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Cablegate: Tymoshenko Appeals to Usg: Ukraine has "Hours, Not

VZCZCXYZ0000
OO RUEHWEB

DE RUEHKV #2111/01 2951408
ZNY CCCCC ZZH
O 211408Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6581
INFO RUCNCIS/CIS COLLECTIVE IMMEDIATE
RUEHZG/NATO EU COLLECTIVE IMMEDIATE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE

C O N F I D E N T I A L KYIV 002111

SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA
DEPARTMENT PLEASE PASS TO TTORGERSON

E.O. 12958: DECL: 10/21/2018
TAGS: EFIN PGOV PREL ECON ETRD XH UP
SUBJECT: TYMOSHENKO APPEALS TO USG: UKRAINE HAS "HOURS, NOT
DAYS" TO TACKLE CRISIS

REF: KYIV 2105 AND PREVIOUS

Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4(B) AND (D)

1. (U) This is an Action Request. See Summary and Paragraphs
11 and 12.

Summary
-------

2. (C) At a late night meeting on October 20, Prime Minister
Tymoshenko told the Ambassador that Ukraine had "hours, and
not days" to restore confidence in the country's financial
system. The situation in the country was more dire than
commonly believed, she claimed. She and Finance Minister
Pynzenyk asked the USG to encourage the IMF to approve a
support package at an IMF Board meeting on October 22 in
Washington. Tymoshenko also asked that the highest levels of
the USG weigh in with President Yushchenko to cancel snap
elections now scheduled for December 14. The IMF would put
tough restrictions on Ukraine in return for support. Rada
backing for the unpopular measures would be difficult in the
best of cases, and impossible with elections looming,
Tymoshenko and Pynzenyk argued.

3. (C) Action Request: Ukraine's financial situation is
precarious, but most observers do not yet see a meltdown as a
foregone conclusion. Nonetheless, swift IMF action now
appears to be the only possibility to restore confidence in
Ukraine in the short run, and we urge Washington to weigh in
with the IMF as Tymoshenko is requesting. Whatever her
political motives may be in seeking USG help to delay the
election sought by Yushchenko, Tymoshenko is nonetheless
correct that continued political infighting will prevent
Ukraine from adequately addressing the crisis, and may even
neutralize the positive effects of an IMF program. End
summary and action request.

"Hours, and Not Days"
---------------------

4. (C) Prime Minister Yulia Tymoshenko summoned the
Ambassador to an 11 p.m. meeting on October 20 to seek USG
support for an IMF support package and to postpone early
parliamentary elections. Flanked by Deputy PM Hryhoriy
Nemyrya and Finance Minister Victor Pynzenyk, Tymoshenko used
dramatic language to argue that Ukraine's financial system
was in a far more precarious situation than commonly
believed. Things were deteriorating rapidly, and Ukraine had
"hours, and not days," to restore confidence. Pynzenyk said
action was necessary by the end of the week. If swift action
were not taken, both Tymoshenko and Pynzenyk told the
Ambassador, the banking system and the hryvnia could
collapse. Restoring confidence after a complete collapse
would be a long and painful process, they said.

5. (C) Tymoshenko said that Ceyla Pazarbasioglu, head of the
IMF delegation currently in Kyiv, was equally alarmed by the
situation. The delegation had prepared a support package
that now needed the approval of the IMF Board. Tymoshenko
said the IMF would share all details of the package only
after approval by the IMF Board. However, Tymoshenko claimed
the package could be "the most ambitious program in IMF
history." Nemyrya said it could be larger than the $14
billion figure mentioned by GOU and NBU officials in recent
days.

IMF To Link Support to Tough Conditions
---------------------------------------

6. (C) Although details were still missing, Tymoshenko and
Pynzenyk said, Ukraine already knew that the IMF would expect
tough measures in return for its support. Responding to a
question by the Ambassador, Tymoshenko confirmed that Ukraine
would need to limit growth in salaries and pensions, a main
driver of growth, inflation and the ballooning current
account deficit. Pynzenyk said the GOU would provide
immediate and significant support to banks. It would also
make changes to the budget and pass a number of other laws.
They were not more specific on fiscal changes expected by the
IMF, nor did they indicate whether the IMF might require the
National Bank of Ukraine to modify its policy of pegging the
hryvnia to the dollar.

