Welcome to the U.S.-Ukraine Business Council

Ukrainian News-on-line, Ukrainian News Agency, Kyiv, Ukraine, Thu, September 3, 2009 

CHS Inc, St. Paul, Minnesota, Wednesday, September 2, 2009

Squire, Sanders & Dempsey law firm, Kyiv, Ukraine, Tuesday, Sep 1, 2009

Analysis & Commentary:  Jock Nunan, Partner, PricewaterhouseCoopers Ukraine
Kyiv Post, Kyiv, Ukraine, Friday, September 4, 2009

By Natalya Zinets, Reuters, Kiev, Ukraine, Friday, September 04, 2009 

bne - Credit weekly, Berlin, Germany, Monday, August 31, 2009

Interfax, Kyiv, Ukraine, Thursday, September 3, 2009

Interfax Ukraine, Kyiv, Ukraine, Wednesday, September 2, 2009

UkrInform - Economic News online, Thursday, September 3, 2009 

Interfax Ukraine, Kyiv, Ukraine, Thursday, September 3, 2009


Ukrainian News-on-line, Ukrainian News Agency, Kyiv, Ukraine, Thu, September 3, 2009 

KYIV - Ukraine hopes to attract in October-November 1.5-2 billion dollars of investments from the European Commission and international finance organizations for modernization of the national gas transportation system, Hryhorii Nemyria, vice premier for international and European integration, told a news briefing.

Agreements were reached by the European Bank for Reconstruction and Development, the World Bank, the International Finance Corporation, the European Investment Bank, the European Commission and Ukraine on the moves to make it possible by the end of the autumn, in October-November, to get access to investments of about USD 1.5 - 2 billion for modernization of Ukraine's gas sector, Nemyria said.  On top he emphasized the importance to Ukraine of its cooperation with international finance organizations.

As Ukrainian News reported, in August the Cabinet of Ministers called on the Ministry of Fuel and Energy and the Naftohaz Ukrainy national joint stock company to approve a project feasibility study and specified cost estimations in order to launch modernization of the Ukrainian gas transport system.

The Cabinet of Ministers of Ukraine and the European Commission signed a joint statement following the March 23 international conference in Brussels where the Ukrainian government pledged to ensure transparency and openness of a debtor assigned to provide modernization of the gas transport system under international standards.

CHS Inc, St. Paul, Minnesota, Wednesday, September 2, 2009

ST. PAUL, MINNESOTA - CHS Inc., a leading energy, grains and foods company today announced it has invested in a project that will result in partial ownership of a grain export terminal with GN Terminals, Odessa [Ukraine]. The two companies will operate an export terminal there with expected annual grains shipping capacity of two million tons.

Under the agreement and upon closing, CHS (http://www.chsinc.com/) will manage part of the terminal's capacity, allowing it to manage its own rail cars, trucks and ships through the Odessa terminal. CHS operations in Odessa will be managed from the CHS Europe office in Geneva, Switzerland, and all grain will be marketed as CHS.

"Our Black Sea investments support the company's strategy of being a major supplier of grain to the global marketplace from both domestic and key international sources," says Claudio Scarrozza, general manager, CHS Europe.

CHS Inc. is a diversified energy, grains and foods company committed to providing the essential resources that enrich lives around the world. A Fortune 200 company, CHS is owned by farmers, ranchers and cooperatives, along with thousands of preferred stockholders across the United States.

CHS supplies energy, crop nutrients, grain, livestock feed, food and food ingredients, along with business solutions including insurance, financial and risk management services. The company operates petroleum refineries/pipelines and manufactures, markets and distributes Cenex brand refined fuels, lubricants, propane and renewable energy products. CHS is listed on the NASDAQ at CHSCP.

This document contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 that are based on management's current expectations and assumptions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the potential results discussed in the forward-looking statements.

The company undertakes no obligations to publicly revise any forward-looking statements to reflect future events or circumstances. For a discussion of additional factors that may materially affect management's estimates and predictions, please view the CHS Inc. annual report filed on Form 10-K for the year ended Aug. 31, 2008, which can be found on the Securities and Exchange Commission web site (http://www.sec.gov/) or on the CHS web site http://www.chsinc.com/.

