NATIONAL BANK OF UKRAINE

ANNUAL REP ORT

2008 Dear Sirs and Mesdames!

Herewith we present to you the Annual Report of the National Bank of Ukraine for 2008. The main feature of the reporting year was aggravation of the world financial and economic crisis that provoked deceleration of the growth of the econ- omy of Ukraine. Whereas in the 1st half-year of 2008 the economy showed an upward trend due to the favorable conditions in the world market for raw materi- als, then in the 4th quarter the economic growth pace sharply slowed down due to reduction in the external demand, investment and consumer demand, as well as expansion of the crisis phenomena over the financial sector. Despite the downward dynamics of consumer prices in the second half of 2008, the inflationary pressure during the year remained at a high level - 22.3% inflation. Under these conditions the National Bank of Ukraine focused its efforts both on curbing the high inflation rate in the first half-year and on mitigating the hryv- nia's devaluation against world currencies by means of deliberate use of the mon- etary instruments and tools at the end of the year. In the 4th quarter of 2008, in the light of the unfavorable development of processes in the world economy, artificially provoked distrust in some banks and the banking system as a whole, and deposit outflow from the banks, the National Bank of Ukraine was concentrated on keeping the stability of the banking sector. During the year, the dynamics of deposits' attraction by banks drastically changed. Specifically, in the first half-year, the growth rate of the residents' deposits was quite high and in line with the economic activity in the country. However, for the tense situation in the financial market, starting from October 2008, the deposit growth rate swiftly decelerated (to 126.7% by the year results as compared with 152.7%, in 2007). For the purpose of preventing the house- holds' deposits outflow from the banking system, in particular, in October- December, and accumulating the resource base, the banks gradually increased the interest rates on the households’ deposits. In 2008, dynamics of the loans extended to economic entities were irregular. In January-September 2008, noted was a tendency toward a gradual slowdown of the credit growth rate due to a complicated access to the external sources of funding, aggravation of the financial status of enterprises, a slump in solvency of the population, as well as the necessity to meet the NBU requirements purposed to limit banks' lending activities. However, starting from October 2008, an appre- ciable acceleration of the growth rate of crediting by banks took place, primarily at the expense of hryvnia devaluation against the main foreign currencies. By the year results, the lending rate slowed down to 172.0% as compared with 174.1% in the previous year. Thus, during 2008, the banking sector developed under conditions of deposits' withdrawal and assets’ quality worsening. The National Bank of Ukraine approved a set of normative and legal documents for increasing the capitalization, the share of long-term liabilities and banks' reserves; disclosing the information on ultimate beneficial holders of banks; improving the risk management practice; raising the banks' potential in respect of stress-testing; and implementing stricter prudential regulations to the banks whose liquidity position worsened. To improve the situation with meeting lenders’ claims on the banks under liquida- tion, first of all, the individual depositors’ claims, the Deposit Insurance Fund increased the amount of guaranteed recovery on the deposits up to UAH 150 thousand per every depositor of a participant (or provisional participant) bank in the Fund, includ- ing the interest accrued on the date when the deposit became unavailable. In 2008, the NSMEP continued to develop; innovative projects and technologies were implemented by banks and by the Payment Organization of the system. In particular, continued was the pilot project ”Electronic Student Identification Card” for higher educational establishments of the 1st-4th accreditation class. Internet pay- ments through the NSMEP showed very expansive dynamics. In the reporting year, a mobile payment system, that provided for bank account control and manage- ment, as well as payments through a mobile telephone, was launched. Finally, I would like to thank sincerely the numerous staff of the banking system whose professionalism and committal to the business were targeted towards ensur- ing development of the banking sector and strengthening the confidence in the banking system.