7. (C) The measures would be highly unpopular, Pynzenyk said,
and difficult to pass in the Rada. In particular, the Rada
would not approve tough measures without assurances that the
IMF would actually deliver on its part of the deal. If
neither the IMF nor the Rada acted soon, the situation could
worsen beyond repair, Pynzenyk said. Hence speed was of the
essence: the IMF Board would discuss the proposed package on
October 22 in Washington, Pynzenyk said. He and Tymoshenko
asked that the USG weigh in with the IMF, and in particular
First Deputy Managing Director John Lipsky and the U.S.
executive director, to guarantee approval of the package. At
the very least, Pynzenyk said, the IMF should adopt
"simplified measures" to document that it was backing
Ukraine.

Tymoshenko: Presidential Secretariat Doesn't Understand
--------------------------------------------- ----------

8. (C) According to Tymoshenko, the IMF had not conducted a
direct dialog with the National Security and Defense Council
(NSDF), which discussed emergency measures on October 20
(septel). Instead, the IMF held separate discussions with
the GOU, the NBU and the Presidential Secretariat. She was
vague on whether the measures envisaged by the NSDC actually
addressed the conditions put forth by the IMF. In any case
the Presidential Secretariat did not comprehend the depth of
the crisis, she said. Pynzenyk said he talked to Oleksandr
Shlapak, Deputy Head of the Presidential Secretariat, after
the latter met with the IMF and concluded that Shlapak still
did not understand the situation. He said he feared that
President Yushchenko was not being properly briefed.

PM Asks USG to Weigh in With Yushchenko
---------------------------------------

9. (C) Tymoshenko also asked that the highest levels of the
USG weigh in with President Yushchenko to delay early
parliamentary elections. During the October 20 NSDC meeting
Yushchenko agreed to suspend his decree calling for new
elections, she said. At a press conference moments later,
however, Yushchenko announced that elections would only be
delayed by a week to December 14. The move took her by
surprise, Tymoshenko said. She no longer understood what
drove the President. With elections on the horizon nobody in
the Rada would support the unpopular measures needed for IMF
backing. Insisting on elections in the present circumstances
was irresponsible and would destroy the economic and
political stability of the country. The proper decision
would be for her and her ministers to resign, she said, but
that would only deepen the overall crisis and leave nobody to
sign an agreement with the IMF. The Party of Regions (PR)
"would rule the country completely" if elections were held
according to Yushchenko's timetable. The President "was
fantasizing" if he believed claims by the PR that it would
support his reelection bid, she said.

World Bank, EBRD Also Ready to Help
-----------------------------------

10. (C) Nemyrya said the World Bank was also considering a
loan package, known as DBL3, that would need support from WB
President Robert Zoellick. He asked for USG support for this
package as well. The EBRD was also sending a delegation to
Kyiv. On the way out, Nemyrya told the Ambassador that
Tymoshenko fully supported the idea of a Strategic Framework
Agreement. Consultations and assistance related to the
financial crisis would be welcome.

Comment and Action Request: How Bad Is the Situation?
--------------------------------------------- ---------

11. (C) Tymoshenko's assessment of the financial situation
belongs to the most pessimistic that we are hearing in Kyiv.
It is broadly expected that the crisis will lead to a
significant drop in economic growth and to a devaluation of
the hryvnia, but it is not a foregone conclusion among market
participants that a meltdown is imminent -- otherwise it
would have already occurred. The markets are currently
frozen and in a wait and see mode. What happens next will
depend on world events and Ukraine's policy responses.
Although some market participants feel that the NBU and GOU
are in control, many question whether policymakers fully
understand the problems in the banking sector and have an
idea what to do next. All are hoping that the IMF program
will bring more transparency and provide a way forward. We
agree that, whatever the underlying reality in the banking
sector may be, swift IMF action is at the moment the only way
to restore confidence in Ukraine in the short term, and we
encourage Washington to weigh in with the IMF Board to secure
formal support for a Ukraine program at the October 22 Board
meeting.

12. (C) Tymoshenko may be privy to insider information not
(yet) available to the markets. The situation is truly dire
if that is the case. Whatever her motives in seeking USG
help to stop the elections sought by Yushchenko, it is true
that Ukraine needs unity to address the current crisis.
Electioneering will prevent the Rada, the GOU and the
President from making the hard decisions expected by the IMF,
and could even neutralize any stabilizing effects of an IMF
program. We therefore encourage a dialog with President
Yushchenko aimed at tabling the idea of elections until an
IMF program, along with parallel actions taken by Ukraine,
have stabilized the country's financial system and restored
confidence. End comment and action request.
TAYLOR

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