VZCZCXRO8346
RR RUEHDBU RUEHSL
DE RUEHKV #1434/01 2331510
ZNY CCCCC ZZH
R 211510Z AUG 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8303
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
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 001434 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 08/20/2019 
TAGS: EFIN EREL ETRD PGOV PREL UP XH
SUBJECT: IMF MAY EXPAND IN UKRAINE, DESPITE LACK OF REFORMS 
 
Classified By: CDA James Pettit for reasons 1.4 (b) and (d) 
 
¶1.  (C) Summary. With Ukraine's sovereign debt reaching 30 
percent of GDP, primarily in short- to medium-term 
instruments, and doubts increasing about Ukraine's intentions 
to implement macroeconomic reforms, many in Kyiv are 
predicting the need for continued IMF lending beyond the 
current program.  Even the IMF's Kyiv-based resident 
representative Max Alier mused that an expansion of the 
Fund's program for Ukraine could occur in 2010, "not 
necessarily because Ukraine would need the money," but in 
order to boost market confidence.  Separately, private sector 
analysts predicted such an expansion of the IMF program was 
inevitable, given that macroeconomic imbalances were 
projected to last through next year.  British counterparts 
are reviewing Ukraine's commitments and IMF flexibility and 
may suggest greater U.S.-U.K. coordination to push through 
reform.  End summary. 
 
 
IMF Considers Expanding Program? 
-------------------------------- 
 
¶2.  (C) The IMF's Alier told us on August 19 that he could 
envision an extension of the IMF program after the current 
one ends in 2010, "not necessarily because Ukraine would need 
the money," but rather to bolster the confidence of investors 
and the international community.  Alier's statement was 
consistent with previous informal comments made to us, in 
which he had noted that the IMF would have to wait until 
after presidential elections to negotiate an expansion of the 
program, due to the lack of credible interlocutors among 
Ukraine's authorities.   Alier confirmed that the IMF had not 
initiated any discussions with the GOU on a program 
expansion. 
 
¶3.  (C) Separately, analysts at the Kyiv offices of Russian 
investment bank Troika Dialog told us on August 19 that the 
IMF would have to establish a precautionary lending program 
after the current 11 billion SDR ($17.1 billion at August 
2009 exchange rates) Stand-By Arrangement concludes.  Reforms 
in the energy sector will be too "sluggish" to have much 
effect on the fiscal deficit, and the exchange rate and 
banking sector would remain volatile due to the country's 
2009 GDP decline, forecast by the IMF to be 14 percent.  The 
Troika analysts said recent equity market optimism was "not 
justified," and that there was a strong likelihood of another 
correction in the stock market, given the skittish, herd-like 
behavior of investors who have disproportionately reacted to 
IMF signals. 
 
¶4.  (C) Troika analysts also expected a second wave of 
banking sector defaults in Ukraine and throughout Eastern 
Europe, pointing to recent comments made to their investors 
by Raiffeisen International CEO Herbert Stepich.  Stepich 
apparently stated that Austria-based Raiffeisen expected the 
wave to come after September 2009, due to a "6-8 month lag 
after the underlying macroeconomic event" (i.e. a 20.3 
percent real GDP decline year-on-year in the first quarter of 
2009).  On the positive side, Troika analysts believed 
Ukraine could grow out of its budget problems by 2012 without 
drastic structural reforms if the IMF were to stay beyond 
¶2010.  They also said that investors were looking to the IMF 
to co-draft Ukraine's 2010 state budget to avoid excess 
populist spending and push pension reform.  Alier confirmed 
to us that IMF experts will, in fact, assist the GOU in 
formulating the 2010 budget. 
 
¶5. (C) Mounting market expectations of a longer-term Fund 
presence, combined with IMF representative Alier's comments 
about a program expansion, have led to speculation about how 
tough the IMF will be on Ukraine's current authorities in 
this pre-election period.  Alier admitted that the next 
mission review would be very difficult and that IMF officials 
were "not looking forward" to future negotiations. 
 
U.K Proposes Review of Ukraine Economic Policy 
--------------------------------------------- - 
 
¶6.  (C) Concerned about the "extraordinary flexibility" the 
IMF has shown with Ukraine and the possibility of further 
fiscal and banking problems, British Embassy counterparts 
said that their Foreign Office and Treasury in London are 
reviewing the U.K.'s economic policy toward Ukraine and may 
be looking for coordination with the United States on an 
approach to the IMF.  British Embassy officials have picked 
 
KYIV 00001434  002 OF 002 
 
 
up on general concerns voiced in Kyiv that it could be 
considered "meddling" in Ukraine's presidential elections if 
Western powers were not to demand the implementation of 
already-promised reforms from the Tymoshenko government over 
the next six months. 
 
Comment 
------- 
 
¶7.  (C) Upcoming presidential elections next January, 
combined with expected parliamentary elections later in 2010, 
mean few in Ukraine foresee implementation of serious 
economic reforms, such as budget tightening or increases in 
consumer gas prices.  As a result, key IMF conditionalities 
are likely to be largely unmet in the next six months. 
Looking down the road, this leaves Ukraine with a sovereign 
debt burden of as much as 30 percent of GDP and the 
possibility of continued budgetary shortfalls.  Although some 
remain optimistic that Ukraine can "grow" itself out of its 
macroeconomic troubles, current Ukrainian authorities may be 
missing an opportunity to correct fiscal imbalances as well 
as display leadership for a population that is already 
hardened for tougher anti-crisis measures. 
 
PETTIT