VZCZCXRO7674
PP RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0169/01 0290732
ZNR UUUUU ZZH
P 290732Z JAN 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7153
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 000169 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, EEB/OMA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PREL PGOV XH UP
SUBJECT: CORRECTED COPY: UKRAINE: NBU GOVERNOR ON HIS WAY 
OUT? 
 
REF: KYIV 155 
 
Sensitive but Unclassified.  Not for Internet or 
Distribution Outside the USG. 
 
Resending KYIV 167, Due to Transmission Error. 
 
¶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.  Ukrainian 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 
"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 
 
KYIV 00000169  002 OF 002 
 
 
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 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. 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