Identifier
Created
Classification
Origin
09KYIV1557
2009-09-11 15:59:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kyiv
Cable title:  

NATIONAL BANK CAUGHT IN UKRAINIAN POLITICS

Tags:  EFIN EREL ELAB ECON ETRD PGOV PREL XH UP 
pdf how-to read a cable
VZCZCXRO3651
PP RUEHDBU RUEHIK RUEHLN RUEHPOD RUEHSK RUEHSL RUEHVK RUEHYG
DE RUEHKV #1557/01 2541559
ZNR UUUUU ZZH
P 111559Z SEP 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 8395
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 001557 

SENSITIVE
SIPDIS

STATE FOR EUR/UMB, EEB/OMA

E.O. 12958: N/A
TAGS: EFIN EREL ELAB ECON ETRD PGOV PREL XH UP
SUBJECT: NATIONAL BANK CAUGHT IN UKRAINIAN POLITICS

SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION

UNCLAS SECTION 01 OF 02 KYIV 001557

SENSITIVE
SIPDIS

STATE FOR EUR/UMB, EEB/OMA

E.O. 12958: N/A
TAGS: EFIN EREL ELAB ECON ETRD PGOV PREL XH UP
SUBJECT: NATIONAL BANK CAUGHT IN UKRAINIAN POLITICS

SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION


1. (SBU) Summary. The ongoing dispute between Ukrainian government
authorities and the National Bank of Ukraine (NBU) escalated this
week, when the Ministry of Interior interrogated NBU deputy governor
Anatoliy Shapovalov over recent fluctuations of the hryvnia exchange
rate. Controversial Interior Minister Yuri Lutsenko accused the NBU
of fraud in recent bank refinancing operations and currency auctions
that involved hundreds of millions of hyrvnia. He said that the NBU
policy of maintaining a large discrepancy between the official and
market exchange rates had encouraged currency speculation.
Nonetheless, others have suggested that Lutsenko is instead acting
to burnish his reputation as well as to protect Prime Minister
Tymoshenko's political interests. End summary.

NBU INDISCRETIONS
--------------


2. (SBU) Earlier this month, the NBU had reverted to conducting
currency auctions at a subsidized rate, which in turn allowed for
immediate arbitrage opportunities for undisclosed banks. The timing
of the auctions coincided with the vacation of NBU governor
Volodymyr Stelmakh, while deputy governor Shapovalov was acting in
his stead. One editorial characterized Stelmakh's holidays as
"traditional in times of turmoil in the currency market."


3. (SBU) Shapovalov's interrogation by the Interior Ministry was
accompanied by the September 11 resignation of another NBU deputy
Governor Oleksandr Savchenko, who is considered to be loyal to Prime
Minister Tymoshenko. Savchenko immediately lobbed accusations at
the NBU's senior leadership, suggesting that Shapovalov and others
had allowed unnamed "speculators" to earn $5-6 million in arbitrage
on a daily basis.


4. (SBU) Nonetheless, Petro Poroshenko, an influential businessman
and head of the NBU's council, criticized the media frenzy caused by
the government's investigation. He defended the NBU, suggesting
that the central bank had already admitted to the "inefficiencies"

of previous currency interventions. He pointed out that in two
currency auctions this week, the NBU's intervention rate had been
within close range of the interbank rate. He also said that all
interested banks had been allowed to participate in the auctions.


5. (SBU) Via auctions on September 8 and 10, commercial banks
bought $63.7 million and $105.4 million, respectively, at an average
rate of UAH 8.3/$1. Twelve banks were allowed to buy foreign
exchange on September 8; the number of banks participating in the
auction on September 10 was not disclosed. Furthermore, Stelmakh
suggested that the NBU would be positioned to sell up to a billion
more dollars before the end of September to stabilize the exchange
rate. This statement, a sign that the NBU is willing to move
dangerously close to its net international reserve floor set by the
IMF, appears to have been the primary reason the hryvnia appreciated
from 8.85-9/$1 on the interbank market over the past three days.

