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Cablegate: Ukraine Foreign Minister's Case for Imf Loan

VZCZCXRO6484
RR RUEHDBU RUEHSL
DE RUEHKV #2135/01 3491247
ZNY CCCCC ZZH
R 151247Z DEC 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8969
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 02 KYIV 002135

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 12/14/2019
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: UKRAINE FOREIGN MINISTER'S CASE FOR IMF LOAN

REF: A. KYIV 2133
B. KYIV 2130

Classified By: Ambassador John F. Tefft for Reasons 1.4 (b) and (d)

1. (C) Summary. Ukrainian Foreign Minister Poroshenko
described meetings with IMF deputy managing director Lipsky
as "not constructive" and relations more generally with the
IMF as "very bad". Poroshenko told the Ambassador on
December 13 that he had weighed in with the Constitutional
Court to strike down the IMF-criticized social standards law,
and that he had asked the President to overcome his
"politically motivated" opposition to the IMF Letter of
Intent (LOI). Describing Ukraine's situation as "dangerous",
Poroshenko said even a partial IMF disbursement would ensure
payments to Gazprom and foreign creditors. End summary.

FOREIGN MINISTER DOWNBEAT ON IMF
---------------------------------

2. (C) Foreign Minister Poroshenko told the Ambassador that,
after meeting with IMF deputy managing director Lipsky in
Washington on December 11, it was clear Ukraine's current
situation was "dangerous" and relations with the IMF were
"very bad". Talks with Lipsky over disbursing the IMF's
fourth tranche were described as "not constructive".

3. (C) Addressing recent IMF-criticized legislation
increasing social payments, Poroshenko told the Ambassador
that he had spoken with the Chairman of the Constitutional
Court. The Court had indicated it would cancel provisions of
the budget-busting social standards law on constitutional
grounds, according to Poroshenko, but only after the
presidential election.

4. (C) Poroshenko conceded that President Yushchenko had
refused to sign the LOI for political reasons. Even though
the President otherwise had "no influence" over economic
policy, Poroshenko had called Yushchenko from Washington to
brief him on his December 10 meeting with the Secretary and
had asked him to consider accommodating the IMF.

5. (C) In any case, Poroshenko argued, Yushchenko's
signature would be meaningless, since there was no prospect
of the Rada adopting an IMF-compliant budget before the
election. (Comment: With this statement, Poroshenko may have
been attempting to deflect criticism of the President's
refusal to sign the LOI. However, the IMF would have
considered disbursing at least a partial fourth tranche had
Yushchenko signed the LOI and had the Cabinet of Ministers
re-submitted a draft 2010 budget. With a presidential
signature, the IMF would have waived the requirement to pass
the 2010 budget. End comment.)

6. (C) Poroshenko suggested that a partial IMF disbursement
would be adequate for Ukraine's budget, gas, and debt payment
needs. Additionally, an IMF disbursement would also free up
contingent loan offers from the EBRD, World Bank, and the
European Investment Bank. Poroshenko said the IMF's Lipsky
had suggested getting a "bridge loan" from some other source
to pull the country through the immediate crisis. Shaking
his head, Poroshenko told the Ambassador that, without any
monies forthcoming, the $12 billion disbursed so far by the
IMF would have been "wasted." (Note: Poroshenko's
calculations likely include three tranches of the IMF's
Stand-By Arrangement, as well as roughly $2 billion
transferred in IMF Special Drawing Rights. End note.)

GLOOMY ON FINANCES
------------------

7. (C) Although Ukraine could probably pay its gas bill in
January, it would likely not be able to do so in February,
according to Poroshenko. External debt had grown in 2010 but
remained modest overall. The Foreign Minister said there was
a real possibility of loan defaults threatening the already
fragile banking system. This would affect not just Ukrainian
banks, he said. December revenues for the government were
abysmally low, reflecting low business profits and general
credit problems throughout the economy. VAT arrears were a
major and growing concern. The Foreign Minister admitted
that he did not have a complete read on government finances,
as acting Finance Minister Umanskiy had not assented to his
request for details.

8. (C) Poroshenko said he told Lipsky that even a limited
disbursement to cover gas and other foreign debts would be
enough to save Ukraine from massive defaults. Lipsky had
replied that Ukraine's external debt could be financed out of
NBU reserves. Poroshenko commented that this would
over-expose state-owned banks to particular borrowers, since
such banks are the only institutions that can legally receive
central bank disbursements. Poroshenko pointed to current
exposure by state-owned banks to Naftogaz, which he said was
already dangerous and threatened the stability of the banking
system.

CEYLA TO BE REPLACED
--------------------

9. (C) Poroshenko informed the Ambassador that IMF
interlocutors had indicated Ceyla Pazarbasioglu was being
replaced as Ukraine mission director. The Foreign Minister
expressed concern that this would hamper the IMF's engagement
with Ukraine.

COMMENT
-------

10. (C) Poroshenko had been tasked by Prime Minister
Tymoshenko to ask Lipsky whether Ukraine could be included on
the agenda of the IMF's next board meeting (ref B). Based on
what we heard separately from IMF resident representative Max
Alier (ref A), Poroshenko's request was likely rebuffed by
Lipsky, further underscoring the firm line the IMF has taken
on Ukraine. Reaching out to the Ambassador, Poroshenko was
clearly seeking an ally on the IMF loan. Yet, he made pains
to show he was not taking sides in the dispute among
Ukraine's presidential candidates, focusing instead on the
country's dire predicament that he said would affect both
current authorities and their successors.
TEFFT

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