VZCZCXRO9211
OO RUEHDBU RUEHSL
DE RUEHKV #2147/01 3511315
ZNY CCCCC ZZH
O 171315Z DEC 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8987
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 02 KYIV 002147 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 12/16/2019 
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: UKRAINIAN FINANCE MINISTRY GRIM ON BUDGET 
 
REF: A. KYIV 2140 
     ¶B. KYIV 2133 
     ¶C. KYIV 2130 
 
Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and 
(d) 
 
¶1.  (C) Summary.  In preparation for DPM Nemyria's talks with 
IMF officials on December 17 and 18 (ref A), the GOU's top 
budget experts met with Kyiv-based IMF resident 
representative Max Alier to reconcile revenue and expenditure 
figures for 2009 and the first quarter of 2010.  Talking 
separately with Econoff on December 15, Deputy Finance 
Minister Myarkovskiy said that the GOU had a shortfall of $3 
billion over the next six weeks, taking into account only 
minimum social expenditures and the January 7 Gazprom 
payment.  Separately, Deputy Minister of Finance Kravets told 
us the GOU had successfully sold UAH 400 million ($50 
million) in one and three-year notes on December 15 in an 
attempt to cover roughly UAH 2 billion ($250 million) in 
domestic debt payments due in late December.  End summary. 
 
CRITICAL SHORTFALL OVER NEXT SIX WEEKS 
-------------------------------------- 
 
¶2.  (C) Working furiously with the IMF's Alier on budget 
figures prior to traveling to the U.S. on December 16 with 
DPM Nemyria and acting Finance Minister Umanskiy, Myarkovskiy 
told us that, at a minimum, the GOU had a UAH 8.8 billion 
($1.1 billion) deficit for remaining December wage and 
pension expenditures.  The Ministry of Finance projected it 
would have a further deficit of UAH 6 billion ($825 million) 
for similar minimum social expenditures in January. 
 
¶3.  (C) Myarkovskiy said there was an additional $1.2 billion 
needed for the January 7 gas payment, as the GOU wanted to 
import as much gas as possible in December due to 2010 price 
increases.  Although not confirming what DPM Nemyria and 
Naftohaz spokesman Valentyn Zemlyansky separately reported to 
us (ref A), Myarkovskiy's figures suggest the GOU is firmly 
focused on importing approximately 5.5 billion cubic meters 
(bcm) this month. 
 
¶4.  (C) The Ministry of Finance confirmed that these minimum 
social and gas payment obligations, which PM Tymoshenko 
considered essential expenditures over the next six weeks, 
would total over $3 billion.  Myarkovskiy's figure explicitly 
does not account for shortfalls on other protected budget 
items, including government operations.  In fact, Deputy 
Minister of Economy Maksiuta lamented to us that the Cabinet 
of Ministers no longer had money to fill up official vehicles 
with gasoline, pointing to the fact that he had taken public 
transportation to attend the embassy's holiday party. 
 
EMPTY DECEMBER COFFERS 
---------------------- 
 
¶5.  (C) Myarkovskiy did not disclose figures on GOU revenues 
for December, except to say they were very low and the state 
treasury's "cupboard was bare".  Making some spot 
calculations, he determined that the treasury had UAH 1.77 
billion ($221 million) in IMF Special Drawing Rights (SDR) 
remaining.  When asked whether these SDRs would be used for 
January 7 gas payments, Myarkovskiy demurred, noting instead 
that the IMF was forcing Naftohaz to spend its revenues on 
the payment to Gazprom, rather than transferring December 
revenues to the government for budget payments.  (Note:  We 
have not received clarification from the IMF on this demand. 
End note.)  The Deputy Minister of Finance did not mention 
whether shortfalls would be made up by NBU monetization or 
domestic debt issuance. 
 
