CORRECTED COPY: UKRAINE: NBU GOVERNOR ON HIS WAY

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SUBJECT: CORRECTED COPY: UKRAINE: NBU GOVERNOR ON HIS WAY
OUT?

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1. (SBU) Summary. National Bank of Ukraine (NBU) Governor
Volodymyr Stelmakh may be on his way out. In a legally
meaningless yet politically important move, the Rada voted
to oust Stelmakh on January 26. The Rada's actions have
incited a fresh round of accusations between Prime Minister
Yulia Tymoshenko and President Viktor Yushchenko, in what
amounts to the latest proxy dispute over leadership and
responsibility for Ukraine's deteriorating economic crisis
(reftel). Stelmakh is being criticized for his heavy-
handed, insular, and uncooperative leadership style and for
the NBU's botched foreign exchange interventions. Under
Stelmakh, the NBU has also been accused of favoritism in
both the foreign exchange market and in the refinancing of
banks. Yushchenko continues to stand by Stelmakh, but the
pressure to oust the unpopular governor is growing, and now
Yushchenko must decide whether to abandon his fallen ally
or stand-by Stelmakh and risk further culpability for the
NBU's blunders. End summary.

Stelmakh Under Pressure
--------------


2. (SBU) NBU Governor Volodymyr Stelmakh is coming under
increasing pressure and may resign or be fired soon.
Stelmakh, who is close to President Yushchenko, has been on
vacation since early January, a step that makes little
sense in the midst of Ukraine's worsening economic crisis
but is commonly taken by leading Ukrainian officials
shortly before their ouster. Currently, First Deputy
Governor Anatoliy Shapovalov is acting head of the NBU, but
we hear repeatedly that important decisions are not being
taken on account of Stelmakh's absence.

IMF: Stalemate "Can't Go On"
--------------


3. (SBU) IMF mission chief Ceyla Pazarbasioglu told us on
January 27 that the current stalemate between Tymoshenko
and Yushchenko over Stelmakh's fate "can't go on (any
longer)." Pazarbasioglu and her deputies, in Kyiv to
monitor progress on Ukraine's $16.4 billion Stand-By
Arrangement, could not say for certain that there would be
a move at the central bank. Citing politically charged
conversations held with Tymoshenko and Presidential aides,
however, IMF senior expert Thordur Olafsson indicated his
impression that there would likely be a new NBU Governor in
coming days, since "nobody seems to trust (the NBU) now."
Separately, EBRD officials told us on January 28 that the
NBU had become "paralyzed" over the Stelmakh affair, with
decisions on key banking reforms delayed by a lack of
leadership.

Rada Action Unconstitutional
--------------


4. (SBU) In a special January 26 session of the Verkhovna
Rada, Tymoshenko's BYuT faction teamed up with the
Communist Party to narrowly pass a resolution that cancels
the 2004 Rada confirmation of Stelmakh. The move has no
legal significance, however. According to the Ukrainian
constitution, the Rada approves the President's nomination
and dismissal of the NBU governor. It has no power to
dismiss the NBU governor on its own. Tymoshenko told a
live television audience that the Rada's method for
removing Stelmakh was not "natural" but nonetheless the
"only legal means" to restore confidence in the currency
and financial markets. Ukrainian commentators disagree,
suggesting that the Rada's attempt to oust Stelmakh fell
outside its legal writ. President of the Ukrainian Academy
of Political Science Nikolay Mikhalchenko noted that
"parliament is not acting in the spirit of the law." Yuriy
Yakimenko of the Ukrainian Center for Economic and
Political Studies likewise stated that the Rada decision
did not respect the President's constitutional authority
and would cause the matter to be taken up in Constitutional
Court.


5. (SBU) According to these experts, Stelmakh will remain
the nominal NBU governor until his five-year term expires

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in December 2009, unless he resigns or is fired by
Yushchenko, with subsequent Rada approval. Yushchenko's
public statements continue to support the wounded Governor.
Appearing on television Kanal 5, owned by Yushchenko ally
and National Bank council chairman Petro Poroshenko, the
President said that he would appeal to the Constitutional
Court against the Rada's decision, in order to "safeguard
the NBU" from political forces in the Cabinet. The
President is not challenging the substance of the Rada
action, which has no legal implications, but instead hopes
to get a ruling to block the Rada from taking such actions
in the future.


6. (SBU) Rada deputy and former NBU Governor Sergey
Tigipko is widely viewed as a favorite to replace Stelmakh
if he is in fact dismissed. After its meaningless January
26 vote, the Rada failed by a few votes to reinstate
Tigipko. It is also being speculated that First Deputy
Governor Shapovalov could remain as Acting Governor until a
new president is elected in late 2009 or early 2010.


7. (SBU) Stelmakh has been a favorite whipping boy since
September 2008, when Ukraine's currency began its steep
decline against the dollar. The NBU has been criticized
for its poor management of the hryvnia devaluation, having
spent roughly $11 billion in reserves, mostly through
ineffective and non-transparent efforts to stabilize the
currency, which has lost almost half its value in recent
months. Stelmakh has also been criticized for an
inflexible and secretive management style, and he has been
at odds with both Tymoshenko and the Ministry of Finance on
a nearly uninterrupted basis since the crisis began. The
NBU has also been accused of favoritism in its foreign
exchange interventions and its refinancing of banks. In
both instances, the NBU's actions have often been non-
transparent and sometimes unexplainable, perhaps favoring
particular insiders at the expense of the broader market.
According to media reports, the NBU has sold nearly $1
billion in January to prop up the currency, while
macroeconomists tell us Ukraine's current account deficit
should cause the hryvnia to devalue another 15-25 percent.


8. (SBU) Comment. Tymoshenko has shrouded her faction's
vote to dismiss Stelmakh in economic terms by suggesting
that a new NBU Governor could restore the hryvnia to an
improbable 6-6.5/$ rate (last seen in the first weeks of
the crisis). Yet, her ulterior motive is equally clear and
certainly politically driven. Having pushed Yushchenko
into a corner, from which he must alienate his longtime
friend and former NBU colleague or associate himself with
the ill-fated policies of the NBU, Tymoshenko looks to
further tarnish her rivals' reputation and highlight his
political weaknesses amidst a sharpening crisis. The
presence of the IMF team may have emboldened Tymoshenko; it
also puts pressure on the President to act, since the lack
of an NBU decision-maker on banking sector reforms has been
a chief concern of the IMF team thus far. End comment.

TAYLOR