VZCZCXRO6726
OO RUEHDBU RUEHSL
DE RUEHKV #0113/01 0251045
ZNY CCCCC ZZH
O 251045Z JAN 10
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9188
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 000113 
 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB 
 
E.O. 12958: DECL: 01/24/2020 
TAGS: EFIN ETRD PGOV PINR PREL UP XH EREL
SUBJECT: WORLD BANK PROPOSES UKRAINE REFORM PROGRAM 
 
REF: KYIV 103 
 
Classified By: Ambassador John F. Tefft for Reasons 1.4 (b) and (d) 
 
¶1.  (C) Summary.  The World Bank's Kyiv-based country 
director Martin Raiser plans to convene the donor community 
to coordinate a message to Ukraine's new President on needed 
economic reforms.  Raiser told the Ambassador that the Bank 
had grouped its reform proposals into three areas (fiscal, 
investment climate, financial sector), and that the World 
Bank had already outlined specific suggestions for programs 
that could be immediately enacted.  Raiser noted World Bank 
President Zoellick had requested frequent Ukraine briefs and 
would consider visiting Kyiv once it was clear that Ukraine 
was making efforts at economic reform.  Separately, Raiser 
noted his concerns with the IMF's optimistic plans for 
re-engaging Ukrainian authorities, suggesting the Fund could 
face serious pressures to disburse a fourth tranche before 
post-election political consolidation had been fully 
completed.  End summary. 
 
WORLD BANK TO COORDINATE REFORM PUSH 
------------------------------------ 
 
¶2.  (C) World Bank country director Martin Raiser told the 
Ambassador on January 21 that the Bank would bring together 
donors from the international community in the coming weeks 
to frame a reform plan for Ukraine's incoming President.  The 
World Bank wanted to gather all multi- and bilateral 
stakeholders, so that each could not only express priority 
concerns but also agree on common talking points.  Raiser 
felt it was essential for the donor community to speak in one 
voice to the new Ukrainian authorities, since vested 
political and business interests might push against donor 
goals.  Raiser also emphasized it was essential for the Bank 
to show it could make progress with the new administration to 
justify continued broad engagement. 
 
PRIORITY REFORM AREAS 
--------------------- 
 
¶3.  (C) Raiser grouped needed economic reforms into three 
areas: fiscal, investment climate, and financial sector.  He 
noted that fiscal reforms would be the foundation for 
Ukraine's future economic growth.  He explained that budget 
disparities needed to be addressed for Ukraine to get back on 
track with the IMF, which in turn would attract investment 
and stimulate the financial sector.  Raiser said pension 
reform, energy price increases, and reductions in industrial 
subsidies were key austerity measures World Bank experts had 
already identified.  On the issue of energy price increases, 
Raiser noted that then-Acting Prime Minister Yekhanurov 
raised gas prices in 2006 and there had been no public 
protests against the move.  In his opinion, gas prices could 
again be raised without political fallout since energy bills 
were a small percentage of total household expenditures. 
 
¶4.  (C) Among his suggestions for investment climate 
improvements, Raiser indicated deregulation and tax reform as 
the most essential first steps.  He said Ukraine could only 
increase its competitiveness if it reduced redundant 
regulation and streamlined taxation.  Longer term 
anti-corruption work with the judiciary and administrative 
organs was also necessary but would be more politically 
difficult and thus needed to come later.  Corruption in 
public procurement was a persistent drag on Ukraine's 
economy, since 20% of Ukraine's GDP is derived from state 
purchasing. 
 
¶5.  (C) Raiser said the most pressing financial sector 
problem remained inadequate capitalization levels within 
Ukraine's banking system.  Separately, Raiser insinuated to 
Econoff that a new round of bank stress testing was needed, 
especially for first and second tier domestic banks. 
 
POSSIBLE ZOELLICK VISIT 
----------------------- 
 
¶6.  (C) World Bank President Zoellick had considered coming 
to Ukraine in 2009 to encourage reforms announced for 
Ukraine's gas transit system.  However, with the onset of the 
economic crisis and growing evidence that Prime Minister 
Tymoshenko was unlikely to implement her promises, the World 
Bank called off the visit.  World Bank management was now 
mulling over a 2010 visit by Zoellick, but only after the 
donor community and the GOU had built and begun to implement 
a reform agenda. 
 
KYIV 00000113  002 OF 002 
 
 
 
WORLD BANK CONCERNED ABOUT IMF OPTIMISM 
--------------------------------------- 
 
¶7.  (C) Separately, Raiser noted to Econoff that he was 
concerned about the IMF's "best and only case scenario" for 
re-engaging Ukraine after the presidential election.  The 
Fund recognized Ukraine's fiscal situation was critical, and 
that IMF lending would be necessary to prevent a damaging 
budget crisis in the first quarter.  Nonetheless, Raiser 
agreed that the IMF seemed to have done too little planning 
for possible delays, either due to court litigation or other 
post-election uncertainty, that could push back the formation 
of a new government and the IMF mission team's visit. 
 
¶8.  (C) Raiser felt that the IMF would run into serious 
reputational risks if it disbursed without a clear winner in 
the presidential election and a newly formed government.  On 
the other hand, Raiser warned that asset prices would likely 
plunge in March if the IMF signaled it had to delay its 
re-entry.  He raised the concern that Kremlin-backed Russian 
investors were watching and waiting for the opportunity to 
pick up distressed assets, while Russian banks expected they 
would have increased leverage over corporate borrowers and 
sovereign Ukraine for which there would be no other lending 
source. 
 
COMMENT 
------- 
 
¶9.  (C) The World Bank has vacillated in its commitment to 
donor coordination over the last year, mostly due to the 
political paralysis that inhibited new lending programs from 
being initiated.  Its new drive to take charge of a reform 
program is encouraging and would benefit from ongoing USG 
input.  A more disheartening note was struck by Raiser over 
the IMF program, tracking with our concerns following a 
January 20 meeting with the IMF's Kyiv-based resident 
representative (reftel). 
 
 
TEFFT