Identifier
Created
Classification
Origin
09KYIV1760
2009-10-13 13:21:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

TYMOSHENKO'S NBU DISPUTES DEEPEN

Tags:  EFIN EREL ETRD PGOV PREL UP XH 
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VZCZCXYZ0015
RR RUEHWEB

DE RUEHKV #1760/01 2861321
ZNY CCCCC ZZH
R 131321Z OCT 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8568
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 KYIV 001760 

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 10/12/2019
TAGS: EFIN EREL ETRD PGOV PREL UP XH
SUBJECT: TYMOSHENKO'S NBU DISPUTES DEEPEN

REF: KYIV 1557

Classified By: Acting Economic Counselor Kaye Lee for Reasons 1.4 (b) a
nd (d)

C O N F I D E N T I A L KYIV 001760

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 10/12/2019
TAGS: EFIN EREL ETRD PGOV PREL UP XH
SUBJECT: TYMOSHENKO'S NBU DISPUTES DEEPEN

REF: KYIV 1557

Classified By: Acting Economic Counselor Kaye Lee for Reasons 1.4 (b) a
nd (d)


1. (C) Summary. A dispute between the National Bank of
Ukraine (NBU) and Prime Minister Tymoshenko's government has
escalated in recent days. At stake is the future of a major
Ukrainian bank under temporary administration as well as the
potential for additional capital infusions into two smaller
banks that were recently nationalized by the GOU. The
tension has spilled over from the banking sector to fiscal
policy, with the NBU suggesting it may refuse to monetize GOU
treasury bills which are expected to be issued to finance
Ukraine's 2009 fiscal deficit and Naftohaz payments to
Gazprom. End summary.

NBU-GOU DISPUTE OVER NADRA
--------------


2. (C) Acrimony between NBU officials and the GOU, recently
flaring into the public domain when Minister of Interior
Lutsenko launched an investigation of NBU Deputy Governor
Shapovalov (reftel),has been evident in negotiations over
the future of Nadra bank, Ukraine's largest private domestic
bank under temporary government administration. It is widely
expected that the government will recapitalize Nadra, though
the bank's fate may rest on finding a compromise among
Ukraine's authorities.


3. (C) Nadra vice president Nikolay Onishchenko acknowledged
to econoff that the fate of Nadra was still unclear, even
though Tymoshenko had given bank officials an end-November
deadline to complete restructuring talks. Nadra officials
told us that the bank had chosen UBS to serve as a lead
dealer on its $175 million Eurobond restructure, and that it
was making progress on finalizing terms with export credit
agencies (including U.S. Export-Import Bank and the
Department of Agriculture's Commodity Credit Corporation,
whose representatives were in Kyiv in recent weeks for
negotiations with Nadra). Nadra's biggest concerns were with
major trade finance creditors. The inability of Nadra's
temporary administrator to quickly establish a plan to
restructure trade finance debt, including $125 million owed

to Cargill, had apparently exacerbated the rift between
Tymoshenko and the NBU (which appointed and supports the
temporary administrator).


4. (C) Cargill Trade and Structured Finance representative
Ross Jennings (protect throughout) told us that NBU governor
Stelmakh had backed out of a verbal agreement with
Tymoshenko, made in the presence of Cargill negotiators in
July, to relieve Nadra's temporary administrator Valentina
Zhukovska of her duties. According to Jennings, Zhukovska
had been seen as an impediment to a restructuring deal,
perhaps acting on the behest of President Yushchenko, for
whom her son, Roman Zhukovskyi, works as a senior economic
advisor. (Note: For his part, Zhukovskyi recently admitted
to us that he had been familiar with the Nadra situation, as
it had "required the attention of the President." End note.)



5. (C) Cargill speculated that the President had advised
both Stelmakh and Zhukovska to block a deal on Nadra's
restructuring, and had supported Zhukovska's decision to stay
on at the bank in order to accomplish that goal. Absent
enough resources in Ukraine's thinly stretched Deposit
Insurance Fund, Tymoshenko would be forced to cope with the
political fallout from thousands of disgruntled depositors in
the event of Nadra's liquidation. Zhukovska herself cagily
told us that she had been agnostic about staying on at Nadra,
and had proposed Tymoshenko advisor and Ministry of Finance
director for bank recapitalization, Timur Bagirov, as a
possible replacement, but that Bagirov had refused the
position.