Sincerely yours,

Governor of the National Bank of Ukraine

Volodymyr Stelmakh Members of the Council

Petro Ihor Poroshenko Prasolov Resolution of the Verkhovna Rada Resolution of the Verkhovna Rada of Ukraine of 11.01.2007 №560-V of Ukraine of 11.01.2007 №560-V Chairman of the Council Deputy Chairman of the Council of the National Bank of Ukraine of the National Bank of Ukraine (Decision of the Council of the National (Decision of the Council of the National Bank of Ukraine of 23.02.2007 №4) Bank of Ukraine of 23.02.2007 №4)

Anatolii Serhii Danylenko Kliuiev Decree of the President of Ukraine Resolution of the Verkhovna Rada of 28.02.2005 №384/2005 of Ukraine of 11.01.2007 №560-V

Petro Volodymyr Sabluk Stelmakh Decree of the President of Ukraine Member of the Council of 28.02.2005 №384/2005 of the National Bank of Ukraine by position, as Governor of the National Bank of Ukraine of the National Bank of Ukraine (as at 1 January, 2009)

Valerii Mykhailo Vasyl Heiets Honcharov Horbal Decree of the President of Ukraine Resolution of the Verkhovna Rada Resolution of the Verkhovna Rada of 28.02.2005 №384/2005 of Ukraine of 11.01.2007 №560-V of Ukraine of 11.01.2007 №560-V

Borys Mykola Volodymyr Kolesnikov Onischuk Poliachenko Resolution of the Verkhovna Rada Decree of the President of Ukraine Decree of the President of Ukraine of Ukraine of 11.01.2007 №560-V of 28.02.2005 №384/2005 of 16.05.2008 № 448/2008

Anatolii Arsenii Fedorenko Yatseniuk Decree of the President of Ukraine Decree of the President of Ukraine of 28.02.2005 №384/2005 of 25.09.2006 №782/2006 Members of the Board

Volodymyr Anatolii Stelmakh Shapovalov Governor First Deputy Governor of the National Bank of Ukraine of the National Bank of Ukraine

Viktor Oleh Kravets Daschenko Executive Director Executive Director on Payment Systems and Settlements on Cash Circulation

Ihor Olha Vasyl Ivaniuk Kandybka Pasichnyk Director Director Director of the Personnel Department of the Financial Department of the Legal Department of the National Bank of Ukraine (as at 1 January, 2009)

Volodymyr Olexandr Pavlo Krotiuk Savchenko Senysch Deputy Governor Deputy Governor Deputy Governor of the National Bank of Ukraine of the National Bank of Ukraine of the National Bank of Ukraine

Mykola Ihor Natalia Lavruk Shumylo Hrebenyk Executive Director Executive Director Director of the on Administration on the Economy Monetary Policy Department

Vira Anatolii Anatolii Rychakivska Savchenko Stepanenko Chief Accountant – Director of the Head of the Main Department Director of the Accounting Department Information Technology Department for the City of Kyiv and Kyiv Region Organizational Chart

NBU Governor Volodymyr Stelmakh

NBU Council Group of Advisers Audit Bank Security Office to NBU Governor Department Department

Guard of NBU Institutions in Kyiv

First Deputy Governor Deputy Governor Anatolii Shapovalov Volodymyr Krotiuk

Executive Department of Executive Audit Executive Director – Director Banks’ Director Department Director of Directorate Reorganization on Economics (operationally) on Administration for Banking and Activity Ihor Shumylo Mykola Lavruk Regulation Termination and Supervision Olexandr Kirieiev Foreign Exchange Department NBU Regulation Directorate Department of Off-Site Maintenance and Department for Banking of Economic Administration Regulation Banking Analysis and Office and Supervision Supervision Forecasting

Monetary Policy Department for Prevention of Archive Department Office for Legalization of Office Legal Provision Balance the Proceeds of Banking of Payments from Crime Supervision Department through the Department Banking System of Foreign and Terrorism NBU Exchange Financing Construction Reserve Department for Office Management Normative and Statistics and Open Methodological Department and Reporting Market Provision of Banks' Department Operations of Banking Registration and Regulation and Licensing Supervision

Division of NBU Tenders and Supervisory Scientific Marketing Regulations Department Research Centre Research Office Compliance of Banks' Control Inspection of the National Bank of Ukraine (as at 1 January, 2009)

Department Personnel NBU Board’s Legal of External Department Secretariat Department Economic Relations NBU Educational Institutions

NBU Training Editorial Centre Office of NBU Periodicals NBU Central Library

Deputy Governor Deputy Governor Olexandr Savchenko Pavlo Senysch

Accounting Executive Executive Department Director Department of Director on Cash Foreign Exchange on Payment Circulation Regulation Systems Oleh Daschenko and Licensing and Information Settlements Technology Viktor Kravets Department