Squire, Sanders & Dempsey, Kyiv, Ukraine, Tue, Sep 1, 2009

KYIV - Since the end of 2008, Ukraine’s banking sector has faced unprecedented challenges resulting from the worldwide and regional financial crises. Until recently, matters related to the financial recovery of Ukrainian banks have been dealt with in an ad hoc fashion.

In an attempt to facilitate the resolution of bank rehabilitation matters in a more permanent and consistent manner, the Ukrainian Parliament enacted the Act of Ukraine On Amendments to Certain Laws Regarding Peculiarities for Financial Recovery Measures for Banks, No. 1617-VI, of 24 July 2009 (Bank Recovery Law).

Enactment of the Bank Recovery Law was one of the International Monetary Fund’s (IMF) conditions for Ukraine to obtain the next tranche of funding from the IMF and was a precondition to state recapitalization of some Ukrainian banks experiencing severe financial difficulties. The Bank Recovery Law went into force on 5 August 2009. The major provisions are described below.

Extended NBU Authority to Introduce Temporary Administration of Banks
The discretionary powers of the National Bank of Ukraine (NBU) to appoint temporary administrators have been broadened. The Bank Recovery Law (i) lowers the threshold for when the NBU must appoint an administrator of a Ukrainian bank and (ii) introduces additional reasons why the NBU may appoint an administrator.

The NBU now is obliged to appoint a temporary administrator in case of a threat to the creditworthiness of a bank. Previously, the threat needed to be "substantial" (see Act of Ukraine On Banks and Banking Activity, No. 2121-III, of 7 January 2000 [Banking Law]).

Though the NBU Regulation No. 369, On Use by NBU of the Means of Influence for Violation of Banking Legislation, of 28 August 2001 contains detailed guidance as to what constitutes a "substantial threat to creditworthiness," neither the Banking Law nor NBU Regulation No. 369 provides any guidance as to the qualification of "a threat to creditworthiness."

Moreover, NBU Regulation No. 369 still contains the rule pursuant to which the NBU is obliged to appoint a temporary administrator in case of a "substantial threat" to the creditworthiness of a bank.

Also, the Bank Recovery Law expands the right of the NBU to appoint a temporary administrator by introducing the following additional grounds for such an appointment:

(1) If a bank decreases its regulatory capital by 30 percent within a six-month period (previously, it had to be shown that the bank also violated at least one
      economic ratio established by the NBU);
(2) If within five business days (previously, 15 business days) the bank fails to perform 10 percent or more of its overdue obligations;
(3) If the bank performs high-risk transactions that cause or may cause a loss of assets or income; or
(4) If the bank breaches money laundering laws.

Creditors Beware – Wider Authorities of Temporary Administrator
The Bank Recovery Law permits a temporary administrator to act unilaterally to assign demand rights, assign debt, reorganize a bank and engage in other actions under a financial recovery program of the bank without notifying or receiving the consent of the bank’s shareholders, debtors or creditors (depositors).

The bank’s shareholders and depositors do not have the right to demand termination of agreements entered into with the bank or early performance of bank obligations or to recover losses that result from a bank performing measures as part of a financial recovery program overseen by a temporary administrator.

Thus, creditors, without having any say in the matter, may end up with a completely different party than they bargained for on the other side of the transaction. There might be a number of reasons why a creditor would not wish to deal with the assignee or be wary to do so. For instance, there might be regulatory restrictions that prevent such a creditor from contracting with the new party, or there might be other difficulties of a commercial or legal nature that arise as a result of such an assignment.

The Bank Recovery Law establishes new rules regarding reorganization of the bank by a temporary administrator through divestiture. In particular, the rules requiring a minimal amount of charter capital (currently €10 million) and requiring a bank to form its charter capital only through monetary contributions do not apply to a successor bank created as a result of the reorganization of a bank by a temporary administrator through divestiture.

