMF staunchly opposes (Ref B),
Tymoshenko's back is against the wall. The Prime Minister
will likely attempt to file an injunction against the budget
amendment or the social standards law itself, while
simultaneously appealing to the Constitutional Court. A
zealous approach of this kind would be risky in the run up to
the presidential election, as Regions already stands to
capitalize from BYuT's opposition to the spending increase.

PETTIT