Identifier
Created
Classification
Origin
10KYIV71
2010-01-15 16:39:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

UKRAINE'S NATIONAL BANK WILL HELP WITH GAS PAYMENTS

Tags:  EFIN ECON ENRG EREL PGOV UP 
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R 151639Z JAN 10 ZDK
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 9144
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/NSC WASHDC
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 000071 

SIPDIS

STATE FOR EUR/UMB AND EEB/OMA

E.O. 12958: DECL: 01/14/2030
TAGS: EFIN ECON ENRG EREL PGOV UP
SUBJECT: UKRAINE'S NATIONAL BANK WILL HELP WITH GAS PAYMENTS

Classified By: Ambassador John F. Tefft for Reasons 1.4 (b) and (d)

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000071

SIPDIS

STATE FOR EUR/UMB AND EEB/OMA

E.O. 12958: DECL: 01/14/2030
TAGS: EFIN ECON ENRG EREL PGOV UP
SUBJECT: UKRAINE'S NATIONAL BANK WILL HELP WITH GAS PAYMENTS

Classified By: Ambassador John F. Tefft for Reasons 1.4 (b) and (d)


1. (C) Summary. Despite the lack of political unity, the
National Bank of Ukraine was obliged to help the government
make its gas payments to Russia in a timely manner, National
Bank Governor Stelmakh told the Ambassador on January 14.
During the meeting, Stelmakh also noted that the exchange
rate had been under pressure of depreciation recently as a
result of political uncertainty and banks engaging in
speculation. Nonetheless, he expressed confidence in the
National Bank of Ukraine's monetary policy, particularly its
success in holding down inflation over the past year. Nadra
Bank would be brought back to life quickly if creditors would
only agree to a stiff financial haircut. End Summary

Stelmakh Complains of Lack of Political Unity
-------------- ---


2. (C) Disharmony between Ukraine's President and Prime
Minister had a negative impact on Ukraine's economy, National
Bank Governor Volodymyr Stelmakh told the Ambassador on
January 14. Conducting monetary policy was difficult.
Stelmakh complained that as a result of political infighting,
the National Bank of Ukraine (NBU) lacked access to basic
statistics, including budget deficit and GDP figures.
Business was difficult. The government, for example, owed
businessmen UAH 17 - 22 billion ($2.1-$2.75 billion) in VAT
arrears, according to Stelmakh. And the economy continued to
suffer generally from the government's inability to address
the economic crisis in a unified manner.

Gas Payments Continue to be Problematic but Will Be Made
-------------- --------------


3. (C) Gas payments were also a problem. Stelmakh confirmed
that the National Bank made the decision in December to
"provide for these problems" although doing so violated the
Bank's standard operating procedures. Expressing a sense of
responsibility for facilitating gas payments, Stelmakh noted
that the NBU was obligated to be involved since the IMF loan
was intended to support Ukraine's balance of payments and gas
payments constitute an important balance of payments line

item.


4. (C) Stelmakh confirmed that the NBU monetized $900 million
in early January from reserves to help the government make
the January 11 gas payment. The NBU ensured, however, that
it used accounts within the National Bank itself to enact the
payment. Stelmakh wanted to guarantee that neither Naftohaz
nor the GOU could touch the money before it was transferred
to Gazprom out of concern that the funds would be used for
domestic obligations instead. The transaction was finalized
on January 6, according to Stelmakh. Stelmakh criticized
Russia for trying to use Ukraine's difficulties making the
payments to discredit Ukraine at every turn. He also stated
that, although Ukraine was in discussions with Russia about
schemes for making the February and March gas payments, he
doubted that the Russians would come through in any way.
Ukraine hoped that Russia would allow Ukraine's gas payment
to be offset by advance gas transit fees or provide loans.
Stelmakh stated categorically, however, that gas payments,
which would be lower in February and March, would be made.
He did not state specifically how they would be made but said
that the NBU was obliged to be involved.


5. (C) Clearly unhappy that the NBU had not been the
recipient of all IMF program money to Ukraine, Stelmakh
asserted that the IMF program was actually operating in
violation of Ukrainian law. He stated that of the $10.6
billion the Ukraine already received from the IMF, $4.9
billion had gone directly to the Government of Ukraine to pay
domestic obligations. Stelmakh claimed that any debt burden
taken on by the government should first have the approval of
the Ukrainian parliament. However, Tymoshenko's government
had not sought parliamentary approval. Stelmakh also
maintained that the money the government had earned from
selling Kyoto carbon credits had gone directly to the budget,
rather than into "green" programs as intended.