The amount and procedure of formation of the charter capital of such a successor bank should be determined by the NBU. The temporary administrator must sell such a successor bank before completion of the temporary administration procedure.

New Moratorium Term
The Bank Recovery Law changes the maximum moratorium term for fulfillment of creditors’ claims from six to three months, thus decreasing the term for which a bank may freeze a creditor’s funds. The NBU has the right to extend, by six months, the moratorium for satisfaction of claims of creditors of a bank if the moratorium existed as of the date the Bank Recovery Law went into effect.

The NBU used this provision immediately by prolonging by half a year the moratorium on satisfying the demands of creditors of several banks, including such large banks as Nadra Bank and Ukrprombank.

Previously the moratorium applied only to creditors’ claims for which the due date of fulfillment occurred before the imposition of the moratorium. The Bank Recovery Law eliminates such a requirement, and now the moratorium may be applied to claims coming due after the imposition of the moratorium.

The Bank Recovery Law provides the NBU with the right to impose a moratorium fully or partially. The Bank Recovery Law does not contain any guidance as to what is a full or partial moratorium. However, it can be assumed from this wording that the NBU may exclude certain bank obligations from the moratorium in addition to those obligations to which a moratorium does not apply by law.

The Bank Recovery Law establishes that the moratorium does not apply to obligations related to the servicing of commercial activity of the bank, including payment of salaries or compensation for damage to the life and health of the bank’s employees, as well as the claims of creditors to pay salaries, alimonies, pensions, studentships and social payments within the limits established by the temporary administrator.

Incentives to Buy Distressed Banks
The Bank Recovery Law attempts to entice financial institutions to buy troubled banks by providing state financial assistance for such purchases. A potential problem with the wording of the legislation is that all other players in the market seem to be ineligible to receive such financial assistance. As a rule, special purpose vehicles are created for the sole purpose of bank acquisition and may not have the status of "financial institution."

The reasons for that include various regulatory restrictions on investments and acquisitions imposed on financial institutions as well as tax, legal and commercial considerations for structuring a bank acquisition. It remains to be seen whether the NBU will issue clarifications dealing with the issue of financial institutions eligible for state financial assistance.

The amount of state financial assistance must not exceed the difference between the obligations to individuals – depositors of the bank limited by the amounts subject to refund by the Deposit Insurance Fund – and the value of the bank’s assets alienated from the financial institution. The value of the bank’s assets sold to the financial institution must be determined by independent evaluators.

State financial assistance will be funded from the state budget of Ukraine or through the "transfer" of Ukrainian state bonds. The procedure for providing and using state financial assistance and the terms on which such financial assistance will be provided must be established by the Cabinet of Ministers of Ukraine. It is unclear at this time whether the state will actually have or be able to raise funds to assist financial institutions in buying troubled banks.

The Bank Recovery Law introduces a new rule under which a person who is party to an agreement on the transfer of assets or obligations of a bank for which the temporary administrator is introduced is released from making any payments related to alienation/receipt of such assets, obligations for making changes to the state registers and fees for services provided by state bodies.

In practice, it means that the parties to such transactions will be exempt from certain state-mandated fees, such as fees to the Antimonopoly Committee of Ukraine for consideration of the application to grant consent to a concentration, and registration fees with the State Register of Rights to Immovable Property and the State Register of Agreements.

Easier Access to Banking Secrets
The Bank Recovery Law introduces new rules regarding the disclosure of banking secrets. A bank has the right to provide information that constitutes a banking secret to other banks and the NBU to the extent necessary during the extension of loans and bank guarantees.

The bank may now disclose banking secrets to a person (including the persons authorized to act on behalf of the state) from whom the assets and obligations of the bank are alienated during the performance of measures that are part of a bank financial recovery program or during the liquidation procedure. The NBU (or temporary administrator) has the right to provide the Ministry of Finance of Ukraine with information containing banking secrets regarding the banks undergoing capitalization by the state.

The NBU may also exchange banking secrets with banking supervision authorities of another country based on international treaties for the purpose of banking supervision or the prevention of money laundering.

