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08KYIV2105, UKRAINE’S BUSINESSES TENSE; IMF AND NSDC DELIBERATE

October 20, 2008

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Reference ID Created Released Classification Origin
08KYIV2105 2008-10-20 15:31 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

VZCZCXRO9675
PP RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2105/01 2941531
ZNR UUUUU ZZH
P 201531Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 6573
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 03 KYIV 002105 
 
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'S BUSINESSES TENSE; IMF AND NSDC DELIBERATE 
 
REF: A) KYIV 2097, B) KYIV 2030 
 
SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION 
 
1.  (SBU) Summary.  With ongoing International Monetary Fund (IMF) 
negotiations and an emergency session of the National Security and 
Defense Council (NSDC) as the backdrop, Ukraine's politicians 
swapped jabs, while businesses scrambled to cover their mounting 
losses.  No announcement was made about a bailout plan, but the IMF 
released a press statement suggesting financial assistance may be 
offered regardless of snap parliamentary elections.  Industry and 
banking leaders cite growing concerns about jobs, capital, and 
revenue losses.  End Summary. 
 
 
IMF Denies Tymoshenko's Claim 
----------------------------------------- 
 
2.  (SBU) The International Monetary Fund issued a press statement 
on October 17 denying it would require Ukraine to delay early 
parliamentary elections in return for a financial assistance 
package.   Prime Minister Yulia Tymoshenko had announced earlier 
that the IMF would impose this conditionality (Ref A).  Ukrainian 
press widely circulated the public clarification and response to 
Tymoshenko's claim.  Separately, Tymoshenko met with IMF officials 
to discuss measures that would be conditional for financial support. 
 She emerged from the talks to announce that she would end the 
negotiations successfully, and that Ukraine was likely to receive a 
large-scale (up to $14 billion) financial support package.  Post 
received no confirmation from the IMF of Tymoshenko's claims by late 
October 20. 
 
 
NSDC on the Financial Crisis 
------------------------------------ 
 
3.  (SBU) Ukrainian President Viktor Yushchenko chaired a special 
meeting of the National Security and Defense Council on October 20 
to consider a plan for stabilizing Ukraine's financial system. 
During his opening statement, Yushchenko implicitly bashed 
Tymoshenko, stating, "We should stick to professionalism, rather 
than political programs and political ideas."  The president, who 
has referred to himself lately as a "categorical optimist," is 
expected to announce coordinated actions by the government and 
National Bank.  Post had no independent report on the outcome of the 
meeting as of late October 20. 
 
4.  (SBU) Also on October 20, Yushchenko rejected a proposal to 
create an anti-crisis coalition in the Verkhovna Rada, made the 
previous evening in a nationally broadcast address by PM Tymoshenko. 
 According to Yushchenko's press secretary, a coalition of this sort 
would be inferior to the NSDC in its "legitimacy, mobility, and 
professional merits."  In her televised address, Tymoshenko again 
called for delaying the snap elections.  She also announced the 
suspension of her party's legal battle with Yushchenko over the 
elections, in favor of a proposal to create a grand coalition to 
address the financial crisis. 
 
 
NBU Clarifies Resolution 319 
------------------------------------ 
 
5.  (SBU) The National Bank of Ukraine (NBU) revised some of its 
previous measures on bank lending.  Modifying its Resolution 319 of 
October 13 (Ref B), the NBU lifted the restriction that had 
prevented banks from expanding loan portfolios beyond their October 
13 levels.  Banks may now increase both hryvnia and foreign currency 
lending, but only to parties that export goods or services.  In 
another welcome modification, importers can again purchase foreign 
currency to pay for imports before the goods arrive in Ukraine. 
 
 
How Long Will Banks Support Subsidiaries? 
--------------------------------------------- --------- 
 
6.  (SBU) Roughly 70 percent of the external debt due by banks is 
owed by banks controlled by foreign banks (Ref A).  Many local 
observers still assume that foreign parent banks will continue to 
supply their Ukrainian subsidiaries with short term funding.  (Last 
week, for example, Raiffeisen Bank Austria gave its Ukrainian bank, 
Raiffeisen Aval, a $180 million short term loan.)   Nonetheless, 
foreign bank representatives have told us that such backing is not 
without its limits.  Hans Grisel, General Manager of ING Bank 
Ukraine, and Citibank's Nadir Shaikh said that measures adopted by 
regulators in the parent banks' home countries could compel them to 
reduce their exposure in particularly risky markets.  In addition, 
 
KYIV 00002105  002 OF 003 
 
 
foreign banks could at some point themselves decide that the 
continued risk of operating a bank in Ukraine outweighs the value of 
the franchise, even in the longer run, particularly if Ukraine's 
credit rating worsens dramatically or the country places 
restrictions on the repatriation of earnings or capital.  Currently, 
foreign banks are preparing a letter to the NBU requesting that they 
be allowed to hedge the capital that their owners had injecte
d in 
their banks, Grisel and Shaikh told us.  They will ask that the NBU 
allow them to maintain a foreign currency deposit with the central 
bank that equals the value of their paid-in capital at current 
exchange rates. 
 
