UKRAINE: POLITICAL LEADERSHIP MAKES RENEWED EFFORT

UNCLAS SECTION 01 OF 02 KYIV 000471

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: N/A
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE: POLITICAL LEADERSHIP MAKES RENEWED EFFORT
TO PUT IMF LOAN BACK ON TRACK

REF: KYIV 430

KYIV 00000471 001.2 OF 002


Summary
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1. (SBU) On March 11 President Yushchenko, PM Tymoshenko and
NBU Governor Stelmakh met and announced concrete steps aimed
at securing the overdue $1.8 billion second tranche of the
IMF loan program. Most importantly, they pledged to reduce
the planned budget deficit to 3 percent of GDP, a level
acceptable to the IMF providing Ukraine is able to fund it
without borrowing from the NBU. The GOU also took swift
action to reverse provisions of the budget law that, in the
IMF's view, curtailed the independence of the NBU. The IMF
told us that it would await concrete action on the promised
measures before sending a team to Kyiv that would ultimately
recommend paying out the second tranche. The World Bank
pointed out that the announced measures will not be
sufficient to reduce the deficit to planned 3 percent, and
that other, politically difficult cost cutting measures will
be necessary. The GOU also said it approved a balanced 2009
financial plan for Nafthohaz that, under closer scrutiny,
appears to reduce costs this year at the expense of future
transit fees. By all accounts, Ukraine's economic situation
is decaying quickly, and if the GOU succeeds in following up
on the promises then Ukrainian requests for direct budget
support will need to be addressed swiftly. End summary.

President, GOU, NBU Promise Swift Action
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2. (SBU) On March 11 Yushchenko, Tymoshenko and Stelmakh said
Ukraine would take all steps necessary to secure the next
tranche in the IMF's $16.4 billion Stand-By Agreement (SBA).
The tranche of $1.8 billion should have been dispersed in
mid-February, but has been delayed over Ukrainian failure to
fulfill key IMF conditionalities.


3. (SBU) Alexander Shlapak, first deputy head of the
Presidential Secretariat, and acting Finance Minister Igor
Umanskiy both told the media separately that the GOU would
reduce the planned budget deficit from expected 5 percent to
3 percent of GDP through a mixture of reduced expenditures
and increased revenues. The Rada would vote this week on
pension reform and excise tax bills, both of which, if
passed, would help reduce the deficit, Umanskiy said. The
announced intention to sharply curtail the projected deficit
to three percent of GDP marked a change over previous
pronouncements by the GOU, including PM Tymoshenko's
statement to the G7 last week (reftel),in which she claimed
that a further reduction of the budget deficit was not
possible.

IMF, World Bank Want to See Action
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4. (SBU) Both the IMF and World Bank told us on March 12 that
the announced intention to reduce the budget was a positive
development, but cautioned that the GOU would still need to
deliver on its promises. Local IMF spokesmen have been
careful not to indicate when the IMF Mission might return.
Kyiv-based IMF advisor Igor Shpak told us IMF would require
the GOU to take a series of steps, either through legislative
action or executive resolutions, before it would contemplate
a return of the IMF Mission. He emphasized that statements
by Yushchenko and GOU spokesmen envisaging a return of the
IMF by as early as this week were unfounded.


5. (SBU) Acting World Bank country director Pablo Saavedra
told us on March 12 that the planned measures on pensions and
the excise tax were "watered down" versions of earlier World
Bank suggestions to reduce the planned deficit. Taken
together, they would reduce the planned deficit by about 0.8
percent. The GOU also planned to introduce 2 percent
surcharges on gasoline and residential natural gas taxes,
both of which would reduce the deficit by another 0.15
percent. Hence the GOU still needed to come up with savings
equal to about one percent of GDP to meet the IMF goal of a
deficit equal to 3 percent of GDP, Saavedra said.

CabMin Proactively Rescinds NBU Restrictions
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6. (SBU) On March 11 the Cabinet of Ministers also approved a
draft law that would eliminate paragraphs 84 and 86 of the

KYIV 00000471 002.2 OF 002


budget law. These provisions had, in the IMF's view,
severely reduced the NBU's independence. The disputed
paragraphs compelled the NBU to purchase government debt, and
required that the central bank coordinate its refinancing of
banks directly with the CabMin. The draft will now go before
the Rada for a vote. In addition, the CabMin rescinded an
earlier decision that gave First Deputy PM Turchinov the
mandate to oversee the NBU's refinancing actions. Hence the
GOU is not waiting for the Rada to take action on the
amendments before formally withdrawing from its intervention
into the NBU's refinancing policy. In a statement to the
media, however, Deputy PM Nemyrya said that the GOU would
continue to ensure that the NBU "acted responsibly" in its
refinancing policy. In December, the NBU had come under
strong criticism after internal reports, leaked to the media,
appeared to indicate that the central bank had engaged in
favoritism when providing banks with badly needed short-term
liquidity.

NaftoHaz Financial Plan Balanced, With Tricks
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7. (SBU) The GOU also announced that it approved a 2009
financial plan for Naftohaz that actually foresees revenues
exceeding costs. The GOU claimed that it will introduce
cost-cutting measures at Naftohaz, yet according to media
reports the bulk of the savings will come from financial and
accounting measures that do little to improve the true
financial situation at the permanently cash-strapped energy
monopoly. The GOU said it would forego UAH 5.5 billion ($725
million) VAT due from Naftohaz for gas imported in 2008. In
addition, the planned purchase of 15 billion cubic meters of
gas from Gazprom for pumping into storage during the summer
months is not included in the financial plan. Umanskiy said
the GOU hoped to secure the $3.42 billion needed to purchase
the gas by borrowing from either the World Bank or Gazprom.
"Not from us," the World Bank's Saavedra told us when asked
about Umanskiy's statement. IMF's Shpak told us that the
GOU's idea of a "Gazprom loan" was in reality a suggestion
that Naftohaz would offset Russian gas deliveries this summer
against future transit fees paid by Gazprom. In effect
Naftohaz was suggesting paying for gas today at the expense
of future revenues, Sphak said. In the Russian media Gazprom
spokesmen had denied that the company was discussing a loan
with Naftohaz.

Comment
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8. (SBU) This latest meeting between Yushchenko, Tymoshenko
and Stelmakh, who appears to be firmly in the saddle at the
NBU once again (septel),yielded the most concrete promises
to date aimed at getting the IMF plan back on track. The GOU
and Rada now need to act, however, at it remains to be seen
whether their actions will be sufficient to secure a timely
return of the IMF Mission. As the World Bank's budget
calculations show, the GOU will have to take further painful
and politically difficult decisions to remove the planned
deficit to levels acceptable to the IMF. If the GOU succeeds
in getting the IMF program back on track, then Ukraine's
leadership will have demonstrated that it is serious about
addressing the crisis, and requests for direct budgetary
assistance will need to be taken seriously and addressed
quickly. End comment.
TAYLOR