VZCZCXRO7956
PP RUEHDBU
DE RUEHKV #0591/01 0921621
ZNY CCCCC ZZH
P 021621Z APR 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7571
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000591 
 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 04/01/2019 
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: IMF HINTS AT RETURN TO UKRAINE 
 
REF: A. KYIV 581 
     ¶B. KYIV 576 
 
Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4 (B) AND (D) 
 
¶1.  (C) Summary.  The IMF is preparing to return to Ukraine 
in spite of Rada failures to pass needed spending cuts on 
March 31, according to its resident representative in Kyiv, 
Max Alier.  Alier told us on April 1 that the IMF mission 
team would likely come back to Kyiv to engage in tough 
negotiations that would help prevent a further deterioration 
in Ukraine's economy.  The April 1 Rada resolution to 
schedule presidential elections on October 25 "changes 
everything" for the Fund's expectations of Ukraine, said 
Alier.  The IMF cannot anticipate serious implementation of 
conditionalities in Ukraine's current political environment 
without greater engagement, and it cannot let Ukraine fail, 
said the official.  Having been pushed by shareholders -- 
including, he claimed, by parts of the USG -- to move 
forward, the mission would justify its return on the basis of 
Ukraine's current accomplishments and potential for 
finalizing outstanding elements of the program.  If obtained, 
these may be enough to disburse the Fund's second tranche. 
The IMF is standing firm in its view that Ukraine will need 
bilateral budget support, even though it is considering the 
contours of an expanded program that would meet Ukraine's 
worsening external debt position and its fiscal gap.  End 
summary. 
 
Mission Team Preparing a Return 
------------------------------- 
 
¶2.  (C) Based on IMF internal discussions and the agenda 
points for the IMF's principals meeting on Ukraine that took 
place in Washington on April 1, Kyiv-based IMF representative 
Max Alier told us that Ceyla Pazarbasioglu's mission team may 
decide to come back to Ukraine.  (Note: As of April 2, we 
have not heard any update on whether a decision has been 
reached.  End note.)  Alier said that certain parties -- 
including elements of the USG -- have been putting pressure 
on the IMF board to bring the team back (see paragraph 8). 
"We are being told we can't let the program fail or stand by 
and watch Ukraine fall apart," noted Alier.  He added that 
IMF managing director Dominique Strauss-Kahn is highly 
engaged in Ukraine matters, more so than is typical.  "He's 
very interested and follows the details."  Alier stressed 
that the mission team would not return to Kyiv if the Board 
was not prepared to disburse the second tranche of its $16.4 
billion Stand-By Arrangement (SBA). 
 
IMF Tally of Ukraine's Accomplishments 
-------------------------------------- 
 
¶3.  (C) The IMF board would have to justify disbursement of a 
second loan tranche, roughly equal to $1.85 billion, by 
adding up evidence of Ukraine's compliance with IMF 
conditionalities.  Alier pointed to the fact that the Rada 
has passed politically risky changes to budget articles 84 
and 86 (on monetizing debt and bank refinancing).  The GOU 
has started on the bank recapitalization process, and there 
was now a bank recapitalization unit at the Ministry of 
Finance, he said.  Additionally, Alier pointed to the fact 
that the leadership question at the National Bank had been 
clarified, even if Governor Stelmakh remained unpopular, and 
the Rada had passed legislation to boost revenues equivalent 
to 1 percent of GDP. 
 
¶4.  (C) In response to skepticism about Rada measures 
totaling 1 percent of GDP, Alier admitted, "Well, we've been 
generous in our calculations."  He also acknowledged what 
Post has heard about the bank recapitalization process, 
namely that many administrative and political hurdles remain 
before banks can receive funds.  Alier said that overall 
economic leadership and coordination remains a problem, 
especially in the absence of a Finance Minister, but he noted 
that PM Tymoshenko believes her party is unable to marshal 
majority votes in the Rada to approve cabinet-level 
appointees.  BYuT MP Valeriy Pysarenko confirmed with us that 
the coalition has no current plans to introduce cabinet 
changes in the Rada, because they don't have the votes to 
ensure approval.  Deputy Finance Minister Umanskiy has taken 
charge of the Ministry and, according to Alier, is close to 
Tymoshenko in all her IMF dealings. 
 
