VZCZCXRO7798
OO RUEHDBU RUEHSL
DE RUEHKV #2140/01 3501324
ZNY CCCCC ZZH
O 161324Z DEC 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8978
INFO RHMFISS/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
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RUCNCIS/CIS COLLECTIVE
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C O N F I D E N T I A L SECTION 01 OF 04 KYIV 002140 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 12/15/2019 
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: DPM NEMYRIA'S CASE FOR UKRAINE IMF TRANCHE 
 
REF: A. KYIV 2133 
     ¶B. KYIV 2102 
     ¶C. KYIV 1982 
 
Classified By: Ambassador John F. Tefft for Reasons 1.4 (b) and (d) 
 
¶1.  (C) Summary.  Deputy Prime Minister Nemyria made a strong 
pitch to the Ambassador for the disbursement of a fourth IMF 
loan tranche to Ukraine.  He talked of unreasonable IMF 
demands for the passage of a 2010 budget, explained why the 
central bank could not monetize for budget and gas payments, 
and projected that a Ukraine meltdown would have spillover 
effects for the region.  Nemyria admitted that Prime Minister 
Tymoshenko's presidential campaign had been damaged by 
President Yushchenko, whose efforts had worked to 
"demobilize" and fragment "post-orange" voters.  Nemyria is 
currently en route to Washington with key advisors for 
emergency follow-up meetings with the IMF.  End summary. 
 
MORE FREQUENT FLIER MILES 
------------------------- 
 
¶2.  (C) In a December 15 meeting with the Ambassador, Nemyria 
revealed his talking points for December 17 and 18 meetings 
with senior IMF officials.  Nemyria heads back to Washington 
only ten days after talks with IMF Managing Director 
Dominique Strauss-Kahn, and less than a week since Foreign 
Minister Poroshenko saw IMF Deputy Managing Director Lipsky. 
The follow-up trip was apparently prompted by Prime Minister 
Tymoshenko's December 14 call with Strauss-Kahn, who 
allegedly expressed his openness to ongoing negotiations with 
Ukrainian authorities.  Nemyria will be accompanied by acting 
Finance Minister Ihor Umanskiy, Deputy Finance Minister (and 
budget expert) Anatoliy Myarkovksiy, and economic advisor 
Mariia Nikitova. 
 
GOU HONING ITS POSITION 
----------------------- 
 
¶3.  (C) Nemyria tipped his hand by reviewing the GOU's 
revised negotiating position.  Tymoshenko wanted to make the 
case that passage of a 2010 budget was not a reasonable 
conditionality.  Pre-election "political fragmentation" had 
meant that there was almost no chance a budget could be 
reviewed and adopted in the Rada (Ukraine's parliament) 
before March or April.  Furthermore, even if the budget were 
reviewed, revised, and adopted on multiple readings (ref C), 
President Yushchenko would again spite Tymoshenko and veto 
the bill. 
 
¶4.  (C) The fact that the Prime Minister, the Ministry of 
Finance, and the National Bank of Ukraine (NBU) had signed 
the IMF Letter of Intent (LOI) was the best possible sign of 
cooperation, Nemyria argued (ref B).  It was clear the 
President would not sign the LOI for political reasons (the 
lack of an IMF program harms Tymoshenko's candidacy). 
Therefore, there was a need to "de-politicize" the IMF 
process, the Deputy Prime Minister said. 
 
¶5.  (C) The GOU would propose to the IMF that the Ministry of 
Finance and the NBU jointly sign a second LOI, with the PM 
providing a side letter to give her assurance that she would 
propose a budget in line with the IMF's expectations after 
the election.  The GOU would also argue that the lack of a 
2010 budget was not harmful.  Having a continuing 
resolution-type budget in 2010 would act as a 
"straight-jacket" on the GOU for at least three months (i.e. 
until after the inauguration).  Any budget passed by the Rada 
before the election would be populist and bloated, Nemyria 
stated. 
 
¶6.  (C) Tymoshenko and her cabinet were concerned that the 
IMF's Lipsky and staff-level "mathematicians" failed to see 
their point.  Lipsky had insisted in his meeting with Foreign 
Minister Poroshenko that the 2010 budget be passed.  IMF 
staff had been allowed to "dictate the pace of the program", 
especially over whether budget passage should be a lynchpin 
requirement.  Timing was crucial, and the IMF board needed to 
be convinced quickly.  Ukraine was willing to "compromise" 
and accept a partial $2 billion tranche (instead of the full 
$3.8 billion). 
 
¶7.  (C) In addition to political reasons preventing the NBU 
from purchasing GOU securities to pay Gazprom or meet budget 
obligations (ref B), Nemyria pointed to other factors that 
militated against monetization.  1) He said it was "against 
the law" for the NBU to finance the government deficit.  2) 
He claimed the NBU could not provide funds to the government 
via commercial banks, since auditors would not be able to 
approve such transactions.  Nemyria noted that this argument 
had been used in July by Yushchenko, when the President 
rejected the IMF's suggestion that the NBU monetize GOU 
securities to make gas payments.  3) Nemyria claimed 
monetization could lead to interest rates of 50-60%, such as 
in Russia and Ukraine during the late 1990s.  He said 
Tymoshenko had been firm with Strauss-Kahn on December 14 
when she noted that monetization was not an option. 
 
