Identifier
Created
Classification
Origin
09KYIV518
2009-03-25 13:17:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kyiv
Cable title:  

IMF ENCOURAGED BY UKRAINE PM'S PROPOSALS

Tags:  EFIN EREL ECON ETRD PGOV PREL XH UP 
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VZCZCXRO9497
PP RUEHDBU RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0518/01 0841317
ZNR UUUUU ZZH
P 251317Z MAR 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7507
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
UNCLAS SECTION 01 OF 02 KYIV 000518 

SENSITIVE
SIPDIS

DEPT FOR EUR/UMB, EEB/OMA

E.O. 12958: N/A
TAGS: EFIN EREL ECON ETRD PGOV PREL XH UP
SUBJECT: IMF ENCOURAGED BY UKRAINE PM'S PROPOSALS

REF: KYIV 515

SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION

UNCLAS SECTION 01 OF 02 KYIV 000518

SENSITIVE
SIPDIS

DEPT FOR EUR/UMB, EEB/OMA

E.O. 12958: N/A
TAGS: EFIN EREL ECON ETRD PGOV PREL XH UP
SUBJECT: IMF ENCOURAGED BY UKRAINE PM'S PROPOSALS

REF: KYIV 515

SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION


1. (SBU) Summary. PM Tymoshenko has told the IMF that the
GOU plans to put an anti-crisis package to a Rada vote on
March 31, consisting of measures the IMF may consider
satisfactory for the mission team's return. According to
IMF resident representative Max Alier, "things have
changed" between President Yushchenko and the PM, at least
enough to build minimal consensus on needed legislation to
reduce the budget deficit and tackle the mounting fiscal
problems of the state energy company Naftohaz. However,
Alier told G7 ambassadors that the IMF remains concerned
Ukraine's leaders might see the reforms as simply "checking
a box." The IMF is particularly wary about the lack of
progress on bank restructuring, as a plan to address bank
recapitalization and liquidation was not included in the
PM's anti-crisis proposals. End summary.

Rada to Vote on IMF Measures on March 31
--------------


2. (SBU) On March 24, Ukraine's Prime Minister Yulia
Tymoshenko told IMF resident representative Max Alier that
the Rada will vote on a package of measures on March 31
that would cut Ukraine's budget deficit, estimated now by
Kyiv-based World Bank officials to reach roughly 6 percent
of GDP. The Cabinet of Ministers plans to push forward two
excise tax bills, one of which (on tobacco) has already
been adopted in the first reading. The second (on cars,
alcohol, and gasoline) will be proposed in the coming days,
according to Tymoshenko. Taken together, the GOU estimates
the excise tax laws will generate UAH 10 billion ($1.3
billion) in revenues, equivalent to roughly 1 percent of
GDP. Separately, social and economic advisor to the
Presidential Secretariat Roman Zhukovskiy has more
realistically projected that the excise taxes will provide
a revenue increase of UAH 6-6.5 billion (between $780-850
million).


3. (SBU) The other three measures planned by the GOU deal
with pension reform, Naftohaz financing, and public
procurement. The pension-related legislation would differ

from the final version of a bill (number 3556) that was
recently defeated in the Rada. Its provisions would
increase outlays to the Pension Fund from an existing
agricultural fixed tax package. The legislation would also
limit the maximum amount individuals can receive, thereby
affecting public sector executives such as judges,
prosecutors, and cabinet-level officials. These proposed
caps, which would be tied to a multiple of the annually
defined subsistence minimum, would not affect pensions for
the most vulnerable segments of the population.
Nonetheless, similar measures have been previously declared
illegal by the Constitutional Court. Despite expected
benefits up to UAH 6 billion ($780 million) that would
accrue for the overall Pension Fund, analysts foresee that
such reforms could lead to further legal quagmires.

PM Promises Action on Naftohaz, Procurement
--------------


4. (SBU) The IMF told G7 ambassadors on March 24 that the
PM has proposed amending the budget to implement state
energy company Naftohaz's financial plan. Although the
draft law has not been made public, it would essentially
create a mechanism for offsetting Naftohaz's 2009 payments.
The PM also intends to put forward a bill to reform the
public procurement process. This has been a baseline
condition for both the EU (related to its negotiations over
a Ukraine-EU association agreement) and the World Bank (to
release a $500 million DPL4 loan in 2009),though the IMF
has never included it as a component of its loan
conditionalities.

Local IMF Rep: "Things Have Changed" with PM, Yushchenko
-------------- --------------


5. (SBU) Alier reported to G7 ambassadors that he believed
"things have changed" with the Prime Minister and the
President, perhaps related to pressure from the mounting
crisis, the off-track IMF program, pressure from the
international community and G7, and the importance of
recent energy talks in Brussels (Ref A). He pointed to
legislation that had passed in the Rada and been signed by
the President, restoring independence to the National Bank

KYIV 00000518 002 OF 002


(by overturning articles 84 and 86 in the 2009 budget law),
and the formation of a still-nascent bank recapitalization
committee, nominally chaired by the PM. But Alier
commented that a mechanism to implement bank restructuring
was far from resolved. At the same time, he was concerned
that Ukraine's leaders are more interested in "checking a
box" than taking responsibility for pushing needed reforms.
His message to the PM, he told ambassadors, was that these
proposals do not constitute a "one-off" solution.
Nevertheless, they may be enough to bring Ceyla
Pazarbasioglu and her IMF mission team back to Kyiv to
review Ukraine's readiness to receive a second loan tranche
of $1.8 billion.

Comment
--------------


6. (SBU) President Yushchenko indicated in Prague on March
25 that the IMF team would return during the week of March

30. The President is jumping the gun, as the Rada must
first pass a package of measures to cut the budget deficit
and offset Naftohaz's fiscal problems. While the PM's
proposals would fall far short of addressing Ukraine's
total 2009 budget deficit, the IMF's signal that the
mission team could return in the event the proposals are
adopted indicates a softening of tone. Previously, the IMF
had demanded implementation of a bank restructuring
mechanism, seen by many as a lynchpin necessary to prevent
broader corporate sector defaults. It had also sought an
anti-crisis coordinator, as well as clarification of
leadership uncertainties at the National Bank (NBU) and the
Ministry of Finance. We continue to advocate for these
additional measures, while supporting the IMF's efforts to
concentrate on Ukraine's most immediately pressing (and
most realistically resolvable) concerns. End comment.

TAYLOR