VZCZCXRO3651
PP RUEHDBU RUEHIK RUEHLN RUEHPOD RUEHSK RUEHSL RUEHVK RUEHYG
DE RUEHKV #1557/01 2541559
ZNR UUUUU ZZH
P 111559Z SEP 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 8395
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 001557 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/UMB, EEB/OMA 
 
E.O. 12958: N/A 
TAGS: EFIN EREL ELAB ECON ETRD PGOV PREL XH UP
SUBJECT:  NATIONAL BANK CAUGHT IN UKRAINIAN POLITICS 
 
SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION 
 
¶1.  (SBU) Summary.  The ongoing dispute between Ukrainian government 
authorities and the National Bank of Ukraine (NBU) escalated this 
week, when the Ministry of Interior interrogated NBU deputy governor 
Anatoliy Shapovalov over recent fluctuations of the hryvnia exchange 
rate.  Controversial Interior Minister Yuri Lutsenko accused the NBU 
of fraud in recent bank refinancing operations and currency auctions 
that involved hundreds of millions of hyrvnia.  He said that the NBU 
policy of maintaining a large discrepancy between the official and 
market exchange rates had encouraged currency speculation. 
Nonetheless, others have suggested that Lutsenko is instead acting 
to burnish his reputation as well as to protect Prime Minister 
Tymoshenko's political interests.  End summary. 
 
NBU INDISCRETIONS 
----------------- 
 
¶2.  (SBU) Earlier this month, the NBU had reverted to conducting 
currency auctions at a subsidized rate, which in turn allowed for 
immediate arbitrage opportunities for undisclosed banks.  The timing 
of the auctions coincided with the vacation of NBU governor 
Volodymyr Stelmakh, while deputy governor Shapovalov was acting in 
his stead.  One editorial characterized Stelmakh's holidays as 
"traditional in times of turmoil in the currency market." 
 
¶3.  (SBU) Shapovalov's interrogation by the Interior Ministry was 
accompanied by the September 11 resignation of another NBU deputy 
Governor Oleksandr Savchenko, who is considered to be loyal to Prime 
Minister Tymoshenko.  Savchenko immediately lobbed accusations at 
the NBU's senior leadership, suggesting that Shapovalov and others 
had allowed unnamed "speculators" to earn $5-6 million in arbitrage 
on a daily basis. 
 
¶4.  (SBU) Nonetheless, Petro Poroshenko, an influential businessman 
and head of the NBU's council, criticized the media frenzy caused by 
the government's investigation.  He defended the NBU, suggesting 
that the central bank had already admitted to the "inefficiencies" 
of previous currency interventions.  He pointed out that in two 
currency auctions this week, the NBU's intervention rate had been 
within close range of the interbank rate.  He also said that all 
interested banks had been allowed to participate in the auctions. 
 
¶5.  (SBU) Via auctions on September 8 and 10, commercial banks 
bought $63.7 million and $105.4 million, respectively, at an average 
rate of UAH 8.3/$1.  Twelve banks were allowed to buy foreign 
exchange on September 8; the number of banks participating in the 
auction on September 10 was not disclosed.  Furthermore, Stelmakh 
suggested that the NBU would be positioned to sell up to a billion 
more dollars before the end of September to stabilize the exchange 
rate.  This statement, a sign that the NBU is willing to move 
dangerously close to its net international reserve floor set by the 
IMF, appears to have been the primary reason the hryvnia appreciated 
from 8.85-9/$1 on the interbank market over the past three days. 
 
ALL ECONOMICS IS POLITICS 
------------------------- 
 
¶6.  (SBU) The announcement of the government's investigation came on 
the heels of Yushchenko blaming Tymoshenko for destabilizing the 
hryvnia, adding fuel to the speculation that the investigation was 
politically driven.  Yushchenko had pointed to BYuT-supported plans 
for large-scale hryvnia emission to finance the budget deficit. 
Separately, the NBU's Stelmakh, a Yushchenko ally, said that the 
central bank would not finance a one-time payment of UAH 9.8 billion 
($1.2 billion) for Euro 2012 infrastructure projects from the NBU's 
2009 profits, as required by recent BYuT-backed legislation.  Both 
the President and the central bank commented that any monetization 
should come from the state treasury via domestic bonds that would be 
purchased by the NBU. 
 
