Identifier
Created
Classification
Origin
09KYIV1916
2009-11-05 16:41:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

NBU REFUSES TO CONCEDE ON NAFTOHAZ AND UKRAINE

Tags:  EFIN EREL ETRD PGOV PINR UP XH 
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VZCZCXRO0252
RR RUEHDBU RUEHSL
DE RUEHKV #1916/01 3091641
ZNY CCCCC ZZH
R 051641Z NOV 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8737
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 03 KYIV 001916 

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 11/04/2019
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: NBU REFUSES TO CONCEDE ON NAFTOHAZ AND UKRAINE
BUDGET

REF: A. KYIV 1910

B. KYIV 1878

C. KYIV 1760

Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and
(d)

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 001916

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 11/04/2019
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: NBU REFUSES TO CONCEDE ON NAFTOHAZ AND UKRAINE
BUDGET

REF: A. KYIV 1910

B. KYIV 1878

C. KYIV 1760

Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and
(d)


1. (C) Summary. The National Bank of Ukraine (NBU) will
continue to refuse to monetize government of Ukraine debt,
despite a near empty GOU treasury and "psychological
pressure" from Russia to make payments to Gazprom. In the
NBU's view, the GOU will have enough resources via special
IMF allocations to meet Naftohaz's obligations. Even without
NBU support, other high-level sources said Ukraine would make
its November 7 gas payment -- perhaps even early, in order to
"calm down" Russia.


2. Odds that the NBU would sign the latest IMF Letter of
Intent (LOI) were "close to zero", even though the NBU would
meet targets for net reserves and base money. The central
bank was close to approving the transfer of assets and
liabilities from troubled Ukrprombank to Rodovid, but it
acknowledged that talks between Nadra and key foreign
creditors remained off track. End summary.

NBU BALKS ON MONETIZING FOR NAFTOHAZ
--------------


3. (C) NBU official spokesman and head of international
relations Sergiy Kruglyk told the Charge on November 5 that
the NBU would not monetize GOU debt for Naftohaz payments and
Ukraine's 2009 budget deficit, despite possessing ample
foreign reserves. Citing inflation concerns and the need for
macroeconomic discipline, Kruglyk said there was "no
possibility" the NBU would help the government meet its
spending goals via monetization. The one financing tool the
NBU had considered was giving state banks extra time to repay
UAH 80 billion ($9.75 billion) in outstanding credits, some
of which were loans to aid Naftohaz with gas purchases. Such
an extension could allow these banks to again finance
Naftohaz gas payments.


4. (C) Kruglyk noted that the Ministry of Finance had been
declared Ukraine's "fiscal agent" and could draw on general
and special allocations of IMF Special Drawing Rights (SDR)
worth roughly $2 billion from late summer. This mechanism

would provide enough of a "buffer" for Ukraine to make its
November 7 gas payment, even though the "government otherwise
had no money." While Russia had applied "psychological
pressure" on Ukraine to pay Gazprom, the NBU would not heed
politically driven external or internal demands to monetize.


5. (C) Separately, diplomatic contacts confirmed that the
Ministry of Finance already had tapped SDR 300 million late
on November 4, a sum that would facilitate Ukraine's November
7 payment to Gazprom. The IMF's resident representative Max
Alier apparently indicated that the GOU's treasury account
would be credited on November 6. Additionally, according to
a British diplomat, the GOU planned to sell SDR 700-800
million after November 9 to meet November budget obligations
and the December 7 payment to Gazprom.


6. (C) Separately, Naftohaz spokesman Valentyn Zemlyansky
told us that it was still unclear how Naftohaz would make the
November 7 payment. Nonetheless, confirming what
Presidential Envoy for Energy Security Bogdan Sokolovsky told
us (Ref A),the Presidential Secretariat, Prime Minister, and
Naftohaz had been working together to come up with a solution
to the payment problem.


7. (C) Ukraine's newly appointed Ambassador-at-Large for
Energy Security Viacheslav Kniazhnytiskyi told us that
Naftohaz would make the payment in advance to "calm down"
Russia. Independent energy analyst and former chairman of
Ukrtransnafta's board Oleksandr Todiichuk likewise said that
Naftohaz would pay on time. He noted that Naftohaz had
started to sell the gas it had accumulated in underground
storage this summer and was already receiving some
compensation from domestic consumers.


