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Cablegate: Ukraine Crisis Measures Passed to Un-Dissolved Rada

VZCZCXRO0597
PP RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2113/01 2951549
ZNR UUUUU ZZH
P 211549Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 6586
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 002113

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: EFIN ECON ETRD PGOV XH UP
SUBJECT: UKRAINE CRISIS MEASURES PASSED TO UN-DISSOLVED RADA

REF: A) KYIV 2012; B) KYIV 2111

SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION

1. (SBU) Summary. Ukraine's National Security and Defense Council
(NSDC) approved a series of as yet unpublished anti-crisis proposals
on October 20, designed to stave off a worsening financial
emergency. President Viktor Yushchenko temporarily lifted his
decree on parliament's dissolution to allow the Verkhovna Rada to
pass the NSDC's recommended package in the upcoming days. Although
Rada deputies briefly gathered on October 21, they could neither
agree upon an agenda, nor did they have concrete proposals to
consider. The International Monetary Fund (IMF) remains mum, but
National Bank of Ukraine (NBU) Governor Volodymyr Stelmakh suggested
an assistance package could be approved as early as this week. The
NBU hinted that a more flexible exchange rate policy may be in the
works, and both Yushchenko and Prime Minister Tymoshenko indicated
that high growth rates of social spending, a major cause of both
growth and inflation in recent years, would be reduced as part of
any anti-crisis package. End Summary.

NSDC Pushes Proposals
----------------------------------------

2. (SBU) Members of the National Security and Defense Council met
late on October 20 to consider broad measures aimed at shoring up
Ukraine's banking system and broader economy. President Yushchenko
announced that representatives from the Finance Ministry and the NBU
had drafted the NSDC's decision on tackling the financial crisis, so
that the "government, the National Bank and other institutions in
Ukraine speak in one language and make joint and clear assessments."
Yushchenko also stated that the NSDC criticized attempts by the
government to disrupt early elections. The NSDC's approved package
reportedly consists of ten bills whose central features are a 50
billion hryvnia stabilization fund (roughly $10 billion), increased
deposit insurance, plans to reschedule external debt, and reductions
in social spending. While the President offered no comment on
funding for the proposals, NBU's Stelmakh stated that the "ball is
now in the government's court."

3. (SBU) According to statements made by Yushchenko and subsequent
media reports, the stabilization fund would be used to buy equity
stakes in distressed companies, including banks, and would be funded
through privatization revenues and central government borrowing,
implying that the fund would not be financed until deep into 2009
unless some sort of temporary financing was found in the meantime.
The funds available to Ukraine's bank deposit insurance system would
be increased by 1 billion hryvnia (about $200 million), and
insurance per deposit would be doubled from 50,000 to 100,000
hryvnia. Yushchenko also reportedly said that the Cabinet of
Ministers should be empowered "for at least half a year" to set
customs tariffs at levels needed to prevent an erosion of the
balance of payments, which many observers interpreted as a sign that
Ukraine might raise import tariffs, possibly seeking exceptions to
WTO commitments to do so.

Yushchenko Un-Dissolves Parliament
----------------------------------------

4. (SBU) With the NSDC meeting as his prop, Yushchenko dramatically
lifted the suspension of his decree that had dissolved the Rada (Ref
A), stating "tomorrow we'll see who is really interested in
escalating tensions." On October 21, deputies arrived at the
assembly building, only to find that there was no agenda or
legislation to consider. Prime Minister Yulia Tymoshenko's BYuT
party delegates then obstructed the rostrum. One BYuT deputy told
EmbOff that his faction would continue to block plenary sessions
until the anti-crisis measures were at the top of the agenda.
(Note: It is more likely that the holdup was due to the difficulty
of producing paperwork overnight on complex anti-crisis measures.)


5. (SBU) Separately, Timoshenko announced that the Cabinet of
Ministers would be forced to limit social spending due to the
financial crisis, echoing statements she made to the Ambassador late
on October 20 (Ref B). Timoshenko commented that the envisioned
budget limitations would be made in the framework of anti-crisis
legislation, but she did not spell out whether they would be
consistent with actions already proposed by the NSDC. As such, it
is not clear whether Timoshenko's statement is a deliberate attempt
to assert policy independence or a simple lack of coordination
between erstwhile coalition partners.

6. (SBU) In his public remarks, Yushchenko also prepared the ground
for austerity measures to combat the crisis. He said government and
Presidential Secretariat personnel should be reduced by 20 percent

KYIV 00002113 002 OF 002


and the budget should remain balanced. Yushchenko also stated that
he had reached an understanding with the IMF that social spending
should be maintained at "real levels," implying that future growth
rates in public sector wages and in pensions may be more closely
linked to the growth in labor productivity.

NBU, PM, President All Hint at IMF Deal
----------------------------------------

7. (SBU) Stelmakh said on October 20 that the IMF may conclude
negotiations on a stabilization package as soon as this week.
Timoshenko announced that talks would be finalized after October 27,
saying "we have practically concluded negotiations with the IMF at
this moment. The package is 90 percent agreed upon, in terms of
what laws and necessary government decisions Ukraine must adopt to
receive this essential financial assistance next week." These
statements were corroborated by Yushchenko, who announced after his
October 21 meeting with IMF delegation head Ceyla Pazarbasioglu,
that benefits and social risks of IMF conditionalities had been
vetted. In their public statements on the IMF, neither Yushchenko
nor Tymoshenko made reference to the IMF timeline mentioned by the
Prime Minister in her October 20 discussion with the Ambassador (Ref
B).

Currency and Ratings to Move Downward?
----------------------------------------

8. (SBU) NBU Deputy Governor Oleksandr Savchenko told reporters on
October 21 that the National Bank is prepared to continue
interventions on the interbank currency market. At the same time,
he said the exchange rate should float more freely. According to
Savchenko, the NBU will try to bring the official hryvnia exchange
rate closer to the market rate and expects that both will equalize
in the coming weeks. In recent days the NBU has intervened
sporadically, selling small amounts of dollars far below the rates
traded in the interbank market. Since the beginning of October, the
NBU has spent nearly $2 billion on interventions.

9. (U) Moody's lowered its ratings on twelve Ukrainian banks, the
agency said in a press release. Fitch said it had lowered the
ratings on ten banks following its downgrade of Ukraine's sovereign
rating.

Comment
----------------------------------------

10. (SBU) It is assumed that any emergency plan proposed by the
NSDC or Cabinet of Ministers should reflect the IMF's
conditionalities. Likewise, the NBU's public statements on a more
flexible exchange rate policy may be preparing the public for an
austerity program and hryvnia devaluation. Yushchenko has already
taken the first step to align himself with the necessary measures,
by presiding over NSDC proposals and suspending his decree on the
Rada's dissolution. A lack of action at the Rada on October 21,
combined with uncoordinated statements by the President and Prime
Minister on the necessary anti-crisis and austerity measures,
however, reveal that officials in Kyiv remain unable to take the
broadly agreed upon next steps in tandem. Achieving consensus with
the IMF, as well as implementing conditionalities of an IMF support
package, will be difficult as long as both sides cannot publicly
show compromise on the contours of an emergency plan. End Comment.

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