Presidential Elections "Change Everything" 
------------------------------------------ 
 
 
KYIV 00000591  002 OF 003 
 
 
¶5.  (C) Alier noted that the April 1 Rada vote to schedule 
the presidential election on October 25 will "change 
everything" for the IMF program (Ref A).  In the current 
political environment, there were diminishing hopes for RadaQ 
legislation to close the budget deficit without enhanced 
engagement, said Alier.  (Note: Coalition parties jointly 
announced on April 2 their intention to take up remaining 
anti-crisis legislation on April 14.  End note.)  Tymoshenko 
will not risk anything in her desire to win the presidency, 
and all other political parties will be focused more on 
short-term agendas than on the IMF program.  Any effort by 
the President to postpone the election will be worse for the 
IMF program, as it will delay the date the Fund "can start 
working again" to achieve hard compliance with 
conditionalities.  The IMF now needs to turn its attention on 
keeping Ukraine afloat in the months up to the elections. 
Higher-level negotiations may be required to maintain focus 
on outstanding legislative measures on pension spending and 
the budget of state energy company Naftohaz.  The IMF 
recognizes it may have to wait until after the election for 
more serious implementation of structural conditionalities 
and an expansion of the program, according to Alier. 
 
Plugging the Fiscal Gap 
----------------------- 
 
¶6.  (C) Alier stood by the IMF's oft-repeated message that 
bilateral budget support is critical for Ukraine as a 
"bridge" until after the election.  When asked about 
channeling budget assistance through international financial 
institutions, Alier agreed that the IMF could alter its 
program to cover Ukraine's budget deficit, if given an 
impetus to do so by shareholders.  But, he cautioned, "that 
is not a bullet you want to fire yet."  The IMF will 
eventually need a larger package to meet increased external 
debt financing needs in any case, given Ukraine's worsening 
economic outlook.  "You can't raise the level of the program 
twice" (i.e. once for budget support and a second time to 
address a worsening external debt position), especially if 
structural conditionalities were not being met, said Alier. 
The time to alter the IMF program would be after the 
presidential election, but until then Ukraine would still 
need other sources to finance its budget hole.  Alier 
confirmed that the Fund had sufficient resources to expand 
its Ukraine SBA, though it was now focusing efforts on a 
possible roll-out of large programs in Mexico and Turkey. 
 
Relations with Tymoshenko, Yushchenko 
------------------------------------- 
 
¶7.  (C) Alier offered commentary on his working relationships 
with Ukraine's leadership.  He expressed frustration with 
Yushchenko, both for the failure of deputies loyal to the 
President to support anti-crisis proposals in the Rada on 
March 31 (Ref B), and because he had only seen the President 
five times since arriving in January.  By contrast, Alier 
noted that he spends roughly 6-8 hours each week with 
Tymoshenko.  He called her "hands-on, detail oriented, and a 
world class negotiator," referring specifically to her 
brokering of the latest set of IMF prior actions.  Alier told 
anecdotes a2(^HR'3abrainstorming sessions.  Deputy Prime Minister Turchinov, 
Deputy Finance Minister Umanskiy, and others floated in and 
out of the office, AQer said, while the Prime Minister 
remained focused.  The meetings have become relatively 
informal, according to Alier, so much that Martin Raiser 
walked out of the April 1 discussions after two hours, saying 
he had another commitment.  Alier could not believe Raiser's 
pluck.  While Raiser was polite and didn't leave as a result 
of a dispute, "she's the Prime Minister!" Alier quipped. 
 
Comment 
------- 
 
¶8.  (C)  From his position outside of Washinton, Alier has 
the impression IMF headquarters have received conflicting 
signals from the Treasury and State Departments of when the 
team should return.  He said that the Treasury Department had 
determined to move "fast forward" on the mission team's 
return, while the State Department was more wary, waiting to 
see more action from the Ukrainians on IMF conditions.  We 
surmise that this perception is a matter of policy accent 
rather than differing content. 
 
¶9.  (C) Although the Rada failed on March 31 to pass a full 
 
KYIV 00000591  003 OF 003 
 
 
basket of measures to shrink Ukraine's 2009 budget deficit, 
Alier has indicated that the IMF may be prepared to come back 
to Ukraine to conduct serious negotiations.  The United 
States should reinforce the critical nature of these talks 
through high-level engagement, including through visits, that 
stress the importance of swift Ukrainian actions to get the 
IMF program back on track. 
TAYLOR