Identifier
Created
Classification
Origin
09KYIV483
2009-03-17 15:21:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

UKRAINE: STELMAKH RETURNS, LASHES TYMOSHENKO

Tags:  EFIN EREL ETRD PGOV PREL XH UP 
pdf how-to read a cable
VZCZCXRO1866
PP RUEHDBU
DE RUEHKV #0483/01 0761521
ZNY CCCCC ZZH
P 171521Z MAR 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7479
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000483 

SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 03/17/2019
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE: STELMAKH RETURNS, LASHES TYMOSHENKO

REF: A. KYIV 155

B. KYIV 471

C. KYIV 421

Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4 (B) AND (D)

Summary
-------

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000483

SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 03/17/2019
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE: STELMAKH RETURNS, LASHES TYMOSHENKO

REF: A. KYIV 155

B. KYIV 471

C. KYIV 421

Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4 (B) AND (D)

Summary
--------------


1. (C) National Bank of Ukraine (NBU) Governor Stelmakh has
returned to the political scene, and appears to have again
taken clear control of the central bank. A reputable
newspaper has claimed that President Yushchenko and PM
Tymoshenko have agreed to keep Stelmakh at the NBU until the
presidential elections. Stelmakh officially returned from
"vacation" on March 10 after the Constitutional Court
confirmed that the Rada had overstepped its authority when it
voted to oust the Governor in January. In a March 12 meeting
with the Ambassador, a visibly energized Stelmakh said
President Yushchenko's and PM Tymoshenko's jointly announced
intentions to meet IMF conditionalities were an encouraging
development. At the same time, he claimed Tymoshenko could
derail the agreement in the Rada and skillfully pin the blame
on Yushchenko.


2. (C) Stelmakh told the Ambassador that the NBU was moving
forward on bank recapitalization. Nadra Bank would be the
first bank to get publicly funded capital, yet Tymoshenko was
inhibiting the NBU's approach to Nadra over unfounded fears
that Dmitry Firtash wanted to take control of the bank,
Stelmakh said. The NBU had enough reserves to meet the IMF
stipulated floor on March 31, he said. The current account
would roughly balance out this year, yet massive debt
repayments would remain a challenge for Ukraine. Although
loan portfolios would deteriorate further, continued deposit
withdrawals were the biggest short term threat to the banking
system. The NBU Governor asked whether the international
community might consider a $1 billion loan to Ukraine's
Deposit Insurance Fund, which he suggested was more of an
urgent need than funding for bank recapitalizations. Many
will not be happy that Stelmakh is back, but the NBU now
appears to have the decisive leader that was so severely
lacking in recent weeks. End summary.


An Energized Stelmakh Returns from "Vacation"
--------------


3. (C) NBU Governor Volodymyr Stelmakh officially returned
from his extended "vacation" on March 10. Two days later,
during a meeting with the Ambassador, the visibly energized
Stelmakh gave every indication that he was again firmly in
control of the NBU and confident of his political future.
The central bank had been leaderless since Stelmakh
disappeared from public view in late January, ostensibly to
go on leave but in reality stepping aside as PM Tymoshenko
and President Yushchenko fought over his political future.
The already widespread criticism over his handling of the
economic crisis had intensified in the weeks prior to his
departure, particularly from Tymoshenko and her BYuT faction
in the Rada, and had culminated in a meaningless yet
politically symbolic Rada vote to oust him (ref A). Stelmakh
returned to the NBU just days after the Constitutional Court
confirmed Yushchenko's claim that the Rada had no authority
to remove him, and following a report in a reputable
newspaper that cited unnamed sources in the Presidential
Secretariat to claim that Yushchenko and Tymoshenko had
agreed to keep Stelmakh as NBU Governor until after the
upcoming presidential elections.

Tymoshenko's "Lack of Sincerity"
--------------


4. (C) During his meeting with the Ambassador, Stelmakh
repeatedly lashed out at Tymoshenko and what he called her
"lack of sincerity" on issues related to the economic crisis.
He said the March 11 meeting with Yushchenko and Tymoshenko
(ref B) was a positive step towards securing the IMF's return
to Ukraine, yet he doubted whether Tymoshenko would follow up
on the political commitments she made during the meeting.
Stelmakh speculated that Tymoshenko would introduce the
needed legislation to raise excise taxes, lower pension fund
spending and remove paragraphs 84 and 86 of the budget law,
yet work behind the scenes to thwart passage of most, if not
all, of these measures. He said Tymoshenko would work to
ensure that a sufficient number of OUSD deputies, upon whose
votes the coalition depended, would refuse to support the
measures. Tymoshenko could then pin blame on Yushchenko for

KYIV 00000483 002 OF 003


ostensibly failing to deliver the votes of his political
supporters.


5. (C) Stelmakh said he understood the difficulties making
further budget cuts, yet he said Tymoshenko and Rada speaker
Lytvyn had no interest to fight the country's "social
appetite" for large-scale social spending. The Party of
Regions supported both Tymoshenko and Lytvyn in this regard,
he said, which created further challenges to further spending
cuts in this year's budget.

