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08KYIV2340, UKRAINE: DOLLAR AUCTIONS TO OFFSET FALLING HRYVNIA

November 28, 2008

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Reference ID Created Released Classification Origin
08KYIV2340 2008-11-28 05:32 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

VZCZCXRO1248
PP RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2340 3330532
ZNR UUUUU ZZH
P 280532Z NOV 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 6808
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS KYIV 002340 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, EEB/OMA 
TREASURY PASS TO TTORGERSON 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PREL PGOV XH UP
 
SUBJECT: UKRAINE: DOLLAR AUCTIONS TO OFFSET FALLING HRYVNIA 
 
REF: A) KYIV 2224; B) KYIV 2303 
 
SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION 
 
1. (SBU) The hryvnia traded around 6.7/$ on the interbank market on 
November 26, down roughly 3 percent from the previous day and 
falling from 6.0/$ a week ago.  On Kyiv streets, dollar bids started 
around 6.65/$ with offers topping 7.0/$.  Speculation about a 
developing black market filtered into the local press; these rumors 
were repeated anecdotally to Econoffs but have not yet been 
verified.  At the retail level, many banks and kiosks have either 
refused to sell dollars or only with significant markups to 
advertised rates in the form of processing fees. 
 
2. (SBU) Overall, the hryvnia lost 35 percent of its value over the 
last two months.  After spiking around 7.0/$ on October 29, the 
currency stabilized near 5.8/$ during the first three weeks in 
November, when the National Bank announced it would sell unlimited 
dollars from its foreign exchange reserves (ref A).  However, 
implementation of this policy has been piecemeal, and the NBU has 
repeatedly failed to fill all orders for dollars.  As the NBU 
gradually backed away from this policy, it began implementing an 
auction system with the support of IMF advisors.  Nonetheless, 
demand for dollars by both companies and the broader population has 
remained ferocious.  Information last week about unfilled dollar 
requests prompted new fears of a dollar shortage, undermining recent 
stability and causing the hryvnia to fall again.  The declines 
increased this week when the NBU reportedly did not sell any dollars 
for several days.  The NBU last announced its reserves as of October 
31, when they stood at roughly $31.9 billion.  It is widely assumed, 
however, the reserves have dropped substantially in the weeks since 
the last announcement. 
 
3. (SBU) Chairman Oleh Dubyna of Ukraine's national oil and gas 
company NaftoHaz underlined concerns about a jump in the exchange 
rate and a concomitant dollar shortage.  Stating that NaftoHaz had 
placed 600 million hryvnia on the exchange without any buyers, 
Dubyna stressed the need to purchase foreign currency to pay for gas 
imports, especially at a time when the company was facing 
complications making payments.  NaftoHaz needs dollars to settle a 
significant outstanding debt to Gazprom (ref B). 
 
4. (SBU) In a November 25 press conference, NBU Governor Volodymyr 
Stelmakh called the latest developments on the foreign exchange 
market public panic and speculation.  In order to slow demand for 
dollars, he announced the creation of a modified auction system for 
foreign currency, inviting bids from commercial banks for a minimum 
of $100,000.  The auction system will take place overnight, with 
banks pre-paying hryvnia and then waiting until the following day 
without a guarantee that the NBU will actually sell them dollars. 
Speculation is that this new scheme will disrupt banking operations, 
heighten market uncertainty and, like previous NBU programs for 
intervening in the market, remain non-transparent. 
 
5. (SBU) Comment.  Moving towards a more flexible exchange rate 
regime is an important IMF conditionality.  In practical terms, more 
flexibility means further devaluation, especially given Ukraine's 
current macroeconomic climate.  A hryvnia devaluation is also 
necessary to improve the country's external competitiveness and help 
it tackle the burgeoning current account deficit.  The NBU's 
management of the process has been suboptimal, however, marked by 
continuous changes in its intervention policy and growing concerns 
over favoritism when it sells dollars to banks.  End comment. 
 
TAYLOR

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