VZCZCXRO1866
PP RUEHDBU
DE RUEHKV #0483/01 0761521
ZNY CCCCC ZZH
P 171521Z MAR 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7479
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000483 
 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 03/17/2019 
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE: STELMAKH RETURNS, LASHES TYMOSHENKO 
 
REF: A. KYIV 155 
     ¶B. KYIV 471 
     ¶C. KYIV 421 
 
Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4 (B) AND (D) 
 
Summary 
------- 
 
¶1. (C) National Bank of Ukraine (NBU) Governor Stelmakh has 
returned to the political scene, and appears to have again 
taken clear control of the central bank.  A reputable 
newspaper has claimed that President Yushchenko and PM 
Tymoshenko have agreed to keep Stelmakh at the NBU until the 
presidential elections.  Stelmakh officially returned from 
"vacation" on March 10 after the Constitutional Court 
confirmed that the Rada had overstepped its authority when it 
voted to oust the Governor in January.  In a March 12 meeting 
with the Ambassador, a visibly energized Stelmakh said 
President Yushchenko's and PM Tymoshenko's jointly announced 
intentions to meet IMF conditionalities were an encouraging 
development.  At the same time, he claimed Tymoshenko could 
derail the agreement in the Rada and skillfully pin the blame 
on Yushchenko. 
 
¶2. (C) Stelmakh told the Ambassador that the NBU was moving 
forward on bank recapitalization.  Nadra Bank would be the 
first bank to get publicly funded capital, yet Tymoshenko was 
inhibiting the NBU's approach to Nadra over unfounded fears 
that Dmitry Firtash wanted to take control of the bank, 
Stelmakh said.  The NBU had enough reserves to meet the IMF 
stipulated floor on March 31, he said.  The current account 
would roughly balance out this year, yet massive debt 
repayments would remain a challenge for Ukraine.  Although 
loan portfolios would deteriorate further, continued deposit 
withdrawals were the biggest short term threat to the banking 
system.  The NBU Governor asked whether the international 
community might consider a $1 billion loan to Ukraine's 
Deposit Insurance Fund, which he suggested was more of an 
urgent need than funding for bank recapitalizations.  Many 
will not be happy that Stelmakh is back, but the NBU now 
appears to have the decisive leader that was so severely 
lacking in recent weeks.  End summary. 
 
An Energized Stelmakh Returns from "Vacation" 
--------------------------------------------- 
 
¶3. (C) NBU Governor Volodymyr Stelmakh officially returned 
from his extended "vacation" on March 10.  Two days later, 
during a meeting with the Ambassador, the visibly energized 
Stelmakh gave every indication that he was again firmly in 
control of the NBU and confident of his political future. 
The central bank had been leaderless since Stelmakh 
disappeared from public view in late January, ostensibly to 
go on leave but in reality stepping aside as PM Tymoshenko 
and President Yushchenko fought over his political future. 
The already widespread criticism over his handling of the 
economic crisis had intensified in the weeks prior to his 
departure, particularly from Tymoshenko and her BYuT faction 
in the Rada, and had culminated in a meaningless yet 
politically symbolic Rada vote to oust him (ref A).  Stelmakh 
returned to the NBU just days after the Constitutional Court 
confirmed Yushchenko's claim that the Rada had no authority 
to remove him, and following a report in a reputable 
newspaper that cited unnamed sources in the Presidential 
Secretariat to claim that Yushchenko and Tymoshenko had 
agreed to keep Stelmakh as NBU Governor until after the 
upcoming presidential elections. 
 
Tymoshenko's "Lack of Sincerity" 
-------------------------------- 
 
¶4. (C) During his meeting with the Ambassador, Stelmakh 
repeatedly lashed out at Tymoshenko and what he called her 
"lack of sincerity" on issues related to the economic crisis. 
 He said the March 11 meeting with Yushchenko and Tymoshenko 
(ref B) was a positive step towards securing the IMF's return 
to Ukraine, yet he doubted whether Tymoshenko would follow up 
on the political commitments she made during the meeting. 
Stelmakh speculated that Tymoshenko would introduce the 
needed legislation to raise excise taxes, lower pension fund 
spending and remove paragraphs 84 and 86 of the budget law, 
yet work behind the scenes to thwart passage of most, if not 
all, of these measures.  He said Tymoshenko would work to 
ensure that a sufficient number of OUSD deputies, upon whose 
votes the coalition depended, would refuse to support the 
measures.  Tymoshenko could then pin blame on Yushchenko for 
 
KYIV 00000483  002 OF 003 
 
 
ostensibly failing to deliver the votes of his political 
supporters. 
 
¶5. (C) Stelmakh said he understood the difficulties making 
further budget cuts, yet he said Tymoshenko and Rada speaker 
Lytvyn had no interest to fight the country's "social 
appetite" for large-scale social spending.  The Party of 
Regions supported both Tymoshenko and Lytvyn in this regard, 
he said, which created further challenges to further spending 
cuts in this year's budget. 
 
Bank Recap to Begin, Nadra to Get State Funds 
--------------------------------------------- 
 
¶6. (C) Stelmakh said the NBU would in the coming week 
formally determine the additional capitalization needed by 
the first 20 banks that underwent the diagnostic tests 
required by the NBU.  Existing shareholders would provide the 
needed capital in most cases, he said, adding that Nadra Bank 
would be the first to actually need capital from the GOU. 
Tymoshenko was making it difficult for the NBU to move 
forward with a public recapitalization of Nadra Bank, 
Stelmakh said, because she had asked the Prosecutor General's 
office to initiate an investigation into the NBU's treatment 
of Nadra.  Tymoshenko was fearful that oligarch Dmitry 
Firtash was trying to gain control of the bank, yet the NBU 
had no indication that he was involved, Stelmakh said. 
(Note: Firtash, co-owner of gas intermediary RUE, is a bitter 
political foe of Tymoshenko and purported to be close to 
President Yushchenko.  End note).  Tymoshenko was telling the 
NBU that all banks except Nadra were eligible for GOU-funded 
recapitalization, Stelmakh claimed.  Moving forward quickly 
to prevent Nadra, with its UAH 12 billion of deposits (about 
$1.5 billion), from defaulting was being unnecessarily 
hindered because of Tymoshenko's actions, he added. 
 
