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DE RUEHKV #2111/01 2951408
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O 211408Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6581
INFO RUCNCIS/CIS COLLECTIVE IMMEDIATE
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C O N F I D E N T I A L KYIV 002111 
 
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DEPARTMENT PLEASE PASS TO TTORGERSON 
 
E.O. 12958: DECL: 10/21/2018 
TAGS: EFIN PGOV PREL ECON ETRD XH UP
SUBJECT: TYMOSHENKO APPEALS TO USG: UKRAINE HAS "HOURS, NOT 
DAYS" TO TACKLE CRISIS 
 
REF: KYIV 2105 AND PREVIOUS 
 
Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4(B) AND (D) 
 
¶1. (U) This is an Action Request.  See Summary and Paragraphs 
11 and 12. 
 
Summary 
------- 
 
¶2. (C) At a late night meeting on October 20, Prime Minister 
Tymoshenko told the Ambassador that Ukraine had "hours, and 
not days" to restore confidence in the country's financial 
system.  The situation in the country was more dire than 
commonly believed, she claimed.  She and Finance Minister 
Pynzenyk asked the USG to encourage the IMF to approve a 
support package at an IMF Board meeting on October 22 in 
Washington.  Tymoshenko also asked that the highest levels of 
the USG weigh in with President Yushchenko to cancel snap 
elections now scheduled for December 14.  The IMF would put 
tough restrictions on Ukraine in return for support. Rada 
backing for the unpopular measures would be difficult in the 
best of cases, and impossible with elections looming, 
Tymoshenko and Pynzenyk argued. 
 
¶3. (C) Action Request: Ukraine's financial situation is 
precarious, but most observers do not yet see a meltdown as a 
foregone conclusion.  Nonetheless, swift IMF action now 
appears to be the only possibility to restore confidence in 
Ukraine in the short run, and we urge Washington to weigh in 
with the IMF as Tymoshenko is requesting.  Whatever her 
political motives may be in seeking USG help to delay the 
election sought by Yushchenko, Tymoshenko is nonetheless 
correct that continued political infighting will prevent 
Ukraine from adequately addressing the crisis, and may even 
neutralize the positive effects of an IMF program.    End 
summary and action request. 
 
"Hours, and Not Days" 
--------------------- 
 
¶4. (C) Prime Minister Yulia Tymoshenko summoned the 
Ambassador to an 11 p.m. meeting on October 20 to seek USG 
support for an IMF support package and to postpone early 
parliamentary elections.  Flanked by Deputy PM Hryhoriy 
Nemyrya and Finance Minister Victor Pynzenyk, Tymoshenko used 
dramatic language to argue that Ukraine's financial system 
was in a far more precarious situation than commonly 
believed.  Things were deteriorating rapidly, and Ukraine had 
"hours, and not days," to restore confidence.  Pynzenyk said 
action was necessary by the end of the week.  If swift action 
were not taken, both Tymoshenko and Pynzenyk told the 
Ambassador, the banking system and the hryvnia could 
collapse.  Restoring confidence after a complete collapse 
would be a long and painful process, they said. 
 
¶5. (C) Tymoshenko said that Ceyla Pazarbasioglu, head of the 
IMF delegation currently in Kyiv, was equally alarmed by the 
situation.  The delegation had prepared a support package 
that now needed the approval of the IMF Board.  Tymoshenko 
said the IMF would share all details of the package only 
after approval by the IMF Board.  However, Tymoshenko claimed 
the package could be "the most ambitious program in IMF 
history."   Nemyrya said it could be larger than the $14 
billion figure mentioned by GOU and NBU officials in recent 
days. 
 
IMF To Link Support to Tough Conditions 
--------------------------------------- 
 
¶6. (C) Although details were still missing, Tymoshenko and 
Pynzenyk said, Ukraine already knew that the IMF would expect 
tough measures in return for its support.  Responding to a 
question by the Ambassador, Tymoshenko confirmed that Ukraine 
would need to limit growth in salaries and pensions, a main 
driver of growth, inflation and the ballooning current 
account deficit.  Pynzenyk said the GOU would provide 
immediate and significant support to banks.  It would also 
make changes to the budget and pass a number of other laws. 
They were not more specific on fiscal changes expected by the 
IMF, nor did they indicate whether the IMF might require the 
National Bank of Ukraine to modify its policy of pegging the 
hryvnia to the dollar. 
 
