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09KYIV471, UKRAINE: POLITICAL LEADERSHIP MAKES RENEWED EFFORT

March 16, 2009

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Reference ID Created Released Classification Origin
09KYIV471 2009-03-16 15:06 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

VZCZCXRO1674
PP RUEHIK RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHKV #0471/01 0751506
ZNR UUUUU ZZH
P 161506Z MAR 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7470
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 KYIV 000471 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: N/A 
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE: POLITICAL LEADERSHIP MAKES RENEWED EFFORT 
TO PUT IMF LOAN BACK ON TRACK 
 
REF: KYIV 430 
 
KYIV 00000471  001.2 OF 002 
 
 
Summary 
------- 
 
1. (SBU) On March 11 President Yushchenko, PM Tymoshenko and 
NBU Governor Stelmakh met and announced concrete steps aimed 
at securing the overdue $1.8 billion second tranche of the 
IMF loan program.  Most importantly, they pledged to reduce 
the planned budget deficit to 3 percent of GDP, a level 
acceptable to the IMF providing Ukraine is able to fund it 
without borrowing from the NBU.  The GOU also took swift 
action to reverse provisions of the budget law that, in the 
IMF's view, curtailed the independence of the NBU.  The IMF 
told us that it would await concrete action on the promised 
measures before sending a team to Kyiv that would ultimately 
recommend paying out the second tranche.  The World Bank 
pointed out that the announced measures will not be 
sufficient to reduce the deficit to planned 3 percent, and 
that other, politically difficult cost cutting measures will 
be necessary.  The GOU also said it approved a balanced 2009 
financial plan for Nafthohaz that, under closer scrutiny, 
appears to reduce costs this year at the expense of future 
transit fees.  By all accounts, Ukraine's economic situation 
is decaying quickly, and if the GOU succeeds in following up 
on the promises then Ukrainian requests for direct budget 
support will need to be addressed swiftly.  End summary. 
 
President, GOU, NBU Promise Swift Action 
---------------------------------------- 
 
2. (SBU) On March 11 Yushchenko, Tymoshenko and Stelmakh said 
Ukraine would take all steps necessary to secure the next 
tranche in the IMF's $16.4 billion Stand-By Agreement (SBA). 
The tranche of $1.8 billion should have been dispersed in 
mid-February, but has been delayed over Ukrainian failure to 
fulfill key IMF conditionalities. 
 
3. (SBU) Alexander Shlapak, first deputy head of the 
Presidential Secretariat, and acting Finance Minister Igor 
Umanskiy both told the media separately that the GOU would 
reduce the planned budget deficit from expected 5 percent to 
3 percent of GDP through a mixture of reduced expenditures 
and increased revenues.  The Rada would vote this week on 
pension reform and excise tax bills, both of which, if 
passed, would help reduce the deficit, Umanskiy said.  The 
announced intention to sharply curtail the projected deficit 
to three percent of GDP marked a change over previous 
pronouncements by the GOU, including PM Tymoshenko's 
statement to the G7 last week (reftel), in which she claimed 
that a further reduction of the budget deficit was not 
possible. 
 
IMF, World Bank Want to See Action 
---------------------------------- 
 
4. (SBU) Both the IMF and World Bank told us on March 12 that 
the announced intention to reduce the budget was a positive 
development, but cautioned that the GOU would still need to 
deliver on its promises.  Local IMF spokesmen have been 
careful not to indicate when the IMF Mission might return. 
Kyiv-based IMF advisor Igor Shpak told us IMF would require 
the GOU to take a series of steps, either through legislative 
action or executive resolutions, before it would contemplate 
a return of the IMF Mission.  He emphasized that statements 
by Yushchenko and GOU spokesmen envisaging a return of the 
IMF by as early as this week were unfounded. 
 
