VZCZCXRO1709
RR RUEHDBU RUEHSL
DE RUEHKV #0089/01 0191229
ZNY CCCCC ZZH
R 191229Z JAN 10
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 9159
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

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 
--------------------------------------------- ------------- 
 
¶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 
---------------------------------------- 
 
¶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 
------------------------------------------- 
 
¶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 
 
 
--------------------------------------------- ---------------- 
Banking Sector Still Under Pressure; Nadra No Longer Systemic 
--------------------------------------------- ---------------- 
 
¶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. 
 
--------------------------------------------- - 
Finance Ministers Are Shot For Years Like This 
--------------------------------------------- - 
 
¶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 
------- 
 
¶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