FIRTASH TRIUMPHS OVER TYMOSHENKO ON NADRA

UNCLAS SECTION 01 OF 02 KYIV 000232

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SUBJECT: FIRTASH TRIUMPHS OVER TYMOSHENKO ON NADRA

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1. (SBU) Summary. Nadra Bank's year-long moratorium on deposit
withdrawals ended on February 10, amidst last-ditch negotiations
over the bank's future. The National Bank of Ukraine (NBU) had
engaged in talks on February 10 about liquidating Nadra, one of
Ukraine's largest private banks, only to halt negotiations at day's
end and yield to majority shareholder Dmitro Firtash's proposal to
recapitalize the bank. This solution amounts to a notable defeat
for Prime Minister Tymoshenko, who had sought to gain control of the
bank to prove accusations of currency speculation and insider
dealings against Firtash, Nadra's majority shareholder.
Nonetheless, if Firtash's plan comes to fruition, the GOU would
stand to save $938 million in expenditures from its strapped 2010
budget that had been slated for Nadra's recapitalization. The deal
would also eliminate the NBU's need to monetize GOU securities to
pay for the majority of Nadra's unfinanced liabilities. End
summary.

FIRTASH REGAINS THE UPPER HAND
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2. (SBU) In what appears to be a dramatic, if predictable,
conclusion to the Nadra saga on February 10, business tycoon Dmytro
Firtash offered to inject a further UAH 6 billion ($750 million)
into Nadra, provided he was given a guarantee that Nadra's assets
and liabilities would remain at the bank. This proposal caused the
NBU governing board to halt deliberations over transferring Nadra's
assets and liabilities to state-owned Rodovid, which it had been
mandated to do per a December 23 Cabinet of Ministers' decision.
According to Embassy sources, NBU deliberations on February 10 were
interrupted throughout the day by numerous side meetings between NBU
Governor Stelmakh and Firtash. Ultimately, the NBU announced it
would extend Nadra's temporary administration and stated it would be
willing to accept Firtash's recapitalization proposal, upon
receiving proof that Firtash had sufficient funds to meet Nadra's
needs.


3. (SBU) A major financial backer of Viktor Yanukovych, Firtash is
motivated to retain control over and prevent liquidation of Nadra,
both to keep it out of the hands of Tymoshenko's government and to
prevent the loss of UAH 4 billion ($500 million),which Firtash had
placed as collateral for NBU refinancing in 2008. Since he also
reportedly controls roughly 92% of Nadra's shares through numerous
holding companies, including the eponymous DF Group, losing the bank
would mean he would cease having access to a financing source for
his numerous business activities.


4. (SBU) After purchasing Nadra in the fall of 2008, Firtash
quickly managed to secure NBU refinancing, which in total was
equivalent to nearly 29% of Nadra's entire loan portfolio.
Tymoshenko then accused Firtash, also the notorious head of gas
middleman RosUkrEnergo (RUE),of using Nadra's NBU monies for
currency speculation in December 2008. Tymoshenko publicly claimed
Firtash's currency dealings caused massive hryvnia depreciation and
wreaked havoc on Ukraine's banking sector and broader economy.
Tymoshenko has since sought to wrest control of the bank from
Firtash and the NBU.


5. (SBU) Meanwhile, Nadra's temporary administrator, Valentina
Zhukovskaya, has reputedly worked to delay the bank's resolution
until after the presidential election. With a Yanukovych victory
apparent for weeks before the election, and with the alleged support
of incumbent President Yushchenko, Zhukovskaya succeeded in
scuttling a negotiated agreement with foreign creditors, including
the U.S. Export-Import Bank and USDA's Commodity Credit Corporation.
The inability to come to terms with creditors prevented a decision
by the Tymoshenko government and stymied plans for Nadra's
recapitalization and nationalization.

NBU EXTENDS TEMPORARY ADMINISTRATION
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6. (SBU) After the NBU agreed on February 10 to extend
Zhukovskaya's writ for another year, Nadra announced it would begin
paying out deposits to households for the first time since February

2009. The following day, lines of disenfranchised, mostly elderly
depositors could be observed outside Nadra branches in Kyiv.
Analysts speculate there will be a run on Nadra's deposit base,
leading to a sharp deterioration of Nadra's already precarious
capital position. As of January 2010, Nadra's capital adequacy
ratio was a meager 1.9%, according to Embassy sources.

TYMOSHENKO NOW PLIANT
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7. (SBU) Aced out by Firtash and Zhukovskaya (and their political
supporters),the Tymoshenko government announced it would likely
cancel the December 23, 2009 Cabinet of Ministers' resolution to
transfer Nadra's assets and liabilities to recently nationalized
Rodovid bank. Acting Finance Minister Umanskyi also said the
government would halt plans to use government treasury bills to
recapitalize Rodovid, which reportedly required UAH 7.5 billion
($938 million) to make up for the shortfall in Nadra's assets.
Umanskyi insinuated that Tymoshenko had agreed to halt the
recapitalization of Rodovid, and he suggested the Cabinet of
Ministers would likely approve his proposal during a February 11
meeting. Umanskiy indicated the move would save the government UAH
7.5 billion in expenditures and drastically reduce the overall
amount the NBU would need to monetize in government securities in

2010.

COMMENT
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8. (SBU) Despite the fact that Nadra is -- in the words of one IMF
official -- a "dead man walking" from a financial point of view,
Firtash's victory is sweet revenge over Tymoshenko, who had cut RUE
out of its lucrative dealings with Gazprom and Naftohaz in early

2009. Firtash has clearly made the calculation that he stands to
gain more by retaining control of the troubled bank than letting it
become nationalized or liquidated, and thus falling into the hands
of Tymoshenko in what most likely are the waning days of her
government. After following through on his proposal to recapitalize
Nadra, Firtash is likely to get another major liquidity injection
from the NBU, which could enable the bank to become a going concern
again and position Firtash to take full advantage of his alliance
with Yanukovych, Ukraine's apparent President-elect.

TEFFT