Identifier
Created
Classification
Origin
09KYIV430
2009-03-06 18:32:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

IMF UKRAINE PROGRAM IN JEOPARDY

Tags:  EFIN EREL ETRD PGOV PREL XH UP 
pdf how-to read a cable
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ZNY CCCCC ZZH (CCY AD3B7708 MSI7874-632)
P 061832Z MAR 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7437
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
C O N F I D E N T I A L KYIV 000430 

C O R R E C T E D COPY TEXT

SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 03/06/2019
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: IMF UKRAINE PROGRAM IN JEOPARDY

REF: A. KYIV 419

B. KYIV 406

Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4 (B) AND (D)

C O N F I D E N T I A L KYIV 000430

C O R R E C T E D COPY TEXT

SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 03/06/2019
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: IMF UKRAINE PROGRAM IN JEOPARDY

REF: A. KYIV 419

B. KYIV 406

Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4 (B) AND (D)


1. (C) Summary. In the presence of G7 ambassadors and the
World Bank, the Kyiv-based IMF resident representative told
PM Yulia Tymoshenko on March 5 that there would be "little
benefit" in the mission team returning to Ukraine without
greater progress on the Fund's conditionalities. Despite a
recent declaration of political unity by President
Yushchenko, the PM, and other senior officials, the IMF cited
a lack of political will to implement necessary measures,
calling on Ukraine to "help itself first." The PM appealed
for understanding, asking the assembled group to take into
account Ukraine's "special (political) circumstances" that
"will not change." Appearing unusually haggard and short
tempered, the PM admitted that it would be a "tragedy" if
Ukraine failed to renew its cooperation with the IMF. The PM
focused on solutions for bringing Ukraine into compliance
with its IMF commitments, though her ideas were well-worn and
materially at cross-purposes with the Fund's overall goals.
End summary.


2. (C) In the face of what may be a larger than projected
fiscal deficit, increased deposit withdrawals from already
teetering banks, and rising unemployment and corporate
defaults, Ukraine's leaders cobbled together a "joint
declaration" on March 3 in order to placate the IMF's calls
for greater political unity. Max Alier, the IMF's
residential representative in Kyiv, told the PM in front of
G7 ambassadors and the World Bank that the Fund had been
encouraged by "signs of renewed political cooperation" by the
newly constituted Anti-Crisis Working Group. The joint
declaration, a one page document forwarded to us by
Presidential aide Oleksander Shlapak before it was signed,
pledged that the group would take three actions: 1) develop a
tax and fiscal policy to match available external financing;
2) gradually introduce a flexible exchange rate to soften the
impact of external shocks; and 3) engage in the comprehensive

reconstruction of the banking sector, aimed at renewing
financial stability.


3. (C) While Yushchenko, Tymoshenko, and other principals
made good on their promise to put forward a declaration of
their willingness to adhere to IMF conditionalities, Alier
was downcast about the lack of political will to implement
the full IMF program. In particular, he cited the Working
Group's other compromise pact, a draft Letter of Intent (LOI)
to the IMF. Alier said that the LOI "falls short" on key
steps needed to bring the mission team back to complete its
review, necessary for the disbursement of the IMF's next $1.8
billion loan tranche. The lack of specific dates and prior
actions referenced by the LOI has provided "little assurance"
that Ukraine had fully committed to IMF program
conditionalities, according to Alier.


4. (C) Ukraine must "help itself first," said Alier, an
opinion that was also apparently expressed to President
Yushchenko in a letter from IMF Managing Director
Strauss-Kahn this week. Alier reiterated that in order to
bring the Fund back, the country's leaders must take urgent
"fiscal corrective action" to generate savings of at least 2
percent of GDP. Alier affirmed that progress on a bank
resolution strategy had been slow, even though the diagnostic
studies of the first two groups of Ukraine's banking sector
had been completed. It remains essential, according to
Alier, to put together a sound framework to address the
banking sector, as loan quality had rapidly deteriorated and
an average of $3.75 billion (UAH 30 billion) per month had
been withdrawn from banking deposits since the crisis began.
It would not take long for the banking system to succumb,
projected the IMF representative.