Special Regime of NBU Control
The Bank Recovery Law introduced the notion of a curator into the Banking Law, thus reconciling the Banking Law with NBU Regulation No. 369. The NBU has the right to restrict the activities of the bank by imposing a special control regime over the bank and appointing a curator who should, among other things, closely monitor the bank’s activities and give its consent to transactions related to the movement of funds.

During the "special control regime" (as well as during temporary administration) the NBU has the right to prohibit the bank from using direct correspondent accounts for settlements or demand that the bank perform settlements solely through a consolidated correspondent account.

Bank Liquidation
The Bank Recovery Law provides a liquidator with broad rights to alienate the bank’s assets and obligations. A liquidator may decide how to transfer assets and obligations of a bank without giving notice to or receiving the consent of the bank’s shareholders, debtors or creditors (depositors).

Similar to the fee exemptions for the disposal of assets and obligations of the banks under temporary administration, both parties involved in the transfer of assets and obligations of a bank under liquidation are released from paying certain fees to state bodies.

Rehabilitation Bank
The Bank Recovery Law grants the Cabinet of Ministers of Ukraine the right to create a rehabilitation bank based upon the NBU’s proposal. The main task of the rehabilitation bank is protection of the interests of the bank’s depositors (creditors). A rehabilitation bank is not a participant of the Deposit Insurance Fund.

The Bank Recovery Law is short on details of the functions and responsibilities of the rehabilitation bank, and it remains to be seen how the NBU will delineate the major tasks and regulate the activity of the rehabilitation bank. It is expected that the rehabilitation bank will be used to help "clean" toxic assets from the balance sheets of troubled banks.

Taxation of Deposits of Individuals
The Bank Recovery Law changed the date when interest income derived from an individual’s deposits or current accounts will be taxed from 1 January 2010 to 1 January 2013. Considering the massive outflow of funds from the banking system and general distrust of the population towards Ukrainian banks, postponing of the taxation of interest income appears to be a sensible step to take.

The legislative initiatives brought by the Bank Recovery Law, although lacking clarity on some points, appear to provide necessary tools for faster and simplified procedures for the sale, reorganization and liquidation of troubled banks. Time will tell whether the benefits of the Bank Recovery Law will be effectively and smoothly utilized in practice.

For more information regarding the Bank Recovery Law, please contact your principal Squire Sanders lawyer or one of the lawyers listed in this Alert.
Contacts: Peter Z. Teluk, +380.44.220.1414; Kateryna S. Kokot, +380.44.220.1402., Squire, Sanders & Dempsey L.L.P., Leonardo Business Center, 19-21 Bohdan Khmelnytsky St., 16th Floor, Kyiv 01030, Ukraine.

Founded in 1890, Squire, Sanders & Dempsey L.L.P. has lawyers in 32 offices and 15 countries around the world. With one of the strongest integrated global platforms and our longstanding one-firm philosophy, Squire Sanders provides seamless legal counsel worldwide.

The contents of this update are not intended to serve as legal advice related to individual situations or as legal opinions concerning such situations. Counsel should be consulted for legal planning and advice. 

NOTE:  Squire, Sanders & Dempsey L.L.P. is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.

Analysis & Commentary: Jock Nunan, Partner, PricewaterhouseCoopers Ukraine
Kyiv Post, Kyiv, Ukraine, Friday, September 4, 2009

Political instability remains the greatest threat to the country's economy.

Ukraine, perhaps more than any of its ex-Soviet neighbors, is a barometer of the global economy: demand falls for the metals and other commodities it exports when the world is under the weather, and it picks up again when the global outlook turns sunnier.

The challenge for Ukraines leaders was to make sure its financial system did not collapse before it could emerge from the downturn to reap the benefits of the global recovery, and, after a stormy few months, they seem to have just about managed to do that.

It may be too early to rejoice, but there are signs that Ukraine has put the worst of the economic turbulence behind it. Production at steelmakers has stopped plummeting; traders have started buying the hryvnia again after months of ditching the sinking currency for dollars; the central banks foreign exchange reserves are growing and analysts forecasts are less gloomy.

