VZCZCXRO3708
RR RUEHDBU RUEHSL
DE RUEHKV #1888/01 3021505
ZNY CCCCC ZZH
R 291505Z OCT 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8701
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 001888 
 
SIPDIS 
 
STATE FOR EUR/UMB AND EEB/OMA 
 
E.O. 12958: DECL: 10/28/2034 
TAGS: EFIN EREL PREL PGOV UP
SUBJECT: PRESIDENT UNWILLING TO VETO BUDGET-BUSTING BILL 
 
REF: A. KYIV 1835 
     ¶B. KYIV 1878 
 
Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and 
(d) 
 
¶1. (C) Summary and comment:  Putting the next IMF tranche in 
greater jeopardy, President Yuschenko indicated October 28 
that he would not veto a pensions and wages spending bill 
that would add another $337 million to the government deficit 
in 2009 and $4.7 billion (or about 4% of GDP) in 2010, by NGO 
estimates.  In response, Prime Minister Tymoshenko's 
government plans to block implementation of the law, possibly 
through a Constitutional Court challenge.  The President has 
also indicated that he is disinclined to sign a letter of 
intent with the IMF concerning conditions for disbursement of 
the fourth tranche of money.  The President's unwillingness 
to work with the Prime Minister and the IMF will undoubtedly 
put the economy under greater pressure and result in 
heightened negative sentiment toward the ruling elite in 
advance of the January presidential elections.  End Summary 
and comment. 
 
------------------------------------------- 
Budget-busting Bill Likely to Pass into Law 
------------------------------------------- 
 
¶2. (SBU) While travelling in rural Ukraine, President 
Yuschenko stated that he "agreed with Parliament" concerning 
the controversial social spending bill that was passed by the 
Rada (Ukraine's parliament) on October 20 (Ref A). 
Yuschenko's unwillingness to veto the Party of 
Regions-sponsored bill comes despite the negative impact on 
the budget and IMF's insistence that the bill be vetoed as a 
condition for disbursement of the fourth tranche under its 
Stand-by Arrangement with Ukraine (Ref B). 
 
¶3. (C) Presidential Economic Advisor Shlapak further 
confirmed that the President was disinclined to sign the 
letter of intent required by the IMF for additional 
disbursements, according to IMF resident representative Max 
Alier.  Alier reported that IMF Managing Director 
Strauss-Kahn is attempting to reach President Yuschenko to 
discuss the implications of allowing the bill to come into 
law.  G-7 Ambassadors in Kyiv are also seeking a meeting with 
President Yuschenko to discuss the issue. 
 
¶4. (C) During a conversation with PolCouns on October 29, 
former national security advisor Volodymyr Horbulin said that 
he had given up trying to divine Yuschenko's motives.  A veto 
of the social spending bill was clearly in order from the 
perspective of national interest.  Valeriy Chaliy, Director 
of the Razumkov Center and former advisor in Yuschenko's 
Presidential Secretariat, commented that a decision by 
Yuschenko not to veto the bill would make it clear that he 
was driven entirely by political considerations, particularly 
the desire to undermine Tymoshenko. 
 
--------------------------------------------- -------- 
Tymoshenko Supporters Looking to Block Implementation 
--------------------------------------------- -------- 
 
¶5.  (SBU)  Trying to find a way to undo the damagQ Prime 
Minister Tymoshenko's government has stated that it will 
block implementation of the bill should it come into law. 
For example, Finance Minister Umanskiy said that the bill 
could not be implemented because it raises spending without 
making the required amendments to the Rada-approved budget. 
He also said that the government would search out other legal 
means to block implementation.  The Minister of Labor and 
Social Policy announced that the government did not have the 
money to support the spending increase and that the Cabinet 
of Ministers would file a court case to challenge the 
constitutionality of the bill if the President signs it into 
law or chooses not to explicitly veto it. 
 
¶6. (C)  BYuT MP Valeriy Pysarenko told us that the party is 
also examining how to prevent the law from being enacted 
after the President signs it, including the possibility of 
appealing it to the Constitutional Court based on procedural 
or other grounds.  The Court would then have one month to 
decide whether to accept the appeal and, if accepted, three 
more months to rule on the appeal.  Politically, Pysarenko 
does not believe that Yuschenko or Yanukovych would be able 
to place all the blame on Tymoshenko and told us that, in his 
 
KYIV 00001888  002 OF 002 
 
 
opinion, Ukrainian voters have stopped differentiating among 
the three and see them all jointly as the cause of the 
country,s economic problems.  He conceded that the 
worse-case scenario -- an enacted spending bill and a 
withheld fourth tranche of IMF funding -- would be 
economically and politically disastrous for the country, but 
he stressed that such a scenario would not benefit any of the 
triad. 
 
--------------------------------------------- ---- 
Opposition: Blocking Implementation Will Backfire 
--------------------------------------------- ---- 
 
¶7. (C)  Not unexpectedly, Regions Deputy Faction leader and 
MP Volodomyr Makeyenko welcomed Yuschenko's support for the 
social expenditure legislation and said that it showed that 
there was broad support across political boundaries for 
raising pensions, wages and welfare payments.  He told us 
that this would only complicate Tymoshenko's ability to block 
implementing the legislation and that ultimately court 
appeals to strike down the law would fail.  Makeyenko 
explained that politically Tymoshenko's best option was to 
find a way to fund the higher social payments because if she 
challenges the law's legitimacy or refuse to implement it, 
then she alone will bear the political fallout.  He said that 
telling voters that there was no money in the budget for 
"modest increases" for Ukraine,s poorest would backfire 
because voters see the "opulent" lifestyle of the country,s 
political leadership. 
 
¶8. (C)  Makeyenko, who is also the First Deputy Chairman of 
the Rada budget committee, said that with "proper fiscal 
management" Ukraine can live without IMF money.  He asserted 
that much of the first three tranches were improperly used 
for currency speculation, profligate spending, and to finance 
Tymoshenko,s presidential campaign.  Makeyenko claimed that 
the government has still not taken the most basic steps to 
create an economic crisis plan, including rapid bank 
recapitalization, direct financial support for major 
industries, and economic relief for tax payers.  Makeyenko 
asked what had Tymoshenko done with the 10 billion USD 
already borrowed from the IMF.  He predicted that if the IMF 
does not give Tymoshenko the next tranche to "prop up her 
campaign" then Yanukovych could have a chance to win the 
January presidential election in the first round. 
 
--------------- 
Economic Impact 
--------------- 
 
¶9. (C) While hard to predict the impact of a delayed fourth 
IMF tranche, analysts speculate that postponement of the IMF 
installment would put mounting pressure on PM Tymoshenko to 
keep government spending under control.  This could take the 
form of wage and pension arrears but also should damper her 
promises of additional spending for special interests in the 
run-up to the election.  Analysts have commented that the 
public would react to the news of an IMF delay by demanding 
hard currency, which in turn would put downward pressure on 
the exchange rate and on the banking system.  However, an 
advisor to the Ministry of Finance notes that the banking 
system is already under water and argues that the impact on 
the real economy of further banking problems could be minimal 
since lending is already next to zero. 
 
PETTIT