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Cablegate: Ukraine's Businesses Tense; Imf and Nsdc Deliberate

VZCZCXRO9675
PP RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2105/01 2941531
ZNR UUUUU ZZH
P 201531Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 6573
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 03 KYIV 002105

SENSITIVE
SIPDIS

DEPT FOR EUR/UMB, EEB/OMA
TREASURY PLEASE PASS TO TTORGERSON

E.O. 12958: N/A
TAGS: EFIN ECON ETRD PGOV XH UP
SUBJECT: UKRAINE'S BUSINESSES TENSE; IMF AND NSDC DELIBERATE

REF: A) KYIV 2097, B) KYIV 2030

SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION

1. (SBU) Summary. With ongoing International Monetary Fund (IMF)
negotiations and an emergency session of the National Security and
Defense Council (NSDC) as the backdrop, Ukraine's politicians
swapped jabs, while businesses scrambled to cover their mounting
losses. No announcement was made about a bailout plan, but the IMF
released a press statement suggesting financial assistance may be
offered regardless of snap parliamentary elections. Industry and
banking leaders cite growing concerns about jobs, capital, and
revenue losses. End Summary.


IMF Denies Tymoshenko's Claim
-----------------------------------------

2. (SBU) The International Monetary Fund issued a press statement
on October 17 denying it would require Ukraine to delay early
parliamentary elections in return for a financial assistance
package. Prime Minister Yulia Tymoshenko had announced earlier
that the IMF would impose this conditionality (Ref A). Ukrainian
press widely circulated the public clarification and response to
Tymoshenko's claim. Separately, Tymoshenko met with IMF officials
to discuss measures that would be conditional for financial support.
She emerged from the talks to announce that she would end the
negotiations successfully, and that Ukraine was likely to receive a
large-scale (up to $14 billion) financial support package. Post
received no confirmation from the IMF of Tymoshenko's claims by late
October 20.


NSDC on the Financial Crisis
------------------------------------

3. (SBU) Ukrainian President Viktor Yushchenko chaired a special
meeting of the National Security and Defense Council on October 20
to consider a plan for stabilizing Ukraine's financial system.
During his opening statement, Yushchenko implicitly bashed
Tymoshenko, stating, "We should stick to professionalism, rather
than political programs and political ideas." The president, who
has referred to himself lately as a "categorical optimist," is
expected to announce coordinated actions by the government and
National Bank. Post had no independent report on the outcome of the
meeting as of late October 20.

4. (SBU) Also on October 20, Yushchenko rejected a proposal to
create an anti-crisis coalition in the Verkhovna Rada, made the
previous evening in a nationally broadcast address by PM Tymoshenko.
According to Yushchenko's press secretary, a coalition of this sort
would be inferior to the NSDC in its "legitimacy, mobility, and
professional merits." In her televised address, Tymoshenko again
called for delaying the snap elections. She also announced the
suspension of her party's legal battle with Yushchenko over the
elections, in favor of a proposal to create a grand coalition to
address the financial crisis.


NBU Clarifies Resolution 319
------------------------------------

5. (SBU) The National Bank of Ukraine (NBU) revised some of its
previous measures on bank lending. Modifying its Resolution 319 of
October 13 (Ref B), the NBU lifted the restriction that had
prevented banks from expanding loan portfolios beyond their October
13 levels. Banks may now increase both hryvnia and foreign currency
lending, but only to parties that export goods or services. In
another welcome modification, importers can again purchase foreign
currency to pay for imports before the goods arrive in Ukraine.


How Long Will Banks Support Subsidiaries?
--------------------------------------------- ---------

6. (SBU) Roughly 70 percent of the external debt due by banks is
owed by banks controlled by foreign banks (Ref A). Many local
observers still assume that foreign parent banks will continue to
supply their Ukrainian subsidiaries with short term funding. (Last
week, for example, Raiffeisen Bank Austria gave its Ukrainian bank,
Raiffeisen Aval, a $180 million short term loan.) Nonetheless,
foreign bank representatives have told us that such backing is not
without its limits. Hans Grisel, General Manager of ING Bank
Ukraine, and Citibank's Nadir Shaikh said that measures adopted by
regulators in the parent banks' home countries could compel them to
reduce their exposure in particularly risky markets. In addition,

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foreign banks could at some point themselves decide that the
continued risk of operating a bank in Ukraine outweighs the value of
the franchise, even in the longer run, particularly if Ukraine's
credit rating worsens dramatically or the country places
restrictions on the repatriation of earnings or capital. Currently,
foreign banks are preparing a letter to the NBU requesting that they
be allowed to hedge the capital that their owners had injected in
their banks, Grisel and Shaikh told us. They will ask that the NBU
allow them to maintain a foreign currency deposit with the central
bank that equals the value of their paid-in capital at current
exchange rates.


