VZCZCXRO6128
RR RUEHDBU RUEHSL
DE RUEHKV #1835/01 2941523
ZNY CCCCC ZZH
R 211523Z OCT 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8638
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 03 KYIV 001835 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 10/20/2019 
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: KYIV POPULISM COULD TRIGGER "FISCAL DEVASTATION" 
 
Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and 
(d) 
 
¶1.  (SBU) Summary.  Ukraine's shaky IMF program took another 
direct hit, after the Rada (parliament) enacted legislation 
to significantly increase budget spending for pensions and 
public sector wages.  The IMF said the measure would lead to 
"fiscal devastation," while the World Bank estimated an 
increased government deficit of "at least a couple" 
percentage points of GDP.  Tymoshenko, whose BYuT faction 
unanimously voted against the law, dubbed the move an "atomic 
bomb" for Ukraine's budget.  Deputies from the Viktor 
Yanukovych-led Party of Regions provided overwhelming support 
for the law, together with members from OU-PSD, the Communist 
Party, and the Lytvyn Bloc.  All eyes are now turned to 
President Viktor Yushchenko, whose advisors have given mixed 
signals about whether the President intends to veto the law. 
End summary. 
 
DETAILS OF THE LAW 
------------------ 
 
¶2.  (U) The Rada passed legislation on October 20 to increase 
public sector wages and pensions.  The law provides for an 
initial rise in the monthly minimum wage from UAH 669 ($83) 
to UAH 744 ($93) on November 1, 2009, with subsequent 
quarterly augmentations in 2010.  The increases would 
continue until the minimum wage reached UAH 922 ($115), a 38% 
total rise.  According to the law, pensions would increase 
47% by the end of 2010.  The current minimum monthly pension 
is UAH 498 ($62), which would rise in pace with minimum wage 
increases until reaching UAH 734 ($92).  The social spending 
law was unanimously supported by the Party of Regions (172), 
Communist party (27), Lytvyn bloc (19), and the 
pro-presidential half of Our Ukraine-PSD (33). 
 
IFI REACTION 
------------ 
 
¶3.  (SBU) IMF budget expert Igor Shpak told Econoff on 
October 21 that the law, if signed, would lead to "fiscal 
devastation."  Nonetheless, the Kyiv-based official said that 
the IMF had concerns President Yushchenko would succumb to 
pressure and sign the law.  IMF staff and mission team 
members were "hoping" Yushchenko's training as an economist 
would outweigh short-term political considerations.  Shpak 
acknowledged that IMF envoy Ceyla Pazarbasioglu, currently in 
Kyiv to assess Ukraine's $16.4 billion Stand-By Arrangement, 
had been actively engaged on the issue with the Presidential 
Secretariat. 
 
¶4.  (SBU) World Bank senior economist Ruslan Piontkivsky 
similarly commented that the law's potential impact was "at 
least a couple" of percentage points of GDP for 2010.  He 
expressed concern that such additional budget allocations 
would make the 2010 deficit too large to be financed by 
non-inflationary means, and he hoped that Yushchenko would 
veto the law. 
 
BYUT OPPOSITION 
--------------- 
 
¶5.  (U) Prime Minister Tymoshenko's bloc (BYuT) and the 
pro-coalition wing of OU-PSD refused to vote for what the PM 
called an "atomic bomb" for the state budget.  BYuT 
representatives publicly called on President Yushchenko to 
veto the legislation. 
 
¶6.  (SBU) Deputy Prime Minister Turchynov stated the measure 
would cost UAH 8 billion (nearly $1 billion) in 2009 alone 
and could lead to substantial hryvnia emission and inflation. 
 Turchynov also noted that the measure had the potential to 
"ruin" Ukraine's financial system.  Deputy Finance Minister 
Voldymyr Matviychuk said that the measure would require UAH 8 
billion in additional funding in 2009 and UAH 71 billion 
(roughly $8.6 billion) in 2010.  In order to find the money 
to implement the law, Matviychuk speculated that the 
government would need to lay off 45% of public sector 
employees (teachers, doctors), an amount equal to 1.6 million 
jobs. 
 