With its export-driven economy, Ukraine was always going to suffer from the global downturn, said Boris Krasnyansky, managing partner at PricewaterhouseCoopers Ukraine. The crucial factor is that the country appears to have weathered the storm. Ukraine needs to keep its financial system stable. If it can do that, then all the reasons that made it vulnerable to a global downturn will make it well-placed to profit when the world economy recovers.

In the five years since Ukraines Orange Revolution swept in a new leadership committed to reform and integration with the West, political turbulence has dominated the outside worlds perception of this country of nearly 46 million people. Infighting between President Victor Yushchenko and Prime Minister

Yulia Tymoshenko, former Orange Revolution allies, has hampered government, while bouts of wrangling with Russia over gas supplies has added to the instability.

What has attracted less attention is that away from the political fireworks, Ukraine's economy has been growing steadily. Gross domestic product grew by about 7 percent in 2007, and Ukraine was the third biggest destination for foreign direct investment after Russia and Kazakhstan in the 12-nation Commonwealth of Independent States.

That achievement is all the more significant because Ukraine has few of the oil and gas reserves that have driven foreign investment and economic growth in Russia and in Kazakhstan. What Ukraine does have is heavy industry. The chemical and steel plants inherited from the Soviet Union have made it the regions second biggest industrial power after Russia.

Ukraine is the worlds eighth largest steel producer and the metal accounts for 30 percent of its exports. Before the slowdown, high demand from countries like China for steel to use in their booming construction industries brought orders rolling in.

But there are other factors besides its industrial might that make Ukraine a solid, long-term investment. While integration with the West has been slower than promised in the heady days of the Orange Revolution, Kyiv joined the World Trade Organization last year ahead of Russia and Ukraine has a partnership agreement with the European Union.

The countries location on the eastern edge of the European Union, and its deep sea ports on the Black Sea, help too. Costs for shipping steel, chemicals and grain to world markets are lower than for competitors in Russia.

The growth of the steel industry in Ukraine owes much to strong global demand but also bears testament to the good conditions inside Ukraine for doing business. Home-grown firms such as Metinvest and Industrial Union of Donbass the biggest and the second biggest Ukrainian steel producers respectively have expanded to make major acquisitions abroad, while in 2005 the worlds biggest steelmaker, ArcelorMittal, bought the countries biggest steel mill for $4.8 billion in a privatization auction.

There is little doubt that political turmoil in Kyiv has hampered the economy: analysts say government decision-making is slow and reforms have been hesitant. But some investors see a silver-lining even here. They say the government has been too divided to push through a proposed re-privatization of former state enterprises which, if it had gone ahead, could have made the investment climate more uncertain.

And investors note that the rival factions in the government and presidential administration were able to bury their differences for long enough to negotiate a $16.4 billion loan program with the International Monetary Fund. The loan has played a crucial part in restoring some stability to the financial system.

An acquisition by Ukrainian steelmaker Metinvest could be a sign of things to come. The firm concluded a deal in April to buy U.S. coal miner United Coal to help keep its smelters supplied with coking coal. In Ukraine, it seems, some firms are already looking beyond the storm clouds towards a brighter future in the long term.

But in the short term, big challenges remain. Will Ukraine capitalize on the opportunity to restructure the banking sector?

The initial response of the Ukrainian authorities to the ongoing financial crisis was promising. With the help of the IMF and World Bank, the Ukrainian authorities were quick to conduct diagnostics of the biggest banks and place into administration those banks which could not withstand the events of the fourth quarter of 2008.

The central bank was active in providing the necessary liquidity to commercial banks, having provided approximately $7.8 billion in loans to commercial banks in the first half of 2009. This amount of liquidity support should be measured against the total customer deposit base of the banking sector as a whole, which as of July 30 totaled some $60 billion compared with $58 billion in early 2009.

