VZCZCXRO4123
OO RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2141/01 2991418
ZNR UUUUU ZZH
O 251418Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6624
INFO RUCNCIS/CIS COLLECTIVE IMMEDIATE
RUEHZG/NATO EU COLLECTIVE IMMEDIATE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE

UNCLAS SECTION 01 OF 02 KYIV 002141 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
TREASURY FOR TTORGERSON 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV PREL ECON ETRD XH UP
SUBJECT: UKRAINE: HRYVNIA CONTINUES ITS SLIDE AS 
EXPECTATIONS OF FURTHER DEVALUATION GROW 
 
REF: A. KYIV 2039 AND PREVIOUS 
     ¶B. KYIV 2030 
 
Sensitive But Unclassified.  Not For Internet Distribution. 
 
Summary 
------- 
 
¶1. (SBU) The hryvnia continues its slide against the dollar, 
having crossed the psychologically important barrier of 6 
UAH/$ on October 24-25.  It appears that demand for dollars 
by ordinary Ukrainians, fearful of further devaluation and 
inflation, is beginning to drive movements in the market, a 
trend acknowledged by the National Bank of Ukraine (NBU). 
Companies are also adapting their behavior in anticipation of 
further drops in the currency: some retailers are reviving 
the practice of indexing their prices to the dollar, and 
exporters are reportedly becoming increasingly reluctant to 
cash in dollar revenues for hryvnia.  The NBU has openly 
threatened to force exporters to turn over dollar receipts, 
but otherwise is standing on the sidelines as the currency 
slides.  The hryvnia's sudden and sharp turn of fortune is 
bound to damage the Ukrainians' fledging and fragile trust in 
their currency.  Whether the damage can be contained will 
depend on how swiftly, and effectively, the NBU and GOU 
implement an expected IMF support package.  End comment. 
 
Hryvnia Crosses Psychologically Important Barrier 
--------------------------------------------- ---- 
 
¶2. (SBU) The hryvnia continued its slide against the dollar 
on October 24 and 25.   Retail kiosks around central Kyiv 
were buying dollars at the rate of roughly 6.1 UAH/$, and 
selling at about 6.3 UAH/$.  Late on October 24 banks were 
also seeking to buy dollars above 6 UAH/$ on the interbank 
market, marking the first time in the current crisis that the 
exchange rate closed above this important psychological 
barrier.  The hryvnia had reached its peak at  4.63 UAH/$ in 
late June, and only a week ago was trading at 5.34 UAH/$. 
 
"Tail Wags the Dog" 
------------------- 
 
¶3. (SBU) Various sources are telling us that demand for cash 
dollars by ordinary Ukrainian citizens is beginning to drive 
the market.  In normal times, the well-regulated street 
kiosks, most of which are operated by banks, set their rates 
in accordance with developments on the interbank market.  It 
now appears that "the tail is beginning to wag the dog," as 
one commentator put it, with Ukrainians increasingly seeking 
to move into dollar cash as fear of further devaluation, 
possible bank failures, and a renewed surge in inflation 
mounts.  Anatoliy Shapovalov, deputy governor of the NBU, 
admitted as much in an October 24 statement to the media, 
claiming that the market was now being driven by panic within 
the population. 
 
Consumers and Companies Position For Further Devaluation 
--------------------------------------------- ----------- 
 
¶4. (SBU) Anecdotal evidence suggests that growing numbers of 
Ukrainian businesses and households are expecting further 
devaluation and adapting their behavior accordingly.  We have 
heard that some retailers are indexing prices for higher-end 
consumer goods to the dollar, with the customer paying in 
hryvnia at whatever exchange rate is in the market at the 
time of the purchase.  This practice, widespread in the 1990s 
and still common for real estate and automobile transactions, 
had virtually disappeared in other retail sectors in recent 
years as the exchange rate remained stable and confidence in 
the hryvnia grew.  We have also heard numerous reports that 
exporters are increasingly keeping dollar receipts rather 
than converting them to hryvnia.  One commentator told the 
media that the practice has increased dramatically since 
October 13, when the NBU adopted its Resolution 319 limiting 
the ability of companies to transfer foreign currency abroad 
(ref B).  The NBU's Shapovalov openly threatened to 
re-introduce regulations forcing exporters to turn over 
foreign currency receipts if the practice continues.  Such 
NBU action would be "an extreme measure," Shapovalov 
acknowledged, but added that it might become necessary if the 
situation on the foreign exchange market worsened. 
 
NBU Stands Aside and Hopes for Swift IMF Action 
 
KYIV 00002141  002 OF 002 
 
 
--------------------------------------------- -- 
 
¶5. (SBU) The NBU is looking increasingly reticent to step in 
and influence the foreign exchange markets.  It continues to 
intervene, but only in a negligible manner, selling small 
amounts of dollars at exchange rates far below where the 
markets are trading.  Many commentators are questioning why 
the NBU is essentially giving away dollars to a lucky few 
buyers who ostensibly plan to use them to purchase imports, 
but who could just as easily resell them on the interbank 
market for an instant and riskless profit.  Most believe the 
NBU is trying, increasingly without success, to portray some 
semblance of being an active player in the markets.  Changing 
its policy and selling at current market rates could even put 
further pressure on the hryvnia, some speculate, as the 
market might interpret such NBU behavior as a sign that the 
central bank expects the hryvnia to drop even further. 
Shapovalov told the media that the NBU had sold $2.777 
billion since the beginning of October to prop up the hryvnia. 
 
Comment 
------- 
 
¶6.  (SBU) The NBU's actions continue to lag behind the 
market, and commentators are increasingly questioning whether 
the central bank even has a strategy to deal with the 
currency's slide.  Many think it does not, but the local IMF 
rep told us on October 25 (septel) that the NBU is the only 
actor in the Ukrainian public sphere actually doing anything 
at the moment. Most likely, the NBU is buying time and hoping 
that an IMF deal will be struck soon and reestablish 
confidence in the hryvnia before more severe controls on 
currency movements and bank deposits become necessary. 
 
¶7. (SBU) In any case the sharp turn of fortune of the hryvnia 
will have a longer term impact on how Ukrainians view their 
currency.  In recent years trust in the currency had grown 
slowly yet consistently on the back of a stable exchange rate 
and growing nominal hryvnia-based incomes.  Ukrainian 
citizens and companies were growing increasingly comfortable 
using the hryvnia as a store of value, as evidenced by the 
rapid growth in bank deposits from very low levels in recent 
years, and by the fact that indexing prices had become less 
common.  The current sudden shifts in behavior suggest that 
such fledging trust has already been damaged, and that it 
will take time for faith in the currency to return. Just how 
long, will depend on how quickly and effectively the NBU and 
government use an IMF package to reestablish stability in the 
economy.  End comment. 
TAYLOR