VZCZCXRO5356
OO RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2030/01 2881439
ZNR UUUUU ZZH
O 141439Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6530
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 002030 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, EEB/OMA 
TREASURY PLEASE PASS TO TTORGERSON 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV XH UP
SUBJECT:  UKRAINIAN NATIONAL BANK IMPOSES CAPITAL CONTROLS 
 
REF:  A) KYIV 2028, B) KYIV 1995, C) KYIV 1959 
 
SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION 
 
 
¶1.  (U)  Summary.  The National Bank of Ukraine (NBU), pressed to 
stop a run on deposits in commercial banks, sharply tightened 
capital controls on October 13.  The measures effectively prevent 
Ukraine's banking system, which has relied heavily on foreign 
borrowing to fuel its breakneck growth in recent years, from 
expanding any further in the short term.  The action comes after an 
estimated $3 billion, or 4% of total deposits, were withdrawn from 
the banking system over the past two weeks.  The October 13 measures 
are the first taken by the NBU to preempt capital flight and 
stabilize the country's teetering financial system.  Coming just 
prior to an International Monetary Fund (IMF) delegation to Ukraine, 
the NBU's heavy-handed measures may prevent a meltdown in the very 
short run, but they could have a severe impact on economic growth in 
the medium term if not modified or replaced by more flexible 
measures.  End Summary. 
 
¶2.  (U)  The NBU's Resolution 319 introduces a wide range of 
restrictions on the financial system that will effectively prevent 
banks from expanding in the short run.  Banks may only extend a new 
loan when an existing loan is paid back, and they cannot expand 
their loan portfolios beyond their October 13 positions.  Banks are 
also forbidden from releasing deposits earlier than the maturity 
agreed upon when the deposit was received.  In addition, banks may 
not sell foreign currency to purchase imports without proof that the 
imported goods or services have been delivered in Ukraine, with few 
exceptions.  In order to reduce the recent wild swings in the UAH 
exchange rate, the NBU introduced measures aimed at limiting the 
spreads between the buy and sell exchange rates quoted by banks to 
five percent.  Such "bid-ask spreads" had recently widened 
dramatically in tandem with the mounting insecurity over the hryvnia 
(Ref A and B). 
 
¶3.  (SBU)  The harsh NBU measures, according to national bankers and 
politicians, were designed to boost confidence in Ukraine's overall 
financial system.  First Deputy NBU Governor Anatoliy Shapovalov 
pointed to the need to calm fears, since "panics are 90 percent the 
result of psychological triggers."  NBU Governor Volodymyr Stelmakh 
and Finance Minister Viktor Pynzenyk had conducted an emergency 
meeting with Ukrainian President Viktor Yushchenko to discuss 
possible steps and receive blessing for NBU actions.  After the 
meeting, Yushchenko, himself a former bank governor, shied away from 
talk of a financial crisis.  Instead, he placed blame on the "weak" 
budget policy of Prime Minister Timoshenko that has led to the 
"challenges that have emerged." 
 
¶4.  (SBU)  Prices on Ukraine's small and illiquid stock market fell 
after the NBU's stabilization program was announced.  Analysts 
suggested this was primarily due to the NBU's unusual limitation on 
early withdrawal of deposits.  Mindful of the need to prevent a run 
on banks, parliamentarians proposed their own alternative plan to 
increase deposit guarantees up to $40,000.  The Rada measure has 
stalled, however, due to Ukraine's concurrent political crisis.  The 
effect of Resolution 319 on banks and the equity market was 
immediate, with the PFTS stock index losing 5.5 percent over the 
course of the day.  In addition, S&P lowered its ratings for three 
Ukrainian banks - Hadra, Alfa-Bank, and Kredobank - from "stable" to 
"negative," reflecting the rise of systemic risks in the financial 
sector. 
 
¶5.  (SBU)  The International Monetary Fund has confirmed to us that 
a delegation will arrive in Kyiv on October 15.  IMF sources say 
that a request was made in recent days by the GOU, but no official 
announcement has been released.  It remains unclear whether the 
Ukrainians have requested a financial assistance package or 
so-called "exceptional access." 
 
¶6.  (SBU)  Comment:  The NBU's resolution, coupled with major 
downward pressure on the hryvnia (Ref B), are strong evidence that 
the spreading global financial crisis may cause a meltdown in 
Ukraine's financial sector, which had grown rapidly in recent years 
on the back of foreign borrowing.  Although it has targeted the 
capital market to prevent further panic, Resolution 319 may also 
stifle economic activity by restricting credit for investment and 
debt repayment.  The undifferentiated, across the board cap on 
credit growth may prevent banks from financing even the most worthy 
of investment projects.  Import markets -- even for investment goods 
needed to expand the economy -- are reportedly coming to a 
standstill, because banks cannot extend hard currency for payment 
until goods are imported.  The NBU gave no indication how long the 
new regulations will remain in force, but the rules will no doubt 
need to be modified or relaxed once confidence in the financial 
 
KYIV 00002030  002 OF 002 
 
 
system is restored, so as not to put a further break on Ukraine's 
economic growth.  End Comment. 
 
TAYLOR