VZCZCXRO1508
RR RUEHDBU RUEHSL
DE RUEHKV #1878/01 3001554
ZNY CCCCC ZZH
R 271554Z OCT 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8691
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 001878 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 10/26/2019 
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: IMF AT ANOTHER UKRAINE IMPASSE 
 
REF: A. KYIV 1835 
     ¶B. KYIV 1760 
 
Classified By: CDA James Pettit for Reasons 1.4 (b) and (d) 
 
¶1.  (C) Summary.  Negotiations between the IMF and Ukrainian 
authorities appear to have stalled over a bloated budget and 
the uncertain fate of a new social spending law which, if 
signed by the President, would represent a "red line" for the 
Fund.  According to the IMF's Kyiv-based resident 
representative Max Alier, who briefed G-7 ambassadors on 
October 27, IMF mission head Ceyla Pazarbasioglu departed 
from Kyiv without reaching agreement on terms for disbursing 
the fourth tranche. 
 
¶2.  (C) Alier noted that the political situation was 
"difficult" and the IMF and senior Ukrainian officials were 
"still negotiating".   President Yushchenko had thus far 
declined to sign a letter of intent (LOI) regarding 
conditions for a fourth tranche, with NBU leadership also 
withholding support.  Although PM Tymoshenko had signaled she 
was prepared to sign the LOI, she had not reached an 
agreement with the IMF on problems with the draft 2010 
budget.  End summary. 
 
SOCIAL BENEFITS LAW IS "RED LINE" 
--------------------------------- 
 
¶3.  (C) According to Alier, the IMF is most concerned about 
the "social benefits" law adopted by the Rada (Ukraine's 
parliament) on October 20 (Ref A).  President Yushchenko thus 
far had not signaled his intentions on whether he would sign 
the law.  He apparently had failed to respond to a meeting 
request from IMF envoy Pazarbasioglu after the law's passage, 
although Pazarbasioglu waited two days for the appointment. 
 
¶4.  (C) Meanwhile, the IMF had strongly pushed for a veto 
with representatives from the Presidential Secretariat, who 
have given indications that they would oppose the law.  Alier 
told G-7 ambassadors that he would meet with Deputy Head of 
the Presidential Secretariat Oleksandr Shlapak on October 27 
to again press for a veto.  (Note: The deadline for a 
Presidential veto is on/around November 5). 
 
¶5.  (C) In the Fund's estimation, Yushchenko allegedly "does 
not see the purpose" of a LOI with the presidential election 
looming and politics dominating economic policy making. 
Although staff from the Finance Ministry and National Bank of 
Ukraine (NBU) had a good understanding of what needs to be 
done to maintain the loan program, the IMF mission was 
puzzled by the President's actions and could not determine 
whether he understood the full extent of Ukraine's economic 
problems. 
 
¶6.  (C) Alier argued that while the Fund had required fiscal 
discipline for neighboring countries, notably Hungary, it had 
previously taken a more lenient position with Kyiv 
authorities, allowing for the effects of Ukraine's 
significant 2009 GDP decline.  In particular, the IMF already 
had shown significant flexibility by allowing wage and 
pension increases to occur in line with inflation.  But the 
new social benefits law represented a "red line" that 
required a Presidential veto.  According to Alier, if the IMF 
were to "cave" on the social benefits law, then "everything 
would go." 
 
FLABBERGASTED OVER THE BUDGET(S) 
-------------------------------- 
 
¶7.  (C) Even if the social benefits law were to be vetoed, 
Alier stated the 2009 fiscal situation was very tight.  He 
projected that the GOU would run out of money within three 
weeks if the IMF did not disburse its fourth tranche. 
Revenues were collapsing, as tax payers had lost confidence 
in the authorities.  Alier surmised that "if you don't give 
(VAT) refunds, they don't pay taxes," and sizeable wage and 
pension arrears would become the order of the day.  Alier 
noted the "car was already sputtering" and that transfer 
payments to local budgets already had been delayed. 
 
¶8.  (C) The IMF was "flabbergasted" at the draft 2010 budget 
that the Cabinet of Ministers had submitted to the Rada. 
With a projected 8% of GDP deficit, the draft 2010 budget was 
"in contempt" of the IMF program.  Alier noted that 
Tymoshenko had tried to reassure the IMF mission, reasoning 
that the draft 2010 budget would not pass the Rada in any 
 
KYIV 00001878  002 OF 003 
 
 
case, and that submitting a more austere budget would damage 
her politically prior to the election. 
 
¶9.  (C) There had been an internal debate within the IMF 
mission as to whether it would require Tymoshenko to resubmit 
the draft 2010 budget (which the Prime Minister has refused 
to do thus far), or whether the GOU could commit itself to 
cut the budget by administrative means.  Alier indicated that 
resubmission of the budget would be a complicated process. 
Moreover, under Ukrainian law and regulations, resubmitting 
the budget would not be technically possible until the latter 
part of November at the earliest. 
 
