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Cablegate: More Ukraine Budget Drama

VZCZCXRO8761
PP RUEHIK
DE RUEHKV #2057/01 3291326
ZNR UUUUU ZZH
P 251326Z NOV 09 ZDK
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 8880
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 002057

SENSITIVE
SIPDIS

STATE FOR EUR/UMB, EEB/OMA

E.O. 12958: N/A
TAGS: EFIN EREL ELAB ECON ETRD PGOV PREL XH UP
SUBJECT: MORE UKRAINE BUDGET DRAMA

REF: KYIV 1982, KYIV 1920

KYIV 00002057 001.2 OF 002


SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION

1. (SBU) Summary. After weeks of dithering, Ukraine's
parliamentary budget committee approved hundreds of proposed
amendments, only to see the draft 2010 budget get voted down in the
Rada (Ukraine's parliament) on a floor vote. This orchestrated
maneuver, designed to further delay the review process, may ensure
that the 2010 budget is not passed before the presidential election.
The Ministry of Finance has agreed to rewrite the draft budget, but
it will not comply with a Rada resolution to tabulate increases for
social spending. The Party of Regions will try to prevent Prime
Minister Tymoshenko from gaining extraordinary discretionary
spending authority, over and above what her government would already
possess in a continuing resolution-type scenario. End summary.

BUDGET COMMITTEE APPROVES AMENDMENTS, BUT...
--------------------------------------------

2. (SBU) Against the expectations of senior committee members (Ref
A), the Rada budget committee voted on November 19 to present an
amended 2010 draft budget to the full parliament for a floor vote.
In any typical year, this committee vote would have been a mere
formality, necessary prior to a first reading in the parliament and
adoption of the committee's recommendations.

...THE RADA VOTES AGAINST THEIR ADOPTION
----------------------------------------

3. (SBU) On November 20, however, the Rada voted against the budget
committee's proposals. Embassy sources indicated that the procedure
had been entirely orchestrated within the committee and on the Rada
floor by leading factions, united (for conflicting reasons) in their
desire to see the current draft 2010 budget fail (Ref A).

4. (SBU) Although Tymoshenko's government drafted the budget, her
BYuT faction is now against it for two reasons: 1) the IMF has said
the draft budget contains an unsustainable 8% deficit, and 2) the
lack of a budget would give Tymoshenko more control over directing
2010 expenditures prior to the presidential election. The
opposition Party of Regions does not support the draft budget
because it lacks credible macroeconomic indicators, and because it
is a sop to Tymoshenko-backed interests.

5. (SBU) As a result of the Rada rejecting the draft budget, one of
its key amendments -- a provision to bring the 2010 budget in line
with the recently approved social standards law -- was voted down.
Observers said this was only a "technical 'no' vote", since the
Party of Regions continues to support implementation of the social
standards law (Ref B), which established a revised subsistence
minimum and will likely lead to an increase in pension allocations
(with concomitant wage increases anticipated in 2010).

BUDGET BACK TO CABINET OF MINISTERS
-----------------------------------

6. (SBU) The Rada also issued a resolution to send the draft 2010
budget back to the Cabinet of Ministers for revision. The Ministry
of Finance now has two weeks to prepare a new draft budget. The
Rada resolution instructs the Cabinet of Ministers to bring the
budget in line with the Budget Code and the law on social standards.
It passed with support from the Party of Regions (171 votes), Our
Ukraine (23), Communist Party (27), and the Lytvyn Bloc (19).
Tymoshenko's BYuT faction did not vote.

CYNICAL FINANCE MINISTRY
------------------------

7. (SBU) Acting Minister of Finance Umanskiy responded by saying
that his experts on fiscal policy would revise the budget. The
Ministry would comply with the Rada instruction to finalize a new
draft within two weeks, with the caveat that the Ministry could not
abide by the Rada resolution to bring the 2010 budget in line with
the social spending law, which Tymoshenko and her BYuT faction have
opposed. Umanskiy reasoned that the Rada floor vote, striking down
the budget committee's amendments (one of which had required
implementation of the social standards law in the 2010 budget), had
more legal force than the Rada resolution.

2010 SPENDING: AT WHAT LEVEL?
-----------------------------

8. (SBU) While most analysts expect that the Tymoshenko government
will enter 2010 without a Rada-approved budget, triggering a
continuing resolution-type scenario, there are no clear guidelines
for how additional or extraordinary spending allocations would be

KYIV 00002057 002.2 OF 002


made. According to the Budget Code, if the 2010 budget is not
approved, GOU expenditures should be disbursed at 2009 levels.

9. (SBU) Tymoshenko has sought to get around restrictions on
additional expenditures, such as for the presidential election or
other discretionary items, through an October 29 Cabinet of
Ministers resolution (#1181). The resolution, which will enter into
force if the 2010 budget is not passed, would allow the state
treasury to fund articles not envisioned in 2009, despite the fact
that budget watchers believe such a provision would violate the
Budget Code.

10. (SBU) Both the Party of Regions and President Yushchenko have
stated that they oppose resolution 1181. On November 18, Party of
Regions MPs challenged the resolution in the Constitutional Court, a
move that the IMF had told us was inevitable. If the 2010 budget is
not adopted, and if the October 29 resolution is struck down by the
Constitutional Court, the GOU would need to find a new mechanism to
finance the presidential election. A separate law likely would be
required to cover the projected UAH 969 million ($120 million)
needed for election-related expenditures.

COMMENT
-------

11. (SBU) More fiscal theatrics have not changed the bottom line:
the Rada is unlikely to pass a 2010 budget before the presidential
election. After the Cabinet of Ministers makes its revisions, the
draft budget will go again to the budget committee for new
amendments, and finally to the full Rada for a repeat first reading.
The absence of a 2010 budget is seen as beneficial by all the major
political forces, despite the possible need to pass separate
legislation to finance the 2010 election.

12. (SBU) Tymoshenko's attempt to secure further control over 2010
expenditures (beyond what she would have with a continuing
resolution-type scenario) and boost her power to make discretionary
payments is bold. But, it was predictable that she would encounter
a challenge from the Party of Regions and President Yushchenko over
her Cabinet resolution. The outcome of a legal ruling on Resolution
1181 is still unclear, however.

PETTIT

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