Cash Risk Circulation Management Financial Department Unit Payment Department Systems Department State Treasury of Ukraine Project NBU Banknote Monitoring Printing and Unit for Central Minting Works NBU Operations International Accounting Department Credit Lines House attached to NBU NBU NBU Regional Banknote Branches Paper Mill

Directorate NBU of Administering Central Vault the NBU Corporate Non-State NBU Pension Fund Money Museum

ABOUT THE NATIONAL BANK OF UKRAINE

The National Bank of Ukraine is the central bank of Ukraine, the single issuing center of the country, the state organ of monetary and foreign exchange regulation and banking supervision. The National Bank of Ukraine is a special central body of the state management, whose legal status, tasks, functions, powers and organization principles are determined by the Constitution of Ukraine, the Law of Ukraine "On the National Bank of Ukraine" and other Ukrainian laws. The supreme managerial body of the National Bank of Ukraine until 1999 was the Board headed by the Governor of the Board (from 1997 – the Governor of the National Bank of Ukraine). In compliance with the Law of Ukraine "On the National Bank of Ukraine", the gov- erning bodies of the National Bank of Ukraine are the Council of the National Bank of Ukraine and the Board of the National Bank of Ukraine. The National Bank of Ukraine formation took place in particularly complex environment of the transition economy, construction of the conceptually new state management system, dras- tic change in the country's political situation and exacerbation of a chronic economic and finan- cial crisis. Under such conditions, the National Bank of Ukraine met with difficulties in solving the problems of not only general economic or political character, such as gaining the appropri- ate central bank's status and the place in the state management system, elaboration and implementation of the appropriate monetary and lending policy, money turnover management, foreign exchange market regulation etc., but also with specific practical tasks related to creation of the material and technical base, formation of personnel, development of the regulatory and legal framework of banking. The solution of these tasks was complicated by lack of a preparatory period in the devel- opment of the National Bank of Ukraine and therefore it had to take immediate decisions. The most remarkable events which determined the development of the National Bank of Ukraine as the central bank of the state were confirmation of its right to issue the national money of Ukraine; elaboration of theoretical and methodological foundation of the monetary and lending policy and organizational mechanism of its implementation. Adoption of the Law "On the National Bank of Ukraine" by the Verkhovna Rada of Ukraine in 1999, became a remarkable milestone in the NBU development. This, in fact, tallied up the stage of institutional establishment of the National Bank of Ukraine as the central bank, fixed legally its place in the economic system, underlined its status, functions and controlling mech- anisms in line with the new conditions and prospects for the development of Ukraine. The tasks that face the National Bank of Ukraine determine its role and place within the eco- nomic system of Ukraine. Like the central banks of other market economy countries, the National Bank of Ukraine is destined to be the issuing centre of the state, the body of banking regulation and supervision, as well as the body of monetary and foreign exchange regulation of the economy. Exercising appropriate functions and operations, the National Bank of Ukraine has an effect on all sides of the country's economic life and above all ensures the stability of the national monetary unit. One of the basic functions of the National Bank of Ukraine is to represent the interests of Ukraine in its relations with the central banks of other countries and international financial organizations. The National Bank of Ukraine cooperates closely with the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development, the European Central Bank, national central banks of member countries of the European Union, the Bank for International Settlements in Basle, central banks of many countries, as well as leading com- mercial banks of Western Europe and the USA on the issues of monetary policy, organization of banking supervision, monetary and banking statistics, balance of payments, implementation of settlement systems and international accounting standards used in the international practice. The National Bank of Ukraine has correspondent relations with banks of many countries. The organizational structure of the National Bank of Ukraine has a functional and territorial basis. It includes the Central Office functioning in the City of Kyiv, and regional branches in the Autonomous Republic of the Crimea, City of Kyiv and Kyiv Region, and in 23 regional centers of Ukraine. The Central Office consists of functional departments, which in their turn have offices and divisions. A number of structural units including the Operations Department, the Central Clearing House, the State Treasury, the Central Vault, the Banknote Printing and Minting Works and the Banknote Paper Mill are subordinated to the National Bank of Ukraine. Putting into operation the Banknote Paper Mill and the Banknote Printing and Minting Works created a closed cycle of the national money manufacture (banknotes and coins) in Ukraine. The National Bank of Ukraine includes the following structural subdivisions: the Scientific Research Center, the Central Library, the Training Center and the Museum of Money. The National Bank of Ukraine has the following educational institutions: the Banking University including the Lviv, Kharkiv and Cherkasy Banking Institutes, as well as the Ukrainian Banking Academy. Formation of the Council of the National Bank of Ukraine in 2000 became an important step towards improving the monetary policy elaboration and realization. This promoted the estab- lishment of the National Bank of Ukraine as a special central body of the state management, its independence in pursuing the monetary policy, further development of the system of credit insti- tutions and intensification of their activity. The National Bank of Ukraine holds an adequate place among the central banks of the developed countries. It is reliable in exercising the entrusted functions, the basic of which is to assure stability of the national currency. The National Bank of Ukraine has assured the formation of two macroeconomic data sys- tems of monetary and balance of payments statistics. The official publications of the National Bank of Ukraine "The Herald of the National Bank of Ukraine" (supplements to the edition "Legal and Normative Acts on Banking" and "Banknotes and Coins of Ukraine"), "Bulletin of the National Bank of Ukraine" and "Balance of Payments and Foreign Debt of Ukraine" are prepared and published on a regular basis. With due regard for the importance of the banking system and a considerable contribution of employees of this sector to the development of the country's economy and support of finan- cial stability, the professional holiday "The Banker's Day" was instituted in Ukraine by the Order of the President of Ukraine and is annually celebrated on May 20. Part 1

