VZCZCXRO0987
PP RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0227/01 0331512
ZNR UUUUU ZZH
P 021512Z FEB 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7190
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 03 KYIV 000227 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, EEB/OMA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PREL PGOV XH UP
SUBJECT: UKRAINE FINANCE MINISTER'S SECRET PREDICTIONS 
 
REF: KYIV 169 
 
Sensitive but Unclassified.  Not for Internet or 
Distribution Outside the USG. 
 
Summary 
------- 
 
¶1.  (SBU) In a leaked letter to PM Tymoshenko, Ukraine's 
Minister of Finance Viktor Pynzenyk has predicted the "very 
real" possibility of Ukraine's total economic collapse. 
Internet newspaper Ukrainska Pravda published the 
classified document, addressed to Prime Minister Yulia 
Tymoshenko and the Cabinet of Ministers, in which Pynzenyk 
equates Ukraine's current fiscal and monetary crises to the 
country's economic traumas in 1994. 
 
¶2.  (SBU) On January 28, following the 24 page letter's 
leak and subsequent, contradictory public statements on its 
authenticity, Pynzenyk was admitted to a Kyiv hospital, 
reportedly due to a heart condition.  Scuttlebutt on 
Pynzenyk's future has since dominated the air waves and 
newspapers, even exceeding attention given to his 
discredited colleague, National Bank of Ukraine Governor 
Volodymyr Stelmakh (reftel).  Pynzenyk's assistant told us 
on January 29, however, that the Minister will "be back 
soon," while cooperation with the IMF team continues "on 
track."  End summary. 
 
Minister's Dire Predictions 
--------------------------- 
 
¶3.  (SBU) Pynzenyk's letter to PM Tymoshenko and the 
Cabinet of Ministers, dated January 6 but leaked to the 
media and published on January 27, contains strong language 
about an "extremely threatening" economic situation.  The 
biggest fears, according to the letter, are a recurrence of 
the 1994 crisis, when the country's monthly inflation grew 
70 to 100 percent, currency reserves fell perilously low, 
and many large factories sat idle.  The major concerns in 
2009, according to the letter, are an untenable budget, 
collapsing GDP, falling industrial production, and mounting 
foreign debt. 
 
¶4.  (SBU) Citing Ministry of Finance estimations, the 
letter describes budget revenues that will amount to UAH 
225.3 billion ($28.9 billion), or UAH 85 billion ($10.9 
billion) less than had been first projected by the 
Ministry.  New laws that increase excise duties only 
slightly offset the deficit.  (Note: Subsequent to the date 
of the letter, another bill passed in the Rada that would 
have increased import tariffs by 13 percent.  Under 
pressure from business groups, however, President Viktor 
Yushchenko vetoed the bill, and it now awaits an override 
vote in parliament.  End note.)  Local budget performance 
is hardly better, with over 425 municipalities failing to 
fulfill their plans for revenue collections. 
 
¶5.  (SBU) The letter attributed to Pynzenyk states that all 
existing revenues into the state treasury will be needed to 
cover non-discretionary spending, leaving no room for 
discretionary expenses or a larger than expected shortfall 
in the pension fund.  It continues: "(E)nergy payments, 
medicines, food, debt servicing (that is a big threat), 
science, etc. will not be financed.  And under such 
conditions, the budget includes a provision for bringing 
the minimum wage to the subsistence level.  But we can't 
even pay at existing levels...Proposals to balance the 
budget through tax increases put unacceptable pressure on 
the economy.  Ukraine will not survive with the current 
2009 budget." 
 
¶6.  (SBU) The letter recounts previously published 
statistics, such as the 14 percent year-on-year GDP drop 
and 28.6 percent drop in industrial output in November 
(including declines in machine-building of 38.8 percent and 
metallurgy of 48.8 percent).  Another worrisome signal was 
the decline in electricity consumption, which shrank 19 
percent in October, 35 percent in November, and 38 percent 
in December.  The letter indicates that the Ministry of 
Finance's earlier predictions of minus 5 percent GDP growth 
in 2009 are too optimistic, projecting a 7-10 percent drop 
in GDP from the first quarter of 2008 to the first quarter 
of 2009 alone. 
 
