VZCZCXRO7428
RR RUEHDBU RUEHSL
DE RUEHKV #1982/01 3171326
ZNY CCCCC ZZH
R 131326Z NOV 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8806
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 001982 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 11/12/2019 
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: TYMOSHENKO'S DESPERATE BUDGET SCRAMBLE 
 
REF: A. KYIV 1943 
     ¶B. KYIV 1920 
     ¶C. KYIV 1888 
 
Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and 
(d) 
 
¶1.  (C) Summary.  Members of parliament (MPs), the Cabinet of 
Ministers, and the Ministry of Finance doubt there will be 
any movement on Ukraine's draft 2010 budget before the 
presidential election, despite cajoling statements from Rada 
Speaker Volodymyr Lytvyn.  With the IMF's fourth loan tranche 
delayed, Prime Minister Tymoshenko and her BYuT party have 
lost their incentive to recast the draft 2010 budget and its 
roughly 8% deficit before the outcome of the presidential 
election.  Tymoshenko will likely use the absence of an 
approved budget, which would trigger a continuing 
resolution-type scenario, to "manually" manipulate 
expenditures in early 2010.  Desperate for cash, she seems to 
have calculated how she intends to dole out public sector 
wages, pensions, and payments to Gazprom, while minimizing 
the political effects of impending arrears. 
 
LYTVYN'S BULLY PULPIT 
--------------------- 
 
¶2.  (SBU) On a campaign stop in Dnipropetrovsk, Rada Speaker 
Volodymyr Lytvyn pledged to push forward the draft 2010 
budget, hitherto stalled in the Rada budget committee by MPs 
from the Party of Regions and BYuT factions.  Lytvyn said 22 
of 33 members had not attended committee meetings and were 
blocking the draft budget from consideration.  He 
particularly accused PM Tymoshenko's faction of obstruction, 
suggesting that BYuT -- with its "controlling stake" on the 
committee -- was trying to avoid meeting its myriad of social 
spending promises (such as wage increases to librarians, who 
oversee many of Ukraine's polling stations). 
 
¶3.  (U) Lytvyn said the Rada would vote on the draft budget 
in a first reading during a plenary session the week of 
November 16.  After a first reading, the draft 2010 budget 
would be forwarded for revisions to the Cabinet of Ministers 
(CabMin), which would then have until November 20 to return 
the draft to the Rada for a second reading.  According to the 
budget code, a third reading and final passage of the budget 
would have to be concluded by December 1. 
 
¶4.  (SBU) Despite his public commitments, Lytvyn may have 
little power to force committee members to vote out the 
draft, aside from blunt tactics such as his recent threat to 
withhold members' pay.  Ukraine's budget code requires the 
budget committee to review and adopt recommendations from 
fellow MPs before forwarding the draft for a first reading. 
However, since the draft budget was first submitted on 
September 15, over 1000 amendments have been proposed. 
According to Rada procedures, Lytvyn cannot circumvent the 
budget committee's process, even if its October 20 deadline 
for review of budget amendments has long passed. 
 
¶5.  (SBU) In any case, Lytvyn appears to have determined his 
fight over the budget was unwinnable.  He announced on 
November 12 that he would take a leave of absence from 
November 17 to dedicate himself full-time to his bid for the 
presidency, as well as to obviate accusations of conflict of 
interest. 
 
"ZERO CHANCE" FOR DRAFT 2010 BUDGET 
----------------------------------- 
 
¶6.  (C) Deputy PM Hryhoriy Nemyria's economic advisor Mariia 
Nikitova told Econoff that the CabMin could not offer an 
amended budget until "late November" at the earliest, because 
the draft budget had not yet been voted on in a first 
reading.  According to Nikitova, the IMF's demands for a 
resubmission of the draft budget were technically impossible 
because the previously submitted draft was still being 
considered by the budget committee.  If it resorted to 
revoking its own draft budget, BYuT could be accused of 
violating the terms of the budget code, or of woefully 
mismanaging the budget process.  Thus, everything depended on 
when the committee could bring the draft budget to a floor 
vote. 
 
¶7.  (C) Yet Rada MPs do not expect the 2010 budget will pass 
before the election.  Deputy chair of the Rada budget 
committee Volodymyr Makeyenko (Party of Regions) told us that 
 
KYIV 00001982  002 OF 003 
 
 
there is "zero chance" the committee would approve the 
budget.  In addition to the 8% deficit envisioned, he pointed 
to the fact that macroeconomic indicators had been absent or 
misleading in the draft budget, that an unjustified price for 
imported gas had been projected, and that expenditures for 
the social standards law (which he accepted was spendthrift) 
had not been incorporated. 
 
