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Cablegate: Ukraine's "Scare Tactics" Over Imf Loan

VZCZCXRO5336
RR RUEHDBU RUEHSL
DE RUEHKV #2133/01 3481219
ZNY CCCCC ZZH
R 141219Z DEC 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8964
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 002133

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 12/13/2019
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: UKRAINE'S "SCARE TACTICS" OVER IMF LOAN

REF: A. KYIV 2130
B. KYIV 2102

Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and
(d)

1. (C) Summary. Kyiv-based IMF resident representative Max
Alier told Econoff on December 11 that GOU representatives
deliberately misled Ukrainian and international media outlets
into believing that Ukraine had met the IMF's "primary
demands" for releasing a fourth loan tranche. Alier
reiterated that the IMF's "very reasonable" conditionalities
were firm and still unmet. He speculated that Prime Minister
Tymoshenko was "letting out all the horses" to put pressure
on the European Union, Russia, and the United States to weigh
in with IMF management to again ease the conditions for
disbursal. Alier did not discount further GOU "scare
tactics" over a gas shutoff, social unrest, or a default on
domestic debt. End Summary.

NEMYRIA'S FALSE POSITIVE
------------------------

2. (C) Alier passed on Deputy Prime Minister Nemyria's
readout to him from December 6 talks in Washington with IMF
and USG officials, which Alier said was "surprisingly
positive". The Deputy Prime Minister told Alier that he
thought a disbursement could be done in a few days, and he
said the GOU was pushing to include the subject of an
emergency loan to Ukraine on the next IMF board meeting
agenda.

3. (C) Alier told Econoff, however, that IMF management was
against the idea of a fast-tracked loan, especially without
support from IMF mission director Ceyla Pazarbasioglu or a
completed staff-level review. Further concessions on IMF
conditionalities were unlikely, he said. The IMF was firm in
its view that it had already been "very reasonable" with its
still unmet demands of Ukraine's authorities (ref B).

GOU MEDIA SPIN ON IMF LOAN
--------------------------

4. (C) Alier noted with concern that Nemryia had taken his
interpretation of the Washington talks to Ukrainian and
international media outlets, which widely reported on
December 11 and over the weekend that the GOU had made
progress in its negotiations with the IMF. Nemyria was
quoted by no fewer than a dozen international media outlets
as stating that Ukraine had met the IMF's "primary demands"
and was hoping for a loan disbursement to avert another
January gas crisis. Nemyria told media that the lack of an
IMF disbursement would be a "fatal error" and could
destabilize the eastern European region. Nemyria's
spokeswoman stressed that the IMF money was needed to pay
Ukraine's January 7 bill to Gazprom.

5. (C) Prior to his meeting with IMF deputy managing
director Lipsky in Washington, Foreign Minister Poroshenko
was similarly quoted on December 11 to have said there would
be a "higher risk" of gas supply disruptions to Europe if
Ukraine did not receive an IMF tranche. (Note: Poroshenko
privately clarified his position with the Ambassador on
December 13, suggesting that Ukraine could probably pay its
gas bill in January, but that the situation was precarious
and would be even worse in February without external support.)

6. (SBU) Local commentary on the GOU's statements has been
mostly derogatory. A Ukrainian business daily declared on
December 14 that Tymoshenko was attempting to put
"psychological pressure" on the IMF. Another pundit noted
that the IMF loan was needed more by the government than the
economy as a whole.

GOU PRESSURE FOR DISBURSAL
--------------------------

7. (C) The IMF's Alier characterized Nemyria and
Poroshenko's public statements as "scare tactics" designed to
pressure the European Union, Russia, and the United States to
weigh in with the IMF. "You can't imagine the number of
calls" the IMF had received in response to the media stories,
including from Russia, Alier said. "The Prime Minister was
playing all sides, not necessarily against each other but to
her advantage," the IMF had concluded. Alier warned that
Ukraine's partners should take Tymoshenko's assurances "with
a big grain of salt".

8. (C) The Prime Minister was "willing to promise anything
to anybody" to make budget, gas, and domestic debt payments,
according to Alier. Alier predicted Tymoshenko would use
public relations messaging to threaten a gas shut off, social
unrest, or a sovereign default on domestic debt. In his
words, Tymoshenko was "letting out all the horses."