 
Crisis Hits Businesses and the Common Man 
--------------------------------------------- --------- 
 
7.  (SBU) We hear anecdotal information from a number of sources 
that business leaders (please protect throughout) and citizens alike 
are taking measures to soften the blow.  Stephen Ansell, general 
manager of the Kyiv Hyatt, whose five-star hotel is owned by 
Ukrainian oligarch and head of the Industrial Union of Donbass (IUD) 
Sergey Taruta, told us that Taruta is extremely alarmed about his 
conglomerate's worsening economic position.  Ansell said that 
Taruta's steel business is expecting heavy losses in the fourth 
quarter of 2008, during which time over 500,000 job losses are 
expected industry-wide.  Echoing what Post heard from Rinat 
Akhmetov's System Capital Management (Ref A), Taruta told news 
weekly Kommersant that IUD would halt all investment projects, 
including a $500 million joint venture with Arcelor Mittal known as 
Crooked Horn.  He also confirmed that 20,000 of IUD's 60,000 steel 
workers would be laid off.  "It is not our fault," Taruta said.  "We 
simply cannot support the pay of these people."  IUD's vice 
president Oleksandr Pylypenko further stated, "This crisis is 
systemic.  The problem concerns everyone.  I think soon in Ukraine 
every third person will become jobless."  For his part, Ansell 
lamented that his once thriving luxury restaurant business had also 
greatly suffered, due to inflation, currency devaluation, and rising 
food costs, but demand for Kyiv's limited high-end hotel rooms had 
shielded his core business from heavy losses. 
 
8.  (SBU) Automobile companies are expected to take similar measures 
to reduce their workforces.  Bohdan Kulchyckyj, CEO of Winner Group 
-- an American-owned importer and retailer of Ford, Volvo, Jaguar, 
Land Rover, and Porsche, is also dour about his company's prospects. 
 Whereas sales growth had made the Ukrainian car market one of 
Europe's leaders for the past five years, there is now a huge 
inventory glut of mid-market and luxury cars.  Kulchyckyj told us 
that banks halted new credit issuance for auto purchases on October 
15, which has led to an immediate 50 percent drop in consumer demand 
and an expected sharp reduction in imports.  Kulchyckyj has directed 
managers to rate all employees, protecting essential workers in the 
top 20 percent and letting go the bottom 10 percent.  Kulchyckyj 
intimated this would be the first of at least two rounds of layoffs 
in the coming months. 
 
9.  (SBU) IKEA production executive Andreas Weidenholzer predicted 
large near-term layoffs in his industry.  He lamented that IKEA's 
Ukraine-based furniture plant which, until six weeks ago, had been 
trying to secure investment for upgrades to its 20 year-old 
machinery, could halt production or shift operations to more 
efficient facilities in Romania.  Weidenholzer cited market 
uncertainty, overly bureaucratic regulation, and a capital freeze as 
the basis for IKEA's move to EU plants.  He was stinging in his 
appraisal of Ukraine's governmental response to the crisis, saying 
that officials are acting to get a return on their bribes before the 
impending elections throw them out of office. 
 
10.  (SBU) Although Kyiv-based analysts suggest that the hryvnia 
will depreciate further and that the NBU will be forced to move its 
official exchange rate downward, possibly in connection with an IMF 
conditionality that Ukraine allows the currency to float more 
freely, it is unclear where the hryvnia is actually headed or how 
fast a depreciation might occur.   AmCham President Jorge Zukowski 
told us that several of his members, companies importing consumer 
goods, were preparing scenarios that foresaw an exchange rate 
anywhere between 7 and 10 UAH/$. 
 
11.  (SBU) Walking around the streets of Kyiv, concerns about the 
exchange rate are visible on the faces of everyday citizens. 
EconOff stood in line at a local exchange kiosk, where twenty people 
waited to sell hryvnia at one of the city's best advertised prices, 
which at 5.35 to 5.50 UAH/$ on October 20 was weaker than the NBU's 
official rate of 4.96 (+/- 8 percent).  Elderly ladies expressed 
their belief that the currency would only further devalue.  Others 
in the queue, from men in business suits to construction workers, 
whispered that they needed to buy now "before dollars were all 
 
KYIV 00002105  003 OF 003 
 
 
gone." 
 
TAYLOR

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