TYMOSHENKO UNABLE TO PRY OPEN NBU RESERVES

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 000017

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 01/04/2020
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: TYMOSHENKO UNABLE TO PRY OPEN NBU RESERVES

REF: KYIV 1981

Classified By: CDA James D. Pettit for Reasons 1.4 (b) and (d)


1. (C) Summary. Negotiations have stalled over the transfer
of $2 billion in National Bank of Ukraine (NBU) reserves to
the state treasury, inhibiting Prime Minister Tymoshenko's
government from getting ready cash to assist with Naftohaz's
January 11 payment to Gazprom. Having lowered the NBU's net
international reserve (NIR) target and allowed for the
transfer, the IMF Board and its Kyiv resident representative
have stepped back from any mediating role among Ukraine's
authorities. While holding firm on the transfer of reserves,
the NBU has proposed the sale of Naftohaz-held government
bonds to commercial banks, though bankers say they have not
heard of (nor would they necessarily be interested in) an
impending sale of GOU debt. Analysts conclude that a deal
between the GOU and NBU over the transfer of reserves may
still be forthcoming or else a financial workaround will be
found, as there is no interest within or outside Ukraine in a
gas crisis redux. End summary.

IMF "DONE WHAT IT CAN DO"
--------------


2. (C) IMF Kyiv-based resident representative Max Alier told
us on January 5 that negotiations over the transfer of $2
billion in liabilities to the IMF from the NBU to the GOU
were continuing but "not going anywhere". Alier said he had
not met with any of Ukraine's top authorities in recent days
and was studiously avoiding a "mediating" role among the
parties over the NBU's reserves.


3. (C) Alier said the IMF had already "done what it can do"
for Ukraine before the upcoming presidential election. It
had become "extremely clear" to the Fund that it could not
intervene any further. Absent a consensus among Ukraine's
authorities over the transfer of the reserves from the NBU to
the GOU, Alier expected that the GOU and Naftohaz would be
forced to reach out to commercial banks. He speculated that
Naftohaz might test market appetite for a sale of GOU bonds,
held by the state energy company since it was recapitalized
by UAH 18.6 billion in July 2009 and another UAH 12 billion
at the end of December 2009 (reftel). (Note: Naftohaz has
used at least UAH 3.25 billion of the bonds to pay for gas
previously. End note.)


4. (C) Alier felt certain that foreign banks had enough
liquidity to purchase the bonds, though he admitted he had
not spoken with bankers about whether they would be
interested in the debt. An alternative mechanism would have
public banks purchase the instruments below par value. In
any case, IMF leadership was certain that no key stakeholders
within or outside Ukraine wished to prompt a crisis in the
event of non-payment of Naftohaz's January 11 bill to
Gazprom.


5. (C) Note: IMF Deputy Managing Director Lipsky had written
a confidential memo to Prime Minister Tymoshenko, Deputy
Prime Minister Nemyria, Acting Finance Minister Umanskiy, and
NBU Governor Stelmakh on December 30 to inform them of the
Board's decision to lower the end-2009 NIR target by $2
billion to $12.9 billion, per the GOU's request. Although
the NBU had deemed this move "unnecessary", the IMF reasoned
that the modification could increase flexibility to make
external payments. End note.

NBU REJECTS TRANSFER OF RESERVES, GOU BOND PURCHASE
-------------- --------------


6. (C) NBU Director for International Relations Sergiy
Kruglyk told us on January 5 that the central bank could not
transfer reserves to the GOU without a guarantee that the GOU
would use the monies solely for external payments. Only the
IMF could impose such a guarantee, Kruglyk said, since the
GOU "doesn't care about gas -- only about making wage and
pension payments." Furthermore, the NBU would not buy GOU
bonds, as it had determined that it already held 500% more
than the acceptable amount of GOU liabilities and needed to
closely watch the overall money supply.


7. (C) There were two possible options remaining to help
with the gas payment, according to the NBU. One would have
the IMF recall a prior loan allocating monies to the NBU's
reserves, with the IMF instead reissuing a new loan of the
same amount to the GOU's treasury. Another option would be

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for Naftohaz or the GOU to sell bonds to commercial banks.
There was UAH 20 billion in banking sector liquidity,
according to Kruglyk, and Naftohaz only needed UAH 8 billion
(roughly $1 billion) to meet its upcoming obligations.
(Note: Naftohaz Chairman Oleh Dubyna told the Ambassador on
December 24 that Ukraine purchased approximately 4.2 billion
cubic meters of gas in December. Based on that amount, the
payment due on January 11 will be around $874 million. End
note.)


8. (C) Kruglyk noted that if either the GOU or Naftohaz had
enough hryvnia resources available, the NBU would be willing
to exchange local currency for dollars to meet external
payments. The NBU would not comment on market appetite for
GOU debt issued directly or sold by Naftohaz, though Kruglyk
said Ukrainian authorities were in active negotiations with
commercial banks today.

BANKS HEARING CRICKETS
--------------


9. (C) However, a sample group of representatives from
foreign-owned banks and domestic state-owned banks -- the two
likeliest sources of available capital -- told us on January
5 that they had not been approached by the GOU or Naftohaz to
buy bonds prior to the January 11 gas payment deadline. OTP
board member Miklos Bebiak said that he had heard some rumors
of the bond sale, but that he was not aware of any details.
Dimitro Sologoub noted that Raiffeisen-Aval's traders had
likewise not been contacted.


10. (C) Raiffeisen-Aval had concluded the NBU and GOU would
continue their negotiations over the transfer of reserves
until the last minute. It had also heard that, as a fallback
plan, the NBU was working on a mechanism to directly credit
Gazprom, effectively bypassing Naftohaz and the GOU treasury
in order to prevent Tymoshenko from using the monies for
social payments. In any case, Raiffeisen-Aval and other
foreign-owned banks saw "no point" in buying more GOU
liabilities, as they already had huge holdings.


11. (C) Anna Zakharova, Director of International Finance at
state-owned Rodovid Bank, said that most senior
representatives she knew from fellow state-owned banks were
away from Kyiv during the holiday week. She told us that
Rodovid had not been approached by the GOU or Naftohaz. Even
if it had been requested to urgently buy GOU securities, it
would not have been in a position to make a large trade until
the week of January 11.

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


12. (C) The bank most likely to be arm-twisted into buying
GOU debt is state-owned Oshchadbank, whose assets are already
extraordinarily tied to Naftohaz. (Fitch recently indicated
that Naftohaz takes up 53% of Oshchadbank's loan portfolio,
roughly equivalent to 120% of the bank's capital.) However,
because state-owned banks do not possess enough liquidity to
help with the entirety of Naftohaz's outstanding obligations,
NBU reserves or a loan from a Russian source will still be
needed. Governor Stelmakh holds the aces and has upped the
ante but, serving at the will of the President and in his
final days in office, will be careful not to overplay his
hand.

PETTIT