A LONELY FRIEND 
--------------- 
 
¶10.  (C) With the World Bank and EBRD saying "goodbye" to the 
GOU until further reforms had been made, IMF management was 
uncomfortable that the Fund was the "only game in town". 
Alier observed that the IMF now found itself in a "no-win" 
situation: either it would disburse the fourth tranche and be 
accused of "choosing a candidate," or it would not disburse 
and "see the country go up in flames."  Alier added that he 
had worked as an IMF official in other crisis situations 
(such as Argentina, Brazil, and Indonesia), but that 
Ukraine's political situation was "as dysfunctional as it 
gets, with politicians willing to bring down the entire 
country in order to bring each other down." 
 
¶11.  (C) Alier dismissed oft-repeated Party of Regions' 
claims that the IMF had endorsed Tymoshenko's candidacy via 
its loan program, arguing that Ukraine's economic situation 
was such that whoever won the presidential election would be 
calling the IMF the next day. 
 
NUMBERS UNDETERMINED 
-------------------- 
 
¶12.  (C) Alier could not say whether the IMF, if it chose to 
release a fourth tranche, would support disbursement of the 
full $3.8 billion as scheduled.  If the GOU had been in 
compliance with prior actions and structural benchmarks, then 
full disbursement would be in order.  The IMF official 
cautioned that if implementation of conditionalities was 
"backloaded", then disbursements logically would be 
backloaded as well, though the IMF had no mechanism for 
spreading out the disbursement of a particular tranche in 
steps/stages. 
 
¶13.  (C) The IMF had considered it might "recalibrate" and 
disburse a lesser amount than what had been previously 
scheduled.  In any case, if it were to disburse, the IMF 
would want monies directed to the NBU, which in turn could 
transfer funds to the GOU.  Alier acknowledged that difficult 
relations between the NBU and GOU complicated such a scheme 
(Ref B). 
 
GAS PAYMENTS AND PRICES 
----------------------- 
 
¶14.  (C) On gas payments to Russia, Alier estimated that $400 
million would come due on November 6, while Ukraine would 
need to transfer just short of $1 billion on December 6. 
Alier maintained that Ukraine's foreign reserves of $26 
billion were more than sufficient to meet monthly gas 
obligations.  But an ongoing "stupid family argument" could 
scuttle plans for the NBU to monetize GOU treasury bills for 
gas payments (Ref B).  In any event, it would be impossible 
for the IMF to disburse before November 6. 
 
¶15.  (C) Alier displayed considerable skepticism about the 
GOU's stated rationale for not implementing previously 
promised gas price increases.  Labor unions (currently 
picketing the IMF's Kyiv offices) never before had garnered a 
role in such decisions, he said.  Alier expressed similar 
doubt about municipalities' reluctance to increase gas prices 
for utilities. 
 
¶16.  (C) The IMF official noted that if it came to it, he 
could see the Ukrainians "closing the tap" on gas imports 
this winter.  In the event the country was unable to make 
payments to Gazprom, it would consider using its sufficient 
reserves in storage for domestic consumption during the 
winter heating season.  Alier said he expected Russian 
officials would pressure the IMF on disbursement of the next 
tranche, as Russia wanted to ensure that revenues from 
 
KYIV 00001878  003 OF 003 
 
 
Ukrainian gas purchases would continue. 
 
NEXT STEPS 
---------- 
 
¶17.  (C) Alier indicated that the IMF team had returned to 
Washington and, at present, saw no reason to come back to 
Ukraine.  The Fund was working on a communications strategy, 
recognizing that if it does not disburse the fourth tranche, 
then severe economic consequences for Ukraine could follow. 
Alier underscored the possibility of significant hryvnia 
depreciation and another round of destabilization in the 
banking system. 
 
¶18.  (C) Alier indicated the situation had moved past his 
technical, civil servant status, and was now a political 
issue for more senior officials.  He invited capitals to 
provide policy input. 
 
COMMENT 
------- 
 
¶19.  (C) One diplomatic colleague likened Ukraine's current 
situation to "being in a hole and digging," with the 
President now wielding the spade.  On its merits, Yushchenko 
-- who has made it a point to speak out against populist 
public spending -- should veto the bill.  However, 
Yushchenko's desire to harm Tymoshenko could, as it has so 
often in the past, get the better of him.  It is notable that 
the remnant in the Rada that still backs Yushchenko voted in 
favor of the bill )- along with Yanukovych, the Communists 
and Speaker Lytvyn,s bloc -- and against Tymoshenko. 
 
¶20.  (C) Ukraine's pit could grow deeper soon.  Information 
about the IMF's self-described "no-win" situation has yet to 
hit the market, and analysts are still predicting that the 
Fund will disburse the entire tranche as soon as the social 
benefits law is vetoed.  A leak about the program's 
indefinite delay and ultimate recalibration may have an 
immediate impact on the exchange rate, with knock-on effects 
for the banking sector. 
 
¶21.  (C) While dramatic, this situation resembles the 
scenario after the first formal review, when the Fund walked 
out for a lengthy period, only to return with a display of 
heightened flexibility.  A key difference now may be that the 
Fund no longer has room to give on the budget.  Additionally, 
with the election looming, it must carefully tread among 
critics who claim it has unduly favored a particular 
presidential candidate. 
 
PETTIT