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DE RUEHKV #2412/01 3441632
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FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6879
INFO RUCNCIS/CIS COLLECTIVE IMMEDIATE
RUEHZG/NATO EU COLLECTIVE IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC IMMEDIATE

C O N F I D E N T I A L KYIV 002412 
 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
TREASURY PASS TO TTORGERSON 
 
E.O. 12958: DECL: 12/09/2018 
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE FINANCE MINISTER'S PECULIAR AVOWALS 
 
Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4(B) AND (D) 
 
 ¶1.  (C) Summary.  Ukraine's Minister of Finance Viktor 
Pynzenyk told the Ambassador on December 4 that a change of 
leadership at the National Bank of Ukraine (NBU) is necessary 
to stabilize the country's faltering economy.  Alluding to 
what he said was an inept inter-agency anti-crisis team, he 
decried the lack of policy coordination between the Ministry 
and the NBU, blaming NBU Governor Stelmakh for the impasse. 
At the same time, his own grasp of details appeared weak, as 
he couldn't comment in depth on Ukraine's financing gap, 
seemed to dismiss a previous conversation on loan 
"hryvniazation," and admitted to being left out of recent 
high-profile negotiations between the GOU and Morgan Stanley. 
 Pynzenyk ventured into obscure musings on Russia and 
"non-standard times," giving the overall impression of an 
anxious and even overwhelmed actor in Ukraine's developing 
financial crisis.  End summary. 
 
 
Policy Dis-Coordination 
----------------------- 
 
¶2.  (C) At a meeting he requested with the Ambassador on 
December 4, Finance Minister Pynzenyk was notably cogent 
while offering scathing criticism of the NBU and Governor 
Stelmakh.  Describing his December 3 meeting with President 
Yushchenko and Stelmakh, Pynzenyk said the President had been 
compelled "to force" the NBU to fulfill its obligations. 
While Pynzenyk said he did not want to interfere with the 
NBU, action was needed to ensure that the NBU performed its 
vital role.  In particular, he noted the NBU had failed to 
keep the exchange rate in a "correct range" that the markets 
could understand.  Pynzenyk said the NBU should stop pumping 
excess liquidity into the banking system.  It should also 
raise interest rates, make its interventions more 
transparent, and audit purchases of foreign exchange to 
ensure that buyers used foreign currencies for their stated 
purposes.  Pynzenyk repeated three times that he planned to 
put these demands in a letter to Stelmakh. 
 
¶3.  (C) In response to the Ambassador's comments on the 
difficulty of changing the NBU's leadership during a time of 
crisis, Pynzenyk said he would have agreed with that argument 
a month ago, but he now felt the markets would welcome 
Stelmakh's dismissal.  At the mention of former Rada Speaker 
Arseniy Yatsenyuk being out of a job, Pynzenyk smiled and 
quipped that he would not wish the NBU job on him. 
 
¶4.  (C) As the subject matter shifted, Pynzenyk wistfully 
detailed his views on the need for "non-standard policies" 
during today's "non-standard times."  According to Pynzenyk, 
methods of regulating banks need to change, since banks are 
not transferring the support they receive into the wider 
economy.  He told the Ambassador that capital adequacy levels 
for banks should be "changed" -- presumably to a lower level 
-- so that "banks are not sitting on their money." 
Otherwise, Pynzenyk was not specific about how "countries of 
the world should respond to the problem."  He passed to the 
Ambassador an open letter to world governments and central 
banks, in which he suggested that governments' attempts to 
revive the financial sector will not resolve the global 
crisis alone.  He gave no further concrete examples in his 
letter or in his discussion with the Ambassador. 
 
 
Financing Gap 
------------- 
 
¶5.  (C) The Ambassador asked Pynzenyk to explain in more 
detail PM Tymoshenko's assertion, made in a November 4 letter 
to Treasury Secretary Paulson, that Ukraine's financing gap 
could reach $27 billion.  Pynzenyk claimed that the IMF 
derived this figure based on the Fund's calculations of 
Ukraine's external exposure.  Later, Pynzenyk said the $16.4 
billion IMF program was never intended to cover the entire 
financing gap, and the GOU was now in discussions with the 
World Bank and EBRD for additional loans to help cover the 
shortfall.  (Comment:  On November 28, the resident IMF 
representative confirmed to us that the $16.4 billion 
stand-by loan was calibrated to cover the projected gap over 
the next three years, based on needs of $4.3 billion in 2008, 
$10.07 billion in 2009 and roughly $2.3 billion in 2010.) 
 
