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08KYIV2097, UKRAINE IMF VISIT HIGHLIGHTS DEEPENING BANK CRISIS

October 17, 2008

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Reference ID Created Released Classification Origin
08KYIV2097 2008-10-17 17:02 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

VZCZCXRO8420
PP RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2097/01 2911702
ZNR UUUUU ZZH
P 171702Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 6570
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 02 KYIV 002097 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, EEB/OMA 
TREASURY PLEASE PASS TO TTORGERSON 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PGOV XH UP
SUBJECT:  UKRAINE IMF VISIT HIGHLIGHTS DEEPENING BANK CRISIS 
 
REF:  KYIV 2030 AND PREVIOUS 
 
SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION 
 
1.  (SBU) Summary.  The International Monetary Fund (IMF) is not 
commenting on the substance of its ongoing discussions with the 
government of Ukraine (GOU) on a possible support program, but its 
representatives told us on October 17 that the delegation's stay in 
Kyiv was open-ended.  PM Tymoshenko said the IMF was prepared to 
loan Ukraine anywhere from $3 to $15 billion and suggested the IMF 
would expect the country to delay early parliamentary elections. 
There was no independent confirmation of Tymoshenko's claims, 
although various analysts speculate that IMF support could total $10 
to $15 billion.  Although the National Security and Defense Council 
(NSDC) will continue discussions on an economic emergency package on 
October 20, the GOU, President Yushchenko, and the National Bank of 
Ukraine (NBU) have not demonstrated they can form a consensus to 
tackle the crisis and jointly accept IMF conditions for an 
assistance package. 
 
2.  (SBU) Attention of market participants in Kyiv is now focused on 
how Ukraine will finance $50 to $60 billion in external commitments 
due in 2009.  The NBU's foreign exchange reserves of $37 billion are 
not sufficient to cover the expected commitments, and international 
sources of funding, used heavily by Ukraine's private sector in 
recent years to fuel growth, have all but dried up as a result of 
the world's financial crisis.  There has been speculation, 
unsupported by any GOU statements, that Ukraine may seek exceptions 
to its WTO commitments to deal with the deteriorating balance of 
payments situation.  End Summary. 
 
IMF Silent on Substance, GOU Plans Unclear 
--------------------------------------------- ---------- 
 
3.  (SBU) The IMF delegation, the first in five years to Ukraine, 
continued its discussions with the GOU on October 17.  The local IMF 
office would not comment on the substance of the discussions, but 
told us only that the delegation was planning to remain in Ukraine 
on an "open-ended" basis.   IMF Managing Director Dominique 
Strauss-Kahn was quoted as saying that the IMF was prepared to help 
Ukraine, and PM Tymoshenko said that the IMF could loan Ukraine 
anywhere from $3 to $15 billion.  There was no independent 
confirmation of the figures cited by Tymoshenko.   NBU deputy 
governor Oleksandr Savchenko, leading the negotiations with the IMF, 
has suggested that an IMF deal may be signed as early as next week. 
Various analysts have speculated that Ukraine may be seeking a 
$10-15 billion "stand-by" program. 
 
4.  (SBU) Parallel to the IMF discussions, the National Security and 
Defense Council (NSDC) began discussing an emergency package to 
support Ukraine's banking system and fend off a balance of payments 
crisis.  The NSDC announced that it would meet again on October 20 
to approve the package.  The NSDC would not comment on the measures 
being discussed, but various media reports speculated that the 
package would, among other measures, focus on boosting Ukrainian 
exports while diminishing imports.  There was even speculation that 
Ukraine would request from the WTO exemptions from its commitments 
in order to deal with a potential payments crisis.  However, Post 
has not had any GOU confirmation that this might be the case. 
 
5.  (SBU) Any IMF support will focus on stabilizing Ukraine's 
banking system and helping the country meet its external debt 
obligations, particularly in the short term.  Discussions among 
market participants and analysts in Kyiv in recent days have focused 
on the composition and term structure of Ukraine's external debt, 
which has grown by about 45 percent in the past two years and 
currently totals roughly $100 billion, or 60% percent of GDP.   Of 
this debt, about $15 billion is public sector debt, $38 billion is 
debt owned by banks, and $43 billion is external debt of Ukraine's 
corporate sector.  The rest is inter-company lending. 
 
6.  (SBU) Most observers have argued that the level of external debt 
by the public sector, which has remained fairly constant in recent 
years, is not a source of concern.  The GOU is not dependent on 
external borrowing to finance its modest budget deficit, and it 
could turn increasingly to internal sources of funding if the 
international capital markets remain as dormant as they are now. 
While less is known about the composition of the $43 billion in 
external debt owned by Ukraine's corporate sector, several analysts 
have pointed out that it is concentrated in a few hands, primarily 
the largest and most well-known Ukrainian companies with 
international exposure. 
 
