DNIPROPETROVSK: HUNKERING DOWN FOR ECONOMIC SLIDE

UNCLAS SECTION 01 OF 02 KYIV 000199 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: PGOV PREL ECON UP SUBJECT: DNIPROPETROVSK: HUNKERING DOWN FOR ECONOMIC SLIDE Summary -------------- ¶1. (SBU) Poloff met with local government and political leaders and political analysts during a two-day visit to Dnipropetrovsk (DP). They reported that DP is calm for now, but an expected surge in layoffs and ineffectual government anti-crisis measures could result in large-scale unrest and political destabilization in the eastern industrial city. Kyiv must be more responsive to local issues and problems, but national political leaders have little connection to the people they are supposed to represent. Local government lacks the discretionary budget authority or political power to effectively address local fallout from the economic crisis. The small, but growing middle class is especially at risk. Needed reform to rebalance the fiscal and political relationship between Kyiv and the regions should happen now. End Summary. Crisis Evident, but Dnipropetrovsk is Stable...For Now -------------- -------------- ¶2. (SBU) On January 22 and 23 in Dnipropetrovsk, Poloff met with local Tymoshenko Bloc (BYuT) and Party of Regions (Regions) leaders, the Deputy Mayor, political analysts and NGO representatives to assess the political mood in one of Ukraine's most important industrial centers. While the economic crisis is the talk of DP and "everyone feels" the looming crisis, the city and oblast appear to be calm, with no one reporting any large-scale unrest or protests. Vice Mayor Vladimir Tyurin explained that, as an industrial center, DP had a labor deficit before the economic downturn. This labor imbalance provided a "cushion" during the initial months of the downturn. Interlocutors also reported that many businesses and factories instituted mandatory vacation in December in order to push the "hard decisions" about layoffs beyond the holiday season. But forced vacations cannot go on forever, Tyurin said. ¶3. (SBU) Oleskandr Smirnov, Director of the DP branch of the Kyiv-based think tank Gorshenin Institute, suggested that the people of DP would be patient in the face of the economic crisis. He posited that DP had seen no protests or unrest yet because "our people have come to expect disappointment." Local BYuT vice-chairman Valeriy Murlyan said that because people have heat, food, and see activity on the streets, they want to pretend like nothing is wrong for as long as possible. Vladyslav Romanov, Director of DP-based Prydneprovye Analytical Center (PAC),said that the majority of people in DP will respond to the crisis by finding whatever work they can, being creative to meet their families' needs, and spending less. Without some sort of provocation that ripples through the population, Romanov expected a minority of "more anarchic people" to agitate and protest, with the majority of Ukrainians turning inward to focus on their immediate needs rather than national issues. Expect Things to Get Worse -------------- ¶4. (SBU) All interlocutors agreed that Dnipropetrovsk is likely to see a worsening economic and social situation starting in February or March, when more factories and businesses shut their doors and lay off large numbers of workers. Mikhail Razgoniayev, deputy chairman of the DP Regions Party, worried that as industry grinds to a halt, the ripple effect would start to hit small and medium sized businesses soon. Local businessman and Committee of Voters of Ukraine (CVU) representative Oleksandr Sydorenko said that the primary business being transacted in DP now was "food and drink." ¶5. (SBU) Vice Mayor Tyurin told us that with rising unemployment the city expected a concomitant rise in crime and general unrest. Analyst Romanov reported that Regions representatives in Kyiv recently met with mayors from around Ukraine to try to convince them to use the unrest to organize large protests around the country. Romanov said that the mayors, led by DP's Ivan Kulichenko, balked at Regions' plan, arguing that once people are on the streets, it would be difficult to get them back off. Middle Class At Risk -------------- ¶6. (SBU) Many interlocutors expressed confidence that Ukraine could weather the economic crisis as it has in the past. The difference this time, however, is the effect on Ukraine's growing middle class. Smirnov described the middle class as the "management class" that has decent salaries but little KYIV 00000199 002 OF 002 influence. CVU's Sydorenko echoed Smirnov, saying that the middle class was built on good salaries and access to credit, both of which they will lose in the economic downturn. Sydorenko suggested that it would take "some time" to rebuild the middle class. Meanwhile, the rich will still be rich and "the poor were poor already." Local Government Lacks Means to Act -------------- ¶7. (SBU) Tyurin said that, while the city and oblast expect things to get worse, they can do little more than talk about the crisis while "we wait for help from Kyiv." A common lament in Dnipropetrovsk is that, as a large net donor to the national budget, DP should see more benefits from the national budget and more local authority to govern. Instead, the current national/local government power structure leaves local governments weak, with little budgetary discretion to meet local needs. Local government could provide local solutions to local problems, but budget constraints make it impossible to counter the negative consequences of the economic downturn at the local level. Tyurin noted that the city had an anti-crisis plan in place, but it consisted primarily of "starting a dialogue" with employers, and limiting city expenses. ¶8. (SBU) According to Tyurin, the priority for local government is to continue salaries for police, teachers, medical personnel, and other local service agencies. He predicted budget shortfalls in the second quarter that would jeopardize the city's ability to provide communal and other services, and make impossible any infrastructure improvements. The Gorshenin Institute's Smirnov noted that civic organizations were stepping in to address issues that local government cannot or will not address, but said that such a system was not sustainable. Smirnov concluded that if government worked, "the people wouldn't have to do it for themselves." Kyiv Disconnected from the Regions -------------- ¶9. (SBU) Tyurin said that DP was working through the Association of Ukrainian Cities to influence anti-crisis measures at the national level, but that "Kyiv politicians" do not pay much attention to the needs of the regions. While both BYuT and Regions representatives touted their parties' strong connection to voters in DP, political analysts said that national politicians are disconnected from the reality in the regions, and that Ukraine's top down political system marginalizes voters and their concerns. Vladyslav Romanov expressed disdain for national politicians that "fly in and fly out" without really getting to know local issues. Local Government Reform Needed -------------- ¶10. (SBU) All interlocutors discussed the need for political reform to give more power to local government. Romanov suggested that the economic crisis provided the opportunity to decentralize political power in Ukraine. He argued that the system is not currently responsive to crises or the everyday needs of the people. He said now was the time to try something new because "the results cannot be any worse" than the system we have now. TAYLOR