VZCZCXRO9520
OO RUEHDBU RUEHSL
DE RUEHKV #2102/01 3411403
ZNY CCCCC ZZH
O 071403Z DEC 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8917
INFO RHMFISS/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 002102 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 12/06/2019 
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: TYMOSHENKO'S IMF SALVAGE OPERATION 
 
REF: KYIV 1760 
 
Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and 
(d) 
 
¶1.  (C) Summary.  Ukrainian Prime Minister Tymoshenko 
dispatched Deputy Prime Minister Nemyria and Acting Finance 
Minister Umanskiy to Washington for meetings with IMF 
Managing Director Dominique Strauss-Kahn and high-level USG 
officials.  Bearing a Letter of Intent (LOI) with three 
signatures -- including that of Tymoshenko, Umanskiy, and 
National Bank of Ukraine (NBU) governor Volodymyr Stelmakh -- 
Nemyria will ask the Fund on December 7 to disburse the 
fourth tranche, even though Ukraine has not met the IMF's 
conditions.  President Yushchenko has refused to sign the 
LOI.  Nemyria will likely express pessimism over the 
possibility of passing the 2010 budget, and he will plead for 
direct budgetary assistance, since the GOU has a nearly 
balanced current account but faces political fallout from its 
depleted treasury. 
 
¶2.  (C) Officials from Ukraine's Cabinet of Ministers 
(CabMin) described details of a December 4 phone call between 
Tymoshenko and Strauss-Kahn, who reportedly conditioned 
further IMF outlays on a signed LOI and a submitted (and 
passed) 2010 budget.  The following day, the CabMin hailed 
Stelmakh's subsequent signature as a breakthrough.  Embassy 
sources close to GOU-NBU negotiations said the NBU's 
acquiescence reflected Stelmakh's desire to protect his 
personal fortune on the eve of his retirement.  End summary. 
 
STRAUSS-KAHN ON SPEED DIAL 
-------------------------- 
 
¶3.  (SBU) A CabMin official gave the embassy a readout of 
Prime Minister Tymoshenko's December 4 conference call with 
IMF managing director Strauss-Kahn.  According to the CabMin, 
Strauss-Kahn said that Ukraine needed to submit a LOI with 
three signatures.  Furthermore, for the Fund to consider 
disbursing its fourth loan tranche of up to $3.8 billion, the 
GOU would also have to re-submit and win Rada approval of the 
draft 2010 budget.  The requirement for passage of the 2010 
budget would be dropped if President Yushchenko also signed 
the LOI as the fourth counterparty, according to the CabMin's 
version of the call. 
 
¶4.  (SBU) Strauss-Kahn told Tymoshenko that he would meet 
with Nemyria and Umanskiy in Washington on December 7.  The 
Ukrainian delegation also planned to meet with mission 
director Ceyla Pazarbasioglu and Europe director Marek Belka, 
before having lunch with IMF executive directors and holding 
talks with USG officials later in the day. 
 
STELMAKH SIGNS THE LOI 
---------------------- 
 
¶5.  (SBU) The CabMin reported on December 4 that Stelmakh had 
been increasingly "unconstructive" over the LOI upon 
receiving "new instructions from Bankova" (i.e. Yushchenko). 
Umanskiy met every day last week with senior NBU officials in 
an effort to convince Stelmakh to change his mind, according 
to the CabMin. 
 
¶6.  (C) Desperate to shore up her unfinanced budget deficit 
that could total at least UAH 30 billion (roughly $3.75 
billion), excluding the deficits at Naftohaz and the Pension 
Fund, the Prime Minister and Acting Finance Minister Ihor 
Umanskiy may have upped the ante after the Strauss-Kahn call. 
 On December 5, the Cabinet of Ministers' Mariia Nikitova 
told us that Stelmakh had been persuaded to sign the LOI. 
According to Nikitova, the Prime Minister had offered 
Stelmakh "lots of things" to get his signature, though the 
exact nature of the deal remains unclear. 
 