 
Hryvniazation 
------------- 
 
¶6.  (C) The December 4 meeting came just five days after 
Pynzenyk hastily called the Ambassador for an impromptu 
Saturday appointment to discuss the financial crisis.  Among 
the topics mentioned during the weekend meeting, which took 
place in the Minister's office on November 29, Pynzenyk 
voiced particular enthusiasm for converting hard currency 
loans into hryvnia.  Pynzenyk asserted that such a measure 
would spread risk and enhance loan performance.  On December 
4, the Ambassador returned to the subject, passing the U.S. 
Treasury Department%s strong concerns about the scheme. 
Referring only to media rumors, Pynzenyk sharply denounced 
the notion of hryvniazation.  He blamed journalists for 
fanning public worries, and he stated that Ukraine had no 
intention of introducing such a plan.  As he backed away from 
speculation about the Ministry's role in converting dollar 
loans to hryvnia, Pynzenyk gave the impression he wanted to 
forget his previous endorsement to the Ambassador.  Without 
being specific, Pynzenyk then said the NBU was discussing 
other voluntary actions "of a different measure."  (Comment: 
Pynzenyk's reversal corresponded to President Yushchenko's 
public denial that his Secretariat was working on a 
hryvniazation scheme.  It appears the idea of hryvniazation 
is dead for now, although NBU Council Chairman Petro 
Poroshenko suggested in recent days that borrowers be able to 
service at least the interest payments on dollar-based loans 
in hyrvnia.  End comment.) 
 
 
Stabilization and Reconstruction Fund 
------------------------------------- 
 
¶7.  (C) Pynzenyk revealed that little progress has been made 
in creating an institutional framework to deal with bank 
recapitalization and resolution.  He said it was difficult to 
get any traction with the NBU, rehashing the fact that 
"philosophical differences" exist between the Ministry of 
Finance and the central bank.  He commented on being "afraid 
when the state manages banks," particularly since the NBU's 
capacity to oversee nationalized banking assets and 
liabilities was "problematic."   The Ambassador passed on to 
Pynzenyk that the Treasury Department was securing funding to 
work in tandem with the international donor community to 
provide technical assistance. 
 
 
Anti-Crisis Legislation and the 2009 Budget 
------------------------------------------- 
 
¶8.  (C) Pynzenyk could not provide details on draft 
legislation now pending in the Rada that reportedly clarifies 
the GOU's anti-crisis regulations.  He joked about the need 
for drugs to cope with the volume and array of bills 
apparently circulating among parliamentary committees.  The 
Minister was doubtful about passage of a new budget before 
the beginning of the year.  Not only was the Rada unable to 
deliver legislation due to the vacant speaker's position, 
there were, according to Pynzenyk, political curbs on many of 
the possible spending reductions.  Pynzenyk suggested that 
only two copies of a draft budget have been circulated (at 
the Ministry and the IMF), but he dodged the Ambassador's 
questions on a projected revenue shortfall and whether the 
GOU's 2009 budget would meet the IMF's fiscal policy 
conditionalities.  Pynzenyk appeared certain the GOU would 
stay afloat with a mechanism akin to the U.S. government's 
continuing resolution, though he did not explain how a 
decline in revenues might adequately fund flat-lined 
government spending for 2009. 
 
 
Morgan Stanley Loan 
------------------- 
 
¶9.  (C) Pynzenyk could not comment on the status of 
discussions between Morgan Stanley and the Government of 
Ukraine that had been prompted by a rating downgrade and loan 
call on the state highway company Ukravtodor.  The Minister 
stated he was not involved with Morgan Stanley, but he 
believed "things were moving in the proper direction." 
(Comment:  Prime Minister Tymoshenko's office apparently has 
the lead on the Morgan Stanley negotiations.  The Minister's 
remarks suggest information flow between Pynzenyk and 
Tymoshenko on this issue is limited.  End comment.) 
 
Russia's Economy 
 
---------------- 
 
¶10.  (C) Reiterating comments made in his November 28 
discussion with the Ambassdor, Pynzenyk insisted that the 
economic situation in Russia was severe, and that a weakened 
Russia would have strong negative repercussions for Ukraine. 
Pynzynyk said that statements by Russian officials about 
Ukraine needing to pay $400/tcm for gas in 2009 were 
politically motivated.  Russian leaders would have difficulty 
justifying cuts in state salaries and pensions, according to 
Pynzenyk, if Gazprom charged Ukraine less than $400/tcm.  But 
Ukraine "can't feed Russia."  In an odd side comment, 
Pynzenyk said that killers were being trained in camps 
outside Moscow to murder people on Moscow's metro.  The 
Russian government was performing such acts to divert 
people's attentions from real problems in society.  Such 
Russian tactics presaged difficulties for Ukraine, especially 
if the Russian economy worsened. 
 
 
Comment 
------- 
 
¶11.  (C) Minister Pynzenyk appeared stressed and unfocused, 
and he was less in command of his core policy issues than we 
have observed in the past.  Coupled with blistering comments 
on the NBU's incapacity and poor coordination, Pynzenyk's 
mushy philosophical musings on the need for international 
collaboration, his digressions on Russian killers in the 
metro, and his lack of access on the Morgan Stanley case are 
all troubling portents of GOU problems in the face of a 
growing crisis.  Pynzenyk's words and deeds are clearly those 
of a man in the hot seat. 
TAYLOR