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08KYIV2142, HISTORICAL IMF PACKAGE IMMINENT, MAY NOT BE ENOUGH

October 25, 2008

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08KYIV2142 2008-10-25 18:45 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

VZCZCXYZ0000
OO RUEHWEB

DE RUEHKV #2142/01 2991845
ZNY CCCCC ZZH
O 251845Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6626
INFO RUCNCIS/CIS COLLECTIVE IMMEDIATE
RUEHZG/NATO EU COLLECTIVE IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC IMMEDIATE

C O N F I D E N T I A L KYIV 002142 
 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
TREASURY PASS TO TTORGERSON 
 
E.O. 12958: DECL: 10/25/2018 
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: HISTORICAL IMF PACKAGE IMMINENT, MAY NOT BE ENOUGH 
 
REF: KYIV 2138 
 
Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4(B) AND (D) 
 
 1. (C) Summary.  IMF chief envoy Ceyla Pazarbasioglu told 
the Ambassador on October 25 that Ukraine,s IMF package may 
amount to the second largest ever in IMF history and would be 
likely finalized soon, possibly as early as this weekend. 
She stated that implementation of the assistance package 
would be conditioned on Ukraine,s fractious government 
coming to terms on anti-crisis legislation.  She predicted 
her mission would wrap up by October 29, and that the IMF,s 
Executive Board could vote for approval as soon as the week 
of November 3.  She emphasized that the IMF package alone 
will not equip the GOU for needed reforms, restore investor 
confidence, or loosen capital flows.  Her team requested U.S. 
assistance in reaching out to other governments, foreign and 
domestic banks, private corporations, and the World Bank as a 
necessary supplement to the IMF deal.  End Summary. 
 
 
Funding Scope and Timeline 
-------------------------- 
 
2. (C) Pazarbasioglu was unable to comment on an exact 
figure, but she said Ukraine,s assistance package would be 
the IMF,s second largest and the &quickest8 fund in 
history.  The IMF,s Executive Board is prepared to take an 
immediate vote and, according to Pazarbasioglu, would 
undoubtedly be satisfied that the deal is within the IMF 
delegation,s pre-approved mandate.  The size of the package, 
Pazarbasioglu pointed out, would not &shock the markets8 or 
restore investor confidence on its own.  Any deal needed to 
be coupled with a unified message from Ukraine,s politicians 
and have concomitant support from the private sector, 
domestic and foreign banks, and foreign governments. 
 
3. (C) The IMF team was prepared to conclude its negotiations 
on October 25, pending an agreement on terms with President 
Yushchenko, PM Tymoshenko, Minister of Finance Pynzenyk, and 
National Bank of Ukraine (NBU) Governor Stelmakh.  Just as in 
previous IMF negotiations with Brazil and Turkey, the 
delegation will also request a separate letter from 
opposition leader Viktor Yanukovych, pledging the support of 
his Party of Regions in the event of a change in government. 
 
4. (C) Pazarbasioglu will remain in Kyiv until October 29 or 
30, long enough to ensure that the Rada will pass anti-crisis 
legislation consistent with the IMF package.  The IMF 
Executive Board,s decision could come as soon as the week of 
November 3, according to Pazarbasioglu, though she was 
uncertain whether the Board had yet set a firm date for its 
meeting. 
 
 
Conditionalities and Political Risk 
----------------------------------- 
 
5. (C) Pazarbasioglu stressed that implementation and 
disbursement of an IMF package hinges on anti-crisis 
legislation that has been proposed in the Rada but is still 
seemingly far from approval (reftel).  Pazarbasioglu 
described IMF assistance as &useless8 unless attached to 
measures propping up the banking sector and ensuring a 
balanced budget.  After the IMF reaches agreement with 
Ukraine's five signatories (see paragraph 3), and after the 
IMF Executive Board approves the agreement and the Rada 
passes anti-crisis legislation, an initial disbursement ) up 
to one-third of the total package ) could be made almost 
immediately.  A second tranche would be linked to a balanced 
budget, and a third would be released at a later unspecified 
date. 
 
6. (C) A prudent fiscal stance and a balanced budget are both 
vital, Pazarbasioglu stated, since Ukraine,s government has 
to take &measures to give confidence8 to the markets.  The 
IMF package will not attach specific conditions on fiscal 
policy beyond a "balanced budget" (see paragraph 7), except 
to ask the government for a two-year suspension on a policy 
that links the minimum wage with a subsistence minimum. 
 
7. (C) Pazarbasioglu stated that Rada legislation should 
treat the banking crisis in three important ways: it should 
have a mechanism for thorough diagnosis and rating of 
individual banks; a bank recapitalization program for 
troubled but solvent institutions; and a bolstered deposit 
insurance fund for clients of the weakest banks that may 
inevitably fail.  Technical adjustments to the NBU,s 
authority would also be needed, so that the NBU would be 
certain to make good use of the available monies.  She said 
that bank recapitalization funding could cause up to a 1.5 
percent budget deficit, though this program would be seen by 
the IMF as a permissible exception to its conditions for a 
balanced budget. 
 
8. (C) IMF conditionalities will require a flexible exc
hange 
rate to partially offset the huge terms-of-trade shock 
befalling Ukraine, caused by a collapse in steel prices and 
anticipated cost increases for imported Russian gas in 2009. 
Pazarbasioglu expects the NBU to move to a flexible rate 
policy, though she believes the NBU needs &hand holding8 on 
exchange rate liberalization, as it lacks both technical 
expertise and political backing. 
 