¶7. (C) Stelmakh confirmed that the March 11 meeting also 
approved the creation of an interagency council that would 
oversee the bank recapitalization and resolution process. 
Tymoshenko would chair the council, the NBU would be an 
active participant, and the IMF and World Bank would have 
observer roles to ensure that GOU actions adhered to their 
expectations and conditionalities. 
 
Banking Consolidation Necessary, But Not Easy 
--------------------------------------------- 
 
¶8. (C) Stelmakh said the banking sector was in need of 
serious consolidation, yet the NBU's existing regulatory 
authority did not give it the proper tools to proactively 
encourage bank mergers.  The NBU can force consolidation when 
banks fail to meet regulatory requirements, but has far less 
leverage otherwise.  Reforms requiring all banks to become 
open joint stock companies introduce further legal challenges 
to forced change of ownership he added.  Capital adequacy 
ratios (CARs) were still at a comfortable 13-14 percent in 
the banking sector, far above the 10 percent floor set by the 
NBU.  It would be easy for the NBU to force mergers once 
banks fell below the floor, but far more difficult as long 
they remained above it.  The NBU was currently thinking 
through different models to accelerate consolidation.  These 
included 1) creating a legal basis for the state-owned 
Ukreximbank and Oschadbank to take over smaller banks; 2) 
changing existing bank refinancing rules; under one model now 
being discussed, the NBU would only refinance larger banks. 
These, in turn, would finance smaller banks.  If the smaller 
banks failed to return the debt, the larger banks could 
absorb them as affiliates.  In any case consolidation was 
inevitable, but was a process that would take several years, 
he said. 
 
Deposit Withdrawals Now the Major Problem 
----------------------------------------- 
 
¶9. (C) Stelmakh acknowledged that CARs would continue to 
deteriorate in the coming months, yet said that deposit 
withdrawals were now the biggest short term danger for the 
banking system.  Deposit flight in hryvnia was more serious 
that deposit flight in foreign currencies, he said.  He asked 
the Ambassador whether the international community might 
consider a $1 billion loan to Ukraine's Deposit Insurance 
Fund, which he said was currently more urgent than external 
funding for expected bank recapitalizations.  Stelmakh argued 
that such a loan would help reestablish trust in the banking 
system and help the NBU and GOU stem deposit flight.  The 
Ambassador said he would forward the idea to Washington. 
 
 
KYIV 00000483  003 OF 003 
 
 
Foreign Reserves 
---------------- 
 
¶10. (C) The Governor said that, as of March 11, the NBU had 
$23.6 billion of net foreign exchange reserves, comfortably 
above the $21.8 billion floor needed by March 31 in 
accordance with the IMF conditionalities.  The NBU had lost 
about $16.5 billion in reserves since the beginning of the 
crisis, he said.  Of this amount, $8 billion went to repay 
external loans, $6 billion "disappeared into the socks of the 
population," $2 billion went to Naftohaz to repay debts to 
Gazprom (ref c), and $500 million went to meet the 
accelerated repayment of the Ukravtodor loan to Morgan 
Stanley.  The $4.5 billion that the NBU had already received 
from the IMF was not included in the $23.6 billion.  The NBU 
had already invested the IMF money in sovereign G7 debt and 
had no intention of ever using it, he claimed. 
 
¶11. (C) Looking forward, the NBU was now confident that the 
current account would more or less balance out this year, he 
said.  Meeting the expected sizable deficit in the capital 
account would be more of a challenge, yet was realistic, he 
said.  Two companies might need significant NBU support, 
Stelmakh added.  Naftohaz would need sizable foreign exchange 
to pay for gas imports, and mobile telephone operator 
KyivStar would need $1.5 billion for dividend payments to 
foreign shareholders that had been held up for 5 years in a 
court case that was now resolved.  The NBU would ensure that 
both companies could meet their commitments if the market 
could not provide enough foreign exchange, he said. 
 
Naftohaz 
-------- 
 
¶12. (C) Stelmakh said that many observers in Ukraine had 
criticized the NBU for facilitating Naftohaz's payments to 
Gazprom (ref C), yet the NBU had no realistic alternative. 
The NBU provided only six-month liquidity to Ukreximbank and 
Oschadbank for onward lending to Naftohaz, he said.  Naftohaz 
will be forced to pay back the loans during the course of the 
year, and can only do so by raising gas prices.  Tymoshenko 
was angry when she finally understood what the NBU had done, 
Stelmakh said.  According to him, Tymoshenko "thought she 
could walk away and forget about the problem" once the NBU 
had enabled Naftohaz to meet its debts to Gazprom. 
 
Comment 
------- 
 
¶13. (C) The political infighting between Tymoshenko and 
Yushchenko over the NBU, and the absence of a strong NBU 
leader during the current time of crisis, had been 
universally criticized both in Ukraine, and among that 
international donor community that is now being asked to 
provide Ukraine with a multi-billion budget support package. 
If Stelmakh's energy and self-confidence are any reflection 
of his political status, then it appears that the leadership 
question at the NBU has been resolved.  Many observers may 
not be happy that Stelmakh is back in the saddle, but at 
least the NBU has a decisive leader, and the political 
wrangling over him has notably subsided, at least for the 
moment.  End comment. 
TAYLOR