GENERAL ECONOMIC SITUATION Annual Report 2008

1.1. SOCIAL AND ECONOMIC SITUATION IN UKRAINE

1.1.1. Gross domestic product In 2008, the real gross domestic product (GDP) showed irregular dynamics. In January- September, 2008, the economic growth scored 106.3 versus 107.7% for the same period of 2007. At the end of the year, as far as the economic environment on the export markets aggra- vated, the consumer and investment demand declined, and so did the real GDP growth rate, that in 2008 made up 102.1% versus 107.9%, in 2007 (See Figure 1).

Figure 1. Real gross domestic product of Ukraine in 1991–2008 (as compared with the previous year)

In 2008, the nominal GDP grew by 31.8 % as compared with the previous year and reached UAH 949.9 billion. The deflator increased to 129.1% versus 122.7%, in 2007.

Breakdown of GDP by economic sectors In 2008, the unfavorable economic situation affected the dynamics of all the economic sec- tors, except for agriculture (see Figure 2).

Figure 2. Breakdown of gross added value by principal economic activities (% as compared with the previous year)

Construction

Both internal and external demand dropping sharply, the industrial output has fallen. The recent overheating of the real estate market, slumping of investments in construction and a lack of working capital of the construction companies have driven the crisis in the construction indus-

14 General Economic Situation try. Recession in both industry and construction entailed activity deceleration in the wholesale and retail trade. The only sector contributing to the GDP growth was agriculture. Thanks to a rich grain har- vest, in 2008, the agricultural sector stably ascended in the 2nd half-year and carried its weight of 1.1 percentage points to the GDP growth (see Figure 3).

Figure 3. Shares of economic sectors in the growth*

*Estimates of the National Bank of Ukraine.

In addition, for three years straight the net tax on agricultural products made a material con- tribution to the GDP growth. GDP structure by final consumption The analysis of the GDP structure by final consumption has showed that, in 2008, the con- sumption, like in the previous years, was the key driving factor of the economic growth. Final consumer expenditures have a lion's share of 79.2% in the GDP structure. It is 1.7 percentage points less than in 2007 (See Table 1).

Table 1. GDP STRUCTURE BY FINAL CONSUMPTION (In actual prices) 2008 For information: 2007 Increase Increase Indicators decrease as decrease as compared compared with with UAH share, previous UAH share, previous billion % year billion % year

GDP 949.9 100.0 2.1 720.7 100.0 7.9 Including: Final consumer expenditures 752.5 79.2 9.0 558.6 77.5 13.6 Gross accumulation 274.0 28.9 5.1 203.3 28.2 25.8 Export of goods and services 444.9 46.8 5.2 323.2 44.8 3.3 Imports of goods and services –521.5 –54.5 17.1 –364.4 –50.5 21.5

However, the access to financial resources for economic entities being very complicated and the real population income going down, this component slowed its pace as it gained only 9.0 % against 13.6%, in 2007.

