Identifier
Created
Classification
Origin
09KYIV227
2009-02-02 15:12:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kyiv
Cable title:  

UKRAINE FINANCE MINISTER'S SECRET PREDICTIONS

Tags:  EFIN ECON ETRD PREL PGOV XH UP 
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VZCZCXRO0987
PP RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0227/01 0331512
ZNR UUUUU ZZH
P 021512Z FEB 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7190
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
UNCLAS SECTION 01 OF 03 KYIV 000227 

SENSITIVE
SIPDIS

DEPT FOR EUR/UMB, EEB/OMA

E.O. 12958: N/A
TAGS: EFIN ECON ETRD PREL PGOV XH UP
SUBJECT: UKRAINE FINANCE MINISTER'S SECRET PREDICTIONS

REF: KYIV 169

Sensitive but Unclassified. Not for Internet or
Distribution Outside the USG.

Summary
-------

UNCLAS SECTION 01 OF 03 KYIV 000227

SENSITIVE
SIPDIS

DEPT FOR EUR/UMB, EEB/OMA

E.O. 12958: N/A
TAGS: EFIN ECON ETRD PREL PGOV XH UP
SUBJECT: UKRAINE FINANCE MINISTER'S SECRET PREDICTIONS

REF: KYIV 169

Sensitive but Unclassified. Not for Internet or
Distribution Outside the USG.

Summary
--------------


1. (SBU) In a leaked letter to PM Tymoshenko, Ukraine's
Minister of Finance Viktor Pynzenyk has predicted the "very
real" possibility of Ukraine's total economic collapse.
Internet newspaper Ukrainska Pravda published the
classified document, addressed to Prime Minister Yulia
Tymoshenko and the Cabinet of Ministers, in which Pynzenyk
equates Ukraine's current fiscal and monetary crises to the
country's economic traumas in 1994.


2. (SBU) On January 28, following the 24 page letter's
leak and subsequent, contradictory public statements on its
authenticity, Pynzenyk was admitted to a Kyiv hospital,
reportedly due to a heart condition. Scuttlebutt on
Pynzenyk's future has since dominated the air waves and
newspapers, even exceeding attention given to his
discredited colleague, National Bank of Ukraine Governor
Volodymyr Stelmakh (reftel). Pynzenyk's assistant told us
on January 29, however, that the Minister will "be back
soon," while cooperation with the IMF team continues "on
track." End summary.

Minister's Dire Predictions
--------------


3. (SBU) Pynzenyk's letter to PM Tymoshenko and the
Cabinet of Ministers, dated January 6 but leaked to the
media and published on January 27, contains strong language
about an "extremely threatening" economic situation. The
biggest fears, according to the letter, are a recurrence of
the 1994 crisis, when the country's monthly inflation grew
70 to 100 percent, currency reserves fell perilously low,
and many large factories sat idle. The major concerns in
2009, according to the letter, are an untenable budget,
collapsing GDP, falling industrial production, and mounting
foreign debt.


4. (SBU) Citing Ministry of Finance estimations, the
letter describes budget revenues that will amount to UAH
225.3 billion ($28.9 billion),or UAH 85 billion ($10.9
billion) less than had been first projected by the
Ministry. New laws that increase excise duties only

slightly offset the deficit. (Note: Subsequent to the date
of the letter, another bill passed in the Rada that would
have increased import tariffs by 13 percent. Under
pressure from business groups, however, President Viktor
Yushchenko vetoed the bill, and it now awaits an override
vote in parliament. End note.) Local budget performance
is hardly better, with over 425 municipalities failing to
fulfill their plans for revenue collections.


5. (SBU) The letter attributed to Pynzenyk states that all
existing revenues into the state treasury will be needed to
cover non-discretionary spending, leaving no room for
discretionary expenses or a larger than expected shortfall
in the pension fund. It continues: "(E)nergy payments,
medicines, food, debt servicing (that is a big threat),
science, etc. will not be financed. And under such
conditions, the budget includes a provision for bringing
the minimum wage to the subsistence level. But we can't
even pay at existing levels...Proposals to balance the
budget through tax increases put unacceptable pressure on
the economy. Ukraine will not survive with the current
2009 budget."


