IMF TO "ALLOW" UKRAINE TO SPEND RESERVES

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 002185

SIPDIS

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
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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.


KYIV 00002185 002 OF 002


COMMENT: NBU Chief in Precarious Position
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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.

TEFFT