There are currently 185 banks licensed in Ukraine. This number has been relatively stable over the last 10 years. In contrasting the Ukrainian banking sector with that of other countries in central and Eastern Europe, this statistic alone differentiates Ukraine from its neighbors.

Despite the aggressive entry of many foreign banks into the market over the last five years, with nine of the top 20 banks (representing 70 percent of total banking sector assets) being majority owned by foreign banks, the smaller Ukrainian banks have shown remarkable resilience.

For many years Ukrainian banking sector analysts have predicted consolidation and the recent events gave extra weight to the logic behind this expectation. However predictions of wholesale closures of smaller banks which lack the support of strong shareholders have yet to materialize.

The current approach to bank recapitalization demonstrates the determination by authorities to maintain the sector in its current form. There are 14 banks currently under administration of the central bank, three of which are nationalized.

The largest of the 12 banks in administration is the 11th biggest bank by total assets, with a share of 3 percent of total banking system assets. One of the three banks which was recapitalized is ranked 44th by total assets, with only 0.45 percent of total banking system assets.

The primary objective of recapitalization is to protect depositors by providing the banks with the liquidity to meet there obligations to depositors. On July 14, the government finalized the process of taking stakes of between 81-99 percent in three banks after investing on average $415 million in each.

The amounts to be invested appear to be high given that the retail (individual) deposit base of each bank range from $399 million to $617 million. The government has stated that it will sell these stakes to investors once the sector has rebounded in 3-5 years.
The approach taken by the authorities to bank recapitalization raises a number of questions:

(1) After recapitalization and exiting from administration, will these banks remain viable businesses? The Ukrainian banking sector has seen a period of intense competition, with a large number of banks fighting for market share.

(2) Would customers return to banks whose brand may be seen as permanently damaged?

(3) Even if the banks are able to retain or attract a customer base, would investors be prepared to pay such amounts to enable the government to recover its investment?

Given the acquisition activity in the banking sector between 2005-2008, one may conclude that anyone who wanted to be present in the Ukrainian market is already present. Second and third tier banks which were sold in the boom period fetched less than $400 million, even when multiples were at levels far higher than we would expect to see in the coming years.

Regardless of the outcome for individual banks subject to recapitalization, the overriding question is whether the sector will emerge stronger from the crisis as a result of quick action by authorities. Certainly the presence of foreign banks has provided some much needed stability and with the on-going commitment by authorities to work with the international agencies, confidence is returning to the sector.

LINK:  http://www.kyivpost.com/business/bus_focus/48025

By Natalya Zinets, Reuters, Kiev, Ukraine, Friday September 04, 2009 

KIEV - The Ukrainian hryvnia currency slipped close to its all-year low on Thursday to around 8.72-8.82 against the dollar as the central bank stayed away from the interbank market, dealers said.

The hryvnia has been losing ground in the past two months as banks and the state have more foreign currency debts repayments than they had before in the year and as Ukraine starts buying more gas for the winter months. "If the central bank does not intervene on the market, then the dollar will continue to grow tomorrow," one dealer said.

The central bank made no indication it would intervene on Thursday. Since the start of the year it has, with rare exceptions, intervened on Mondays, Tuesdays and Thursdays and carried out foreign currency auctions on Wednesdays and Fridays.

The central bank has made no comment about the falling hryvnia.

Acting Finance Minister Ihor Umansky blamed the currency's weakness on panic and speculation on the market. "We have no problems with trade and payment balances, they are being equalised. We have no macroeconomic or macrofiscal problems in that respect. The monetary base and payment balance gives no reason to talk of a depreciation," he told journalists. What is going on is down to expectations, to panic and speculation. These are not market factors and they must be eliminated by the central bank."

But traders disagreed. "There is no panic, the dollar is just systematically rising," said one. "There are economic reasons -- the country is import-orientated and the dollar is always needed to pay for suppliers. The central bank has been selling less and more rarely in recent times," the dealer said.

The hryvnia, for years kept in a tight corridor of about 5/$ by the central bank flush with reserves, began falling sharply a year ago when the global financial crisis started to take effect in the ex-Soviet state. As Ukraine's vital steel and chemical exports plunged, so did dollar earnings thus dragging the hryvnia down with them. The currency hit a historic low of 9.5/10/$ in December last year before being systematically support by the central bank.