6. (SBU) The letter recounts previously published
statistics, such as the 14 percent year-on-year GDP drop
and 28.6 percent drop in industrial output in November
(including declines in machine-building of 38.8 percent and
metallurgy of 48.8 percent). Another worrisome signal was
the decline in electricity consumption, which shrank 19
percent in October, 35 percent in November, and 38 percent
in December. The letter indicates that the Ministry of
Finance's earlier predictions of minus 5 percent GDP growth
in 2009 are too optimistic, projecting a 7-10 percent drop
in GDP from the first quarter of 2008 to the first quarter
of 2009 alone.


7. (SBU) Pynzenyk indicated that Ukraine's budgetary and
macroeconomic problems are so deep that the country would

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have trouble attracting foreign capital, even in the best
of times. His letter quotes a number of figures, such as
UAH 31.7 billion ($4.05 billion) to service public sector
debt, in addition to the UAH 50 billion ($6.4 billion) he
presumes Ukraine needs for bank recapitalization.
"Countries with such deficits as ours are not lent money,"
he surmised.

How to Fix the Situation?
--------------


8. (SBU) The letter proposes a cut in government wages by
an average of 20 percent, with minister and Rada deputy
salaries to be halved during the crisis. The Ministry of
Finance would also cancel all superfluous benefits for
public officials, including official vehicle and cell phone
use and non-essential travel. Pension outlays and
subsidies would be reformed and targeted, and the
government would take over the social insurance fund during
the crisis period to protect rising numbers of unemployed.
The author writes: "It is not normal for poor and rich
people to consume cheap Ukrainian gas at an equal price (or
receive the same rates) for utility services. And free
books and school food should be provided only to families
with low incomes." The letter also proposes increases in
the percentage of students paying university tuition (as
opposed to receiving full-ride scholarships).

Dissecting the Letter's Authenticity
--------------


9. (SBU) While Pynzenyk and his assistant did not directly
acknowledge Ministry authorship of the letter, Kyiv-based
analysts, journalists, and well-known politicians have all
weighed in on its authenticity and significance. Even
former Rada speaker Arseniy Yatseniuk called the letter's
choppy and blunt Ukrainian writing "characteristically
Pynzenyk," equating the "psychology" of the prose with that
of the anxious, chain smoking Minister.


10. (SBU) The 24 page letter is replete with graphs and
statistics, similar to a presentation on the world
financial crisis the Minister gave to G-7 ambassadors on
December 19. At that time, Pynzenyk described a recipe for
worsening global conditions and a particular deterioration
in the Russian economy that would have an impact on
Ukraine. Pynzenyk's focus on falling GDP, declining
industrial production numbers, and Russian financial
difficulties related to falling energy prices and a highly
leveraged banking sector has turned out to be remarkably
prescient.

The Minister's Future
--------------


11. (SBU) Although two press releases, one by the Cabinet
of Ministers and the other by the Ministry of Finance,
provide conflicting details on the alleged origins of the
letter, both denounced its leak as a "provocation." Our
sources in the Ministry of Finance tell us there is
speculation among Ukrainian officials that Pynzenyk might
be removed because of the letter. Cynical observers note
that disgraced politicians often seek refuge in hospitals
or undisclosed vacation destinations, and now both Pynzenyk
and National Bank of Ukraine Governor Stelmakh (on a
January-long holiday) have disappeared from the public eye.
Rumors aside, the Minister's assistant Ivan Yurik confirmed
that Pynzenyk had been hospitalized, and he expressed hope
the Minister would be out soon. Negotiations with the IMF
continue "on track" in the Minister's absence, said Yurik.


12. Comment. From our previous encounters with Pynzenyk,
and from correspondence and presentations he has authored
in the past, the didactic style of the letter almost
undoubtedly can be attributed to the Minister. He has a
history of pessimistically taking the worst case scenario,
focusing on detailed points, and stressing their importance
in a manner that can come across to some as exaggerated.


13. However, Pynzenyk's now three-week-old projections do
not appear embellished to us. Although he has been notably
vilified since the letter's release, Pynzenyk was already
considered to be on the periphery of the GOU's crisis
response team. Perhaps the most alarming element of the
Pynzenyk letter, therefore, is the fact that its author is
the only senior Ukrainian official whose baseline forecasts
parallel those we have heard from private economic analysts

KYIV 00000227 003 OF 003


in Kyiv. While the letter did not contain specific GDP
projections for all of 2009, Pynzenyk allegedly concluded:
"The country is in danger. The citizens are in danger.
Authority (in government) is not a prize...I want to say it
again: there is still a way out of the difficult situation.
But we have almost no time. Unless adequate measures are
taken, the situation will overtake the country in a month
or two." It just may be that bad. End comment.

TAYLOR