8. (C) Despite its slight revenue increase, Naftohaz would
still need to rely on financing from state-owned banks or
receive government support to make the November 7 payment,
according to Todiichuk. He warned that the biggest risk for
a possible cutoff was not whether Ukraine could make its

KYIV 00001916 002 OF 003


monthly payment to Gazprom but the continued threat of
Russian penalties to Ukraine for its under-purchase of gas.

GOU HAS ADEQUATE TOOLS FOR BUDGET
--------------


9. (C) According to the NBU, 2009 and 2010 budget deficits
could be financed with tools already at the GOU's disposal.
Kruglyk said there was "plenty" of liquidity in the Ukrainian
banking system. The GOU should rely on the domestic debt
market to finance spending projects, such as for Euro 2012
infrastructure development and to combat the recent H1N1
outbreak. Nevertheless, Kruglyk later cautioned that the GOU
should not issue securities with a 30% coupon, the rate
offered by the Ministry of Finance on October 27 when it
raised UAH 1 billion. Kruglyk said such rates would cause an
unbearable debt burden.


10. (C) The NBU calculated that the social spending law
figures (Ref B) presented by the Ministry of Finance were
three times their actual cost, and that the President had
signed a "feasible" law that would benefit the poorest of
Ukraine's population. Nonetheless, 2010 would be a "very
difficult" year for the new president. Kruglyk predicted
that there would be no privatizations or new foreign directm(J_7ei5QQu8e1xth IMF tranche, the NBU would have enough funds to cover
balance of payments obligations.

NBU "HEALTHY"
--------------


12. (C) Kruglyk stated that the NBU was relatively "healthy"
with total current reserves roughly $27 billion and net
reserves at $16 billion. The NBU had met IMF targets for net
reserves and base money.


13. (C) The NBU spokesman intimated that NBU governor
Volodymyr Stelmakh would remain in office after formally
retiring on December 18. President Yushchenko had already
devised plans to appoint Stelmakh acting governor until the
end of his presidential term, a move that would not require
confirmation.

UKRPROMBANK AND NADRA UPDATE
--------------


14. (C) Kruglyk told us that NBU vice governor Anatoliy
Shapovalov would authorize the transfer of Ukrprombank's
assets and liabilities to Rodovid, assuming that the
difference between assets and liabilities would be provided
by the GOU in treasury bills (Ref C). Shapovalov planned to
send official notification to the Cabinet of Ministers on
November 5 or 6. (Note: Shapovalov had been the Charge's
intended interlocutor, though allegedly he was summoned
spontaneously by President Yushchenko. End note.)


15. (C) Nadra remained a more complicated case, namely
because external creditors in the Coordinating Committee
(CoComm) had yet to define a unified internal position
vis-a-vis Nadra. According to Kruglyk, Nadra's restructuring
efforts with export credit agencies and Eurobond holders had
been successful. But the lack of CoComm agreement threatened
overall restructuring talks. Nadra's temporary administrator
Valentina Zhukovska had held talks in London on November 4
with CoComm representatives, while NBU banking supervisors
continued negotiations with Nadra creditors on November 5.
(Note: In October, the GOU relaxed its requirement for
restructuring Nadra's external debt from 100% to 75%. Even
this lower requirement has not been met, casting doubt on
whether the bank will be recapitalized. End note.)

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


KYIV 00001916 003 OF 003



16. (C) Using economically astute (and politically
convenient) arguments, the NBU appears to be holding its
ground on the monetization of government debt for Naftohaz
and the budget deficit. This has prompted the Ministry of
Finance to use its newly clarified "fiscal agent" status for
SDR allocations to make quasi-sovereign gas payments.


17. (C) Options for the GOU's outstanding fiscal gap,
totaling up to $3.75 billion for the remainder of 2009, are
more limited. Prime Minister Tymoshenko says the IMF program
is now the only hope. Without NBU financing or IFI support,
it is indeed difficult to see any way Ukraine will avoid
payment arrears, anathema for Tymoshenko prior to the
presidential election but just what her opponents seem to
have ordered.
PETTIT