CLEVER ACCOUNTING ON CORE DEFICIT 
--------------------------------- 
 
¶6.  (C) Ukraine's total 2009 budget deficit would be UAH 55 
billion ($6.88 billion), excluding Naftohaz's deficit and 
bank recapitalization financing, a figure that would allow 
the GOU to claim that its deficit was in line with IMF 
targets.  Myarkovskiy admitted the IMF had been forced to 
"reconcile" the GOU's revenue figures.  At issue specifically 
was whether a UAH 3 billion ($375 million) loan to 
Ukravtodor, the state highway company, could be counted as 
revenue to help the GOU meet the IMF's target.  Deputy 
Minister of Economy Maksiuta told us later on December 15 
that the IMF had acquiesced on the GOU's accounting of the 
 
KYIV 00002147  002 OF 002 
 
 
Ukravtodor loan as revenue.  In addition to the Ukravtodor 
monies, as well as loans from the World Bank and the IMF's 
second and third tranches that provided budget assistance 
earlier in 2009, over $2 billion in IMF Special Drawing 
Rights had been apportioned as revenue by GOU accountants, 
allowing PM Tymoshenko to declare that Ukraine's state budget 
had been "fulfilled" through November. 
 
Q1 2010 PROJECTIONS 
------------------- 
 
¶7.  (C) Myarkovskiy said that the Ministry of Finance was 
projecting the Q1 2010 budget deficit to be UAH 14.3 billion 
(roughly $1.79 billion, excluding Naftohaz's deficit and bank 
recapitalization financing).  Confirming Naftohaz Chairman 
Oleh Dubinya's November 27 statement, Myarkovskiy said the 
GOU planned to import 7 bcm from Gazprom in Q1 2010.  As a 
result, based on a $300-310 tcm price (and as projected by 
Gazprom Sbyt on December 17), the GOU would need to pay at 
least UAH 16.8 billion ($2.1 billion) for imported gas in Q1 
2010, according to Myarkovskiy. 
 
DECEMBER DEBT AUCTION 
--------------------- 
 
¶8.  (C) Deputy Finance Minister Kravets told Econoff on 
December 15 that the Ministry had sold UAH 400 million ($50 
million) in domestic securities.  The one-year notes went at 
24% and the three-year notes sold at 25%, he said.  There was 
no appetite for three-month notes, according to Kravets.  The 
Deputy Minister had told us on December 11 that the new 
securities were being issued to cover roughly UAH 2 billion 
($250 million) in domestic payments due in December, 
otherwise Ukraine would default on these obligations, 
possibly triggering calls for accelerated payments on other 
debt (ref C).  Kravets' numbers closely corresponded with IMF 
calculations for December domestic debt payments (ref B). 
 
¶9.  (C) Kravets was actively marketing the next debt auctions 
(scheduled on December 22 and 29) to at least three of our 
foreign banking contacts (OTP, Ukrsibbank/BNP Paribas, and 
UniCredit) at the embassy holiday reception on December 15. 
All then reported to us that they had not bought securities 
on December 15.  Speaking separately, UniCredit CEO Federico 
Russo admitted that he had been eyeing six-month notes, and 
that he had already purchased GOU securities earlier in 2009. 
 Russo reasoned that shorter maturities would be too tied up 
in election-related political risk (and may not be paid out). 
 However, having a slightly longer maturity horizon would not 
only provide the bank favorable yields, there were few other 
avenues to make money, due to the abundance of risk and the 
lack of favorable lending opportunities on the Ukrainian 
market. 
 
COMMENT 
------- 
 
¶10.  (C) The government has made expenditure calculations 
based on absolute minimum priorities to get to the second 
round of the presidential election.  Now that the IMF has 
apparently given in on accounting tricks that will allow the 
GOU to meet IMF budget deficit targets by including loans and 
SDRs as budget revenue, the GOU will continue to focus its 
efforts on avoiding arrears in social and gas payments, while 
keeping a wary eye on debt obligations that could trigger 
lenders to demand early repayment in an "event of default" 
scenario.  Without further sources of budget financing (in 
the form of a partial IMF tranche or monetization), we expect 
a major fiscal adjustment in December 2009 and the first 
quarter of 2010 will result. 
 
TEFFT