¶7.  (SBU) BYuT MPs had told us on October 6 that they had 
allowed the measure to go forward beyond a first reading in 
exchange for Regions' guarantees to unblock the Rada's 
rostrum.  BYuT's legislative agenda, particularly related to 
the 2010 budget law, had been stymied for weeks by Regions' 
 
KYIV 00001835  002 OF 003 
 
 
demands for social spending increases. 
 
PROPONENTS MORE SANGUINE 
------------------------ 
 
¶8.  (SBU) Contrary to dire projections by the Cabinet and 
Ministry of Finance, Party of Regions' shadow Finance 
Minister Azarov downplayed the law's fiscal effect, saying 
the measure would cost UAH 5.5 billion (UAH 2 billion to 
raise minimum wages and 3.5 billion to raise pensions).  The 
author of the law, Lytvyn Bloc's Oleh Zarubinskiy, said that 
the increase could be funded with cuts to Presidential 
Secretariat and Cabinet of Ministers expenditures (by UAH 1 
million and 17%, respectively). 
 
PRESIDENT UNDECIDED 
------------------- 
 
¶9.  (SBU) The President will likely receive pressure from a 
variety of sources.  His own faction members from OU-PSD 
voted in favor of the pre-election spending increases.  On 
the other hand, the President will have to contend with the 
IMF's concerns about the fiscal impact of the law. 
 
¶10.  (C) Deputy Head of the Presidential Secretariat Igor 
Popov told Poloff that the Secretariat had held an October 21 
meeting on the law and was "split 50/50."  Popov, who also 
serves as the President's representative to the Rada, said 
that Yushchenko had not determined whether to veto the law. 
While the President understood the law's "horrible" financial 
implications for the budget, Popov implied that the politics 
of the presidential campaign could drive Yushchenko's 
decision making.  Throwing his hands up in the air, Popov 
declared "that's populism for you."  The Presidential aide 
said Yushchenko had determined he would remain "silent" in 
the coming days before making a final decision. 
 
¶11.  (C) Roman Zhukovskiy, a senior economic advisor in the 
Presidential Secretariat, publicly indicated on October 20 
that the Secretariat would propose to veto the bill. 
Zhukovskiy noted to us on October 21, however, that the 
President was "awaiting a more detailed study" of the law. 
He acknowledged that the measure could be considered a "major 
threat to state finances," but that it was not the only one 
of the sort the President had contended with.  Zhukovskiy 
admitted that he was personally opposed to the law and that 
he would continue to lobby against a Presidential signature. 
 
¶12.  (SBU) If Yushchenko were to veto the law, it is unclear 
whether Regions and the other groups in support of the law 
could muster support to override.  Deputy Speaker Oleksandr 
Lavrynovych (Party of Regions) purported he had located 
enough Rada MPs to push through an override.  Yet, Rada 
watchers have noted that Regions and its allies would have to 
whip up roughly 50 additional votes, a tough task that would 
require significant horse trading. 
 
¶13.  (U) The President also could rely on technical means to 
thwart final adoption of the law.  Rada procedures require a 
bill's drafter to determine sources of financing and estimate 
the budget impact of a potential law.  No such determinations 
were provided with the draft law on social spending. 
Furthermore, the Rada's legal committee has noted that 
current Ukrainian legislation requires the minimum wage and 
pension rate be set in conjunction with the current budget 
law, an action that had not been completed prior to passage. 
 
COMMENT 
------- 
 
¶14.  (SBU) It is difficult to fully assess the fiscal impact 
of the law, since it remains uncertain whether higher pension 
earners would be re-indexed according to the pension minimum. 
 The World Bank's Piontkivsky's estimation of roughly 2% of 
GDP expenditure increases did not account for re-indexed 
pensions at all levels.  Perhaps a better indicator for the 
law's potential effect would be the Ministry of Finance's 
projections of general re-indexed pension rate adjustments, 
which would add roughly UAH 71 billion (nearly 7% of GDP) in 
budget obligations. 
 
¶15.  (C) Given the law's expected popularity among key voting 
constituents and the difficulty Tymoshenko's government would 
have in fulfilling its terms, Yushchenko may decide to let it 
pass.  In this case, Tymoshenko would need to come up with 
extra cash for pensioners by November 1, putting at greater 
 
KYIV 00001835  003 OF 003 
 
 
risk the government's ability to pay for other obligations. 
Regions appears to be betting that the President and 
Tymoshenko will suffer politically in any case. 
PETTIT