15 Annual Report 2008

The investment activities fell during the year inasmuch as more and more companies were running at a loss and therefore, accumulating debts, which caused a cut in the foreign invest- ments. As a result, the gross accumulation went down to 105.1 versus 125.8%, in 2007. In 2008, imports of goods and services continued to exceed the exports, which increased the trade balance deficit. However, for the internal demand dropping the imports of goods and services fell materially.

Figure 4. Contributions to the real GDP growth*

*Estimates of the National Bank of Ukraine.

Both final consumer expenditures and gross accumulation made a positive contribution to the real GDP growth of 7.0 and 1.4 percentage points, respectively. However, as one can see from Figure 4, their shares decreased as compared with 2007. The net exports of goods and services adversely affected the real GDP growth and amounted to "minus" 6.3 percentage points or 2.8 percentage points less than in 2007.

GDP structure by type of income The GDP structure by income has shifted as the gross profit and mixed income decreased by 0.5 percentage points because of dropping the operating profit before tax of Ukraine's companies and enterprises. At the same time, the share of employees' wages and salary and that of the net tax on industry grew by 0.2 and 0.3 percentage point, respectively (See Table 2).

Table 2. GDP STRUCTURE BY TYPE OF INCOME 2008 For information: 2007 Indicators UAH share, UAH share, billion % billion %

GDP 949.9 100.0 720.7 100.0 Including: Wages and salary of employees 465.5 49.0 351.9 48.8 Net tax on industry 118.4 12.5 87.8 12.2 Gross profit, mixed income 366.0 38.5 281.0 39.0

Industrial output In 2008, the industrial output showed inconsistent dynamics, as at the beginning of the year it ascended for high domestic and foreign demand, rise in the world prices for metal, boom in lending operations, and increase in households' income. However, starting with August, a rad- 16 General Economic Situation ical deterioration of the external conditions and a decline in the domestic demand, both con- sumer and investment, resulted in slumping output. In 2008, for the first time since 1998, the output fell by 3.1% (See Figure 5). This reduction of output was driven by diminishing capital investments in the industry, and a decrease in the export value as compared with the previous months, as a result of a sharp drop of the external demand and sinking of prices for basic Ukrainian export goods.

Figure 5. Contributions to the real GDP growth (cummulative, to the respective period of the previous year)

In 2008, the Ukrainian industrial companies sold products worth UAH 779.1 billion (See Table 3). Like in the previous years, metallurgy and manufacture of finished metal articles; food- stuff, beverages, and tobacco goods; as well as machine building had the largest share in the total worth of goods sold: 24.3%, 14.2%, and 14.0%, respectively.

Table 3. BASIC INDUSTRIAL INDICES BY TYPE OF INDUSTRY including: Power, gas and water Indicators Industry Mining Processing generation industry industry and supply 2008 2007 2008 2007 2008 2007 2008 2007

Sales of goods, UAH billion 779.1 717.1 77.0 56.3 588.9 530.2 113.2 130.6 Share in the total goods sold, % 100.0 100.0 9.9 7.9 75.6 73.9 14.5 18.2 Industrial output index, % as compared with the previous year 96.9 110.2 97.6 102.7 96.8 111.7 97.5 103.2

In 2008, nearly every industry faced recession (See Figure 6). At the beginning of the year, the machine-building industry rapidly accelerated its pace (125.0%, in January-September 2008), however, at the end of the year, its growth rate fell sharply to 108.6% for both the aggravation of the general economic situation in partner coun- tries and a decrease in the domestic demand and in the investment activities. In 2008, the output in metallurgy sank by 10.6%, as a consequence of the material deteri- oration of the external conditions and a decline in the domestic demand from construction and machine-building enterprises.

17 Annual Report 2008

Figure 6. Major industries (as compared with the previous year, %)

In 2008, the food industry showed a 0.9% decline in output, because of the real population income slowing down and imports of some foodstuffs growing sharply. Throughout the year, the production of coke and petroleum refining products was slumping and reported a decrease by 15.0%, as a result of descending world prices for oil and petrole- um products, and cutting oil supplies to Ukrainian refineries. In the mining industry, output slumped by 2.4%, in 2008, as a consequence of a downfall in the production of fuels and minerals, in particular, coal, because of dropping demand from the metallurgical enterprises. Downward dynamics of the industrial output, including metallurgy, adversely affected the demand for power, gas, and water generation and supply, where output fell by 2.5%, in 2008.

