RR RUEHDBU RUEHSL
DE RUEHKV #2185/01 3571042
ZNY CCCCC ZZH
R 231042Z DEC 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 9021
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 02 KYIV 002185
STATE FOR EUR/UMB AND EEB/OMA
E.O. 12958: DECL: 12/21/2029 TAGS: EFIN EREL PGOV UP SUBJECT: IMF TO "ALLOW" UKRAINE TO SPEND RESERVES
Classified By: Ambassador John F. Tefft for Reasons 1.4 (b) and (d)
1. (C) Summary. Ukraine's Deputy Prime Minister Nemyrya is returning from Washington with QQf}4dg>Eey but the same reform requirements -- in 2010, after Ukraine's new President is elected. End Summary
Government Seeking Cover for the NBU to Monetize
2. (C) The IMF's so-called "deal" with Ukraine's Deputy Prime Minister Nemyrya to lower the National Bank of Ukraine's (NBU) floor on net international reserve by $2 billion was nothing more than a "fig leaf" that would allow NBU governor Stelmakh to monetize some of the government's deficit despite President Yushchenko's objections, Kyiv-based IMF resident representative Max Alier told the Ambassador on December 21. Alier noted that Stelmakh could have monetized in January without the deal. The GOU is close to the $14.9 billion floor for December set under the IMF stand-by arrangement during the second program review in July. However, no IMF targets have been set beyond the end of 2009.
Deal Not Final; Unclear Whether NBU Fully On Board
3. (C) Alier stated, however, that neither Acting Minister of Finance Umanskyi nor NBU Governor had yet signed the required letter formally requesting the IMF to lower the reserve requirements. Umanskyi had not yet made it back from Washington D.C. due to snow storms in the United States and Europe, and Stelmakh had not returned Alier's phone calls on December 21. Alier said that the IMF would need the signed request before it could call a formal meeting of the executive directors to approve the decision. Technically, this would need to be accomplished no later than noon on December 23 due to holiday closures in Washington. Alier stated, however, that whether the understanding was formalized or not, it had no real implications for the stalled IMF program in Ukraine. Furthermore, Alier questioned whether Stelmakh would actually authorize release of the funds, which were to be used for external payments only, even if he signed the request.
New Program After the Election Much Like the Old
4. (C) Although Prime Minister Tymoshenko would likely ask for additional funds again after the first round of the presidential election on January 17, the IMF would stand firm in its decision to wait for election results before engaging again in Ukraine, Alier commented. Neither Tymoshenko nor Yanukovich would hesitate, however, to call the IMF after the election results were final. Both leaders, in Alier's view, are driven by pragmatism rather than ideology. After the elections, Alier said that Ukraine would need a new IMF program, alluding to the fact that Ukraine would need more than the remaining $5.8 billion from the original stand-by arrangement. IMF requirements for a new program would remain largely the same, as Ukraine's problems had not changed. Alier thought priority should be placed on fiscal austerity to put public finances back on a sustainable track. This would mean the 2010 budget would need to be shaved considerably from the originally proposed 9% of GDP deficit. The IMF would also continue to stress the need for gas sector reform to minimize the sector's drain on the government's budget. Pension reform would be harder but was still needed as well. Alier commented that Ukraine spends more on pensions as a percentage of GDP than any western European country. Ukraine would also need to continue reforms in the banking and financial sector.
5. (C) Alier suggested that it would be important for both the United States and the European Union to push for reform with the new government in 2010. Unfortunately, real reform would continue to be elusive because Ukraine's politicians, including frontrunners Tymoshenko and Yanukovych, focused attention on short-term tactics rather than a long-term strategic vision for the country.
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COMMENT: NBU Chief in Precarious Position
6. (C) NBU Governor Stelmakh again appears to be waiting until the last minute before taking sides in the presidential election either behind Tymoshenko or opposition Party of Regions leader Yanukovych. Stelmakh will likely sign the letter requesting additional flexibility with reserves, hoping that this will buy him time. Whether he actually uses the flexibility to monetize may depend upon his assessment of Tymoshenko's chances of winning the election. Stelmakh, who has officially reached the end of his five-year term but remains in his position as NBU governor at the pleasure of the President, will also need to be careful of how he handles any monetization lest the President decide to dismiss him from office. Dismissal before the elections would leave Stelmakh without leverage to strike a deal with the next President to avoid repercussions for his missteps as NBU chief. End Comment.