Identifier
Created
Classification
Origin
09KYIV591
2009-04-02 16:21:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

IMF HINTS AT RETURN TO UKRAINE

Tags:  EFIN EREL ETRD PGOV PREL XH UP 
pdf how-to read a cable
VZCZCXRO7956
PP RUEHDBU
DE RUEHKV #0591/01 0921621
ZNY CCCCC ZZH
P 021621Z APR 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7571
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 SECTION 01 OF 03 KYIV 000591 

SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 04/01/2019
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: IMF HINTS AT RETURN TO UKRAINE

REF: A. KYIV 581

B. KYIV 576

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

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000591

SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 04/01/2019
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: IMF HINTS AT RETURN TO UKRAINE

REF: A. KYIV 581

B. KYIV 576

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


1. (C) Summary. The IMF is preparing to return to Ukraine
in spite of Rada failures to pass needed spending cuts on
March 31, according to its resident representative in Kyiv,
Max Alier. Alier told us on April 1 that the IMF mission
team would likely come back to Kyiv to engage in tough
negotiations that would help prevent a further deterioration
in Ukraine's economy. The April 1 Rada resolution to
schedule presidential elections on October 25 "changes
everything" for the Fund's expectations of Ukraine, said
Alier. The IMF cannot anticipate serious implementation of
conditionalities in Ukraine's current political environment
without greater engagement, and it cannot let Ukraine fail,
said the official. Having been pushed by shareholders --
including, he claimed, by parts of the USG -- to move
forward, the mission would justify its return on the basis of
Ukraine's current accomplishments and potential for
finalizing outstanding elements of the program. If obtained,
these may be enough to disburse the Fund's second tranche.
The IMF is standing firm in its view that Ukraine will need
bilateral budget support, even though it is considering the
contours of an expanded program that would meet Ukraine's
worsening external debt position and its fiscal gap. End
summary.

Mission Team Preparing a Return
--------------


2. (C) Based on IMF internal discussions and the agenda
points for the IMF's principals meeting on Ukraine that took
place in Washington on April 1, Kyiv-based IMF representative
Max Alier told us that Ceyla Pazarbasioglu's mission team may
decide to come back to Ukraine. (Note: As of April 2, we
have not heard any update on whether a decision has been
reached. End note.) Alier said that certain parties --
including elements of the USG -- have been putting pressure
on the IMF board to bring the team back (see paragraph 8).
"We are being told we can't let the program fail or stand by
and watch Ukraine fall apart," noted Alier. He added that

IMF managing director Dominique Strauss-Kahn is highly
engaged in Ukraine matters, more so than is typical. "He's
very interested and follows the details." Alier stressed
that the mission team would not return to Kyiv if the Board
was not prepared to disburse the second tranche of its $16.4
billion Stand-By Arrangement (SBA).

IMF Tally of Ukraine's Accomplishments
--------------


3. (C) The IMF board would have to justify disbursement of a
second loan tranche, roughly equal to $1.85 billion, by
adding up evidence of Ukraine's compliance with IMF
conditionalities. Alier pointed to the fact that the Rada
has passed politically risky changes to budget articles 84
and 86 (on monetizing debt and bank refinancing). The GOU
has started on the bank recapitalization process, and there
was now a bank recapitalization unit at the Ministry of
Finance, he said. Additionally, Alier pointed to the fact
that the leadership question at the National Bank had been
clarified, even if Governor Stelmakh remained unpopular, and
the Rada had passed legislation to boost revenues equivalent
to 1 percent of GDP.


4. (C) In response to skepticism about Rada measures
totaling 1 percent of GDP, Alier admitted, "Well, we've been
generous in our calculations." He also acknowledged what
Post has heard about the bank recapitalization process,
namely that many administrative and political hurdles remain
before banks can receive funds. Alier said that overall
economic leadership and coordination remains a problem,
especially in the absence of a Finance Minister, but he noted
that PM Tymoshenko believes her party is unable to marshal
majority votes in the Rada to approve cabinet-level
appointees. BYuT MP Valeriy Pysarenko confirmed with us that
the coalition has no current plans to introduce cabinet
changes in the Rada, because they don't have the votes to
ensure approval. Deputy Finance Minister Umanskiy has taken
charge of the Ministry and, according to Alier, is close to
Tymoshenko in all her IMF dealings.

