Identifier
Created
Classification
Origin
09KYIV1982
2009-11-13 13:26:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

TYMOSHENKO'S DESPERATE BUDGET SCRAMBLE

Tags:  EFIN EREL ETRD PGOV PINR UP XH 
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VZCZCXRO7428
RR RUEHDBU RUEHSL
DE RUEHKV #1982/01 3171326
ZNY CCCCC ZZH
R 131326Z NOV 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8806
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 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)

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