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09KYIV518, IMF ENCOURAGED BY UKRAINE PM’S PROPOSALS

March 25, 2009

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Reference ID Created Released Classification Origin
09KYIV518 2009-03-25 13:17 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

VZCZCXRO9497
PP RUEHDBU RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0518/01 0841317
ZNR UUUUU ZZH
P 251317Z MAR 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7507
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 02 KYIV 000518 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, EEB/OMA 
 
E.O. 12958: N/A 
TAGS: EFIN EREL ECON ETRD PGOV PREL XH UP
SUBJECT:  IMF ENCOURAGED BY UKRAINE PM'S PROPOSALS 
 
REF: KYIV 515 
 
SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION 
 
1.  (SBU) Summary.  PM Tymoshenko has told the IMF that the 
GOU plans to put an anti-crisis package to a Rada vote on 
March 31, consisting of measures the IMF may consider 
satisfactory for the mission team's return.  According to 
IMF resident representative Max Alier, "things have 
changed" between President Yushchenko and the PM, at least 
enough to build minimal consensus on needed legislation to 
reduce the budget deficit and tackle the mounting fiscal 
problems of the state energy company Naftohaz.  However, 
Alier told G7 ambassadors that the IMF remains concerned 
Ukraine's leaders might see the reforms as simply "checking 
a box."  The IMF is particularly wary about the lack of 
progress on bank restructuring, as a plan to address bank 
recapitalization and liquidation was not included in the 
PM's anti-crisis proposals.  End summary. 
 
Rada to Vote on IMF Measures on March 31 
---------------------------------------- 
 
2.  (SBU) On March 24, Ukraine's Prime Minister Yulia 
Tymoshenko told IMF resident representative Max Alier that 
the Rada will vote on a package of measures on March 31 
that would cut Ukraine's budget deficit, estimated now by 
Kyiv-based World Bank officials to reach roughly 6 percent 
of GDP.  The Cabinet of Ministers plans to push forward two 
excise tax bills, one of which (on tobacco) has already 
been adopted in the first reading.  The second (on cars, 
alcohol, and gasoline) will be proposed in the coming days, 
according to Tymoshenko.  Taken together, the GOU estimates 
the excise tax laws will generate UAH 10 billion ($1.3 
billion) in revenues, equivalent to roughly 1 percent of 
GDP.  Separately, social and economic advisor to the 
Presidential Secretariat Roman Zhukovskiy has more 
realistically projected that the excise taxes will provide 
a revenue increase of UAH 6-6.5 billion (between $780-850 
million). 
 
3.  (SBU) The other three measures planned by the GOU deal 
with pension reform, Naftohaz financing, and public 
procurement.  The pension-related legislation would differ 
from the final version of a bill (number 3556) that was 
recently defeated in the Rada.  Its provisions would 
increase outlays to the Pension Fund from an existing 
agricultural fixed tax package.  The legislation would also 
limit the maximum amount individuals can receive, thereby 
affecting public sector executives such as judges, 
prosecutors, and cabinet-level officials.  These proposed 
caps, which would be tied to a multiple of the annually 
defined subsistence minimum, would not affect pensions for 
the most vulnerable segments of the population. 
Nonetheless, similar measures have been previously declared 
illegal by the Constitutional Court.  Despite expected 
benefits up to UAH 6 billion ($780 million) that would 
accrue for the overall Pension Fund, analysts foresee that 
such reforms could lead to further legal quagmires. 
 
PM Promises Action on Naftohaz, Procurement 
------------------------------------------- 
 
4.  (SBU) The IMF told G7 ambassadors on March 24 that the 
PM has proposed amending the budget to implement state 
energy company Naftohaz's financial plan.  Although the 
draft law has not been made public, it would essentially 
create a mechanism for offsetting Naftohaz's 2009 payments. 
The PM also intends to put forward a bill to reform the 
public procurement process.  This has been a baseline 
condition for both the EU (related to its negotiations over 
a Ukraine-EU association agreement) and the World Bank (to 
release a $500 million DPL4 loan in 2009), though the IMF 
has never included it as a component of its loan 
conditionalities. 
 
Local IMF Rep: "Things Have Changed" with PM, Yushchenko 
--------------------------- ---------------------------- 
 
5.  (SBU) Alier reported to G7 ambassadors that he believed 
"things have changed" with the Prime Minister and the 
President, perhaps related to pressure from the mounting 
crisis, the off-track IMF program, pressure from the 
international community and G7, and the importance of 
recent energy talks in Brussels (Ref A).  He pointed to 
legislation that had passed in the Rada and been signed by 
the President, restoring independence to the National Bank 
 
KYIV 00000518  002 OF 002 
 
 
(by overturning articles 84 and 86 in the 2009 budget law), 
and the formation of a still-nascent bank recapitalization 
committee, nominally chaired by the PM.  But Alier 
commented that a mechanism to implement bank restructuring 
was far from resolved.  At the same time, he was concerned 
that Ukraine's leaders are more interested in "checking a 
box" than taking responsibility for pushing needed reforms. 
His
 message to the PM, he told ambassadors, was that these 
proposals do not constitute a "one-off" solution. 
Nevertheless, they may be enough to bring Ceyla 
Pazarbasioglu and her IMF mission team back to Kyiv to 
review Ukraine's readiness to receive a second loan tranche 
of $1.8 billion. 
 
Comment 
------- 
 
6.  (SBU) President Yushchenko indicated in Prague on March 
25 that the IMF team would return during the week of March 
30.  The President is jumping the gun, as the Rada must 
first pass a package of measures to cut the budget deficit 
and offset Naftohaz's fiscal problems.  While the PM's 
proposals would fall far short of addressing Ukraine's 
total 2009 budget deficit, the IMF's signal that the 
mission team could return in the event the proposals are 
adopted indicates a softening of tone.  Previously, the IMF 
had demanded implementation of a bank restructuring 
mechanism, seen by many as a lynchpin necessary to prevent 
broader corporate sector defaults.  It had also sought an 
anti-crisis coordinator, as well as clarification of 
leadership uncertainties at the National Bank (NBU) and the 
Ministry of Finance.  We continue to advocate for these 
additional measures, while supporting the IMF's efforts to 
concentrate on Ukraine's most immediately pressing (and 
most realistically resolvable) concerns.  End comment. 
 
TAYLOR

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