THREATS OF GAS DISRUPTION NOT CREDIBLE
--------------------------------------

9. (C) Alier said the GOU's talk of gas transit disruptions
were not a credible ploy to instigate European support for
emergency lending. The Europeans had learned their lesson
from January 2009; most countries reliant on Ukraine for
transit flows now had enough gas in storage to last through
the winter heating season. Instead, Europeans had become
cynical about Ukrainian duplicity and tended to believe
Russian messages blaming Kyiv for problems with energy
security. Alier said that the January 7 payment to Gazprom
was "likely, but in the hands of the Prime Minister".

THE "SOCIAL UNREST" CARD
------------------------

10. (C) The IMF official focused heavily on the possibility
of social unrest, which he predicted could be the GOU's "next
escalation". Alier speculated that Tymoshenko might choose
to encourage or support protests, but that such a tactic
would backfire. He predicted that the Prime Minister could
instead find herself in the position of being a lightning rod
for public discontent.

IMF ON UKRAINE DEBT DEFAULT
---------------------------

11. (C) GOU fears over December domestic debt payments could
be justified, but Alier downplayed the foreboding concerns
expressed to Econoff by Deputy Minister of Finance Kravets on
December 11 (ref A). The IMF had calculated that the GOU
needed to repay or rollover UAH 1.8 billion ($225 million) in
domestic debt by the end of December. The Ministry of
Finance's plans for December auctions of short-term treasury
bills would likely only raise enough to cover domestic debt
servicing, one-third of which was owed to the National Bank
of Ukraine (NBU). The IMF was not aware of any cross-default
covenants that could be triggered by non-payment of maturing
domestic debt, but Alier did not rule out the possibility
that such existed. In any case, threatening defaults to gin
up emergency external lending would be a "very negative
action", said the IMF official.

BUDGET SITUATION STILL WORSENING
--------------------------------

12. (C) Arrears of public sector wages and pensions were
already visible, according to the IMF, even though Tymoshenko
had determined to do "whatever it took" to make these
payments. The month of January 2010 would be no better; not
only had taxes been paid in advance, revenues were still
collapsing as a result of Ukraine's GDP decline and the lag
effect "catching up" on the real economy. (Note: Although
Alier stated that there are visible wage and pension arrears,
our assessment is that these are localized and not widespread
to date. Alier did not elaborate or provide evidence to
support his claim. End note.)

NBU'S PERFECT COVER
-------------------

13. (C) The NBU was in a position to monetize GOU securities
without causing inflation or dangerously depleting reserves,
according to Alier, but its decision to help the GOU make
budget, gas, or debt payments would continue to be
politically motivated. NBU Governor Stelmakh was waiting
until the last minute before the presidential election to
throw his support behind either Tymoshenko or opposition
Party of Regions leader Yanukovych. If the former appeared
to be gaining ground, Stelmakh would likely turn on the
printing presses. If Yanukovych looked set to hold on,
Stelmakh would refuse to concede.

14. (C) President Yushchenko was providing the perfect cover
to the NBU, allowing Stelmakh to maneuver between both
Tymoshenko and Yanukovych. Stelmalkh's signing of the IMF
Letter of Intent gave him some credibility with the Prime
Minister. However, Alier speculated Stelmakh had also told
Yanukovych that the NBU Governor's signature was meaningless
without Yushchenko's support (ref B), and that it did not
count as a vote for Tymoshenko. According to Alier, Stelmakh
knew the stakes were high. His actions could help decide the
presidential race, as well as determine whether he would be
prosecuted by Yushchenko's successor for what the IMF
acknowledged were his many misdeeds.

COMMENT
-------

15. (C) IMF resident representative Alier's comments reflect
real disillusionment towards Ukraine within the Fund.
Notwithstanding Deputy Prime Minister Nemyria's misleading
suggestions to the public, the IMF will not weaken its
resolve on conditionalities before the presidential election.
IMF staff-level experts clearly interpret the GOU's threats
as negative and exaggerated, perhaps even further reducing
the likelihood of additional "flexibility". Alier's
assessment that the NBU will act as a spoiler (or kingmaker)
appears correct, especially if Yushchenko extends Stelmakh's
term after the NBU Governor's formal retirement tomorrow.
TEFFT

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