TYMOSHENKO'S DESPERATE BUDGET SCRAMBLE

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 001982 SENSITIVE SIPDIS DEPT FOR EUR, EUR/UMB, EEB/OMA E.O. 12958: DECL: 11/12/2019 TAGS: EFIN EREL ETRD PGOV PINR UP XH SUBJECT: TYMOSHENKO'S DESPERATE BUDGET SCRAMBLE REF: A. KYIV 1943 ¶B. KYIV 1920 ¶C. KYIV 1888 Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and (d) ¶1. (C) Summary. Members of parliament (MPs),the Cabinet of Ministers, and the Ministry of Finance doubt there will be any movement on Ukraine's draft 2010 budget before the presidential election, despite cajoling statements from Rada Speaker Volodymyr Lytvyn. With the IMF's fourth loan tranche delayed, Prime Minister Tymoshenko and her BYuT party have lost their incentive to recast the draft 2010 budget and its roughly 8% deficit before the outcome of the presidential election. Tymoshenko will likely use the absence of an approved budget, which would trigger a continuing resolution-type scenario, to "manually" manipulate expenditures in early 2010. Desperate for cash, she seems to have calculated how she intends to dole out public sector wages, pensions, and payments to Gazprom, while minimizing the political effects of impending arrears. LYTVYN'S BULLY PULPIT -------------- ¶2. (SBU) On a campaign stop in Dnipropetrovsk, Rada Speaker Volodymyr Lytvyn pledged to push forward the draft 2010 budget, hitherto stalled in the Rada budget committee by MPs from the Party of Regions and BYuT factions. Lytvyn said 22 of 33 members had not attended committee meetings and were blocking the draft budget from consideration. He particularly accused PM Tymoshenko's faction of obstruction, suggesting that BYuT -- with its "controlling stake" on the committee -- was trying to avoid meeting its myriad of social spending promises (such as wage increases to librarians, who oversee many of Ukraine's polling stations). ¶3. (U) Lytvyn said the Rada would vote on the draft budget in a first reading during a plenary session the week of November 16. After a first reading, the draft 2010 budget would be forwarded for revisions to the Cabinet of Ministers (CabMin),which would then have until November 20 to return the draft to the Rada for a second reading. According to the budget code, a third reading and final passage of the budget would have to be concluded by December 1. ¶4. (SBU) Despite his public commitments, Lytvyn may have little power to force committee members to vote out the draft, aside from blunt tactics such as his recent threat to withhold members' pay. Ukraine's budget code requires the budget committee to review and adopt recommendations from fellow MPs before forwarding the draft for a first reading. However, since the draft budget was first submitted on September 15, over 1000 amendments have been proposed. According to Rada procedures, Lytvyn cannot circumvent the budget committee's process, even if its October 20 deadline for review of budget amendments has long passed. ¶5. (SBU) In any case, Lytvyn appears to have determined his fight over the budget was unwinnable. He announced on November 12 that he would take a leave of absence from November 17 to dedicate himself full-time to his bid for the presidency, as well as to obviate accusations of conflict of interest. "ZERO CHANCE" FOR DRAFT 2010 BUDGET -------------- ¶6. (C) Deputy PM Hryhoriy Nemyria's economic advisor Mariia Nikitova told Econoff that the CabMin could not offer an amended budget until "late November" at the earliest, because the draft budget had not yet been voted on in a first reading. According to Nikitova, the IMF's demands for a resubmission of the draft budget were technically impossible because the previously submitted draft was still being considered by the budget committee. If it resorted to revoking its own draft budget, BYuT could be accused of violating the terms of the budget code, or of woefully mismanaging the budget process. Thus, everything depended on when the committee could bring the draft budget to a floor vote. ¶7. (C) Yet Rada MPs do not expect the 2010 budget will pass before the election. Deputy chair of the Rada budget committee Volodymyr Makeyenko (Party of Regions) told us that KYIV 00001982 002 OF 003 there is "zero chance" the committee would approve the budget. In addition to the 8% deficit envisioned, he pointed to the fact that macroeconomic indicators had been absent or misleading in the draft