5. (SBU) Acting World Bank country director Pablo Saavedra 
told us on March 12 that the planned measures on pensions and 
the excise tax were "watered down" versions of earlier World 
Bank suggestions to reduce the planned deficit.  Taken 
together, they would reduce the planned deficit by about 0.8 
percent.  The GOU also planned to introduce 2 percent 
surcharges on gasoline and residential natural gas taxes, 
both of which would reduce the deficit by another 0.15 
percent.  Hence the GOU still needed to come up with savings 
equal to about one percent of GDP to meet the IMF goal of a 
deficit equal to 3 percent of GDP, Saavedra said. 
 
CabMin Proactively Rescinds NBU Restrictions 
-------------------------------------------- 
 
6. (SBU) On March 11 the Cabinet of Ministers also approved a 
draft law that would eliminate paragraphs 84 and 86 of the 
 
KYIV 00000471  002.2 OF 002 
 
 
budget law.  These provisions had, in the IMF's view, 
severely reduced the NBU's independence.  The disputed 
paragraphs compelled the NBU to purchase government debt, and 
required that the central bank coordinate its refinancing of 
banks directly with the CabMin.  The draft will now go before 
the Rada for a vote.  In addition, the CabMin rescinded an 
earlier decision that gave First Deputy PM Turchinov the 
man
date to oversee the NBU's refinancing actions.  Hence the 
GOU is not waiting for the Rada to take action on the 
amendments before formally withdrawing from its intervention 
into the NBU's refinancing policy.  In a statement to the 
media, however, Deputy PM Nemyrya said that the GOU would 
continue to ensure that the NBU "acted responsibly" in its 
refinancing policy.  In December, the NBU had come under 
strong criticism after internal reports, leaked to the media, 
appeared to indicate that the central bank had engaged in 
favoritism when providing banks with badly needed short-term 
liquidity. 
 
NaftoHaz Financial Plan Balanced, With Tricks 
--------------------------------------------- 
 
7. (SBU) The GOU also announced that it approved a 2009 
financial plan for Naftohaz that actually foresees revenues 
exceeding costs.  The GOU claimed that it will introduce 
cost-cutting measures at Naftohaz, yet according to media 
reports the bulk of the savings will come from financial and 
accounting measures that do little to improve the true 
financial situation at the permanently cash-strapped energy 
monopoly.  The GOU said it would forego UAH 5.5 billion ($725 
million) VAT due from Naftohaz for gas imported in 2008.  In 
addition, the planned purchase of 15 billion cubic meters of 
gas from Gazprom for pumping into storage during the summer 
months is not included in the financial plan.  Umanskiy said 
the GOU hoped to secure the $3.42 billion needed to purchase 
the gas by borrowing from either the World Bank or Gazprom. 
"Not from us," the World Bank's Saavedra told us when asked 
about Umanskiy's statement.  IMF's Shpak told us that the 
GOU's idea of a "Gazprom loan" was in reality a suggestion 
that Naftohaz would offset Russian gas deliveries this summer 
against future transit fees paid by Gazprom.  In effect 
Naftohaz was suggesting paying for gas today at the expense 
of future revenues, Sphak said.  In the Russian media Gazprom 
spokesmen had denied that the company was discussing a loan 
with Naftohaz. 
 
Comment 
------- 
 
8. (SBU) This latest meeting between Yushchenko, Tymoshenko 
and Stelmakh, who appears to be firmly in the saddle at the 
NBU once again (septel), yielded the most concrete promises 
to date aimed at getting the IMF plan back on track.  The GOU 
and Rada now need to act, however, at it remains to be seen 
whether their actions will be sufficient to secure a timely 
return of the IMF Mission.  As the World Bank's budget 
calculations show, the GOU will have to take further painful 
and politically difficult decisions to remove the planned 
deficit to levels acceptable to the IMF.  If the GOU succeeds 
in getting the IMF program back on track, then Ukraine's 
leadership will have demonstrated that it is serious about 
addressing the crisis, and requests for direct budgetary 
assistance will need to be taken seriously and addressed 
quickly.  End comment. 
TAYLOR

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