UKRAINE'S ACTING FINANCE MINISTER SURVIVES 2009,

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 000089

SIPDIS

STATE FOR EUR/UMB AND EEB/OMA

E.O. 12958: DECL: 01/18/2030
TAGS: EFIN ECON ENRG EREL PGOV UP
SUBJECT: UKRAINE'S ACTING FINANCE MINISTER SURVIVES 2009,
BUT 2010 WILL CONTINUE TO BE CRUEL

REF: KYIV 008

Classified By: Ambassador John F. Tefft for Reasons 1.4 (b) and (d)


1. (C) Summary. Ukraine's government still hopes for
revisions to the IMF program that would allow it to access $2
billion currently held in reserves at the National Bank of
Ukraine (NBU),according to Acting Finance Minister Umanskyi.
Without access to IMF money, the first quarter of 2010 would
be very difficult for Ukraine, which was already running a
large internal government deficit. Umanskyi said he wanted
to limit domestic borrowing, due to the high interest rates
creditors currently demanded, because such borrowing could
drive the economy into default. Umanskyi also cautioned that
Nadra Bank had lost its importance as a systemic bank, and as
a result the government's incentive to recapitalize the bank
was diminishing. Finally, Umanskyi, who said 2009 was the
type of year for which Finance Ministers are shot, predicted
continued difficulties for Ukraine in 2010 and a need for
continued IMF lending. End Summary

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Government of Ukraine Still Looking for IMF Revision/Money
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2. (C) Ukraine's government still hoped for a revision of
the IMF program that would free up $2 billion from the
National Bank of Ukraine (NBU) for government use, according
to Acting Minister of Finance Ihor Umanskyi during a January
14 meeting with the Ambassador. Ukraine had sent a working
level delegation to the United States for meetings with
Treasury, the IMF, and others on January 14 and 15 to again
discuss the possibility of reallocating funds to designate
them as government (rather than NBU) liabilities. Umanskyi
stated that the GOU understood a quick revision of the IMF
program was not likely, but stressed that the GOU still
needed the $2 billion to cover domestic obligations in the
first quarter of 2010. Nothing would change from the point
of view of the IMF: Ukraine had still drawn $10.6 billion to
date as part of its stand-by arrangement. Ukrainian
prohibitions on direct NBU funding of the national deficit,
however, meant Ukraine needed the IMF to reallocate the $2
billion. (For additional details of GOU's request to the IMF
see reftel.)

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First Quarter Deficit Larger Than Normal
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3. (C) Umanskyi confirmed that the government already faced
a deficit of UAH 14 billion ($1.75 billion) in the first
quarter of 2010 as a result of depleted Treasury accounts,
low consumer spending in the holiday month of January, and
central government arrears to local budgets of UAH 8 billion
($1 billion) at the end of 2009. In addition, first quarter
corporate tax revenues were traditionally low.


4. (C) Adding to Ukraine's budget woes, government payments
to Ukraine's pension fund were growing. Umanskyi explained
that the pension fund had been underfunded starting in 2004.
Now about half of the money paid out each year to pensioners
came directly from the national budget. The level of
contributions to the pension fund from salaries had not been
revised upward in many years, according to Umanskyi. As a
result, the GOU budget shortfall was reaching critical
levels, Umanskyi stated.

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Domestic Borrowing Costly; IMF Money Needed
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5. (C) Umanksyi said that Ukraine would need the IMF to
continue lending in 2010. Even at interest rates in excess
of 25%, there was no appetite domestically for government
debt. In Umanskyi's opinion, the interest rates required by
the market were too burdensome and the IMF should not suggest
that Ukraine turn to domestic debt markets. He pointed to
Russia's high rates of domestic borrowing and default at the
end of the 1990s, stating that although Ukraine was not
borrowing domestically as much as the Russians then, Ukraine
still defaulted and could not borrow domestically or
internationally for the following two years. Ukraine did not
want a repeat of that scenario.


KYIV 00000089 002 OF 002


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Banking Sector Still Under Pressure; Nadra No Longer Systemic
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6. (C) Ukraine's banking sector continued to be weak,
according to Umanskyi. The banks would need help in 2010,
and Umanskyi was concerned that the poor relationship between
the NBU and the government would continue to hinder banking
sector reform.


7. (C) Umanskyi stated that Nadra Bank, which has been under
temporary administration and basically idle for the past
year, had lost its importance as a systemic bank. He hinted
that since Nadra was no longer important to the overall
health of the sector, the GOU felt less obliged to
recapitalize it. Umanskyi said that international creditors
had been unwilling to accept multiple offers, hoping that the
government would infuse capital into the bank. In addition,
Nadra's assets continued to deteriorate. As a result, the
creditors may have "fooled themselves," Umanskyi advised.
The Ambassador noted USG interests in Nadra Bank and
advocated for a fair and transparent process.

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Finance Ministers Are Shot For Years Like This
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8. (C) In Umanskyi's opinion, 2009 had been one of the
hardest years economically for Ukraine since independence;
but on the bright side, he said, Ukraine had avoided default.
"Finance Ministers are shot for years like this," Umanskyi
stated, clearly feeling vulnerable. Umanskyi predicted that
2010 would not be any easier and that real reform was still
needed, not just a return to the old ways.

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Comment
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9. (C) Given the dismal state of Ukraine's economy, which
contracted 14% for the whole of 2009, and its large
government deficit, Ukraine has little choice but to continue
to seek funding from outside. Ukraine's next president will
need to start economic reform as soon as possible after
taking office to restart IMF and lending from other
international financial institutions. Until IFI lending
restarts, Ukraine will need to rely on other sources of
funding -- drawing down on reserves, domestic borrowing at
high rates, and possibly loans from Russia -- but in the eyes
of many, including Acting Finance Minister Umanskyi, these
sources of funds are less desirable and do not lead to reform
that would put Ukraine on the path to sustainable economic
growth.

TEFFT