5. (C) Commenting to Alier that she "got the message," the
PM told the group that she saw two options: early
parliamentary elections or a higher budget deficit -- perhaps
10 percent of GDP. Early elections would take 5-6 months.
(Comment: We think that a budget deficit of 10 percent of
GDP would be extraordinary, given that Ukraine cannot finance
its current deficit equivalent to at least 5 percent of GDP.
End comment.) The PM pointed to other countries worldwide
that had resorted to large budget deficits in order to
stimulate their economies. To garner financing, the PM
expected that she could borrow externally or raise gas prices
for industrial consumers. She was also actively courting
partners for the privatization of Ukrtelecom, Odessa Portside
Plant, and regional electricity generation plants (so-called
oblenergos). Privatization would not require any
legislation, though President Yushchenko continues to oppose
the idea, said Tymoshenko. The PM projected that privatizing
these assets would yield at least $1.5 billion (UAH 12
billion),and she said that the French Ministry of Finance
had confirmed its interest in a partnership for the purchase
of Ukrtelecom during her recent visit to Paris. (Note:
President Yushchenko and others have opposed privatization
efforts, citing market deterioration and concerns that an
asset "fire sale" would run counter to Ukraine's medium to
long-term interests.)


6. (C) Based on recent revenue projections for the current
2009 budget, Alier stated that Ukraine's fiscal deficit would
likely exceed the 5 percent of GDP originally estimated by
the IMF. In turn, the PM commented that she was disheartened
that measures to cut the deficit had not passed in the Rada.
Tymoshenko acknowledged that the March 3 defeat of a bill
that would have brought substantial savings to the Pension
Fund had raised concerns for the IMF, though she blamed
OU/PSD -- a faction formerly controlled by the President and
his allies -- for its weak support, with only 7 deputies
voting in favor.


7. (C) Proxy disputes between Yushchenko and Tymoshenko now
dominate the local media, as the unraveling "political truce"
appears to further threaten the IMF program. The pension
bill met its demise on March 3, hours after a group of BYuT
deputies joined the opposition parties to vote for the ouster
of Foreign Minister Ohryzko, an ally of the President,
allegedly for Ohryzko's anti-Tymoshenko letter circulated to
Ukraine's key embassies abroad (Ref B). On March 4, Naftohaz
headquarters were raided by the state security service (SBU),
which is under the control of the President, allegedly to
seize documents related to controversial elements of the
Tymoshenko-brokered gas deal with Russia (Ref A). On March
5, after receiving an order from the Presidential
Secretariat, the Ukraine NATO mission refused to credential
DPM Grigoriy Nemyria, Tymoshenko's key foreign policy
advisor, as he sought access to the compound to participate
in the NATO-Ukraine Council Ministerial with Acting Foreign
Minister Khandogiy in Brussels. Nemyria had traveled to
represent Tymoshenko, thus the "gate incident" has been
interpreted as a slap in the government's face.


8. (C) Note: Rada Speaker Lytvyn saw the disintegration of
Yushchenko/Tymoshenko cooperation coming, when he spoke to
the Ambassador on March 4. He worried that Ukraine would "go
down in chaos," with each faction leader looking to
capitalize on the mistakes of others. He had predicted that
the Ohryzko dismissal would lead to more destabilization of
an already fragile "pretense" of unity. End note.


9. (C) The IMF, World Bank, and G7 ambassadors told PM
Tymoshenko -- repeating what they had stated to the President
on February 26 -- that an "on track" IMF program remains a
pre-condition to any external budget support. The PM asked
the assembled group to take into account Ukraine's "special
(political) circumstances" that "will not change." The PM
admitted that it would be a "tragedy" if Ukraine failed to
renew its cooperation with the IMF, and she said that she
would continue to reach out to the U.S. and the E.U. for
financial assistance, knowing that such support was
conditioned on a prior agreement with the IMF. She admitted
that Ukraine was in ongoing negotiations with the Russians
for a bilateral loan. Yet, the PM suggested that Russia was
in a worse economic condition than Ukraine, and she predicted
that Russia would face an avalanche of financing obligations
in the months to come.


10. (C) Comment. That the IMF program is in trouble is no
surprise, especially since the second tranche of a $16.4
billion Stand-By Arrangement (SBA) has been on hold for
several weeks due to the lack of GOU action on the IMF's
conditionalities. Nonetheless, to our knowledge, the IMF
had not previously told the President or the PM that the Fund
would indefinitely withhold the return of its Ukraine mission
team. The longer the IMF mission team is delayed, the
greater the threat of a Ukrainian financial disaster.


11. (C) The ball is now firmly in Kyiv's court. On the one
hand, the Anti-Crisis Working Group, a roundtable process
that had made some progress and generated some hope, has been
unable to contain the animosity and scope of personal
ambitions driving Ukraine's senior leaders. On the other
hand, some sort of joint process remains essential, given the
gravity of the situation and the seeming inability of
Ukraine's leadership to put aside politicking for more than a
few days in order to rescue the country from further decline.
We are concerned that while the G7 ambassadors plus
IMF/World Bank process has helped, it no longer can
substitute for higher level engagement. End comment.

TAYLOR