ALL ECONOMICS IS POLITICS
--------------


6. (SBU) The announcement of the government's investigation came on
the heels of Yushchenko blaming Tymoshenko for destabilizing the
hryvnia, adding fuel to the speculation that the investigation was
politically driven. Yushchenko had pointed to BYuT-supported plans
for large-scale hryvnia emission to finance the budget deficit.
Separately, the NBU's Stelmakh, a Yushchenko ally, said that the
central bank would not finance a one-time payment of UAH 9.8 billion
($1.2 billion) for Euro 2012 infrastructure projects from the NBU's
2009 profits, as required by recent BYuT-backed legislation. Both
the President and the central bank commented that any monetization
should come from the state treasury via domestic bonds that would be
purchased by the NBU.


7. (SBU) Foreign bankers have told us that senior NBU
representatives had bragged about their plans to avoid meeting the
terms of the Rada legislation on Euro 2012 infrastructure financing.
The NBU had preferred to buy GOU debt, in order to hold a
government liability while collecting interest. NBU officials
suggested to our contacts that this would enable the central bank to
overcome the GOU's attempt to whittle away its independence.


8. (U) A major Kyiv daily newspaper alleged that the "information
war" between the President and the Prime Minister had been launched
by BYuT-faction leadership. It reported that Tymoshenko ally and
Our Ukraine Rada deputy Mykola Martynenko had announced at a
parliamentary coordinating meeting that millions had been channeled
from the currency market to finance the Yushchenko's presidential
campaign. Martynenko allegedly also stated that hryvnia
destabilization may serve as a reason for Yushchenko to declare a

KYIV 00001557 002 OF 002


state of emergency.


9. (SBU) In his press statement, Interior Minister Lutsenko also
accused Yushchenko of covering up for the NBU's questionable
actions. But Ukrainian commentators have wondered whether Lutsenko
is trying to paint over his own recent scandals -- the case of his
alleged intoxication at the Frankfurt airport in May and last week's
mishandling of a high profile internal corruption case against a
criminal gang of police. Since being bailed out by Tymoshenko after
the Frankfurt incident, when many in Kyiv were calling for his
resignation, Lutsenko has been considered a staunch friend of the
Prime Minister.

NBU MURKINESS NOTHING NEW
--------------


10. (SBU) Accusations of fraud have swirled around the NBU
throughout the period of Ukraine's economic crisis, particularly
regarding the NBU's handling of currency sales. In January 2009,
Tymoshenko had criticized the NBU for non-transparent refinancing of
Nadra Bank that allegedly took place in late 2008. Independently, a
senior Nadra executive admitted to us that the shady refinancing
scheme had been carried out during the period of October-December

2008. The Nadra representative also said that the NBU had agreed to
restructure UAH 7.7 billion ($920 million) in debt accrued by Nadra
last year that would have been due in the fourth quarter of 2009.


11. (SBU) More recently, Lutsenko had expanded the GOU's
allegations against the NBU, commenting that former managers of now
nationalized Rodovid bank had been allowed to steal UAH 2 billion
($240 million) in central bank financing. Tymoshenko has also
accused the Viktor Yanukovich-led Party of Regions of misusing
refinancing that had been extended to Ukrgazbank.

COMMENT
--------------


12. (SBU) The recriminations over hryvnia fluctuations and the
NBU's independence hearken back to those levied publicly between
Tymoshenko and her rivals earlier this year. The bad blood appears
to have intensified since the IMF mission left Kyiv last week, with
Tymoshenko, Yushchenko, and their loyalists not holding back their
sharpest criticisms and conspiracy theories. That the NBU has been
unwilling to relinquish its independence by yielding to the
BYuT-supported Euro 2012 financing plan, and that the NBU's shady
dealings are undoubtedly filling rival campaign finance coffers,
only heightens the acrimony. As it typically has done in such
instances, the Party of Regions has refrained from offering
substantial commentary, apparently content to let its rivals
continue their bickering over failing economic policies.

PETTIT