GOU AND NBU NEGOTIATIONS 
------------------------ 
 
¶7.  (C) Alfa Bank executive Ivan Yurik, an advisor and close 
associate of former Minister of Economy Roman Shpek and 
former Minister of Finance Viktor Pynzenyk, confirmed that 
Stelmakh was operating more freely of the President. 
However, he believed the NBU governor's negotiations with 
Tymoshenko should not be construed as a betrayal of 
Yushchenko.  Stelmakh had calculated that he could sign the 
LOI, knowing that Yushchenko would not be a fourth 
counterparty.  According to Yurik, the consensus among 
 
KYIV 00002102  002 OF 003 
 
 
Ukraine's authorities had been that the IMF would not budge 
in its demand to have the President's signature.  Thus, 
Stelmakh's move should be seen as a means to gain chits with 
the Prime Minister, while not necessarily undermining 
Yushchenko's hindrance of the IMF program (designed to harm 
Tymoshenko politically). 
 
¶8.  (C) Yushchenko may also have given Stelmakh the green 
light by concluding Tymoshenko hoped to perpetuate the 
current fiscal deadlock, as she is set to profit from a 
continuing resolution-type budget -- based on the bloated 
2009 budget -- that would give her considerable spending 
discretion in 2010.  The CabMin's Nikitova admitted it looked 
very unlikely the Rada would approve the 2010 draft, even if 
the GOU submitted a revised version to the Rada budget 
committee this week. 
 
NEMYRIA'S STANCE IN WASHINGTON 
------------------------------ 
 
¶9.  (C) According to Nikitova, Nemyria, and Umanskiy plan to 
take the position with Strauss-Kahn that three LOI signatures 
plus a submitted (though not necessarily approved) budget 
should be enough for the IMF mission team to return to Kyiv. 
Acrimony between the Yushchenko and Tymoshenko combined with 
political deadlock in the Rada had conspired to prevent any 
further compromise or reform.  The IMF should disburse the 
tranche to the budget, according to the CabMin's argument, to 
meet the January 7 payment to Gazprom and to stave off large 
arrears and the possibility of massive societal discord. 
 
WORLD BANK REACTION 
------------------- 
 
¶10.  (C) Kyiv-based World Bank country director Martin Raiser 
commented on December 5 that he did not expect the IMF to 
further lend to Ukraine under the conditions offered by 
Tymoshenko.  Displaying up-to-the-minute awareness of GOU-NBU 
negotiations, Raiser said Stelmakh's signing of the LOI was a 
positive -- but likely not decisive -- step.  Raiser reminded 
that it had been because of the stalemate among Ukraine's 
warring politicians that the IMF left Kyiv in November 
without recommending disbursement.  The IMF would likely not 
interpret what is essentially the political status quo as 
rationale to roll back core IMF demands. 
 
TYMOSHENKO NEEDS STELMAKH... 
---------------------------- 
 
¶11.  (C) In recent weeks, Tymoshenko and her close advisors 
had made it clear that they needed Stelmakh's support in four 
key areas: 
 
-- to sign the IMF Letter of Intent 
-- to refinance maturing GOU debt to the NBU worth UAH 4 
billion (roughly $500 million) 
-- to monetize new GOU debt 
-- to solve the stalemate over insolvent Nadra bank 
 
The first three areas were vital for meeting fiscal 
obligations prior to the presidential election.  The fourth 
area may not be as immediately pressing, though Tymoshenko 
has stated repaying Nadra's insured depositors was a 
political necessity. 
 
¶12.  (C) The Letter of Intent was Tymoshenko's top priority 
with the National Bank, as it had been considered necessary 
to unlock any further IMF disbursements.  Stelmakh had 
already agreed to help refinance the UAH 4 billion in 
maturing debt, a move shadow Minister of Economy Iryna 
Akimova told us was politically motivated and "risky".  The 
NBU will likely not monetize new GOU securities, arguing that 
it must adhere to IMF targets on base money and net 
international reserves. 
 
¶13.  (C) On Nadra, the government looked prepared to assume 
liabilities owed to insured depositors that likely total over 
UAH 5 billion (the exact number is unknown even to the 
Ministry of Finance), even though it had not determined 
whether the bank will be recapitalized or liquidated via a 
purchase and assumption transaction.  Tymoshenko has long 
battled Yushchenko and the NBU over control of confidential 
documents related to Nadra shareholder Dmytro Firtash -- a 
Tymoshenko adversary -- and his shady financial and energy 
dealings. 
 