¶7.  (SBU) Pynzenyk indicated that Ukraine's budgetary and 
macroeconomic problems are so deep that the country would 
 
KYIV 00000227  002 OF 003 
 
 
have trouble attracting foreign capital, even in the best 
of times.  His letter quotes a number of figures, such as 
UAH 31.7 billion ($4.05 billion) to service public sector 
debt, in addition to the UAH 50 billion ($6.4 billion) he 
presumes Ukraine needs for bank recapitalization. 
"Countries with such deficits as ours are not lent money," 
he surmised. 
 
How to Fix the Situation? 
------------------------- 
 
¶8.  (SBU) The letter proposes a cut in government wages by 
an average of 20 percent, with minister and Rada deputy 
salaries to be halved during the crisis.  The Ministry of 
Finance would also cancel all superfluous benefits for 
public officials, including official vehicle and cell phone 
use and non-essential travel.  Pension outlays and 
subsidies would be reformed and targeted, and the 
government would take over the social insurance fund during 
the crisis period to protect rising numbers of unemployed. 
The author writes: "It is not normal for poor and rich 
people to consume cheap Ukrainian gas at an equal price (or 
receive the same rates) for utility services.  And free 
books and school food should be provided only to families 
with low incomes."  The letter also proposes increases in 
the percentage of students paying university tuition (as 
opposed to receiving full-ride scholarships). 
 
Dissecting the Letter's Authenticity 
------------------------------------ 
 
¶9.  (SBU) While Pynzenyk and his assistant did not directly 
acknowledge Ministry authorship of the letter, Kyiv-based 
analysts, journalists, and well-known politicians have all 
weighed in on its authenticity and significance.  Even 
former Rada speaker Arseniy Yatseniuk called the letter's 
choppy and blunt Ukrainian writing "characteristically 
Pynzenyk," equating the "psychology" of the prose with that 
of the anxious, chain smoking Minister. 
 
¶10.  (SBU) The 24 page letter is replete with graphs and 
statistics, similar to a presentation on the world 
financial crisis the Minister gave to G-7 ambassadors on 
December 19.  At that time, Pynzenyk described a recipe for 
worsening global conditions and a particular deterioration 
in the Russian economy that would have an impact on 
Ukraine.  Pynzenyk's focus on falling GDP, declining 
industrial production numbers, and Russian financial 
difficulties related to falling energy prices and a highly 
leveraged banking sector has turned out to be remarkably 
prescient. 
 
The Minister's Future 
--------------------- 
 
¶11.  (SBU) Although two press releases, one by the Cabinet 
of Ministers and the other by the Ministry of Finance, 
provide conflicting details on the alleged origins of the 
letter, both denounced its leak as a "provocation."  Our 
sources in the Ministry of Finance tell us there is 
speculation among Ukrainian officials that Pynzenyk might 
be removed because of the letter.  Cynical observers note 
that disgraced politicians often seek refuge in hospitals 
or undisclosed vacation destinations, and now both Pynzenyk 
and National Bank of Ukraine Governor Stelmakh (on a 
January-long holiday) have disappeared from the public eye. 
Rumors aside, the Minister's assistant Ivan Yurik confirmed 
that Pynzenyk had been hospitalized, and he expressed hope 
the Minister would be out soon.  Negotiations with the IMF 
continue "on track" in the Minister's absence, said Yurik. 
 
¶12.  Comment. From our previous encounters with Pynzenyk, 
and from correspondence and presentations he has authored 
in the past, the didactic style of the letter almost 
undoubtedly can be attributed to the Minister.  He has a 
history of pessimistically taking the worst case scenario, 
focusing on detailed points, and stressing their importance 
in a manner that can come across to some as exaggerated. 
 
¶13.  However, Pynzenyk's now three-week-old projections do 
not appear embellished to us.  Although he has been notably 
vilified since the letter's release, Pynzenyk was already 
considered to be on the periphery of the GOU's crisis 
response team.  Perhaps the most alarming element of the 
Pynzenyk letter, therefore, is the fact that its author is 
the only senior Ukrainian official whose baseline forecasts 
parallel those we have heard from private economic analysts 
 
KYIV 00000227  003 OF 003 
 
 
in Kyiv.  While the letter did not contain specific GDP 
projections for all of 2009, Pynzenyk allegedly concluded: 
"The country is in danger. The citizens are in danger. 
Authority (in government) is not a prize...I want to say it 
again: there is still a way out of the difficult situation. 
But we have almost no time.  Unless adequate measures are 
taken, the situation will overtake the country in a month 
or two."  It just may be that bad.  End comment. 
 
TAYLOR