UKRAINIAN FINANCE MINISTRY GRIM ON BUDGET

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 002147

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 12/16/2019
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: UKRAINIAN FINANCE MINISTRY GRIM ON BUDGET

REF: A. KYIV 2140

B. KYIV 2133

C. KYIV 2130

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


1. (C) Summary. In preparation for DPM Nemyria's talks with
IMF officials on December 17 and 18 (ref A),the GOU's top
budget experts met with Kyiv-based IMF resident
representative Max Alier to reconcile revenue and expenditure
figures for 2009 and the first quarter of 2010. Talking
separately with Econoff on December 15, Deputy Finance
Minister Myarkovskiy said that the GOU had a shortfall of $3
billion over the next six weeks, taking into account only
minimum social expenditures and the January 7 Gazprom
payment. Separately, Deputy Minister of Finance Kravets told
us the GOU had successfully sold UAH 400 million ($50
million) in one and three-year notes on December 15 in an
attempt to cover roughly UAH 2 billion ($250 million) in
domestic debt payments due in late December. End summary.

CRITICAL SHORTFALL OVER NEXT SIX WEEKS
--------------


2. (C) Working furiously with the IMF's Alier on budget
figures prior to traveling to the U.S. on December 16 with
DPM Nemyria and acting Finance Minister Umanskiy, Myarkovskiy
told us that, at a minimum, the GOU had a UAH 8.8 billion
($1.1 billion) deficit for remaining December wage and
pension expenditures. The Ministry of Finance projected it
would have a further deficit of UAH 6 billion ($825 million)
for similar minimum social expenditures in January.


3. (C) Myarkovskiy said there was an additional $1.2 billion
needed for the January 7 gas payment, as the GOU wanted to
import as much gas as possible in December due to 2010 price
increases. Although not confirming what DPM Nemyria and
Naftohaz spokesman Valentyn Zemlyansky separately reported to
us (ref A),Myarkovskiy's figures suggest the GOU is firmly
focused on importing approximately 5.5 billion cubic meters
(bcm) this month.


4. (C) The Ministry of Finance confirmed that these minimum
social and gas payment obligations, which PM Tymoshenko
considered essential expenditures over the next six weeks,
would total over $3 billion. Myarkovskiy's figure explicitly
does not account for shortfalls on other protected budget
items, including government operations. In fact, Deputy
Minister of Economy Maksiuta lamented to us that the Cabinet
of Ministers no longer had money to fill up official vehicles
with gasoline, pointing to the fact that he had taken public
transportation to attend the embassy's holiday party.

EMPTY DECEMBER COFFERS
--------------


5. (C) Myarkovskiy did not disclose figures on GOU revenues
for December, except to say they were very low and the state
treasury's "cupboard was bare". Making some spot
calculations, he determined that the treasury had UAH 1.77
billion ($221 million) in IMF Special Drawing Rights (SDR)
remaining. When asked whether these SDRs would be used for
January 7 gas payments, Myarkovskiy demurred, noting instead
that the IMF was forcing Naftohaz to spend its revenues on
the payment to Gazprom, rather than transferring December
revenues to the government for budget payments. (Note: We
have not received clarification from the IMF on this demand.
End note.) The Deputy Minister of Finance did not mention
whether shortfalls would be made up by NBU monetization or
domestic debt issuance.

CLEVER ACCOUNTING ON CORE DEFICIT
--------------


6. (C) Ukraine's total 2009 budget deficit would be UAH 55
billion ($6.88 billion),excluding Naftohaz's deficit and
bank recapitalization financing, a figure that would allow
the GOU to claim that its deficit was in line with IMF
targets. Myarkovskiy admitted the IMF had been forced to
"reconcile" the GOU's revenue figures. At issue specifically
was whether a UAH 3 billion ($375 million) loan to
Ukravtodor, the state highway company, could be counted as
revenue to help the GOU meet the IMF's target. Deputy
Minister of Economy Maksiuta told us later on December 15
that the IMF had acquiesced on the GOU's accounting of the

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Ukravtodor loan as revenue. In addition to the Ukravtodor
monies, as well as loans from the World Bank and the IMF's
second and third tranches that provided budget assistance
earlier in 2009, over $2 billion in IMF Special Drawing
Rights had been apportioned as revenue by GOU accountants,
allowing PM Tymoshenko to declare that Ukraine's state budget
had been "fulfilled" through November.

Q1 2010 PROJECTIONS
--------------


7. (C) Myarkovskiy said that the Ministry of Finance was
projecting the Q1 2010 budget deficit to be UAH 14.3 billion
(roughly $1.79 billion, excluding Naftohaz's deficit and bank
recapitalization financing). Confirming Naftohaz Chairman
Oleh Dubinya's November 27 statement, Myarkovskiy said the
GOU planned to import 7 bcm from Gazprom in Q1 2010. As a
result, based on a $300-310 tcm price (and as projected by
Gazprom Sbyt on December 17),the GOU would need to pay at
least UAH 16.8 billion ($2.1 billion) for imported gas in Q1
2010, according to Myarkovskiy.

DECEMBER DEBT AUCTION
--------------


8. (C) Deputy Finance Minister Kravets told Econoff on
December 15 that the Ministry had sold UAH 400 million ($50
million) in domestic securities. The one-year notes went at
24% and the three-year notes sold at 25%, he said. There was
no appetite for three-month notes, according to Kravets. The
Deputy Minister had told us on December 11 that the new
securities were being issued to cover roughly UAH 2 billion
($250 million) in domestic payments due in December,
otherwise Ukraine would default on these obligations,
possibly triggering calls for accelerated payments on other
debt (ref C). Kravets' numbers closely corresponded with IMF
calculations for December domestic debt payments (ref B).


9. (C) Kravets was actively marketing the next debt auctions
(scheduled on December 22 and 29) to at least three of our
foreign banking contacts (OTP, Ukrsibbank/BNP Paribas, and
UniCredit) at the embassy holiday reception on December 15.
All then reported to us that they had not bought securities
on December 15. Speaking separately, UniCredit CEO Federico
Russo admitted that he had been eyeing six-month notes, and
that he had already purchased GOU securities earlier in 2009.
Russo reasoned that shorter maturities would be too tied up
in election-related political risk (and may not be paid out).
However, having a slightly longer maturity horizon would not
only provide the bank favorable yields, there were few other
avenues to make money, due to the abundance of risk and the
lack of favorable lending opportunities on the Ukrainian
market.

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


10. (C) The government has made expenditure calculations
based on absolute minimum priorities to get to the second
round of the presidential election. Now that the IMF has
apparently given in on accounting tricks that will allow the
GOU to meet IMF budget deficit targets by including loans and
SDRs as budget revenue, the GOU will continue to focus its
efforts on avoiding arrears in social and gas payments, while
keeping a wary eye on debt obligations that could trigger
lenders to demand early repayment in an "event of default"
scenario. Without further sources of budget financing (in
the form of a partial IMF tranche or monetization),we expect
a major fiscal adjustment in December 2009 and the first
quarter of 2010 will result.

TEFFT