¶8.  (C) Note: The first point above was mentioned by Nemyria 
and Poroshenko to the IMF last week.  Nonetheless, while 
legislation governing the powers of the NBU bans direct 
lending to the GOU to finance the budget deficit, it does not 
forbid the NBU from buying government treasury bills. 
According to NBU official figures, the central bank purchased 
UAH 27.7 billion in domestic treasury bills during the first 
nine months of 2009.  The IMF estimates the NBU has room to 
print billions more, while holding enough reserves to protect 
movement in the exchange rate.  On the second point above, 
according to Ukrainian legislation, loans to any one borrower 
should not exceed 25% of a bank's capital.  However, 
state-owned Oshchadbank, the government's chief conduit for 
monetization, has 53% of its loan portfolio booked with 
Naftohaz, a sum roughly equal to 120% of its capital.  A 
bigger problem with domestic debt issuance to commercial 
banks is that it crowds out other investment, given that 
t-bill yields now exceed 24-25%.  On the third point above, 
the 2009 situation is qualitatively different from the 1990s. 
 Inflation this year will not reach higher than 15%, and 
Ukraine's overall sovereign debt burden remains relatively 
modest.  End note. 
 
OUTREACH GONE GLOBAL 
-------------------- 
 
¶9.  (C) Nemyria reported that Russia and Brazil had requested 
an informal December 15 brief on Ukraine from the IMF board. 
Strauss-Kahn told Tymoshenko that he had separately asked for 
a brief from IMF executive directors and had planned to hold 
sessions with the European, BRIC, and Nordic-Baltic groups on 
Ukraine's behalf.  The Deputy Prime Minister told the 
Ambassador that he had recently met with the French, German, 
and Chinese ambassadors.  (Note: Key ally ambassadors 
commented to the Ambassador on December 15 that they thought 
both the Russians and the Chinese had been weighing in 
heavily with the IMF.  End note.) 
 
¶10.  (C) Nemyria reported that the German IMF executive 
director had been the most cautious vis-a-vis emergency 
lending to Ukraine.  However, on the margins of the European 
Peoples' Party congress in Bonn last week, Tymoshenko 
apparently had been told by Chancellor Merkel that the German 
Ministry of Finance planned to send updated instructions to 
its representatives in Washington.  Similarly, the French 
Finance Ministry would send new instructions to its IMF 
executive director, Nemyria told the Ambassador.  (Note: Our 
German embassy contacts told us on December 16 that Berlin 
did not plan to back down from their firm approach to 
Ukraine's IMF program.  End note.) 
 
IMF SDR ALLOCATIONS NOT ENOUGH 
------------------------------ 
 
¶11.  (C) Nemyria said that allocations of IMF Special Drawing 
Rights (SDR) were nearly depleted.  Most of the SDR 
allocations had been used for gas and external payments. 
According to the Deputy Prime Minister, the GOU had just 
incurred an additional foreign currency obligation as a 
condition of debt restructuring talks over a loan default by 
Ukrzaliznytsa, the state railway company.  The GOU would need 
to pay an unspecified amount from the remaining SDRs to 
Ukrzaliznytsa's creditors on December 29, Nemyria said. 
(Note: We heard separately from Deputy Minister of Finance 
Myarkovskiy that Ukraine had UAH 1.77 billion ($221 million) 
in SDRs remaining.  Nemyria made no mention of the GOU's use 
of SDRs for November budget payments.  Nemyria economic 
advisor Nikitova admitted to us that SDRs were reported as 
November revenue for IMF budget deficit calculations.  End 
note.) 
 
¶12.  (C) The Deputy Prime Minister assured the Ambassador 
that gas prices for household consumers would increase by 25% 
in April 2010.  This figure was enough to make up lost 
revenue from the Prime Minister's cancelled increases in 
September, a move that breached one of the IMF's core 
demands, argued Nemyria.  Naftohaz executives were meeting on 
December 15 over whether to buy more gas in December, rather 
than wait until 2010 when prices will be higher.  Nemyria 
believed that if Naftohaz bought 5.5 billion cubic meters 
(BCM) in December (for about $1.2 billion), it would not need 
to purchase as much in Q1 2010.  (Note: Naftohaz spokesman 
Valentyn Zemlyansky told us on December 15 that Naftohaz 
planned to take roughly 5.5 BCM and would make the payment 
for December gas purchases, due January 7, by the end of the 
month.  End note.) 
 
