VZCZCXRO1036
OO RUEHDBU RUEHSL
DE RUEHKV #0017/01 0051618
ZNY CCCCC ZZH
O 051618Z JAN 10
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9082
INFO RHMFISS/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 000017 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 01/04/2020 
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: TYMOSHENKO UNABLE TO PRY OPEN NBU RESERVES 
 
REF: KYIV 1981 
 
Classified By: CDA James D. Pettit for Reasons 1.4 (b) and (d) 
 
¶1.  (C) Summary. Negotiations have stalled over the transfer 
of $2 billion in National Bank of Ukraine (NBU) reserves to 
the state treasury, inhibiting Prime Minister Tymoshenko's 
government from getting ready cash to assist with Naftohaz's 
January 11 payment to Gazprom.  Having lowered the NBU's net 
international reserve (NIR) target and allowed for the 
transfer, the IMF Board and its Kyiv resident representative 
have stepped back from any mediating role among Ukraine's 
authorities.  While holding firm on the transfer of reserves, 
the NBU has proposed the sale of Naftohaz-held government 
bonds to commercial banks, though bankers say they have not 
heard of (nor would they necessarily be interested in) an 
impending sale of GOU debt.  Analysts conclude that a deal 
between the GOU and NBU over the transfer of reserves may 
still be forthcoming or else a financial workaround will be 
found, as there is no interest within or outside Ukraine in a 
gas crisis redux.  End summary. 
 
IMF "DONE WHAT IT CAN DO" 
------------------------- 
 
¶2.  (C) IMF Kyiv-based resident representative Max Alier told 
us on January 5 that negotiations over the transfer of $2 
billion in liabilities to the IMF from the NBU to the GOU 
were continuing but "not going anywhere".  Alier said he had 
not met with any of Ukraine's top authorities in recent days 
and was studiously avoiding a "mediating" role among the 
parties over the NBU's reserves. 
 
¶3.  (C) Alier said the IMF had already "done what it can do" 
for Ukraine before the upcoming presidential election.  It 
had become "extremely clear" to the Fund that it could not 
intervene any further.  Absent a consensus among Ukraine's 
authorities over the transfer of the reserves from the NBU to 
the GOU, Alier expected that the GOU and Naftohaz would be 
forced to reach out to commercial banks.  He speculated that 
Naftohaz might test market appetite for a sale of GOU bonds, 
held by the state energy company since it was recapitalized 
by UAH 18.6 billion in July 2009 and another UAH 12 billion 
at the end of December 2009 (reftel).  (Note: Naftohaz has 
used at least UAH 3.25 billion of the bonds to pay for gas 
previously.  End note.) 
 
¶4.  (C) Alier felt certain that foreign banks had enough 
liquidity to purchase the bonds, though he admitted he had 
not spoken with bankers about whether they would be 
interested in the debt.  An alternative mechanism would have 
public banks purchase the instruments below par value.  In 
any case, IMF leadership was certain that no key stakeholders 
within or outside Ukraine wished to prompt a crisis in the 
event of non-payment of Naftohaz's January 11 bill to 
Gazprom. 
 
¶5.  (C) Note: IMF Deputy Managing Director Lipsky had written 
a confidential memo to Prime Minister Tymoshenko, Deputy 
Prime Minister Nemyria, Acting Finance Minister Umanskiy, and 
NBU Governor Stelmakh on December 30 to inform them of the 
Board's decision to lower the end-2009 NIR target by $2 
billion to $12.9 billion, per the GOU's request.  Although 
the NBU had deemed this move "unnecessary", the IMF reasoned 
that the modification could increase flexibility to make 
external payments.  End note. 
 
