VZCZCXRO0252
RR RUEHDBU RUEHSL
DE RUEHKV #1916/01 3091641
ZNY CCCCC ZZH
R 051641Z NOV 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8737
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
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 001916 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 11/04/2019 
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: NBU REFUSES TO CONCEDE ON NAFTOHAZ AND UKRAINE 
BUDGET 
 
REF: A. KYIV 1910 
     ¶B. KYIV 1878 
     ¶C. KYIV 1760 
 
Classified By: Economic Counselor Edward Kaska for Reasons 1.4 (b) and 
(d) 
 
¶1.  (C) Summary.  The National Bank of Ukraine (NBU) will 
continue to refuse to monetize government of Ukraine debt, 
despite a near empty GOU treasury and "psychological 
pressure" from Russia to make payments to Gazprom.  In the 
NBU's view, the GOU will have enough resources via special 
IMF allocations to meet Naftohaz's obligations.  Even without 
NBU support, other high-level sources said Ukraine would make 
its November 7 gas payment -- perhaps even early, in order to 
"calm down" Russia. 
 
¶2.  Odds that the NBU would sign the latest IMF Letter of 
Intent (LOI) were "close to zero", even though the NBU would 
meet targets for net reserves and base money.  The central 
bank was close to approving the transfer of assets and 
liabilities from troubled Ukrprombank to Rodovid, but it 
acknowledged that talks between Nadra and key foreign 
creditors remained off track.  End summary. 
 
NBU BALKS ON MONETIZING FOR NAFTOHAZ 
------------------------------------ 
 
¶3.  (C) NBU official spokesman and head of international 
relations Sergiy Kruglyk told the Charge on November 5 that 
the NBU would not monetize GOU debt for Naftohaz payments and 
Ukraine's 2009 budget deficit, despite possessing ample 
foreign reserves.  Citing inflation concerns and the need for 
macroeconomic discipline, Kruglyk said there was "no 
possibility" the NBU would help the government meet its 
spending goals via monetization.  The one financing tool the 
NBU had considered was giving state banks extra time to repay 
UAH 80 billion ($9.75 billion) in outstanding credits, some 
of which were loans to aid Naftohaz with gas purchases.  Such 
an extension could allow these banks to again finance 
Naftohaz gas payments. 
 
¶4.  (C) Kruglyk noted that the Ministry of Finance had been 
declared Ukraine's "fiscal agent" and could draw on general 
and special allocations of IMF Special Drawing Rights (SDR) 
worth roughly $2 billion from late summer.  This mechanism 
would provide enough of a "buffer" for Ukraine to make its 
November 7 gas payment, even though the "government otherwise 
had no money."  While Russia had applied "psychological 
pressure" on Ukraine to pay Gazprom, the NBU would not heed 
politically driven external or internal demands to monetize. 
 
¶5.  (C) Separately, diplomatic contacts confirmed that the 
Ministry of Finance already had tapped SDR 300 million late 
on November 4, a sum that would facilitate Ukraine's November 
7 payment to Gazprom.  The IMF's resident representative Max 
Alier apparently indicated that the GOU's treasury account 
would be credited on November 6.  Additionally, according to 
a British diplomat, the GOU planned to sell SDR 700-800 
million after November 9 to meet November budget obligations 
and the December 7 payment to Gazprom. 
 
¶6. (C) Separately, Naftohaz spokesman Valentyn Zemlyansky 
told us that it was still unclear how Naftohaz would make the 
November 7 payment.  Nonetheless, confirming what 
Presidential Envoy for Energy Security Bogdan Sokolovsky told 
us (Ref A), the Presidential Secretariat, Prime Minister, and 
Naftohaz had been working together to come up with a solution 
to the payment problem. 
 
¶7.  (C) Ukraine's newly appointed Ambassador-at-Large for 
Energy Security Viacheslav Kniazhnytiskyi told us that 
Naftohaz would make the payment in advance to "calm down" 
Russia.  Independent energy analyst and former chairman of 
Ukrtransnafta's board Oleksandr Todiichuk likewise said that 
Naftohaz would pay on time.  He noted that Naftohaz had 
started to sell the gas it had accumulated in underground 
storage this summer and was already receiving some 
compensation from domestic consumers. 
 