Banking Vulnerabilities the Chief Concern 
--------------------------------------------- ------- 
 
 
KYIV 00002097  002 OF 002 
 
 
7.  (SBU) During an October 16 discussion, Dominique Menu, country 
head for the Ukrainian subsidiary of the French bank BNP Paribas, 
said his bank believed that corporate borrowers are typically cash 
rich and have low debt-to-capital ratios.  Separately, Jock 
Mendoza-Wilson, head of investor relations at System Capital 
Management (SCM), the holding company of Rinat Akhmetov, Ukraine's 
wealthiest businessman, told us that SCM had "low gearing" in its 
balance sheet and sufficient sources of internal funding, even in 
light of the recent and drastic drop in steel production and prices. 
 The inability to borrow abroad would not harm SCM's current 
operations, but it would all but destroy SCM's aggressive foreign 
expansion plans.  SCM had hoped to borrow heavily in coming years to 
finance $6 billion in foreign acquisitions, Mendoza-Wilson told us. 
 
 
8.  (SBU) The banking sector, which has grown rapidly in recent 
years on the back of aggressive foreign borrowing, is the main focus 
of concern.  BNP Paribas' Menu said risks mainly reside in each 
individual bank's external debt and asset profile.  There was little 
concern about a chain reaction, or domino effect, of bank failures, 
because banks do very little business with each other.  Currently, 
loans to other banks equal only 2 percent of bank assets, he pointed 
out.  Instead, the main risk was banks' ability to roll-over short 
term external debt, now around $13 billion, that will come due in 
the coming months. 
 
9.  (SBU) Ukrainian banks controlled by foreign banks owe roughly 70 
percent of the $38 billion in external bank debt, and another 10 to 
15 percent is owed by banks owned by the largest Ukrainian 
oligarchs, Menu estimated.   BNP Paribas is still operating on the 
assumption that foreign banks would remain interested and able to 
provide their Ukrainian subsidiaries with the minimum funding they 
need to stay afloat, and that cash-rich oligarchs would likewise 
support their banks if necessary.   The biggest challenge would lie 
with the remaining Ukrainian banks that had neither strong foreign 
or domestic backing, he said. 
 
10.  (SBU) There is consensus among our interlocutors that Ukraine's 
external situation, as well as its short-term financing, remain 
precarious.   On October 16, Citibank country director Nadir Shaikh 
said his bank expects that Ukraine will need to finance about $50-60 
billion in external payments in 2009.  Of this total, some $15 to 
$18 billion will be Ukraine's current account deficit, which has 
more than doubled since last year and could reach 10 percent of GDP, 
he estimated.  (Note: Other analysts expect a current account 
deficit of up to $24 billion.)   Another $20 billion will be needed 
for servicing the long-term debt -- this includes about $12 billion 
of long-term debt coming due and $8 billion of interest -- and the 
remaining $15 billion will be short-term debt coming due. 
 
11.  (SBU) The NBU's foreign exchange reserves -- currently about 
$37 billion -- cannot cover the expected financing need, Shaikh 
pointed out, and the world's capital markets have all but dried up. 
Citibank viewed Ukraine's position as critical, and said that the 
next six to nine months would be the most difficult time for the 
country, but the situation could improve in the second half of 2009 
if world markets stabilize.  The NBU had already lost about $1.5 in 
reserves since October 3 to support the hryvnia.   Further 
devaluation of the currency, which has lost 9.2 percent in recent 
weeks, was inevitable, Shaikh said. 
 
12.  (SBU) Shaikh and others were skeptical about the GOU's ability 
and willingness to effectively address the crisis.  He pointed out 
that the IMF would impose conditions in exchange for an assistance 
package, but it is still unknown whether the Tymoshenko government 
and President Yushchenko can jointly agree on IMF stipulations.  The 
institutional rivalry and lack of trust between the NBU and the 
Ministry of Finance could further complicate matters, he said. 
 
13.  (SBU) Comment.  Bad blood between Yushchenko and Tymoshenko has 
already colored the domestic political discussion on measures needed 
to address the potential balance of payments crisis.  Yushchenko has 
openly blamed Tymoshenko.  Tymoshenko has tried to downplay the 
significance of the situation, but is now modifying her position as 
it becomes clearer that action is necessary.  She has suggested that 
the IMF would expect that Ukraine delay the early elections in 
return for its support.  Ministers from Timoshenko's BYUT-led 
government, including Viktor Pynzenyk and Oleksandr Turchynov, have 
spoken out in favor of an IMF deal.   Analysts suggest that IMF 
funding might help them drive through difficult structural reforms 
on privatization and domestic gas price liberalization, measures 
normally off-limits for the bloc's populist wing.   In any case it 
is still too early to tell how the economic crisis will influence 
the political situation in the country.  End Comment. 
 
TAYLOR

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