NBU REJECTS TRANSFER OF RESERVES, GOU BOND PURCHASE 
--------------------------------------------- ------ 
 
¶6.  (C) NBU Director for International Relations Sergiy 
Kruglyk told us on January 5 that the central bank could not 
transfer reserves to the GOU without a guarantee that the GOU 
would use the monies solely for external payments.  Only the 
IMF could impose such a guarantee, Kruglyk said, since the 
GOU "doesn't care about gas -- only about making wage and 
pension payments."  Furthermore, the NBU would not buy GOU 
bonds, as it had determined that it already held 500% more 
than the acceptable amount of GOU liabilities and needed to 
closely watch the overall money supply. 
 
¶7.  (C) There were two possible options remaining to help 
with the gas payment, according to the NBU.  One would have 
the IMF recall a prior loan allocating monies to the NBU's 
reserves, with the IMF instead reissuing a new loan of the 
same amount to the GOU's treasury.  Another option would be 
 
KYIV 00000017  002 OF 002 
 
 
for Naftohaz or the GOU to sell bonds to commercial banks. 
There was UAH 20 billion in banking sector liquidity, 
according to Kruglyk, and Naftohaz only needed UAH 8 billion 
(roughly $1 billion) to meet its upcoming obligations. 
(Note: Naftohaz Chairman Oleh Dubyna told the Ambassador on 
December 24 that Ukraine purchased approximately 4.2 billion 
cubic meters of gas in December.  Based on that amount, the 
payment due on January 11 will be around $874 million.  End 
note.) 
 
¶8.  (C) Kruglyk noted that if either the GOU or Naftohaz had 
enough hryvnia resources available, the NBU would be willing 
to exchange local currency for dollars to meet external 
payments.  The NBU would not comment on market appetite for 
GOU debt issued directly or sold by Naftohaz, though Kruglyk 
said Ukrainian authorities were in active negotiations with 
commercial banks today. 
 
BANKS HEARING CRICKETS 
---------------------- 
 
¶9.  (C) However, a sample group of representatives from 
foreign-owned banks and domestic state-owned banks -- the two 
likeliest sources of available capital -- told us on January 
5 that they had not been approached by the GOU or Naftohaz to 
buy bonds prior to the January 11 gas payment deadline.  OTP 
board member Miklos Bebiak said that he had heard some rumors 
of the bond sale, but that he was not aware of any details. 
Dimitro Sologoub noted that Raiffeisen-Aval's traders had 
likewise not been contacted. 
 
¶10.  (C) Raiffeisen-Aval had concluded the NBU and GOU would 
continue their negotiations over the transfer of reserves 
until the last minute.  It had also heard that, as a fallback 
plan, the NBU was working on a mechanism to directly credit 
Gazprom, effectively bypassing Naftohaz and the GOU treasury 
in order to prevent Tymoshenko from using the monies for 
social payments.  In any case, Raiffeisen-Aval and other 
foreign-owned banks saw "no point" in buying more GOU 
liabilities, as they already had huge holdings. 
 
¶11.  (C) Anna Zakharova, Director of International Finance at 
state-owned Rodovid Bank, said that most senior 
representatives she knew from fellow state-owned banks were 
away from Kyiv during the holiday week.  She told us that 
Rodovid had not been approached by the GOU or Naftohaz.  Even 
if it had been requested to urgently buy GOU securities, it 
would not have been in a position to make a large trade until 
the week of January 11. 
 
COMMENT 
------- 
 
¶12.  (C) The bank most likely to be arm-twisted into buying 
GOU debt is state-owned Oshchadbank, whose assets are already 
extraordinarily tied to Naftohaz. (Fitch recently indicated 
that Naftohaz takes up 53% of Oshchadbank's loan portfolio, 
roughly equivalent to 120% of the bank's capital.)  However, 
because state-owned banks do not possess enough liquidity to 
help with the entirety of Naftohaz's outstanding obligations, 
NBU reserves or a loan from a Russian source will still be 
needed.  Governor Stelmakh holds the aces and has upped the 
ante but, serving at the will of the President and in his 
final days in office, will be careful not to overplay his 
hand. 
 
PETTIT