 
KYIV 00002102  003 OF 003 
 
 
AND STELMAKH NEEDS TYMOSHENKO 
----------------------------- 
 
¶14.  (C) Stelmakh is preparing to retire on December 16. 
While he will likely be appointed by Yushchenko on an interim 
basis through the end of the presidential term (not requiring 
Rada approval), Stelmakh's longer-term prospects are unclear. 
 Multiple sources have claimed Stelmakh pilfered tens of 
millions of dollars, as well as looked the other way while 
fellow members of the NBU governing board lined their pockets 
with preferential bank refinancing schemes and insider 
currency plays. 
 
¶15.  (C) Upon his retirement, Stelmakh would not enjoy any 
formal immunity from prosecution, and analysts have long 
speculated that Stelmakh is at the top of the Prime 
Minister's hit list.  Tymoshenko publicly called for 
Stelmakh's ouster in late 2008 and early 2009 over 
accusations that the NBU had profited from exchange rate 
manipulation and exorbitant refinancing deals, including with 
the Firtash-controlled Nadra bank. 
 
¶16.  (C) In another Tymoshenko salvo, Stelmakh's first deputy 
governor Anatoliy Shapovalov, also a Yushchenko loyalist, 
came under fire in September from Minister of Interior Yuriy 
Lutsenko (reftel).  Lutsenko claimed top NBU leadership had 
"plundered millions".  He also told Yushchenko, who appoints 
and dismisses the NBU governor, "to prepare his subordinates 
for jail". 
 
¶17.  (C) Former NBU deputy governor Oleksandr Savchenko, a 
Tymoshenko associate who resigned during the "Shapovalov 
affair", claimed his former NBU colleagues had conspired in 
currency speculation.  Now Deputy Finance Minister, Savchenko 
told a closed door group of diplomats, IFI representatives, 
and fellow high-level Ukrainian authorities on December 3 
that NBU authorities had "only perpetuated the crisis" by 
sins of omission and commission. 
 
¶18.  (C) Alfa Bank's Ivan Yurik believes the 
Tymoshenko-Stelmakh relationship had become temporarily 
co-dependent.  Yurik said Tymoshenko had plenty of 
information to prosecute and convict Stelmakh.  While 
Yushchenko's power to protect Stelmakh was receding, the 
possibility of a Tymoshenko presidency could not be 
discounted, and Stelmakh had determined that he must secure 
his ill-gotten gains.  Tymoshenko stood in the way of a 
comfortable retirement and a secure "pension". 
 
NBU ORCHESTRATIONS 
------------------ 
 
¶19.  (C) On December 4, NBU deputy director for banking 
supervision Ruslan Gritsenko insinuated to Econoff and IMF 
advisor Engin Akcakoca that NBU senior management had been 
engaged in heightened corruption in recent days.  Gritsenko 
said NBU officials knew "perfectly well" about current 
arrangements between bank managers and regulators over 
refinancing and recapitalization schemes.  The NBU governing 
board had "profitable" ties with Ukrainian banks and firms 
and did not see a need to reach out to foreign bankers who 
had been complaining about NBU non-transparency.  The NBU's 
Gritsenko did not comment explicitly about Stelmakh's plans 
after his scheduled December 16 retirement, but said "this 
was being worked out". 
 
COMMENT 
------- 
 
¶20.  (C) Stelmakh does not have his own independent power 
base and will soon be out of office.  While his signature 
carries the weight of his title, it does not necessarily 
reflect NBU concurrence on budgetary and exchange rate 
policy.  Neither does it serve as a signal of unquestioned 
support for an IMF program that would plug Tymoshenko's 
budget gap in favor of bolstering the NBU's foreign reserves. 
 Stelmakh has walked a fine line in his negotiations with two 
masters: tied to Yushchenko politically and personally, he 
has much to lose by unleashing the Prime Minister's enmity. 
Along with his agreement to refinance UAH 4 billion of GOU 
debt, Stelmakh's decision to sign the LOI, leading to today's 
negotiations with the IMF, should be understood as the least 
risky of all his possible moves. 
TEFFT