The International Monetary Fund also came to the rescue, pumping over $10 billion of a $16.4 billion standby loan into the country, most of that to central bank reserves.

The last tranche of $3.3 billion, disbursed in August, however went straight to the budget deficit, leaving the bank with far less dollars to play with in the coming weeks.

State energy firm Naftogaz also must pay $667 million for its Russian gas bill. Its monthly dollar purchases impacts the currency market, even if it manages to get the foreign currency directly from the central bank, as Umansky said.

"The fact that Naftogaz is not on the market and buys dollars direct from the central bank only means that we are not yet at 10/$," said one dealer. "If Naftogaz had gone straight to the market we would be in an even worse situation."

Since the beginning of last week, the central bank has tried to calm the cash market down, by limiting some of its interventions to banks needing to replenish the foreign currency exchange booth.

But the result was huge queues in recent days outside those banks that bought dollars from the central bank and sold them at about 8.1/$ and those that failed and were selling the dollar at daily increasing rates to about 8.8/$ on Thursday. (Writing by Sabina Zawadzki; Editing by Andy Bruce)

bne - Credit weekly, Berlin, Germany, Monday, August 31, 2009

BERLIN - The hryvnia continues to weaken while the market is still uncertain on NBU policy in the near future.

(1) The NBU weakened its official exchange rate and the rate of its interventions.
(2) Stability and the trend on the FX market depend on the continuity of NBU interventions.

The current market situation provides evidence that no state institution needs the hryvnia to return to the levels of May-June. It seems that the NBU decided
to devalue the hryvnia earlier than the majority of market participants expected. Although NBU officials still talk about the relative stability of the hryvnia and the entirely speculative factors that affect hryvnia stability, the devaluation is on track as market rates depreciated 1.7% WoW to 8.45/USD over the week.

It has become a tradition that if the hryvnia weakens significantly, the NBU or the president (or both) gather the management of the top banks to discuss the FX market situation and potential actions to be taken to reduce the panic. Unfortunately the recent meeting did not provide any signals and the FX market remains in great uncertainty regarding the NBU's future actions on the market.

The NBU is not hurrying to stop the current panic and to break the devaluation trend with more active interventions. Instead, it chose to devaluation, thus gradually weakening the official exchange rate (down by 1.7% over the week to 7.94/USD) and the rate in its interventions (down by 0.6-1.2% to 7.89/7./80/USD).

Current FX policy may be beneficial for the NBU as it is in line with IMF recommendations (for a more flexible exchange rate regime), and may reduce the burden on NBU FX reserves and may additionally discourage imports, thus improving the trade balance.

From one side, the NBU said that more active foreign debt repayments in August were a major reason behind the current hryvnia weakening. At the same time, the NBU sent commercial banks a letter regarding FX interventions this week, in which it mentioned the cash FX market as a major factor affecting the stability on the market.

Thus the NBU decided to intervene on 25 and 27 of August for the needs of the cash exchange market only, also imposing additional restrictions that limit the ability of banks to sell currency via cash outlets and the amount that households are able to purchase. We still believe that constant support of the hryvnia through FX interventions can reduce panic and devaluation fears, thus returning the exchange rate close to 8.0/USD already in 1-2 weeks.

However this may be achievable only if the NBU satisfies all market bids without any limitations. Otherwise, we believe a part of unsatisfied demand will be transferred onto the interbank FX market, thus additionally pressuring the hryvnia.

Preliminary estimates of the balance of payments published by the NBU recently showed significant worsening in the current account balance in July (US$0.4bn) compared to June (US$0.1bn) on the back of higher gas imports and more active car sales in Ukraine.

We believe that the worsening of the current account may be softened within the next 1-2 months, as the hryvnia depreciation that started in the middle of summer will again improve the trade balance in August-September, thus raising exports potential and reducing imports correspondingly.