9. (C) PM Tymoshenko was characterized by Pazarbasioglu as 
being "on board," while President Yushchenko &almost 
understands8 the gravity of the situation but is being 
"pulled the other way by confidants.8  She admitted candidly 
that Ukraine,s internal party deliberations and constraints 
were &tough (for the delegation) because the IMF is not a 
political entity." 
 
10. (C) The Ambassador gave a readout from meetings with 
Yanukovych deputies who have been unreceptive to IMF 
intervention.  Without specifically naming Yanukovych Chief 
of Staff Serhiy Liovochkin, with whom the Ambassador met on 
October 24, Regions, leaders were described as being opposed 
to fiscal belt tightening and a free floating exchange rate. 
The Ambassador mentioned that the Yanukovych,s camp believed 
Ukraine,s economic troubles could be managed with the NBU,s 
$34 billion remaining reserves, and that the IMF package 
should not be counted on for disbursement until May.  In 
fact, according to Liovochkin, the IMF, the U.S., and all the 
major financial institutions were at fault for Ukraine,s 
economic woes.  Pazarbasioglu and the Ambassador agreed that 
Liovochkin,s point of view was not reflective of the urgent 
need to assist banks and restore confidence in Ukraine,s 
markets.  Rather, it was indicative of Regions, political 
stance prior to possible Rada elections. 
 
 
IMF,s Interlocutors and Assistance Requests 
------------------------------------------- 
 
11. (C) Pazarbasioglu told the Ambassador that their meeting 
on October 25 was her first discussion outside a tight group 
of Ukrainian interlocutors.  She had held talks with 
President Yushchenko (3 times) and PM Tymoshenko (2 times) 
and interacted daily with National Bank of Ukraine Governor 
Stelmakh and Minister of Finance Pynzenyk.  She also has met 
with Minister of Economy Danylyshyn, Minister of Energy 
Prodan, and top executives at Naftohaz, the state energy 
company.  Her deputies have had full access to the National 
Bank's records, and she characterized Naftohaz,s 
transparency as &day and night8 compared to early IMF,s 
fears about possible veils of information secrecy.  The NBU 
was described as "very cooperative, very worried,8 though 
Pazarbasioglu added that she herself is also &very worried8 
about the central bank whose top layer is solid but 
underneath is weak technically. 
 
12. (C) Pazarbasioglu requested the Embassy,s assistance in 
cultivating private sector support for Ukraine,s economy, 
since the Fund,s program will not contain investor fear or 
capital flight on its own.  The IMF plans to convene two 
separate roundtables early next week: one with bankers, 
foreign and domestic; the other with business and industrial 
leaders.  The goal is for the IMF to brief banking and 
industry leaders on the assistance package, as well as 
solicit a general message of support from the two groups. 
Pazarbasioglu mentioned the possibility of a road show with 
major rating agencies and investment banks, likely to be held 
in London and New York in November. (Note: IMF resident 
representative in Kyiv informed Embassy late on October 25 
that Rada Speaker Yatsenyuk will sponsor similar roundtables 
for IMF briefings on either October 26 or 27.  If the IMF 
determines Yatsenyuk,s attendees are satisfactory, it may 
cancel plans to hold its own roundtables.  End Note.) 
 
13. (C) Separately, the Ambassador gathered G-7 plus EU 
ambassadors in Kyiv on October 24.  They pledged to 
coordinate a G-7 plus EU meeting with the President, followed 
by meetings with the Prime Minister and opposition leader 
Yanukovych, calling on Ukraine,s leaders to jointly come to 
a resolution to the dual economic and political crises. 
 
14. (C) The IMF envoy also expressed a keen interest to meet 
with U.S. Treasury officials in Kyiv, in order to discuss 
ways to bolster technical assistance in the banking and 
financial sector.  She felt that the NBU urgently needed 
resources and technical collaboration. 
 
15. (C) Pazarbasioglu asked for USG intervention with World 
Bank (WB) headquarters to approve a Development Policy Loan 
(DPL3).  The WB,s funding, presently contingent on a public 
procurement law still pending in the Rada, would greatly help 
relieve pressures on the supply side in Ukraine,s economy, 
as well as complement the IMF,s demand side actions. 
 
16. (C) The Ambassador met later on October 25 with WB 
resident representative Martin Raiser, who indicated that the 
WB was prepared to approve a $500 million DBL3 loan by the 
end of 2008.  The WB was standing firm on principle, he said, 
and saw the public procurement law as a necessary 
anti-corruption measure.  Raiser suggested a draft law in the 
Rada was ready for approval but opposed by vested interests, 
particularly deputies in Tymoshenko's BYuT faction. 
 
Comment 
------- 
 
17. (C) Pazarbasioglu,s clear message was that the IMF 
package, while precedent setting, will nonetheless fall short 
of achieving the Fund,s ultimate goal of propping up 
Ukraine,s faltering economy.  Only a concerted effort by all 
parties with a stake in the country,s stability will stave 
off a further unraveling.  Pazarbasioglu believes the IMF 
should convene key private sector actors while still on the 
ground in Ukraine, but it has turned to the U.S. to help 
generate sufficient World Bank support and provide needed 
technical expertise.  End Comment. 
 
 
TAYLOR 
TAYLOR

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