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Cablegate: Ukraine: Hryvnia Continues Its Slide As

VZCZCXRO4123
OO RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2141/01 2991418
ZNR UUUUU ZZH
O 251418Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6624
INFO RUCNCIS/CIS COLLECTIVE IMMEDIATE
RUEHZG/NATO EU COLLECTIVE IMMEDIATE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE

UNCLAS SECTION 01 OF 02 KYIV 002141

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA
TREASURY FOR TTORGERSON

E.O. 12958: N/A
TAGS: EFIN PGOV PREL ECON ETRD XH UP
SUBJECT: UKRAINE: HRYVNIA CONTINUES ITS SLIDE AS
EXPECTATIONS OF FURTHER DEVALUATION GROW

REF: A. KYIV 2039 AND PREVIOUS
B. KYIV 2030

Sensitive But Unclassified. Not For Internet Distribution.

Summary
-------

1. (SBU) The hryvnia continues its slide against the dollar,
having crossed the psychologically important barrier of 6
UAH/$ on October 24-25. It appears that demand for dollars
by ordinary Ukrainians, fearful of further devaluation and
inflation, is beginning to drive movements in the market, a
trend acknowledged by the National Bank of Ukraine (NBU).
Companies are also adapting their behavior in anticipation of
further drops in the currency: some retailers are reviving
the practice of indexing their prices to the dollar, and
exporters are reportedly becoming increasingly reluctant to
cash in dollar revenues for hryvnia. The NBU has openly
threatened to force exporters to turn over dollar receipts,
but otherwise is standing on the sidelines as the currency
slides. The hryvnia's sudden and sharp turn of fortune is
bound to damage the Ukrainians' fledging and fragile trust in
their currency. Whether the damage can be contained will
depend on how swiftly, and effectively, the NBU and GOU
implement an expected IMF support package. End comment.

Hryvnia Crosses Psychologically Important Barrier
--------------------------------------------- ----

2. (SBU) The hryvnia continued its slide against the dollar
on October 24 and 25. Retail kiosks around central Kyiv
were buying dollars at the rate of roughly 6.1 UAH/$, and
selling at about 6.3 UAH/$. Late on October 24 banks were
also seeking to buy dollars above 6 UAH/$ on the interbank
market, marking the first time in the current crisis that the
exchange rate closed above this important psychological
barrier. The hryvnia had reached its peak at 4.63 UAH/$ in
late June, and only a week ago was trading at 5.34 UAH/$.

"Tail Wags the Dog"
-------------------

3. (SBU) Various sources are telling us that demand for cash
dollars by ordinary Ukrainian citizens is beginning to drive
the market. In normal times, the well-regulated street
kiosks, most of which are operated by banks, set their rates
in accordance with developments on the interbank market. It
now appears that "the tail is beginning to wag the dog," as
one commentator put it, with Ukrainians increasingly seeking
to move into dollar cash as fear of further devaluation,
possible bank failures, and a renewed surge in inflation
mounts. Anatoliy Shapovalov, deputy governor of the NBU,
admitted as much in an October 24 statement to the media,
claiming that the market was now being driven by panic within
the population.

Consumers and Companies Position For Further Devaluation
--------------------------------------------- -----------

4. (SBU) Anecdotal evidence suggests that growing numbers of
Ukrainian businesses and households are expecting further
devaluation and adapting their behavior accordingly. We have
heard that some retailers are indexing prices for higher-end
consumer goods to the dollar, with the customer paying in
hryvnia at whatever exchange rate is in the market at the
time of the purchase. This practice, widespread in the 1990s
and still common for real estate and automobile transactions,
had virtually disappeared in other retail sectors in recent
years as the exchange rate remained stable and confidence in
the hryvnia grew. We have also heard numerous reports that
exporters are increasingly keeping dollar receipts rather
than converting them to hryvnia. One commentator told the
media that the practice has increased dramatically since
October 13, when the NBU adopted its Resolution 319 limiting
the ability of companies to transfer foreign currency abroad
(ref B). The NBU's Shapovalov openly threatened to
re-introduce regulations forcing exporters to turn over
foreign currency receipts if the practice continues. Such
NBU action would be "an extreme measure," Shapovalov
acknowledged, but added that it might become necessary if the
situation on the foreign exchange market worsened.

NBU Stands Aside and Hopes for Swift IMF Action

KYIV 00002141 002 OF 002


--------------------------------------------- --

5. (SBU) The NBU is looking increasingly reticent to step in
and influence the foreign exchange markets. It continues to
intervene, but only in a negligible manner, selling small
amounts of dollars at exchange rates far below where the
markets are trading. Many commentators are questioning why
the NBU is essentially giving away dollars to a lucky few
buyers who ostensibly plan to use them to purchase imports,
but who could just as easily resell them on the interbank
market for an instant and riskless profit. Most believe the
NBU is trying, increasingly without success, to portray some
semblance of being an active player in the markets. Changing
its policy and selling at current market rates could even put
further pressure on the hryvnia, some speculate, as the
market might interpret such NBU behavior as a sign that the
central bank expects the hryvnia to drop even further.
Shapovalov told the media that the NBU had sold $2.777
billion since the beginning of October to prop up the hryvnia.

Comment
-------

6. (SBU) The NBU's actions continue to lag behind the
market, and commentators are increasingly questioning whether
the central bank even has a strategy to deal with the
currency's slide. Many think it does not, but the local IMF
rep told us on October 25 (septel) that the NBU is the only
actor in the Ukrainian public sphere actually doing anything
at the moment. Most likely, the NBU is buying time and hoping
that an IMF deal will be struck soon and reestablish
confidence in the hryvnia before more severe controls on
currency movements and bank deposits become necessary.

7. (SBU) In any case the sharp turn of fortune of the hryvnia
will have a longer term impact on how Ukrainians view their
currency. In recent years trust in the currency had grown
slowly yet consistently on the back of a stable exchange rate
and growing nominal hryvnia-based incomes. Ukrainian
citizens and companies were growing increasingly comfortable
using the hryvnia as a store of value, as evidenced by the
rapid growth in bank deposits from very low levels in recent
years, and by the fact that indexing prices had become less
common. The current sudden shifts in behavior suggest that
such fledging trust has already been damaged, and that it
will take time for faith in the currency to return. Just how
long, will depend on how quickly and effectively the NBU and
government use an IMF package to reestablish stability in the
economy. End comment.
TAYLOR

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