6. (C) Concerned it was caught up in the midst of bickering
between the Tymoshenko government and Yushchenko allies,
Cargill had backed away from the restructure negotiations.
Jennings told us that Cargill also had been frustrated with
the "procedure-oriented" demands of fellow trade finance
creditors, such as Standard Bank and Kommerzbank, whose
requirements for a second audit by Ernst and Young had
further delayed the restructuring process. Cargill told us,
however, that it had reengaged Ukrainian authorities with a
recently drafted letter, on behalf of the trade finance
creditor committee, that outlined general terms for a
restructuring deal, but that it had not received a response.
Bagirov, in turn, told us that the Ministry of Finance had
received the Cargill letter and was open to the parameters
outlined by Cargill and the other creditors, but that the GOU
could not "force" the NBU and Nadra's Zhukovska to the table.
He confirmed that Cargill had made overtures and expressed a
willingness to talk again with Ukrainian authorities. (Note:
During recent meetings with senior NBU managers, we were told
that the NBU was attempting to "stay out" of politics, though
the NBU had been "under constant pressure" from the GOU. End
comment.)


7. (SBU) Separately, a prominent Kyiv daily revealed on
October 13 that Nadra had published the full list of its
42,000 borrowers who collectively owe UAH 8.5 billion (nearly
$1 billion),including corporate, small and medium
enterprise, and private household clients. Although a
technical violation of bank secrecy laws, this move may have
been verbally ordered by Yushchenko in an effort to shed
light on Nadra's defaulted debtors. Nonetheless, explicit
permission for such a general disclosure was not allowed for
in the President's October 8 decree (number 813),which had
focused more narrowly on delinquent borrowers.

"UKRPROMBANK IS DEAD"
--------------


8. (C) Bagirov acknowledged that Ukrprombank, a second major
domestic bank under temporary administration, was "dead" and
would not be made viable. The Ministry of Finance would
uphold a decision by the state recapitalization board and the
Cabinet of Ministers to liquidate Ukrprombank's remaining
assets. Bagirov said Ukrprombank had not been operational
for 6-8 months, that 60% of its assets had been "tied up in a
nasty legal dispute" the GOU "didn't want to touch," and that
the impact of its liquidation on the Ukrainian financial
system had already been factored in by the markets.


9. (C) A NBU-led purchase and assumption agreement would
allow for the transfer of a portion of Ukrprombank's assets
and deposits to newly nationalized Rodovid Bank, whose
temporary administrator was given a short-term extension to
oversee the deal. This plan, first articulated nearly five
weeks ago, is yet to be implemented, though Bagirov has told
us that UAH 6.9 billion in deposits would soon be transferred
to Rodovid, with another UAH 2.8 billion allocated to repay
the NBU for refinancing funds.

ANOTHER INJECTION FOR RODOVID
--------------


10. (C) Rodovid Bank, one of three domestic banks recently
recapitalized by the GOU (to the tune of UAH 2.8 billion or
roughly $330 million),announced publicly that it required
"top off" funds of UAH 1 billion to pay for unexpected
deteriorations in its loan portfolio. However, Rodovid's
temporary administrator, Sergiy Scherbyna, told us that the
figure needed from the GOU was even greater. Scherbyna said
Rodovid had a gap of over UAH 1.5 billion, though he noted
that the bank would not request a capital injection if it
received Ukrprombank's UAH 2.5 billion in performing loans,
plus enough Ministry of Finance treasury bills (monetized by
the central bank) to offset the transfer of Ukrprombank's UAH
7 billion in liabilities. In addition to assuming a portion
of Ukrprombank's assets and liabilities, Rodovid was also
planning to hire Ukrprombank personnel and rebrand its retail
operations. (Note: Bagirov said separately that
Ukrprombank's UAH 2.5 billion in sound assets constituted 25%
of its total assets. End note.)


11. (C) Bagirov also told us that Rodovid had "unresolved
provisions," and that the Ministry of Finance would increase
its capital if Rodovid's management came to the conclusion
that its gap was substantial. He praised Rodovid for its
relatively strong information technology capacity, especially
compared to the Ukrainian state-owned Oshchadbank, where the
Ministry had initially planned to transfer Ukrprombank's
assets and liabilities. Bagirov told us that there was "no
desire" within Oshchadbank's management to take on another
thorny state obligation and that Rodovid had been the only
viable solution for Ukrprombank's liquidation. Later, Post
learned that Platinum Bank had also bid to take over
Ukrprombank's assets, but that its offer had come too late in
the resolution process to be considered.

