VZCZCXRO7033
PP RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0166/01 0281437
ZNR UUUUU ZZH
P 281437Z JAN 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7149
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 000166 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, EEB/OMA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PREL PGOV XH UP
SUBJECT: UKRAINE: EBRD TO SEEK EUROPEAN RESPONSE TO BANKING CRISIS 
 
REF: KYIV 140 
 
Sensitive but Unclassified.  Not for Internet or Distribution 
Outside the USG. 
 
¶1.  (SBU) Summary. EBRD senior advisor Piroska Nagy told us on 
January 28 that her bank hopes to establish a common European 
response to the banking crisis in Ukraine and elsewhere in central 
and eastern Europe.  The EBRD would take equity stakes in, or 
provide debt financing to, the Ukrainian subsidiaries of European 
banks.  In return, the parent European banks would agree to stand by 
their Ukrainian subsidiaries by rolling over debt coming due this 
year and by increasing their capital.  The EBRD would also require 
assurances from the National Bank of Ukraine (NBU) and the GOU that 
the regulatory environment and the NBU's foreign exchange and 
refinancing policies would become more transparent and fairer to 
foreign banks.  End summary. 
 
EBRD Prepared to Supply Equity, Debt to Ukrainian Banks 
--------------------------------------------- ---------- 
 
¶2.  (SBU) Nagy said the EBRD has budgeted 1.1 billion euros over the 
next two years to finance either equity stakes or debt financing to 
banks in troubled central and eastern European countries.  She said 
the European Investment Bank (EIB) and World Bank subsidiary 
International Finance Corporation (IFC) would support EBRD efforts 
and loan to Ukrainian subsidiaries of European banks as well.  To 
gain support for the plan, the EBRD has reached out to the 
headquarters of parent banks in western Europe, and it is working to 
bring together the GOU and NBU with regulators in the countries of 
the parent banks.  A first meeting of regulators and governments 
took place on January 23 in Vienna, and the EBRD met with parent 
bank representatives of Ukrainian subsidiaries, along with senior 
leadership of the National Bank of Ukraine (NBU) and the Ministry of 
Finance, on January 27 in Kyiv. 
 
¶3.  (SBU) Nagy told us that the recently completed diagnostic audits 
of the country's largest 17 banks (reftel) will require them to 
increase their capital by about $3 billion.  Of this sum, $1.8 
billion will be needed by the Ukrainian subsidiaries of foreign 
banks.  The EBRD will be prepared to provide some of the needed 
capital by taking stakes in the Ukrainian subsidiaries, if the 
parent companies also pledge to support their banks in Ukraine. 
 
¶4.  (SBU) The EBRD is prepared to provide loans to Ukrainian banks, 
both foreign and domestically owned.  Nagy pointed out that about 
$17 billion of foreign debt issued by banks in Ukraine is coming due 
in 2009.  The EBRD estimates that roughly half of that sum is debt 
owned by Ukrainian subsidiaries to their foreign parent bank, 
although Nagy said the exact figure was difficult to determine 
because of weak NBU methodology.  Most of the remaining debt takes 
the form of syndicated loans, which are now distributed among many 
lenders in the European capital markets. 
 
How Committed Are Foreign Banks to Ukraine? 
------------------------------------------- 
 
¶5.  (SBU) Nagy was guarded when asked whether foreign banks would 
deliver the needed capital and debt financing to their Ukrainian 
subsidiaries this year.  In general, foreign banks were prepared to 
maintain their presence in Ukraine and support their subsidiaries as 
needed.  She was more confident that foreign banks would provide 
capital to their Ukrainian subsidiaries, because the NBU had the 
institutional leverage to compel them to do so.  The NBU could 
threaten to revoke the license of the subsidiary if it failed to 
meet newer, higher capital requirements.  Although foreign banks 
were also generally prepared to roll-over loans to their Ukrainian 
banks, the worsening economic crisis could make it more difficult 
for them to do so, and Ukraine might not be the top priority for 
many banks that have significant exposure throughout the emerging 
banking markets of central and eastern Europe, Nagy said. 
 
¶6.  (SBU) Still, the EBRD had not seen any indication that foreign 
banks were reconsidering their engagement in Ukraine, although EBRD 
economist Alex Pivovarsky, who accompanied Nagy to the meeting, said 
that mergers or sales of foreign-owned banks were a distinct 
possibility.  In any case, foreign banks were demanding a more 
consistent and equitable regulatory environment, Pivovarsky and Nagy 
said. 
 
¶7.  (SBU) According to Nagy, the EBRD would require specific 
commitments from both the NBU and GOU.  In particular, it would 
expect that NBU refinancing of banks would be transparent, 
non-discriminatory and conform to internationally accepted 
practices.  EBRD would have similar expectations with respect to the 
NBU's foreign exchange operations.  Both the NBU's refinancing and 
foreign exchange operations have come under criticism in recent 
 
KYIV 00000166  002 OF 002 
 
 
months, with many observers arguing that the NBU's non-transparent, 
and often unexplainable actions, were actually benefiting a small 
group of privileged insiders. 
 
TAYLOR