budget, that an unjustified price for imported gas had been projected, and that expenditures for the social standards law (which he accepted was spendthrift) had not been incorporated. ¶8. (C) Makeyenko said "billions" had been set aside for pet projects that benefitted Rada MPs close to Tymoshenko, including orders for Foreign Minister Petro Poroshenko's Bohdan bus factory and tax benefits to companies favored by BYuT MP Valeriy Sushkevych. The draft budget's finances reflected a "pyramid scheme." Revealingly, Makeyenko said that even if the draft budget had been perfect, he and fellow Party of Regions MPs would be forced to cast their lot against it in this pre-election season. ¶9. (C) Ministry of Finance senior economist Volodymyr Parnyuk explained that it would be best for Ukraine's recovery if the bloated draft budget never made it out of committee (Ref A). In the absence of a workable budget, Parnyuk acknowledged that Tymoshenko would have the ability to control revenues and expenditures through the presidential election period to ensure social payments for pensioners and public sector employees. TYMOSHENKO'S PLAN... -------------- ¶10. (C) With IMF Managing Director Dominique Strauss-Kahn acknowledging that the fourth tranche of Ukraine's $16.4 billion IMF Stand-By Arrangement loan would not be forthcoming before the presidential election, in part due to the recently signed law on social standards (Ref C), Tymoshenko is no longer immediately pinched by IMF demands to amend the 2010 budget. She told G-8 ambassadors on November 11 that the draft budget would be "hard to pass" due to instability in the Rada. ¶11. (SBU) Analysts believe Tymoshenko is seeking to forestall passage of the 2010 budget before the election, in an effort to force a Ukrainian version of a continuing resolution, known as a provisional transition budget. Article 46 of the Ukrainian budget code states that if the draft budget is not passed by January 1, 2010, the CabMin would be granted 1/12th of the previous year's allocations on a monthly basis, essentially maintaining 2010 expenditures at 2009 levels. (Note: According to IMF budget expert Igor Shpak, the Stabilization Fund could be distributed in its entirety from the first of the year without restrictions on the timing of payments. However, it is unlikely there will be any monies available in the 2010 Stabilization Fund. End note.) ¶12. (C) Nemyria's advisor Nikitova implied that the Prime Minister had devised a plan to "manually" control expenditures, essentially continuing a practice Tymoshenko has employed since September. A loophole in the budget code (i.e. the lack of a stipulation that the government must maintain line items from the previous year) would legally allow the GOU to maintain tight oversight of individual payments. ...AND HOW IT RELATES TO THE 2009 DEFICIT -------------- ¶13. (C) Controlling expenditures during the presidential election season, Tymoshenko will be able to make key payments to public sector workers and pensions. Absent other financial sources, she also will be able to plumb the budget for monthly gas payments. Furthermore, she will have the tools to manage state arrears from 2009 that may run over $2 billion. ¶14. (C) Her chief unfunded obligations in the coming weeks are payments to Gazprom (due on the 7th of each month) and a projected 2009 core deficit of roughly UAH 30 billion (nearly $3.75 billion). She will have few resources at her disposal to cover these gaps, with only the equivalent of $1.6 billion in IMF Special Drawing Rights (SDRs) still available (Ref B) after Naftohaz reportedly used $400 million for its November 7 gas payment. COMMENT -------------- KYIV 00001982 003 OF 003 ¶15. (C) With a lack of available funds at the end of 2009, the biggest question remains whether Tymoshenko will honor her commitments to pensioners and public sector wage earners, or whether she will instead use IMF SDR funds to finance upcoming payments to Gazprom. It appears she is trying to have it both ways, though SDRs will not be able to cover much more than the November budget deficit and the December 7 gas payment. The tool of untied 2010 expenditures could become essential for Tymoshenko to avoid payments to all but the most politically important articles, though she will not be able to escape the electoral impact of across-the-board payment delays that may have already begun to set in. PETTIT