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DE RUEHKV #2198/01 3091712
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O 041712Z NOV 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6679
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 002198 
 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
TREASURY PASS TO TTORGERSON 
 
E.O. 12958: DECL: 11/04/2018 
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: IMF SET TO APPROVE UKRAINE PACKAGE, DESPITE 
UNRESOLVED TECHNICALITIES 
 
REF: KYIV 2191 
 
Classified By: ECONOMIC COUNSELOR EDWARD KASKA, REASONS 1.4(B) AND (D) 
 
 ¶1. (C) Summary.  The IMF and the government of Ukraine (GOU) 
"have agreement" on the provisions of a $16.5 billion 
stand-by package.  The IMF's Kyiv-based resident 
representative is "relatively positive" Ukraine's anti-crisis 
legislation will pass muster for the IMF Executive Board, 
when it considers the Request for Stand-By Arrangement on 
November 5.  Nonetheless, some elements of Ukraine's 
anti-crisis law do not strictly adhere to IFM 
recommendations, and "prior actions" must still be worked out 
with the GOU, specifically on the fate of Prominvest Bank and 
technical mechanisms for bank resolution.  End Summary. 
 
 
President Signs Anti-Crisis Legislation 
--------------------------------------- 
 
¶2. (C) Late on November 3, President Yushchenko signed into 
law an anti-crisis package that had been passed by the Rada 
on October 31 (reftel). The law contains nearly all of the 
165 amendments tagged onto an original bill that had passed a 
first reading.  One politically charged add-on -- funding for 
snap parliamentary elections -- was left out.  Other 
amendments reflected the IMF team's desire to clarify rules, 
procedures, and authorities for bank recapitalization and 
resolution.  Still others highlighted contentious internal 
debates on fiscal policy.  Rada members removed the IMF's 
suggested two-year moratorium on minimum wage increases to 
the subsistence level, choosing instead to peg increases to 
the inflation rate.  Even after the bill was passed and 
signed, the Lytvyn bloc announced the legislation had been 
falsified, a charge denied by Rada Speaker Yatseniuk. 
 
¶3. (C) IMF contacts shared with us memos that reveal the Rada 
considered numerous revised drafts, which were then sent to 
the IMF team for comments and technical suggestions.  In 
turn, the IMF team would hasten to translate the draft 
legislation and query its advisors (who included banking 
resolution experts from the World Bank and the U.S. 
Department of Treasury) on each draft's merits.  This series 
of events recurred throughout the week of October 27, during 
which time Rada members, foreign and domestic bankers, and 
analysts ) virtually all those with whom we spoke ) were in 
the dark about exact tweaks proposed. 
 
 
IMF Action Imminent 
------------------- 
 
¶4.  (C) According to the IMF's internal Request for Stand-By 
Arrangement, submitted by its European Department to the 
Executive Board on November 3, the approved anti-crisis 
legislation clears the way for the Board to conclude a 
package, possibly by November 5, when it begins deliberations 
in Washington.  Once the Request for Stand-By Arrangement is 
approved, according to the document's proposed decision, the 
first tranche could be disbursed immediately. 
 
¶5.  (C) IMF resident representative Balazs Horvath told us on 
November 4 that, although the IMF is still discussing details 
with the GOU, the IMF and the GOU "have agreement" regarding 
the terms of a standby package.  He requested USG support at 
the November 5 Executive Board meeting.  Separately, Rada 
Speaker Yatseniuk traveled to the United States on November 4 
for working meetings with IMF and World Bank officials. 
 
¶6.  (C) Horvath described the Rada's anti-crisis legislation 
as "relatively positive," insinuating that no provisions 
included in the legislation would be a deal breaker for the 
IMF Board.  When asked specifically about the planned removal 
of the two-year moratorium on bringing the minimum wage to 
the subsistence level, Horvath revealed that the government's 
focus should be on the overarching IMF goal of fiscal 
discipline, regardless of the measures it takes to get there. 
 Ukrainian officials have gotten the message that they will 
need to put the brakes on growth of public sector salaries 
and pensions, which have grown in double-digits in recent 
years.  Regions shadow Minister of the Economy Akimova 
conceded to the Ambassador that making this happen will be 
difficult politically, particularly if elections loom, but 
possible if given room to maneuver. 
 
¶7.  (C) Horvath told us that additional legislation is "not 
required," but "prior actions are needed" before the IMF 
Board can finalize a deal.  He specifically mentioned the 
need to resolve the fate of Prominvest Bank, now under the 
NBU's provisional authority.  (Note: Natalie Jaresko, 
managing Partner at Horizon Capital, told EconOff on November 
3 that brothers Andriy and Sergiy Klyuev, industrialists and 
Regions MPs, had positioned themselves to buy the bank at an 
undisclosed price.  The November 4 edition of Korrespondent, 
a Kyiv business magazine, confirmed this rumor based on 
unnamed sources.  End Note.)  Horvath also stated that the 
NBU lacked "the necessary power" to deal with bank 
recapitalization and resolution, and he foresaw the need for 
the Cabinet of Ministers to issue decrees clarifying the 
NBU's mandate.  Horvath said the IMF is "working around the 
clock" and that a deal this week and IMF board action is 
"within the cards." 
 
 
Implementing the Legislation 
---------------------------- 
 
¶8.  (C) After the IMF reviews the Stand-By Arrangement, 
perhaps even agreeing to its provisions on November 5, the 
most pressing issue is how the government of Ukraine will 
implement its legislation.  Minister of Finance Penzenyk 
hastily called a meeting with the Ambassador late on October 
31, during which he requested U.S. help kick starting 
investment, as well as U.S. technical assistance on banking 
recapitalization and resolution.  During the meeting, 
Penzenyk stated that the National Bank of Ukraine (NBU) 
lacked a cadre of working level technocrats, able to 
provisionally administer failed banks.  He pointed to the 
case of Prominvest Bank, where an NBU Deputy Governor has 
taken the reins, and he speculated that the NBU lacks 
resources to deploy in the event of further, and seemingly 
inevitable, failures.  Penzenyk lamented that neither the IMF 
Stand-By Arrangement nor the anti-crisis legislation 
envisions clear roles for the Ministry of Finance or the NBU 
in administering failed banks and liquidating assets. 
 
¶9.  (C) Comment.  The IMF appears to have been poised for 
final Rada passage and ready to consider the Stand-By 
Arrangement at the earliest possible date.  Coming so soon 
after the October 31 passage and Presidential signing of the 
anti-crisis legislation, it is not clear that back-and-forth 
discussions between the Kyiv-based IMF team and GOU officials 
on the draft bills negatively influenced IMF opinion in 
Washington.  The IMF's swift consideration of the Arrangement 
appears to favor addressing Ukraine's sources of economic 
instability, rather than prolonging debate over mechanisms to 
satisfy conditionalities.  End Comment. 
TAYLOR