¶8.  (C) Makeyenko said "billions" had been set aside for pet 
projects that benefitted Rada MPs close to Tymoshenko, 
including orders for Foreign Minister Petro Poroshenko's 
Bohdan bus factory and tax benefits to companies favored by 
BYuT MP Valeriy Sushkevych.  The draft budget's finances 
reflected a "pyramid scheme."  Revealingly, Makeyenko said 
that even if the draft budget had been perfect, he and fellow 
Party of Regions MPs would be forced to cast their lot 
against it in this pre-election season. 
 
¶9.  (C) Ministry of Finance senior economist Volodymyr 
Parnyuk explained that it would be best for Ukraine's 
recovery if the bloated draft budget never made it out of 
committee (Ref A).  In the absence of a workable budget, 
Parnyuk acknowledged that Tymoshenko would have the ability 
to control revenues and expenditures through the presidential 
election period to ensure social payments for pensioners and 
public sector employees. 
 
TYMOSHENKO'S PLAN... 
-------------------- 
 
¶10.  (C) With IMF Managing Director Dominique Strauss-Kahn 
acknowledging that the fourth tranche of Ukraine's $16.4 
billion IMF Stand-By Arrangement loan would not be 
forthcoming before the presidential election, in part due to 
the recently signed law on social standards (Ref C), 
Tymoshenko is no longer immediately pinched by IMF demands to 
amend the 2010 budget.  She told G-8 ambassadors on November 
11 that the draft budget would be "hard to pass" due to 
instability in the Rada. 
 
¶11.  (SBU) Analysts believe Tymoshenko is seeking to 
forestall passage of the 2010 budget before the election, in 
an effort to force a Ukrainian version of a continuing 
resolution, known as a provisional transition budget. 
Article 46 of the Ukrainian budget code states that if the 
draft budget is not passed by January 1, 2010, the CabMin 
would be granted 1/12th of the previous year's allocations on 
a monthly basis, essentially maintaining 2010 expenditures at 
2009 levels.  (Note: According to IMF budget expert Igor 
Shpak, the Stabilization Fund could be distributed in its 
entirety from the first of the year without restrictions on 
the timing of payments.  However, it is unlikely there will 
be any monies available in the 2010 Stabilization Fund.  End 
note.) 
 
¶12.  (C) Nemyria's advisor Nikitova implied that the Prime 
Minister had devised a plan to "manually" control 
expenditures, essentially continuing a practice Tymoshenko 
has employed since September.  A loophole in the budget code 
(i.e. the lack of a stipulation that the government must 
maintain line items from the previous year) would legally 
allow the GOU to maintain tight oversight of individual 
payments. 
 
...AND HOW IT RELATES TO THE 2009 DEFICIT 
----------------------------------------- 
 
¶13.  (C) Controlling expenditures during the presidential 
election season, Tymoshenko will be able to make key payments 
to public sector workers and pensions.  Absent other 
financial sources, she also will be able to plumb the budget 
for monthly gas payments.  Furthermore, she will have the 
tools to manage state arrears from 2009 that may run over $2 
billion. 
 
¶14.  (C) Her chief unfunded obligations in the coming weeks 
are payments to Gazprom (due on the 7th of each month) and a 
projected 2009 core deficit of roughly UAH 30 billion (nearly 
$3.75 billion).  She will have few resources at her disposal 
to cover these gaps, with only the equivalent of $1.6 billion 
in IMF Special Drawing Rights (SDRs) still available (Ref B) 
after Naftohaz reportedly used $400 million for its November 
7 gas payment. 
 
COMMENT 
------- 
 
KYIV 00001982  003 OF 003 
 
 
 
¶15.  (C) With a lack of available funds at the end of 2009, 
the biggest question remains whether Tymoshenko will honor 
her commitments to pensioners and public sector wage earners, 
or whether she will instead use IMF SDR funds to finance 
upcoming payments to Gazprom.  It appears she is trying to 
have it both ways, though SDRs will not be able to cover much 
more than the November budget deficit and the December 7 gas 
payment.  The tool of untied 2010 expenditures could become 
essential for Tymoshenko to avoid payments to all but the 
most politically important articles, though she will not be 
able to escape the electoral impact of across-the-board 
payment delays that may have already begun to set in. 
 
PETTIT