VZCZCXRO7229
PP RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0167/01 0281621
ZNR UUUUU ZZH
P 281621Z JAN 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7151
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 000167 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, EEB/OMA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PREL PGOV XH UP
SUBJECT: UKRAINE: NBU GOVERNOR ON HIS WAY OUT? 
 
REF: KYIV 155 
 
Sensitive but Unclassified.  Not for Internet or Distribution 
Outside the USG. 
 
¶1.  (SBU) Summary. National Bank of Ukraine (NBU) Governor Volodymyr 
Stelmakh may be on his way out.  In a legally meaningless yet 
politically important move, the Rada voted to oust Stelmakh on 
January 26.  The Rada's actions have incited a fresh round of 
accusations between Prime Minister Yulia Tymoshenko and President 
Viktor Yushchenko, in what amounts to the latest proxy dispute over 
leadership and responsibility for Ukraine's deteriorating economic 
crisis (reftel).  Stelmakh is being criticized for his heavy-handed, 
insular, and uncooperative leadership style and for the NBU's 
botched foreign exchange interventions.  Under Stelmakh, the NBU has 
also been accused of favoritism in both the foreign exchange market 
and in the refinancing of banks.  Yushchenko continues to stand by 
Stelmakh, but the pressure to oust the unpopular governor is 
growing, and now Yushchenko must decide whether to abandon his 
fallen ally or stand-by Stelmakh and risk further culpability for 
the NBU's blunders.  End summary. 
 
Stelmakh Under Pressure 
----------------------- 
 
¶2.  (SBU) NBU Governor Volodymyr Stelmakh is coming under increasing 
pressure and may resign or be fired soon.  Stelmakh, who is close to 
President Yushchenko, has been on vacation since early January, a 
step that makes little sense in the midst of Ukraine's worsening 
economic crisis but is commonly taken by leading Ukrainian officials 
shortly before their ouster.  Currently, First Deputy 
Governor Anatoliy Shapovalov is acting head of the NBU, but we hear 
repeatedly that important decisions are not being taken on account 
of Stelmakh's absence. 
 
IMF: Stalemate "Can't Go On" 
---------------------------- 
 
¶3.  (SBU) IMF mission chief Ceyla Pazarbasioglu told us on January 
27 that the current stalemate between Tymoshenko and Yushchenko over 
Stelmakh's fate "can't go on (any longer)."  Pazarbasioglu and her 
deputies, in Kyiv to monitor progress on Ukraine's $16.4 billion 
Stand-By Arrangement, could not say for certain that there would be 
a move at the central bank.  Citing politically charged 
conversations held with Tymoshenko and Presidential aides, however, 
IMF senior expert Thordur Olafsson indicated his impression that 
there would likely be a new NBU Governor in coming days, since 
"nobody seems to trust (the NBU) now."  Separately, EBRD officials 
told us on January 28 that the NBU had become "paralyzed" over the 
Stelmakh affair, with decisions on key banking reforms delayed by a 
lack of leadership. 
 
Rada Action Unconstitutional 
---------------------------- 
 
¶4.  (SBU) In a special January 26 session of the Verkhovna Rada, 
Tymoshenko's BYuT faction teamed up with the Communist Party to 
narrowly pass a resolution that cancels the 2004 Rada confirmation 
of Stelmakh.  The move has no legal significance, however. 
According to the Ukrainian constitution, the Rada approves the 
President's nomination and dismissal of the NBU governor.  It has no 
power to dismiss the NBU governor on its own.  Tymoshenko told a 
live television audience that the Rada's method for removing 
Stelmakh was not "natural" but nonetheless the "only legal means" to 
restore confidence in the currency and financial markets.  " 
w|  o, 
(o), p l k hok|g`|", - 
.RHLNXEMNUkrainian commentators disagree, suggesting that the 
Rada's attempt to oust Stelmakh fell outside its legal writ. 
President of the Ukrainian Academy of Political Science Nikolay 
Mikhalchenko noted that "" 
Mikhalchenko noted that "" 
g``, k|  k| ps| dph  cph, ` `, 
Epo  khk| lh  l, 
oskhh ` `kl p", - `g`k .parliament is not acting 
in the spirit of the law."  Yuriy Yakimenko of the Ukrainian Center 
for Economic and Political Studies likewise stated that the Rada 
decision did not respect the President's constitutional authority 
and would cause the matter to be taken up in Constitutional Court. 
 
¶5.  (SBU) According to these experts, Stelmakh will remain the 
nominal NBU governor until his five-year term expires in December 
2009, unless he resigns or is fired by Yushchenko, with subsequent 
Rada approval.  Yushchenko's public statements continue to support 
the wounded Governor.  Appearing on television Kanal 5, owned by 
Yushchenko ally and National Bank council chairman Petro Poroshenko, 
the President said that he would appeal to the Constitutional Court 
 
KYIV 00000167  002 OF 002 
 
 
against the Rada's decision, in order to "safeguard the NBU" from 
political forces in the Cabinet.  The President is not challenging 
the substance of the Rada action, which has no legal implications, 
but instead hopes to get a ruling to block the Rada from taking such 
actions in the future. 
 
¶6.  (SBU) Rada deputy and former NBU Governor Sergey Tigipko is 
widely viewed as a favorite to replace Stelmakh if he is in fact 
dismissed.  After its meaningless January 26 vote, the Rada failed 
by a few votes to reinstate Tigipko.  It is also being speculated 
that First Deputy 
Governor Shapovalov could remain as Acting Governor until a new 
president is elected in late 2009 or early 2010. 
 
¶7.  (SBU) Stelmakh has been a favorite whipping boy since September 
2008, when Ukraine's currency began its steep decline against the 
dollar.  The NBU has been criticized for its poor management of the 
hryvnia devaluation, having spent roughly $11 billion in reserves, 
mostly through ineffective and non-transparent efforts to stabilize 
the currency, which has lost almost half its value in recent months. 
 Stelmakh has also been criticized for an inflexible and secretive 
management style, and he has been at odds with both Tymoshenko and 
the Ministry of Finance on a nearly uninterrupted basis since the 
crisis began.  The NBU has also been accused of favoritism in its 
foreign exchange interventions and its refinancing of banks.  In 
both instances, the NBU's actions have often been non-transparent 
and sometimes unexplainable, perhaps favoring particular insiders at 
the expense of the broader market.  According to media reports, the 
NBU has sold nearly $1 billion in January to prop up the currency, 
while macroeconomists tell us Ukraine's current account deficit 
should cause the hryvnia to devalue another 15-25 percent. 
 
¶8.  (SBU) Comment. .RHLNXEMN g`hk`, 
 
sp, wkl wl, opdwl, 
oph| d`kh  p xh dk kh.Tymoshenko 
has shrouded her faction's vote to dismiss Stelmakh in economic 
terms by suggesting that a new NBU Governor could restore the 
hryvnia to an improbable 6-6.5/$ rate (last seen in the first weeks 
of the crisis).  Yet, her ulterior motive is equally clear and 
certainly politically driven.  Having pushed Yushchenko into a 
corner, from which he must alienate his longtime friend and former 
NBU colleague or associate himself with the ill-fated policies of 
the NBU, Tymoshenko looks to further tarnish her rivals' reputation 
and highlight his political weaknesses amidst a sharpening crisis. 
The presence of the IMF team may have emboldened Tymoshenko; it also 
puts pressure on the President to act, since the lack of an NBU 
decision-maker on banking sector reforms has been a chief concern of 
the IMF team thus far.  End comment. 
 
TAYLOR