VZCZCXRO0217
OO RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #1995/01 2811248
ZNR UUUUU ZZH
O 071248Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6483
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 001995 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, EB/OMA 
TREASURY PLEASE PASS TO TTORGERSON 
 
E.O. 12958: N/A 
TAGS: EFIN ECON XH UP
SUBJECT:  UKRAINIAN CURRENCY IN SLIDE 
 
REF: KYIV 1959 
 
SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION 
 
¶1.  (SBU) Summary:  Ukraine's external vulnerabilities - including a 
substantial slowdown in capital flows, worsening terms of trade, and 
a large current account deficit (reftel) - have caught up with the 
economy, leading to a swift hryvnia (UAH) depreciation in recent 
days.  Although the National Bank of Ukraine (NBU) surprised 
observers with a token effort to stabilize the situation, it appears 
the government has not taken any coordinated steps to respond to the 
broader economic causes of the currency slide.  End Summary. 
 
¶2.  (SBU) Since June 2008, the NBU's official policy has been to 
maintain a midpoint-based exchange rate.  Set at 4.85 UAH per 
dollar, with 4 percent flexibility in either direction (4.65-5.05), 
the currency is, in theory, allowed to move within a fixed range. 
In practice, however, market forces have pushed the currency's value 
beyond the prescribed deviation.  Last summer, for example, the UAH 
appreciated below 4.65, and in recent weeks it has traded above 5.05 
UAH at Kyiv exchange kiosks.  (Note: On October 7, Kyiv vendors are 
selling dollars for as much as 5.39 UAH.  End Note.) 
 
¶3.  (SBU) As the currency has depreciated, embassy contacts and news 
reports stated that the NBU would not intervene under any 
circumstances.  Then, on October 3, the National Bank announced it 
had sold $342 million in reserves at the rate of 5.0 UAH to the 
dollar, in order to stave off speculation and change the 
"psychology" of the market.  Bankers now say the intervention did 
little to reverse the UAH slide and raised more questions about the 
competence of NBU policymakers.  In response to criticism, NBU 
Council Chairman Petro Poroshenko stated unequivocally that the 
National Bank would not engage in further currency intervention to 
support the hryvnia.  However, representatives from the arguably 
more powerful NBU Board have been largely silent. 
 
¶4.  (SBU) Ukrainian consumers are subject to the risks of further 
UAH depreciation, because many have taken on debt in UAH fixed to 
the dollar exchange rate.  This is also the case for corporate 
borrowers whose loans in foreign currency (through syndicated loans, 
Eurobonds, etc.) are repaid from UAH revenues.  As the dollar 
appreciates relative to the UAH, repayment schedules become more 
expensive.  These borrowers may soon face problems meeting loan 
obligations, and banks that made loans for cars, vacations, and home 
mortgages will also be in jeopardy, especially if defaults on 
devalued assets occur in appreciating currencies.  In addition, 
Western banks (holding roughly 70% of the country's external banking 
debt) remain focused on their home markets and liquidity of their 
parent banks.  One financier suggested that, other than funds to 
roll over maturing foreign debt, little new capital is likely to 
flow into Ukraine; rather, the trend could be in the opposite 
direction. 
 
¶5.  (SBU) Ukrainian Finance Minister Viktor Pynzenyk recently 
acknowledged concerns about the effects of financial volatility on 
the Ukrainian economy.  His was one of the first public statements 
on the "crisis" uttered by a ranking government official.  More 
typically, however, bureaucrats, politicians, and the general public 
exhibit a lack of interest or capacity to deal with the emerging 
problems.  One observer noted that the situation is worse than 
"heads in the sand," since no one, perhaps outside of Pynzenyk, acts 
as if there were an impending emergency.  Another commented that 
only three people - NBU Governor Volodymyr Stelmakh, Prime Minister 
Yulia Timoshenko, and President Viktor Yushchenko - have the 
wherewithal to pull needed economic levers, but a lack of 
coordination among them has stalled any relief.  In addition to not 
addressing the broader causes of a currency slide, the NBU has been 
silent on how to deal with bank solvency.  Furthermore, the collapse 
of the governing coalition in parliament (Verhovna Rada) has made 
coordinating economic policy more difficult. 
 
¶6. (SBU) Comment.  A real devaluation of the hryvnia is needed. 
Ukraine's real exchange rate may not have been overvalued before the 
global economy fell apart, but mounting external vulnerabilities, 
exacerbated by the worldwide financial crisis, are now forcing the 
UAH downwards.  It remains unclear whether the National Bank will 
attempt to further defend the exchange rate corridor at its current 
level, given the NBU's intervention of the past week.  More prudent 
policy might argue for saving the NBU's $37 billion in reserves for 
bank bailouts or as a shock absorber for future economic needs. 
 
¶7. (SBU) Should the NBU allow the UAH to stay outside its 
established corridor, depreciation would have different affects on 
various stakeholders in the economy.  Exporters, like Ukrainian 
steelmakers who complained recently about their lack of 
competitiveness at current global commodity prices, should benefit 
if inflation is controlled.  Other Ukrainians, especially local 
 
KYIV 00001995  002 OF 002 
 
 
bankers, importers, and those holding highly exposed or hard 
currency-linked loans, will likely not find UAH depreciation so 
palatable.  End Comment. 
 
TAYLOR