12. (C) Scherbyna said Rodovid analysts had calculated the
bank would have to retain at least 50% of its deposit base
for the projected UAH 1.5 billion recapitalization need to
remain constant. However, he cautioned that if outflows were
greater than expected, Rodovid would not be able to pay back
all deposits "on first notice." Within Rodovid's UAH 6.4
billion loan portfolio, over 30% of the bank's credits were
more than three months overdue, according to Scherbyna.
While only 5% of its loans had been made in foreign currency,
and all credits had been collateralized, Rodovid complained
there was "no market" for premium assets, such as land plots
in Kyiv, which had been collected as collateral for defaults.



13. (C) Rodovid has roughly $30-31 million in external debt
that it is currently restructuring, roughly 10% of which had
been owed to U.S.-based CoBank via a trade credit facility
guaranteed by USDA's Commodity Credit Corporation (CCC).
Rodovid and CCC had reached preliminary terms on a
restructure agreement, pending final review by each side's
legal counsel.

STATUS OF OTHER NATIONALIZED BANKS
--------------


14. (C) NBU crisis management director Yuriy Petrov
explained to us that Ukrgasbank and Kyiv Bank had been taken
out of temporary administration because both banks had
established competent executive management teams and
supervisory boards and were healthy enough to reinitiate
commercial operations.


15. (C) Nonetheless, press reports have indicated that Kyiv
Bank would need an additional UAH 1.5 billion in capital to
compensate for the poor quality of its loan stock. It was
rumored that Kyiv Bank had been stripped of its remaining
assets, to the point that Bagirov had characterized the bank
in August 2009 as a "shell" that should not have qualified
for state recapitalization funds. When we recently asked
Bagirov about the NBU's rosy picture of Kyiv Bank, as well as
the Ministry's willingness to put additional funds into the
institution, he stated that while the bank remained in poor
condition, the recapitalization board was unlikely to approve
a further injection.

NBU RELUCTANT TO MONETIZE
--------------


16. (C) NBU director of economic forecasting Oleksandr
Petryk told us that the investigation into NBU deputy
Shapovalov (reftel) had undermined public confidence in the
NBU. He said that politicians were toying with the banking
regulator like a "marionette" to force it into monetizing the
budget deficit and to wrest control of the NBU governorship.
These games would intensify through mid-December, when NBU
governor Volodymyr Stelmakh is set to retire. Petryk blamed
a lack of information sharing between the NBU and the
Ministry of Finance for large discrepancies in budget
macroeconomic indicators, and he puzzled over how the GOU
could get away from owning up to its massive core fiscal
deficit.


17. (SBU) Commentators have noted that the NBU has refused
to buy government treasury bills. Excepting NBU purchases of
bonds for bank recapitalization, a commitment enshrined in
Ukraine's anti-crisis legislation, the central bank may be
actively refusing to conspire in the GOU's attempts to
finance budgetary or extra-budgetary items, such as the UAH
9.8 billion payment for Euro 2012 infrastructure development
(reftel). Furthermore, a back-of-the-envelope calculation
shows that the NBU has not openly financed Naftohaz's monthly
payments to Gazprom since May. PM Tymoshenko stated that the
state energy company met August commitments after it received
a windfall in VAT refunds, while its September payment may
have come via treasury bills purchased by the state-owned
Oshchadbank or from a recent $500 million loan Naftohaz
allegedly took from Russian-owned Prominvestbank.

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


18. (C) The inability of the government and the NBU to work
together, another symptom of the rivalry between the Prime
Minister and the President, is negatively impacting Ukraine's
capacity to work through its banking sector problems. And
while the IMF supports the NBU's refusal to monetize the
budget deficit and Euro 2012 payments, it seems clear that
this "independence" is motivated by political factors, rather
than being a sign of an autonomously functioning central
bank. For her part, PM Tymoshenko appears to view the NBU as
standing in the way, keeping her from realizing public
promises to protect depositors and meet budget targets. With
an unfinanced fiscal deficit and the presidential election
fast approaching, we would not be surprised if Tymoshenko
sought to gain control of the NBU after Stelmakh's
retirement.
PETTIT