VZCZCXRO2568
PP RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2130/01 2971543
ZNR UUUUU ZZH
P 231543Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 6616
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 002130 
 
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 CURRENCY DOWN 20 PERCENT; RADA DIVIDED ON 
SOLUTIONS 
 
REF: KYIV 2128 
 
SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION 
 
¶1.  (SBU) Summary.  While Rada factions were busy haggling over 
three competing versions of anti-crisis measures, the hryvnia 
exchange rate slipped dramatically on October 23.  Embassy contacts 
in the real estate and transportation sectors report more dismal 
news, indicating general woes throughout the real economy.  End 
Summary. 
 
 
Rada Not Equipped to Solve Financial Crisis 
---------------------------------------- 
 
¶2.  (SBU) Bickering in the Verkhovna Rada (reftel) has hampered 
efforts to pass anti-crisis legislation.  All three major political 
factions support distinct programs, with Viktor Yanukovich's Party 
of Regions the latest to offer a (still undisclosed) proposal.  Thus 
far, the Yushchenko-supported National Security and Defense Council 
(NSDC) anti-crisis measure and the Timoshenko-supported Cabinet of 
Ministers bill have been made public.  While it is still too early 
to make a comparative analysis of the draft packages, it does appear 
that the NSDC and CabMin versions share an intention to bolster bank 
liquidity, increase deposit guarantees, and reduce growth rates in 
public sector wages, pensions, and social spending.  We are already 
hearing that such spending cuts will face stiff challenges from Rada 
deputies across the political spectrum. 
 
¶3.  (SBU) Yushchenko noted that "every kopeck" spent should be "well 
thought-out," and he again blamed not the National Bank of Ukraine 
(NBU), but Tymoshenko's government for the crisis.  Yushchenko 
insisted that he would even be willing to work with the Communist 
Party if it acted in the interests of the priorities of Ukraine, and 
that the legislative deadlock was a "tragedy." 
 
 
Rapid Currency Devaluation 
---------------------------------- 
 
¶4.  (SBU) The hryvnia (UAH)/dollar exchange rate has plummeted 
roughly 20 percent in the last twenty-four hours.  Bid-ask quotes on 
the street ranged 5.86-5.95 (buying hryvnia) to 6.15-6.20 (buying 
dollars).  Evening television news on October 22 reported that 
exchange kiosks were unable to sell dollars, due to the scarcity of 
foreign currency on the market.  But when EconOff walked into 
separate kiosks on October 23, traders were not only able to sell 
dollars but very eager to do so. 
 
¶5.  (SBU) Other anecdotal evidence underlines how the exchange rate 
may be causing consumer prices to increase rapidly.  A savvy, 
elderly woman selling flowers on the street was quoted as saying her 
5-10% overnight price increases were due to the more expensive 
dollar rate.  Similarly, an open-air fruit stand owner said her 
supplier would increase wholesale prices by 3 percent on October 27. 
 She was also told to be prepared for further increases thereafter, 
since most produce on the market is imported with prices sensitive 
to exchange rate devaluation. 
 
¶6.  (U) The NBU sold a limited number of dollars at 5.25 UAH/dollar 
to four commercial banks on October 22.  According to the NBU, 
reserves have fallen 8.6 percent since October 1, due to infusions 
to prop up the currency and the banking sector.  NBU Governor 
Volodymyr Stelmakh told reporters on October 22 that the central 
bank will continue to support the exchange rate. 
 
 
Real Estate Markets Tanking 
----------------------------------- 
 
¶7.  (SBU) Oleksandr Pochkun, Managing Partner of Baker Tilly 
International, the fifth largest accounting firm in Ukraine, briefed 
EconOff on the effects of the financial crisis for his key corporate 
clients.  In particular, he stated that construction projects and 
property markets, where commercial real estate holders are exposed 
in varying degrees to Ukraine's financial crisis, have grinded to a 
standstill.  Large-scale commercial real estate developers face the 
greatest risks, since they lack funding for further construction and 
have invested nearly all their cash into land holdings that were to 
have been sporadically sold for revenue.  Pochkun estimated that 
without loan injections, some major developers face bankruptcy, as 
they hold less than three months' cash to meet payroll and will be 
unlikely to find buyers for some of their largest holdings on the 
open market. 
 
 
KYIV 00002130  002 OF 002 
 
 
¶8.  (SBU) Major Ukrainian oligarchs with urban land holdings 
likewise face pressure from declining steel and commodity prices. 
One source told us that 21st Century investments, a publicly traded 
real-estate company that purchased large tracts of land in Kyiv in 
the past year, was insolvent.  Conglomerates may be looking to 
finance debt through property sales in the absence of available 
foreign capital.  A sell-off of their holdings would have a dramatic 
effect generally on the real estate market, where Pochkun says there 
are already signs of panic.  Access to credit has dried up, and 
individual speculators, who had bought one or two properties in 
addition to their primary residences, are now selling holdings 
faster than the market can absorb.  He added that there is now a 
profound psychological element to the sell-offs, especially 
considering the fact that real estate investors had seen up to 
three-fold gains over the past two years. 
 
 
Declines in Freight, Ports, Air Travel 
---------------------------------------- 
 
¶9.  (U) The unfolding financial crisis continues to hit other 
sectors of the economy.  Ukrainian railroads and the country's ports 
have both reported significant drops in freight traffic in recent 
weeks.  According to Ukraine's State Statistics Committee, freight 
transportation by sea and river links has decreased 14.6 percent 
thus far in 2008.  The Odessa port authority commented that it has 
seen a significant drop in metals shipments, though increased grain 
exports have somewhat offset these declines.  Oil reloading in 
Odessa has fallen as well, due to decreases in Russian-origin 
shipments.  The state railroad company Ukrzaliznytsia reported a 20 
percent drop in cargo transportation in October, due to decreased 
shipment of metallurgical and chemical products, iron ore, coal, and 
construction materials. 
 
¶10.  (SBU) An Embassy contact with ties to Mittal Steel Kryviy Rih, 
the country's largest steelmaker, recounted a conversation with the 
company's financial director, who said the vast plant was operating 
at 50 percent capacity, with large unsold inventories accumulating 
at the site.  Yuri Miroshnikov, President of Ukraine International 
Airlines, and KLM/Air France Country Director Arvin Alagh told us 
that their airlines have seen a  dramatic drop in advanced bookings 
for domestic and international flights.  Executives of other 
airlines echoed their statements at a recent roundtable sponsored by 
the American Chamber of Commerce.  Airline representatives openly 
worried about general declines in air travel, and they suggested 
that their profits would be further hampered by high jet fuel prices 
that have not fallen in line with the price of crude oil.  According 
to Aerosvit representatives, airlines in Ukraine have paying up to 
40 percent above market rates due to reported price gouging by 
Lukoil, TNK/BP, and KreBo (Kremenchuk refinery/Borispil airport 
joint venture), forcing carriers to heavily refuel during European 
stopovers. 
 
¶11.  (SBU) Comment.  Ongoing political animosities in the Rada 
aside, Ukraine's real economy has taken a strong downturn, as 
measured on the street in quotidian transactions and on corporate 
balance sheets.  A rapid currency devaluation appears inevitable, 
and its effects are already taking a toll on everyday consumers and 
businesses.  Proposals for anti-crisis legislation may be heard by 
parliament on October 24, but Ukrainians are not waiting for a 
political solution to take action in the market.  End Comment. 
 
 
TAYLOR