Presidential Elections "Change Everything"
--------------


KYIV 00000591 002 OF 003



5. (C) Alier noted that the April 1 Rada vote to schedule
the presidential election on October 25 will "change
everything" for the IMF program (Ref A). In the current
political environment, there were diminishing hopes for RadaQ
legislation to close the budget deficit without enhanced
engagement, said Alier. (Note: Coalition parties jointly
announced on April 2 their intention to take up remaining
anti-crisis legislation on April 14. End note.) Tymoshenko
will not risk anything in her desire to win the presidency,
and all other political parties will be focused more on
short-term agendas than on the IMF program. Any effort by
the President to postpone the election will be worse for the
IMF program, as it will delay the date the Fund "can start
working again" to achieve hard compliance with
conditionalities. The IMF now needs to turn its attention on
keeping Ukraine afloat in the months up to the elections.
Higher-level negotiations may be required to maintain focus
on outstanding legislative measures on pension spending and
the budget of state energy company Naftohaz. The IMF
recognizes it may have to wait until after the election for
more serious implementation of structural conditionalities
and an expansion of the program, according to Alier.

Plugging the Fiscal Gap
--------------


6. (C) Alier stood by the IMF's oft-repeated message that
bilateral budget support is critical for Ukraine as a
"bridge" until after the election. When asked about
channeling budget assistance through international financial
institutions, Alier agreed that the IMF could alter its
program to cover Ukraine's budget deficit, if given an
impetus to do so by shareholders. But, he cautioned, "that
is not a bullet you want to fire yet." The IMF will
eventually need a larger package to meet increased external
debt financing needs in any case, given Ukraine's worsening
economic outlook. "You can't raise the level of the program
twice" (i.e. once for budget support and a second time to
address a worsening external debt position),especially if
structural conditionalities were not being met, said Alier.
The time to alter the IMF program would be after the
presidential election, but until then Ukraine would still
need other sources to finance its budget hole. Alier
confirmed that the Fund had sufficient resources to expand
its Ukraine SBA, though it was now focusing efforts on a
possible roll-out of large programs in Mexico and Turkey.

Relations with Tymoshenko, Yushchenko
--------------


7. (C) Alier offered commentary on his working relationships
with Ukraine's leadership. He expressed frustration with
Yushchenko, both for the failure of deputies loyal to the
President to support anti-crisis proposals in the Rada on
March 31 (Ref B),and because he had only seen the President
five times since arriving in January. By contrast, Alier
noted that he spends roughly 6-8 hours each week with
Tymoshenko. He called her "hands-on, detail oriented, and a
world class negotiator," referring specifically to her
brokering of the latest set of IMF prior actions. Alier told
anecdotes a2(^HR'3abrainstorming sessions. Deputy Prime Minister Turchinov,
Deputy Finance Minister Umanskiy, and others floated in and
out of the office, AQer said, while the Prime Minister
remained focused. The meetings have become relatively
informal, according to Alier, so much that Martin Raiser
walked out of the April 1 discussions after two hours, saying
he had another commitment. Alier could not believe Raiser's
pluck. While Raiser was polite and didn't leave as a result
of a dispute, "she's the Prime Minister!" Alier quipped.

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


8. (C) From his position outside of Washinton, Alier has
the impression IMF headquarters have received conflicting
signals from the Treasury and State Departments of when the
team should return. He said that the Treasury Department had
determined to move "fast forward" on the mission team's
return, while the State Department was more wary, waiting to
see more action from the Ukrainians on IMF conditions. We
surmise that this perception is a matter of policy accent
rather than differing content.


9. (C) Although the Rada failed on March 31 to pass a full

KYIV 00000591 003 OF 003


basket of measures to shrink Ukraine's 2009 budget deficit,
Alier has indicated that the IMF may be prepared to come back
to Ukraine to conduct serious negotiations. The United
States should reinforce the critical nature of these talks
through high-level engagement, including through visits, that
stress the importance of swift Ukrainian actions to get the
IMF program back on track.
TAYLOR