Crisis Hits Businesses and the Common Man
--------------------------------------------- ---------

7. (SBU) We hear anecdotal information from a number of sources
that business leaders (please protect throughout) and citizens alike
are taking measures to soften the blow. Stephen Ansell, general
manager of the Kyiv Hyatt, whose five-star hotel is owned by
Ukrainian oligarch and head of the Industrial Union of Donbass (IUD)
Sergey Taruta, told us that Taruta is extremely alarmed about his
conglomerate's worsening economic position. Ansell said that
Taruta's steel business is expecting heavy losses in the fourth
quarter of 2008, during which time over 500,000 job losses are
expected industry-wide. Echoing what Post heard from Rinat
Akhmetov's System Capital Management (Ref A), Taruta told news
weekly Kommersant that IUD would halt all investment projects,
including a $500 million joint venture with Arcelor Mittal known as
Crooked Horn. He also confirmed that 20,000 of IUD's 60,000 steel
workers would be laid off. "It is not our fault," Taruta said. "We
simply cannot support the pay of these people." IUD's vice
president Oleksandr Pylypenko further stated, "This crisis is
systemic. The problem concerns everyone. I think soon in Ukraine
every third person will become jobless." For his part, Ansell
lamented that his once thriving luxury restaurant business had also
greatly suffered, due to inflation, currency devaluation, and rising
food costs, but demand for Kyiv's limited high-end hotel rooms had
shielded his core business from heavy losses.

8. (SBU) Automobile companies are expected to take similar measures
to reduce their workforces. Bohdan Kulchyckyj, CEO of Winner Group
-- an American-owned importer and retailer of Ford, Volvo, Jaguar,
Land Rover, and Porsche, is also dour about his company's prospects.
Whereas sales growth had made the Ukrainian car market one of
Europe's leaders for the past five years, there is now a huge
inventory glut of mid-market and luxury cars. Kulchyckyj told us
that banks halted new credit issuance for auto purchases on October
15, which has led to an immediate 50 percent drop in consumer demand
and an expected sharp reduction in imports. Kulchyckyj has directed
managers to rate all employees, protecting essential workers in the
top 20 percent and letting go the bottom 10 percent. Kulchyckyj
intimated this would be the first of at least two rounds of layoffs
in the coming months.

9. (SBU) IKEA production executive Andreas Weidenholzer predicted
large near-term layoffs in his industry. He lamented that IKEA's
Ukraine-based furniture plant which, until six weeks ago, had been
trying to secure investment for upgrades to its 20 year-old
machinery, could halt production or shift operations to more
efficient facilities in Romania. Weidenholzer cited market
uncertainty, overly bureaucratic regulation, and a capital freeze as
the basis for IKEA's move to EU plants. He was stinging in his
appraisal of Ukraine's governmental response to the crisis, saying
that officials are acting to get a return on their bribes before the
impending elections throw them out of office.

10. (SBU) Although Kyiv-based analysts suggest that the hryvnia
will depreciate further and that the NBU will be forced to move its
official exchange rate downward, possibly in connection with an IMF
conditionality that Ukraine allows the currency to float more
freely, it is unclear where the hryvnia is actually headed or how
fast a depreciation might occur. AmCham President Jorge Zukowski
told us that several of his members, companies importing consumer
goods, were preparing scenarios that foresaw an exchange rate
anywhere between 7 and 10 UAH/$.

11. (SBU) Walking around the streets of Kyiv, concerns about the
exchange rate are visible on the faces of everyday citizens.
EconOff stood in line at a local exchange kiosk, where twenty people
waited to sell hryvnia at one of the city's best advertised prices,
which at 5.35 to 5.50 UAH/$ on October 20 was weaker than the NBU's
official rate of 4.96 (+/- 8 percent). Elderly ladies expressed
their belief that the currency would only further devalue. Others
in the queue, from men in business suits to construction workers,
whispered that they needed to buy now "before dollars were all

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gone."

TAYLOR

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