UKRAINE CURRENCY DOWN 20 PERCENT; RADA DIVIDED ON

UNCLAS SECTION 01 OF 02 KYIV 002130

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TAGS: EFIN ECON ETRD PGOV XH UP
SUBJECT: UKRAINE CURRENCY DOWN 20 PERCENT; RADA DIVIDED ON
SOLUTIONS

REF: KYIV 2128

SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION


1. (SBU) Summary. While Rada factions were busy haggling over
three competing versions of anti-crisis measures, the hryvnia
exchange rate slipped dramatically on October 23. Embassy contacts
in the real estate and transportation sectors report more dismal
news, indicating general woes throughout the real economy. End
Summary.


Rada Not Equipped to Solve Financial Crisis
--------------


2. (SBU) Bickering in the Verkhovna Rada (reftel) has hampered
efforts to pass anti-crisis legislation. All three major political
factions support distinct programs, with Viktor Yanukovich's Party
of Regions the latest to offer a (still undisclosed) proposal. Thus
far, the Yushchenko-supported National Security and Defense Council
(NSDC) anti-crisis measure and the Timoshenko-supported Cabinet of
Ministers bill have been made public. While it is still too early
to make a comparative analysis of the draft packages, it does appear
that the NSDC and CabMin versions share an intention to bolster bank
liquidity, increase deposit guarantees, and reduce growth rates in
public sector wages, pensions, and social spending. We are already
hearing that such spending cuts will face stiff challenges from Rada
deputies across the political spectrum.


3. (SBU) Yushchenko noted that "every kopeck" spent should be "well
thought-out," and he again blamed not the National Bank of Ukraine
(NBU),but Tymoshenko's government for the crisis. Yushchenko
insisted that he would even be willing to work with the Communist
Party if it acted in the interests of the priorities of Ukraine, and
that the legislative deadlock was a "tragedy."


Rapid Currency Devaluation
--------------


4. (SBU) The hryvnia (UAH)/dollar exchange rate has plummeted
roughly 20 percent in the last twenty-four hours. Bid-ask quotes on
the street ranged 5.86-5.95 (buying hryvnia) to 6.15-6.20 (buying
dollars). Evening television news on October 22 reported that
exchange kiosks were unable to sell dollars, due to the scarcity of
foreign currency on the market. But when EconOff walked into
separate kiosks on October 23, traders were not only able to sell
dollars but very eager to do so.


5. (SBU) Other anecdotal evidence underlines how the exchange rate
may be causing consumer prices to increase rapidly. A savvy,
elderly woman selling flowers on the street was quoted as saying her
5-10% overnight price increases were due to the more expensive
dollar rate. Similarly, an open-air fruit stand owner said her
supplier would increase wholesale prices by 3 percent on October 27.
She was also told to be prepared for further increases thereafter,
since most produce on the market is imported with prices sensitive
to exchange rate devaluation.


6. (U) The NBU sold a limited number of dollars at 5.25 UAH/dollar
to four commercial banks on October 22. According to the NBU,
reserves have fallen 8.6 percent since October 1, due to infusions
to prop up the currency and the banking sector. NBU Governor
Volodymyr Stelmakh told reporters on October 22 that the central
bank will continue to support the exchange rate.


Real Estate Markets Tanking
--------------


7. (SBU) Oleksandr Pochkun, Managing Partner of Baker Tilly
International, the fifth largest accounting firm in Ukraine, briefed
EconOff on the effects of the financial crisis for his key corporate
clients. In particular, he stated that construction projects and
property markets, where commercial real estate holders are exposed
in varying degrees to Ukraine's financial crisis, have grinded to a
standstill. Large-scale commercial real estate developers face the
greatest risks, since they lack funding for further construction and
have invested nearly all their cash into land holdings that were to
have been sporadically sold for revenue. Pochkun estimated that
without loan injections, some major developers face bankruptcy, as
they hold less than three months' cash to meet payroll and will be
unlikely to find buyers for some of their largest holdings on the
open market.


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8. (SBU) Major Ukrainian oligarchs with urban land holdings
likewise face pressure from declining steel and commodity prices.
One source told us that 21st Century investments, a publicly traded
real-estate company that purchased large tracts of land in Kyiv in
the past year, was insolvent. Conglomerates may be looking to
finance debt through property sales in the absence of available
foreign capital. A sell-off of their holdings would have a dramatic
effect generally on the real estate market, where Pochkun says there
are already signs of panic. Access to credit has dried up, and
individual speculators, who had bought one or two properties in
addition to their primary residences, are now selling holdings
faster than the market can absorb. He added that there is now a
profound psychological element to the sell-offs, especially
considering the fact that real estate investors had seen up to
three-fold gains over the past two years.


Declines in Freight, Ports, Air Travel
--------------


9. (U) The unfolding financial crisis continues to hit other
sectors of the economy. Ukrainian railroads and the country's ports
have both reported significant drops in freight traffic in recent
weeks. According to Ukraine's State Statistics Committee, freight
transportation by sea and river links has decreased 14.6 percent
thus far in 2008. The Odessa port authority commented that it has
seen a significant drop in metals shipments, though increased grain
exports have somewhat offset these declines. Oil reloading in
Odessa has fallen as well, due to decreases in Russian-origin
shipments. The state railroad company Ukrzaliznytsia reported a 20
percent drop in cargo transportation in October, due to decreased
shipment of metallurgical and chemical products, iron ore, coal, and
construction materials.


10. (SBU) An Embassy contact with ties to Mittal Steel Kryviy Rih,
the country's largest steelmaker, recounted a conversation with the
company's financial director, who said the vast plant was operating
at 50 percent capacity, with large unsold inventories accumulating
at the site. Yuri Miroshnikov, President of Ukraine International
Airlines, and KLM/Air France Country Director Arvin Alagh told us
that their airlines have seen a dramatic drop in advanced bookings
for domestic and international flights. Executives of other
airlines echoed their statements at a recent roundtable sponsored by
the American Chamber of Commerce. Airline representatives openly
worried about general declines in air travel, and they suggested
that their profits would be further hampered by high jet fuel prices
that have not fallen in line with the price of crude oil. According
to Aerosvit representatives, airlines in Ukraine have paying up to
40 percent above market rates due to reported price gouging by
Lukoil, TNK/BP, and KreBo (Kremenchuk refinery/Borispil airport
joint venture),forcing carriers to heavily refuel during European
stopovers.


11. (SBU) Comment. Ongoing political animosities in the Rada
aside, Ukraine's real economy has taken a strong downturn, as
measured on the street in quotidian transactions and on corporate
balance sheets. A rapid currency devaluation appears inevitable,
and its effects are already taking a toll on everyday consumers and
businesses. Proposals for anti-crisis legislation may be heard by
parliament on October 24, but Ukrainians are not waiting for a
political solution to take action in the market. End Comment.


TAYLOR