UKRAINE'S "SCARE TACTICS" OVER IMF LOAN

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 002133 SENSITIVE SIPDIS DEPT FOR EUR, EUR/UMB, EEB/OMA E.O. 12958: DECL: 12/13/2019 TAGS: EFIN EREL ETRD PGOV PINR UP XH SUBJECT: UKRAINE'S "SCARE TACTICS" OVER IMF LOAN REF: A. KYIV 2130 ¶B. KYIV 2102 Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and (d) ¶1. (C) Summary. Kyiv-based IMF resident representative Max Alier told Econoff on December 11 that GOU representatives deliberately misled Ukrainian and international media outlets into believing that Ukraine had met the IMF's "primary demands" for releasing a fourth loan tranche. Alier reiterated that the IMF's "very reasonable" conditionalities were firm and still unmet. He speculated that Prime Minister Tymoshenko was "letting out all the horses" to put pressure on the European Union, Russia, and the United States to weigh in with IMF management to again ease the conditions for disbursal. Alier did not discount further GOU "scare tactics" over a gas shutoff, social unrest, or a default on domestic debt. End Summary. NEMYRIA'S FALSE POSITIVE -------------- ¶2. (C) Alier passed on Deputy Prime Minister Nemyria's readout to him from December 6 talks in Washington with IMF and USG officials, which Alier said was "surprisingly positive". The Deputy Prime Minister told Alier that he thought a disbursement could be done in a few days, and he said the GOU was pushing to include the subject of an emergency loan to Ukraine on the next IMF board meeting agenda. ¶3. (C) Alier told Econoff, however, that IMF management was against the idea of a fast-tracked loan, especially without support from IMF mission director Ceyla Pazarbasioglu or a completed staff-level review. Further concessions on IMF conditionalities were unlikely, he said. The IMF was firm in its view that it had already been "very reasonable" with its still unmet demands of Ukraine's authorities (ref B). GOU MEDIA SPIN ON IMF LOAN -------------- ¶4. (C) Alier noted with concern that Nemryia had taken his interpretation of the Washington talks to Ukrainian and international media outlets, which widely reported on December 11 and over the weekend that the GOU had made progress in its negotiations with the IMF. Nemyria was quoted by no fewer than a dozen international media outlets as stating that Ukraine had met the IMF's "primary demands" and was hoping for a loan disbursement to avert another January gas crisis. Nemyria told media that the lack of an IMF disbursement would be a "fatal error" and could destabilize the eastern European region. Nemyria's spokeswoman stressed that the IMF money was needed to pay Ukraine's January 7 bill to Gazprom. ¶5. (C) Prior to his meeting with IMF deputy managing director Lipsky in Washington, Foreign Minister Poroshenko was similarly quoted on December 11 to have said there would be a "higher risk" of gas supply disruptions to Europe if Ukraine did not receive an IMF tranche. (Note: Poroshenko privately clarified his position with the Ambassador on December 13, suggesting that Ukraine could probably pay its gas bill in January, but that the situation was precarious and would be even worse in February without external support.) ¶6. (SBU) Local commentary on the GOU's statements has been mostly derogatory. A Ukrainian business daily declared on December 14 that Tymoshenko was attempting to put "psychological pressure" on the IMF. Another pundit noted that the IMF loan was needed more by the government than the economy as a whole. GOU PRESSURE FOR DISBURSAL -------------- ¶7. (C) The IMF's Alier characterized Nemyria and Poroshenko's public statements as "scare tactics" designed to pressure the European Union, Russia, and the United States to weigh in with the IMF. "You can't imagine the number of calls" the IMF had received in response to the media stories, including from Russia, Alier said. "The Prime Minister was playing all sides, not necessarily against each other but to her advantage," the IMF had concluded. Alier warned that Ukraine's partners should take Tymoshenko's assurances "with a big grain of salt". ¶8. (C) The Prime Minister was "willing to promise anything to anybody" to make budget, gas, and domestic debt payments, according to Alier. Alier predicted Tymoshenko would use public relations messaging to threaten a gas shut off, social unrest, or a sovereign default on domestic debt. In his words, Tymoshenko was "letting out all the horses." THREATS OF GAS DISRUPTION NOT CREDIBLE -------------- ¶9. (C) Alier said