¶7. (C) The measures would be highly unpopular, Pynzenyk said, 
and difficult to pass in the Rada.  In particular, the Rada 
would not approve tough measures without assurances that the 
IMF would actually deliver on its part of the deal.  If 
neither the IMF nor the Rada acted soon, the situation could 
worsen beyond repair, Pynzenyk said.  Hence speed was of the 
essence: the IMF Board would discuss the proposed package on 
October 22 in Washington, Pynzenyk said.  He and Tymoshenko 
asked that the USG weigh in with the IMF, and in particular 
First Deputy Managing Director John Lipsky and the U.S. 
executive director, to guarantee approval of the package.  At 
the very least, Pynzenyk said, the IMF should adopt 
"simplified measures" to document that it was backing 
Ukraine. 
 
Tymoshenko: Presidential Secretariat Doesn't Understand 
--------------------------------------------- ---------- 
 
¶8. (C) According to Tymoshenko, the IMF had not conducted a 
direct dialog with the National Security and Defense Council 
(NSDF), which discussed emergency measures on October 20 
(septel).  Instead, the IMF held separate discussions with 
the GOU, the NBU and the Presidential Secretariat.  She was 
vague on whether the measures envisaged by the NSDC actually 
addressed the conditions put forth by the IMF.  In any case 
the Presidential Secretariat did not comprehend the depth of 
the crisis, she said.  Pynzenyk said he talked to Oleksandr 
Shlapak, Deputy Head of the Presidential Secretariat, after 
the latter met with the IMF and concluded that Shlapak still 
did not understand the situation.  He said he feared that 
President Yushchenko was not being properly briefed. 
 
PM Asks USG to Weigh in With Yushchenko 
--------------------------------------- 
 
¶9. (C) Tymoshenko also asked that the highest levels of the 
USG weigh in with President Yushchenko to delay early 
parliamentary elections.  During the October 20 NSDC meeting 
Yushchenko agreed to suspend his decree calling for new 
elections, she said.  At a press conference moments later, 
however, Yushchenko announced that elections would only be 
delayed by a week to December 14.  The move took her by 
surprise, Tymoshenko said.  She no longer understood what 
drove the President.  With elections on the horizon nobody in 
the Rada would support the unpopular measures needed for IMF 
backing.  Insisting on elections in the present circumstances 
was irresponsible and would destroy the economic and 
political stability of the country.  The proper decision 
would be for her and her ministers to resign, she said, but 
that would only deepen the overall crisis and leave nobody to 
sign an agreement with the IMF.  The Party of Regions (PR) 
"would rule the country completely" if elections were held 
according to Yushchenko's timetable.  The President "was 
fantasizing" if he believed claims by the PR that it would 
support his reelection bid, she said. 
 
World Bank, EBRD Also Ready to Help 
----------------------------------- 
 
¶10. (C) Nemyrya said the World Bank was also considering a 
loan package, known as DBL3, that would need support from WB 
President Robert Zoellick.  He asked for USG support for this 
package as well.  The EBRD was also sending a delegation to 
Kyiv.  On the way out, Nemyrya told the Ambassador that 
Tymoshenko fully supported the idea of a Strategic Framework 
Agreement.  Consultations and assistance related to the 
financial crisis would be welcome. 
 
Comment and Action Request:  How Bad Is the Situation? 
--------------------------------------------- --------- 
 
¶11. (C) Tymoshenko's assessment of the financial situation 
belongs to the most pessimistic that we are hearing in Kyiv. 
It is broadly expected that the crisis will lead to a 
significant drop in economic growth and to a devaluation of 
the hryvnia, but it is not a foregone conclusion among market 
participants that a meltdown is imminent -- otherwise it 
would have already occurred.  The markets are currently 
frozen and in a wait and see mode.  What happens next will 
depend on world events and Ukraine's policy responses. 
Although some market participants feel that the NBU and GOU 
are in control, many question whether policymakers fully 
understand the problems in the banking sector and have an 
idea what to do next.  All are hoping that the IMF program 
will bring more transparency and provide a way forward.  We 
agree that, whatever the underlying reality in the banking 
sector may be, swift IMF action is at the moment the only way 
to restore confidence in Ukraine in the short term, and we 
encourage Washington to weigh in with the IMF Board to secure 
formal support for a Ukraine program at the October 22 Board 
meeting. 
 
¶12. (C) Tymoshenko may be privy to insider information not 
(yet) available to the markets. The situation is truly dire 
if that is the case.  Whatever her motives in seeking USG 
help to stop the elections sought by Yushchenko, it is true 
that Ukraine needs unity to address the current crisis. 
Electioneering will prevent the Rada, the GOU and the 
President from making the hard decisions expected by the IMF, 
and could even neutralize any stabilizing effects of an IMF 
program.  We therefore encourage a dialog with President 
Yushchenko aimed at tabling the idea of elections until an 
IMF program, along with parallel actions taken by Ukraine, 
have stabilized the country's financial system and restored 
confidence.  End comment and action request. 
TAYLOR