NBU Successfully Held Inflation Low
--------------


6. (C) With pride, Stelmakh reported that the NBU was able
to lower inflation from 22% to 12% in 2009, despite severe
GDP contraction, which he estimated at 18%, a drop in

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exports, and a large government deficit. Stelmakh believed
that the low inflation rate showed that the NBU's monetary
policy was "correct."

Exchange Rate Intervention but Banks Pushing Rate Lower
-------------- --------------


7. (C) The National Bank continued to intervene in the
currency markets to support the national currency (the
hryvnia). However, Stelmakh complained that the NBU's
ability to intervene was limited because half of the IMF loan
had gone directly to the GOU for budgetary support instead of
to the NBU for balance of payments support. In recent days,
Stelmakh thought currency depreciation was being driven by
psychological factors in advance of the elections. He
lamented the ability of the media to whip up panic and drive
down the exchange rate. Stelmakh also said that the NBU was
seeking to consult with banks that were coming in with low
bids for currency. Stelmakh said, for example, that Citibank
had bid for currency at 8.25 when the official exchange rate
was hovering closer to 8.0. These bids had reportedly caught
the NBU off guard as it had spent $725 million in December
and another $25 million during the first week in January in
support of the hryvnia. Stelmakh hypothesized that banks were
looking to make some money on currency speculation since
lending was still basically frozen. The NBU was considering
suggesting new regulations that would require banks found to
be speculating on the exchange rate to repay any NBU
recapitalization funds they may have received. (Note:
Citibank told Econoff on 1/15 that it and other banks had
received a harsh letter from the NBU threatening to hold CEOs
of banks personally liable for foreign exchange transactions
and any impact of a devaluation on the economy. For its
part, Citibank believes the downward pressure on the hryvnia
is primarily a function of high demand from the population
for foreign currency given the politically unstable period.
End note.)

Nadra Bank
--------------


8. (C) Expressing concern about the health of the banking
system, the Ambassador noted that U.S. export credit agencies
had interests as creditors in Nadra Bank and asked about
efforts to address the problems at Nadra and in the sector.
In response, Stelmakh said that Nadra was among the first
group of banks to be recapitalized; however, a conflict of
interests between its owners and the Prime Minister had
stalled a full workout. He was aware that foreign firms
(including Cargill) and foreign export credit agencies were
interested in restructuring their loans to Nadra. The talks
with creditors were ongoing and not easy, according to
Stelmakh. Creditors were now being offered a package which
would require a 60% write-off, restructuring of 30% over the
next 3-7 years, and a 10% cash payment. But Stelmakh thought
that Nadra couldn't even come up with the 10% cash payment.
If the creditors agreed, Stelmakh thought the bank would come
back to life within 2-3 months, and he expressed willingness
to continue negotiations with the creditors. In general,
Stelmakh thought that the banking system was in better shape
than in was a year ago as banks had been required to increase
their reserves.

Ukraine Shifting out of G-7 Currencies
--------------


9. (C) Prior to the IMF program, Ukraine had its reserves
invested in a broad range of stable but relatively high
yielding currencies and short-term bonds, according to
Stelmakh. However, the IMF has recommended that Ukraine hold
its reserves in G-7 country instruments only. As a result,
Stelmakh said the NBU was buying more U.S. T-bills and
selling off Norwegian and Danish currency-denominated
instruments, among others. Stelmakh complained that this
would mean lower returns on NBU reserves but said the IMF
required such a move.

COMMENT: NBU Chief in Precarious Position
--------------


10. (C) Although NBU Governor Stelmakh said at the beginning
of the meeting that the National Bank was not a political
organization and that he tried to pay little attention to the
issues surrounding Ukraine's election, he is at the center of
one of Ukraine's most heated political conflicts between

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Prime Minister Tymoshenko and President Yushchenko. So far,
he has remained a strong Yushchenko supporter and resisted
monetizing much of the government's domestic debt. However,
realizing the necessity of meeting Ukraine's international
obligations, he (with the President's acquiescence) has made
it clear that as a last resort the NBU will do what it takes
to help the government with gas payments over the next few
months. End Comment.

TEFFT