the GOU's talk of gas transit disruptions were not a credible ploy to instigate European support for emergency lending. The Europeans had learned their lesson from January 2009; most countries reliant on Ukraine for transit flows now had enough gas in storage to last through the winter heating season. Instead, Europeans had become cynical about Ukrainian duplicity and tended to believe Russian messages blaming Kyiv for problems with energy security. Alier said that the January 7 payment to Gazprom was "likely, but in the hands of the Prime Minister". THE "SOCIAL UNREST" CARD -------------- ¶10. (C) The IMF official focused heavily on the possibility of social unrest, which he predicted could be the GOU's "next escalation". Alier speculated that Tymoshenko might choose to encourage or support protests, but that such a tactic would backfire. He predicted that the Prime Minister could instead find herself in the position of being a lightning rod for public discontent. IMF ON UKRAINE DEBT DEFAULT -------------- ¶11. (C) GOU fears over December domestic debt payments could be justified, but Alier downplayed the foreboding concerns expressed to Econoff by Deputy Minister of Finance Kravets on December 11 (ref A). The IMF had calculated that the GOU needed to repay or rollover UAH 1.8 billion ($225 million) in domestic debt by the end of December. The Ministry of Finance's plans for December auctions of short-term treasury bills would likely only raise enough to cover domestic debt servicing, one-third of which was owed to the National Bank of Ukraine (NBU). The IMF was not aware of any cross-default covenants that could be triggered by non-payment of maturing domestic debt, but Alier did not rule out the possibility that such existed. In any case, threatening defaults to gin up emergency external lending would be a "very negative action", said the IMF official. BUDGET SITUATION STILL WORSENING -------------- ¶12. (C) Arrears of public sector wages and pensions were already visible, according to the IMF, even though Tymoshenko had determined to do "whatever it took" to make these payments. The month of January 2010 would be no better; not only had taxes been paid in advance, revenues were still collapsing as a result of Ukraine's GDP decline and the lag effect "catching up" on the real economy. (Note: Although Alier stated that there are visible wage and pension arrears, our assessment is that these are localized and not widespread to date. Alier did not elaborate or provide evidence to support his claim. End note.) NBU'S PERFECT COVER -------------- ¶13. (C) The NBU was in a position to monetize GOU securities without causing inflation or dangerously depleting reserves, according to Alier, but its decision to help the GOU make budget, gas, or debt payments would continue to be politically motivated. NBU Governor Stelmakh was waiting until the last minute before the presidential election to throw his support behind either Tymoshenko or opposition Party of Regions leader Yanukovych. If the former appeared to be gaining ground, Stelmakh would likely turn on the printing presses. If Yanukovych looked set to hold on, Stelmakh would refuse to concede. ¶14. (C) President Yushchenko was providing the perfect cover to the NBU, allowing Stelmakh to maneuver between both Tymoshenko and Yanukovych. Stelmalkh's signing of the IMF Letter of Intent gave him some credibility with the Prime Minister. However, Alier speculated Stelmakh had also told Yanukovych that the NBU Governor's signature was meaningless without Yushchenko's support (ref B),and that it did not count as a vote for Tymoshenko. According to Alier, Stelmakh knew the stakes were high. His actions could help decide the presidential race, as well as determine whether he would be prosecuted by Yushchenko's successor for what the IMF acknowledged were his many misdeeds. COMMENT -------------- ¶15. (C) IMF resident representative Alier's comments reflect real disillusionment towards Ukraine within the Fund. Notwithstanding Deputy Prime Minister Nemyria's misleading suggestions to the public, the IMF will not weaken its resolve on conditionalities before the presidential election. IMF staff-level experts clearly interpret the GOU's threats as negative and exaggerated, perhaps even further reducing the likelihood of additional "flexibility". Alier's assessment that the NBU will act as a spoiler (or kingmaker) appears correct, especially if Yushchenko extends Stelmakh's term after the NBU Governor's formal retirement tomorrow. TEFFT