¶8.  (C) Despite its slight revenue increase, Naftohaz would 
still need to rely on financing from state-owned banks or 
receive government support to make the November 7 payment, 
according to Todiichuk.  He warned that the biggest risk for 
a possible cutoff was not whether Ukraine could make its 
 
KYIV 00001916  002 OF 003 
 
 
monthly payment to Gazprom but the continued threat of 
Russian penalties to Ukraine for its under-purchase of gas. 
 
GOU HAS ADEQUATE TOOLS FOR BUDGET 
--------------------------------- 
 
¶9.  (C) According to the NBU, 2009 and 2010 budget deficits 
could be financed with tools already at the GOU's disposal. 
Kruglyk said there was "plenty" of liquidity in the Ukrainian 
banking system.  The GOU should rely on the domestic debt 
market to finance spending projects, such as for Euro 2012 
infrastructure development and to combat the recent H1N1 
outbreak.  Nevertheless, Kruglyk later cautioned that the GOU 
should not issue securities with a 30% coupon, the rate 
offered by the Ministry of Finance on October 27 when it 
raised UAH 1 billion.  Kruglyk said such rates would cause an 
unbearable debt burden. 
 
¶10.  (C) The NBU calculated that the social spending law 
figures (Ref B) presented by the Ministry of Finance were 
three times their actual cost, and that the President had 
signed a "feasible" law that would benefit the poorest of 
Ukraine's population.  Nonetheless, 2010 would be a "very 
difficult" year for the new president.  Kruglyk predicted 
that there would be no privatizations or new foreign directm(J_7ei5QQu8e1xth IMF tranche, the NBU would have enough funds to cover 
balance of payments obligations. 
 
NBU "HEALTHY" 
------------- 
 
¶12.  (C) Kruglyk stated that the NBU was relatively "healthy" 
with total current reserves roughly $27 billion and net 
reserves at $16 billion.  The NBU had met IMF targets for net 
reserves and base money. 
 
¶13.  (C) The NBU spokesman intimated that NBU governor 
Volodymyr Stelmakh would remain in office after formally 
retiring on December 18.  President Yushchenko had already 
devised plans to appoint Stelmakh acting governor until the 
end of his presidential term, a move that would not require 
confirmation. 
 
UKRPROMBANK AND NADRA UPDATE 
---------------------------- 
 
¶14.  (C) Kruglyk told us that NBU vice governor Anatoliy 
Shapovalov would authorize the transfer of Ukrprombank's 
assets and liabilities to Rodovid, assuming that the 
difference between assets and liabilities would be provided 
by the GOU in treasury bills (Ref C).  Shapovalov planned to 
send official notification to the Cabinet of Ministers on 
November 5 or 6.  (Note: Shapovalov had been the Charge's 
intended interlocutor, though allegedly he was summoned 
spontaneously by President Yushchenko.  End note.) 
 
¶15.  (C) Nadra remained a more complicated case, namely 
because external creditors in the Coordinating Committee 
(CoComm) had yet to define a unified internal position 
vis-a-vis Nadra.  According to Kruglyk, Nadra's restructuring 
efforts with export credit agencies and Eurobond holders had 
been successful.  But the lack of CoComm agreement threatened 
overall restructuring talks.  Nadra's temporary administrator 
Valentina Zhukovska had held talks in London on November 4 
with CoComm representatives, while NBU banking supervisors 
continued negotiations with Nadra creditors on November 5. 
(Note: In October, the GOU relaxed its requirement for 
restructuring Nadra's external debt from 100% to 75%.  Even 
this lower requirement has not been met, casting doubt on 
whether the bank will be recapitalized.  End note.) 
 
COMMENT 
------- 
 
 
KYIV 00001916  003 OF 003 
 
 
¶16.  (C) Using economically astute (and politically 
convenient) arguments, the NBU appears to be holding its 
ground on the monetization of government debt for Naftohaz 
and the budget deficit.  This has prompted the Ministry of 
Finance to use its newly clarified "fiscal agent" status for 
SDR allocations to make quasi-sovereign gas payments. 
 
¶17.  (C) Options for the GOU's outstanding fiscal gap, 
totaling up to $3.75 billion for the remainder of 2009, are 
more limited.  Prime Minister Tymoshenko says the IMF program 
is now the only hope.  Without NBU financing or IFI support, 
it is indeed difficult to see any way Ukraine will avoid 
payment arrears, anathema for Tymoshenko prior to the 
presidential election but just what her opponents seem to 
have ordered. 
PETTIT