Furthermore, the favourable outlook for steel demand together with hryvnia devaluation should support exports in August. Thus we reiterate our view that external trade is rather balanced and will not negatively affect the stability of the exchange rate on the market.

Interfax, Kyiv, Ukraine, Thursday, September 3, 2009

KYIV - The International Monetary Fund (IMF) does not predict a worsening of the economic situation in Ukraine in 2009,IMF Resident Representative in Ukraine Max Alier has said.

"In the global economy,the crisis has already reached its bottom. As for Ukraine,we don't forecast a worsening of the situation. I haven't been in Ukraine for long,and perhaps I have yet to study in full all of the trends,[but] I don't understand the talk about a new wave of the crisis. Of course,we don't expect an economic boom and a speedy recovery. But I don't see any reason to talk about a second wave of crisis," he said in an interview with the Kommersant-Ukraine newspaper.

Alier said that in 2010 the IMF had predicted growth in Ukraine's economy at 3%,which,along with new sources of revenues,in his opinion,would improve the country's budget situation.

"Support for Naftogaz Ukrainy will fall after a rise in gas prices,whereas the rise in excise rates that we have already discussed will produce significant results not this year,but next year. Moreover,an increase in tax collection is expected With the situation stabilizing in the banking system,the financing of the economy will resume,and companies will manage not only to meet their current tax liabilities,but also to pay tax debts for previous periods," he said. ==================================================

Interfax Ukraine, Kyiv, Ukraine, Wednesday, September 2, 2009

KYIV - The Ukrainian government remains optimistic about the prospects of its receiving a fourth tranche of a loan provided by the International Monetary Fund (IMF), according to the Web site of the Cabinet of Ministers.

"The government is by no means rejecting the fulfillment of its assumed commitments, and therefore, is optimistic about further talks on the allocation of the fourth tranche of the loan from the IMF," reads the statement.

Negotiations with the fund's visiting mission continue in a constructive atmosphere, and "media reports with negative predictions regarding cooperation with the IMF are totally untrue," the government said. The Cabinet "once again has to note groundless attempts to fuel hysteria over cooperation between the government of Ukraine and the IMF," it said.

"That is why the office [of the Cabinet's secretariat] asks "news writers" from the Ukrainian president's secretariat to stop criticizing the government's policies absolutely without any grounds, especially its relations with international financial organizations. We have witnessed this criticism during the whole period of stand-by program negotiations. We believe that, during the crisis, one should think about the country's fate, not his own political rating," it said.

UkrInform - Economic News online, Thursday, September 3, 2009 

KYIV - The regular round of negotiations between Ukraine and the International Monetary Fund (IMF) will take place in Istanbul, October 3-8, Deputy Prime Minister for European Integration Hryhoriy Nemyria has told the press in Kyiv. According to Nemyria, the talks will be held in frames of the IMF's annual summit. Representing a Ukrainian delegation will be Hryhoriy Nemyria.

The official also noted that the current visit of an IMF mission to Ukraine is not linked to the review of cooperation criteria with Ukraine. “The purpose of the mission's arrival is to hold consultations on the preparation of the state budget 2010,” he underscored.

Interfax Ukraine, Kyiv, Ukraine, Thu, September 3, 2009

KYIV - Ukrainian President Viktor Yuschenko has said that Ukraine must continue the program of cooperation with the International Monetary Fund (IMF) should be preserved and said he regrets that the government failed to comply with five of the six preliminary conditions put forwards by the IMF.

"We should rationally approach the budget tasks for the next five months, clearly understanding that we should preserve the program for cooperation with the International Monetary Fund at any price. Unfortunately, the Ukrainian government hasn't complied with five out of six preliminary conditions and the continuation of the program has been put at threat," Yuschenko said in an interview with Ukrainian business publications, the presidential press service reported on Thursday.

At the same time, the president stressed that the government should not raise foreign loans under non-transparent conditions. Yuschenko insists that the cooperation with the IMF should be continued, as it will motivate the Ukrainian government to hold reforms and signal about Ukraine's investment appeal.