¶7.  (SBU) Foreign bankers have told us that senior NBU 
representatives had bragged about their plans to avoid meeting the 
terms of the Rada legislation on Euro 2012 infrastructure financing. 
 The NBU had preferred to buy GOU debt, in order to hold a 
government liability while collecting interest.  NBU officials 
suggested to our contacts that this would enable the central bank to 
overcome the GOU's attempt to whittle away its independence. 
 
¶8.  (U) A major Kyiv daily newspaper alleged that the "information 
war" between the President and the Prime Minister had been launched 
by BYuT-faction leadership.  It reported that Tymoshenko ally and 
Our Ukraine Rada deputy Mykola Martynenko had announced at a 
parliamentary coordinating meeting that millions had been channeled 
from the currency market to finance the Yushchenko's presidential 
campaign.  Martynenko allegedly also stated that hryvnia 
destabilization may serve as a reason for Yushchenko to declare a 
 
KYIV 00001557  002 OF 002 
 
 
state of emergency. 
 
¶9.  (SBU) In his press statement, Interior Minister Lutsenko also 
accused Yushchenko of covering up for the NBU's questionable 
actions.  But Ukrainian commentators have wondered whether Lutsenko 
is trying to paint over his own recent scandals -- the case of his 
alleged intoxication at the Frankfurt airport in May and last week's 
mishandling of a high profile internal corruption case against a 
criminal gang of police.  Since being bailed out by Tymoshenko after 
the Frankfurt incident, when many in Kyiv were calling for his 
resignation, Lutsenko has been considered a staunch friend of the 
Prime Minister. 
 
NBU MURKINESS NOTHING NEW 
------------------------- 
 
¶10.  (SBU) Accusations of fraud have swirled around the NBU 
throughout the period of Ukraine's economic crisis, particularly 
regarding the NBU's handling of currency sales.  In January 2009, 
Tymoshenko had criticized the NBU for non-transparent refinancing of 
Nadra Bank that allegedly took place in late 2008.  Independently, a 
senior Nadra executive admitted to us that the shady refinancing 
scheme had been carried out during the period of October-December 
¶2008.  The Nadra representative also said that the NBU had agreed to 
restructure UAH 7.7 billion ($920 million) in debt accrued by Nadra 
last year that would have been due in the fourth quarter of 2009. 
 
¶11.  (SBU) More recently, Lutsenko had expanded the GOU's 
allegations against the NBU, commenting that former managers of now 
nationalized Rodovid bank had been allowed to steal UAH 2 billion 
($240 million) in central bank financing.  Tymoshenko has also 
accused the Viktor Yanukovich-led Party of Regions of misusing 
refinancing that had been extended to Ukrgazbank. 
 
COMMENT 
------- 
 
¶12.  (SBU) The recriminations over hryvnia fluctuations and the 
NBU's independence hearken back to those levied publicly between 
Tymoshenko and her rivals earlier this year.  The bad blood appears 
to have intensified since the IMF mission left Kyiv last week, with 
Tymoshenko, Yushchenko, and their loyalists not holding back their 
sharpest criticisms and conspiracy theories.  That the NBU has been 
unwilling to relinquish its independence by yielding to the 
BYuT-supported Euro 2012 financing plan, and that the NBU's shady 
dealings are undoubtedly filling rival campaign finance coffers, 
only heightens the acrimony.  As it typically has done in such 
instances, the Party of Regions has refrained from offering 
substantial commentary, apparently content to let its rivals 
continue their bickering over failing economic policies. 
 
PETTIT