Bank Recap to Begin, Nadra to Get State Funds
--------------


6. (C) Stelmakh said the NBU would in the coming week
formally determine the additional capitalization needed by
the first 20 banks that underwent the diagnostic tests
required by the NBU. Existing shareholders would provide the
needed capital in most cases, he said, adding that Nadra Bank
would be the first to actually need capital from the GOU.
Tymoshenko was making it difficult for the NBU to move
forward with a public recapitalization of Nadra Bank,
Stelmakh said, because she had asked the Prosecutor General's
office to initiate an investigation into the NBU's treatment
of Nadra. Tymoshenko was fearful that oligarch Dmitry
Firtash was trying to gain control of the bank, yet the NBU
had no indication that he was involved, Stelmakh said.
(Note: Firtash, co-owner of gas intermediary RUE, is a bitter
political foe of Tymoshenko and purported to be close to
President Yushchenko. End note). Tymoshenko was telling the
NBU that all banks except Nadra were eligible for GOU-funded
recapitalization, Stelmakh claimed. Moving forward quickly
to prevent Nadra, with its UAH 12 billion of deposits (about
$1.5 billion),from defaulting was being unnecessarily
hindered because of Tymoshenko's actions, he added.


7. (C) Stelmakh confirmed that the March 11 meeting also
approved the creation of an interagency council that would
oversee the bank recapitalization and resolution process.
Tymoshenko would chair the council, the NBU would be an
active participant, and the IMF and World Bank would have
observer roles to ensure that GOU actions adhered to their
expectations and conditionalities.

Banking Consolidation Necessary, But Not Easy
--------------


8. (C) Stelmakh said the banking sector was in need of
serious consolidation, yet the NBU's existing regulatory
authority did not give it the proper tools to proactively
encourage bank mergers. The NBU can force consolidation when
banks fail to meet regulatory requirements, but has far less
leverage otherwise. Reforms requiring all banks to become
open joint stock companies introduce further legal challenges
to forced change of ownership he added. Capital adequacy
ratios (CARs) were still at a comfortable 13-14 percent in
the banking sector, far above the 10 percent floor set by the
NBU. It would be easy for the NBU to force mergers once
banks fell below the floor, but far more difficult as long
they remained above it. The NBU was currently thinking
through different models to accelerate consolidation. These
included 1) creating a legal basis for the state-owned
Ukreximbank and Oschadbank to take over smaller banks; 2)
changing existing bank refinancing rules; under one model now
being discussed, the NBU would only refinance larger banks.
These, in turn, would finance smaller banks. If the smaller
banks failed to return the debt, the larger banks could
absorb them as affiliates. In any case consolidation was
inevitable, but was a process that would take several years,
he said.

Deposit Withdrawals Now the Major Problem
--------------


9. (C) Stelmakh acknowledged that CARs would continue to
deteriorate in the coming months, yet said that deposit
withdrawals were now the biggest short term danger for the
banking system. Deposit flight in hryvnia was more serious
that deposit flight in foreign currencies, he said. He asked
the Ambassador whether the international community might
consider a $1 billion loan to Ukraine's Deposit Insurance
Fund, which he said was currently more urgent than external
funding for expected bank recapitalizations. Stelmakh argued
that such a loan would help reestablish trust in the banking
system and help the NBU and GOU stem deposit flight. The
Ambassador said he would forward the idea to Washington.


KYIV 00000483 003 OF 003


Foreign Reserves
--------------


10. (C) The Governor said that, as of March 11, the NBU had
$23.6 billion of net foreign exchange reserves, comfortably
above the $21.8 billion floor needed by March 31 in
accordance with the IMF conditionalities. The NBU had lost
about $16.5 billion in reserves since the beginning of the
crisis, he said. Of this amount, $8 billion went to repay
external loans, $6 billion "disappeared into the socks of the
population," $2 billion went to Naftohaz to repay debts to
Gazprom (ref c),and $500 million went to meet the
accelerated repayment of the Ukravtodor loan to Morgan
Stanley. The $4.5 billion that the NBU had already received
from the IMF was not included in the $23.6 billion. The NBU
had already invested the IMF money in sovereign G7 debt and
had no intention of ever using it, he claimed.


11. (C) Looking forward, the NBU was now confident that the
current account would more or less balance out this year, he
said. Meeting the expected sizable deficit in the capital
account would be more of a challenge, yet was realistic, he
said. Two companies might need significant NBU support,
Stelmakh added. Naftohaz would need sizable foreign exchange
to pay for gas imports, and mobile telephone operator
KyivStar would need $1.5 billion for dividend payments to
foreign shareholders that had been held up for 5 years in a
court case that was now resolved. The NBU would ensure that
both companies could meet their commitments if the market
could not provide enough foreign exchange, he said.

Naftohaz
--------------


12. (C) Stelmakh said that many observers in Ukraine had
criticized the NBU for facilitating Naftohaz's payments to
Gazprom (ref C),yet the NBU had no realistic alternative.
The NBU provided only six-month liquidity to Ukreximbank and
Oschadbank for onward lending to Naftohaz, he said. Naftohaz
will be forced to pay back the loans during the course of the
year, and can only do so by raising gas prices. Tymoshenko
was angry when she finally understood what the NBU had done,
Stelmakh said. According to him, Tymoshenko "thought she
could walk away and forget about the problem" once the NBU
had enabled Naftohaz to meet its debts to Gazprom.

Comment
--------------


13. (C) The political infighting between Tymoshenko and
Yushchenko over the NBU, and the absence of a strong NBU
leader during the current time of crisis, had been
universally criticized both in Ukraine, and among that
international donor community that is now being asked to
provide Ukraine with a multi-billion budget support package.
If Stelmakh's energy and self-confidence are any reflection
of his political status, then it appears that the leadership
question at the NBU has been resolved. Many observers may
not be happy that Stelmakh is back in the saddle, but at
least the NBU has a decisive leader, and the political
wrangling over him has notably subsided, at least for the
moment. End comment.
TAYLOR