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Cablegate: Ukraine: Dollar Auctions to Offset Falling Hryvnia

VZCZCXRO1248
PP RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2340 3330532
ZNR UUUUU ZZH
P 280532Z NOV 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 6808
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS KYIV 002340

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: EFIN ECON ETRD PREL PGOV XH UP

SUBJECT: UKRAINE: DOLLAR AUCTIONS TO OFFSET FALLING HRYVNIA

REF: A) KYIV 2224; B) KYIV 2303

SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION

1. (SBU) The hryvnia traded around 6.7/$ on the interbank market on
November 26, down roughly 3 percent from the previous day and
falling from 6.0/$ a week ago. On Kyiv streets, dollar bids started
around 6.65/$ with offers topping 7.0/$. Speculation about a
developing black market filtered into the local press; these rumors
were repeated anecdotally to Econoffs but have not yet been
verified. At the retail level, many banks and kiosks have either
refused to sell dollars or only with significant markups to
advertised rates in the form of processing fees.

2. (SBU) Overall, the hryvnia lost 35 percent of its value over the
last two months. After spiking around 7.0/$ on October 29, the
currency stabilized near 5.8/$ during the first three weeks in
November, when the National Bank announced it would sell unlimited
dollars from its foreign exchange reserves (ref A). However,
implementation of this policy has been piecemeal, and the NBU has
repeatedly failed to fill all orders for dollars. As the NBU
gradually backed away from this policy, it began implementing an
auction system with the support of IMF advisors. Nonetheless,
demand for dollars by both companies and the broader population has
remained ferocious. Information last week about unfilled dollar
requests prompted new fears of a dollar shortage, undermining recent
stability and causing the hryvnia to fall again. The declines
increased this week when the NBU reportedly did not sell any dollars
for several days. The NBU last announced its reserves as of October
31, when they stood at roughly $31.9 billion. It is widely assumed,
however, the reserves have dropped substantially in the weeks since
the last announcement.

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3. (SBU) Chairman Oleh Dubyna of Ukraine's national oil and gas
company NaftoHaz underlined concerns about a jump in the exchange
rate and a concomitant dollar shortage. Stating that NaftoHaz had
placed 600 million hryvnia on the exchange without any buyers,
Dubyna stressed the need to purchase foreign currency to pay for gas
imports, especially at a time when the company was facing
complications making payments. NaftoHaz needs dollars to settle a
significant outstanding debt to Gazprom (ref B).

4. (SBU) In a November 25 press conference, NBU Governor Volodymyr
Stelmakh called the latest developments on the foreign exchange
market public panic and speculation. In order to slow demand for
dollars, he announced the creation of a modified auction system for
foreign currency, inviting bids from commercial banks for a minimum
of $100,000. The auction system will take place overnight, with
banks pre-paying hryvnia and then waiting until the following day
without a guarantee that the NBU will actually sell them dollars.
Speculation is that this new scheme will disrupt banking operations,
heighten market uncertainty and, like previous NBU programs for
intervening in the market, remain non-transparent.

5. (SBU) Comment. Moving towards a more flexible exchange rate
regime is an important IMF conditionality. In practical terms, more
flexibility means further devaluation, especially given Ukraine's
current macroeconomic climate. A hryvnia devaluation is also
necessary to improve the country's external competitiveness and help
it tackle the burgeoning current account deficit. The NBU's
management of the process has been suboptimal, however, marked by
continuous changes in its intervention policy and growing concerns
over favoritism when it sells dollars to banks. End comment.

TAYLOR

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