¶13.  (C) If it came down to making tough spending choices, 
Tymoshenko would opt to contain possible social unrest, 
according to Nemyria.  The top item on her crisis agenda was 
making wage and pension payments, the second was meeting 
Ukraine's monthly bill to Gazprom, and the third was all 
remaining budget obligations, including payment of large and 
growing VAT refund arrears.  In response to the Ambassador's 
questions, Nemyria commented that Ukraine needed more 
stability before refunding VAT to exporters, though he noted 
some SDRs had been used for that purpose in recent weeks. 
 
DIM PROSPECTS WITHOUT IMF 
------------------------- 
 
¶14.  (C) Nemyria concluded his review of Ukraine's position 
on the IMF by stating that the Fund program had been a 
success thus far.  Ukraine's economy had stabilized; the run 
on bank deposits had been stopped.  But speculative, 
short-term capital could flee from Ukraine at any time, and 
parent banks were poised to pull stakes if things got too far 
off track with the IMF, Nemyria added. 
 
¶15.  (C) The Deputy Prime Minister commented that his recent 
media interviews were neither "blackmail" nor "soft 
blackmail", as critics suggested (ref A).  IMF staff simply 
had not paid enough attention to the potential strategic 
consequences of Ukraine's economy unraveling.  There would be 
a spillover to the region, Nemyria noted, especially 
affecting fragile economies like neighboring Hungary.  Any 
strategic opportunity for reforming Ukraine after the 
presidential election would be lost. 
 
TYMOSHENKO'S ELECTION CHANCES 
----------------------------- 
 
¶16.  (C) The presidential election was now a contest between 
Tymoshenko and opposition Party of Regions leader Viktor 
Yanukovych.  There was no longer "any talk of a third 
candidate" (i.e. Arseniy Yatsenyuk).  Yanukovych had an 
impressive lead of 7-10%; he would likely preserve this 
margin through the first round of balloting on January 17. 
Nemyria commented that Yanukovych's core was solid but his 
projected 2nd round support of 42% would be 6% less than in 
¶2004. 
 
¶17.  (C) The biggest concerns for Tymoshenko were the 
fragmentation and "demobilization" of the "post-orange" 
electorate.  Pro-European voters had split their allegiances 
among a number of Ukraine's eighteen candidates, though in 
aggregate they added up to more votes than Yanukovych could 
expect to receive.  The key was to attract those voters 
between the first and second rounds, while eroding 
Yanukovych's base in the east. 
 
¶18.  (C) President Yushchenko's criticism had hurt 
Tymoshenko, especially his stroking of nationalist sentiment 
with such statements as "she's selling Ukraine to the 
Russians" or "she's on par with Yanukovych" or "she's never 
been a Ukrainian patriot".  Tymoshenko had made a decision 
not to respond, but it was "really damaging".  Yushchenko was 
attempting to discourage support for Tymoshenko in the west, 
a de facto policy of supporting Yanukovych. 
 
¶19.  (C) Nemyria said he did not expect large-scale voting 
irregularities such as in 2004, but he speculated there could 
be attempts to manipulate final tallies.  He praised the idea 
of Georgia sending observers to Donetsk oblast, one result of 
Tymoshenko's unpublicized meeting with Georgian President 
Saakashvili in Bonn last week. 
 
PRESENTING TYMOSHENKO'S EURO-ATLANTIC CREDENTIALS 
--------------------------------------------- ---- 
¶20.  (C) Nemyria presented Tymoshenko as the obvious choice 
in a "black and white" race.  He pointed to the fact that 
Yanukovych would recognize South Ossetia and Abkhazia (he had 
twice announced his intention to do so).  The Prime Minister 
wanted to continue NATO integration, but she took seriously 
the fact that NATO was a divisive issue.  Tymoshenko 
estimated that 23-25% of Ukraine's population supported 
Ukrainian membership, a figure far below Yushchenko's 
oft-mentioned claims of 33%, especially since the Georgia 
conflict.  A final decision on NATO would be left to a 
referendum, according to Nemyria.  In any case, Ukraine was 
willing to continue taking an active role in humanitarian and 
peacekeeping operations with Euro-Atlantic partners. 
 
COMMENT 
------- 
 
¶21.  (C) Nemyria's points on the budget have validity if seen 
through a narrow lens.  It is likely true, for instance, that 
any 2010 budget passed before the election would be rife with 
populist pork.  However, it is not clear that NBU Governor 
Stelmakh would be willing to sign a follow-up LOI with just 
the Ministry of Finance.  Similarly, it does not necessarily 
follow that a continuing resolution-type budget would be a 
fiscal "straight-jacket", given the fact that it allows for 
discretionary spending without specific line items. 
Furthermore, we agree with the IMF that not only can 
monetization happen via t-bill issuances to finance gas 
purchases (and/or short-term wage and pension payments), 
there would not necessarily be a major inflationary or 
exchange rate effect.  Nemyria's finance team will have to 
make more poignant explanations to Washington interlocutors 
to overcome these concerns. 
TEFFT