Agriculture In 2008, the total output in agriculture increased by 17.1% and reached UAH 150.8 billion (See Figure 7) thanks to the favorable dynamics of plant cultivation stimulated by a high yield, chiefly of cereals and leguminous crops (yield per unit grew 1.6 times, the cultivated area increased by 14%). Downward profitability of the cattle breeding, as a result of essential sink- ing of the purchase prices, caused reduction of livestock. Consequently, output in the cattle breeding added only 1.0%, in 2008.

Figure 7. Growth rate of agricultural output

18 General Economic Situation

Trade At the beginning of the year, wholesale and retail trade showed swift ascending dynamics due to the regular growth of the population income and lending boom in the banking sector. However, as far as the economic situation aggravated, at the end of year, the trade dynamics also decelerated. In 2008, gross value added slowed down to 101.8% (See Figure 8). Insofar as the real population income decreased, the retail trade decelerated to 118.6%, while stagna- tion in construction and metallurgy affected the wholesale trade growth.

Figure 8. Growth rate of value added in wholesale and retail trade

Construction In 2008, the crisis mainly manifested itself in construction, where output dropped by 15.8% (See Figure 9). The unfavorable dynamics were basically reasoned by deceleration of mortgage lending growth, curtailment of the government support of construction projects, and keeping of high prices for construction and mounting works that, in their turn, resulted in a decrease in loans issued to the construction sector. Growing risks related to suspension of construction-in-process, as a result of a lack of work- ing capital of the construction companies, led to the outflow of private investments from the con- struction sector.

Figure 9. Growth rate of civil works output (cummulative, to the respective period of the previous year)

Investments A downfall of the investment activities was among the main driving factors of the economic growth deceleration in Ukraine, in 2008. It was caused by the unfavorable situation in the world markets, drastic worsening of financial status of enterprises, and a decrease in households' sav- ings. In the reporting year, the companies and organizations funded at their own expense, capi- tal investments worth UAH 233.1 billion, that was by 2.6%1 less than in 2007 (See Figure 10).

1 In comparable prices. 19 Annual Report 2008

Figure 10. Capital investments growth dynamics in 2005–2008 (% as compared with the previous year, in comparative prices of 1996)

The principal sources of funding of capital investments were the companies own funds plus loans from banks and other credits and loans; their share in the total investments made up 74.0%, the share of loans from banks and other loans and credits growing most impressively (by 0.7 p. p.) as compared with 2007 (See Table 4).

Table 4. STRUCTURE OF CAPITAL INVESTMENTS BY SOURCES OF FUNDING 2008 2007 Indicators UAH million % %

Investments in fixed assets (capital investments) 233 081.0 100.0 100.0 Companies' own funds 132 138.0 56.7 56.5 Borrowed funds 100 943.0 43.3 43.5 Domestic sources 93 351.6 40.1 40.0 Including: Loans from banks and other loans and credits 40 450.9 17.3 16.6 Budget funds 21 494.2 9.2 9.4 Investment funds 5 675.5 2.4 2.2 Other sources of funding 25 730.4 11.1 11.7 Foreign sources Funds from foreign investors 7 591.4 3.3 3.5

As regards the breakdown by economic activities, in 2008, the priority directions for investments were industry, real estate operations, and transport and communication which had shares of 32.9%, 21.0, and 14.0% of the total capital investments, respectively (See Figure 11). However, as compared with 2007, the capital investments in these economic activities decreased by 5.3, 5.8, and 17.6%, respectively.

20 General Economic Situation

Figure 11. Structure of capital investments by type of economic activities

At the same time, in 2008, investments in agriculture, hunting, and forestry grew by nearly 42.3%, their share in the total capital investments accounting for 7.2% against 5.1%, in 2007. The share and amount of investments in trade, construction, education, and healthcare also showed upward dynamics.

1.1.2. Dynamics of consumer prices and producer prices

In 2008, inflation processes escalated, as the consumer price index (CPI) reached 122.3 versus 116.6%, in 2007 (See Table 5) and came to a peak since 2000.

Table 5. CONSUMER PRICE INDEX 2008 For information: 2007 Before Share in CPI Before Share in CPI December percentage December percentage Components of the points of the points previous year, previous year, %%

CPI 122.3 22.3 116.6 16.6 Foodstuff and nonalcoholic beverages 124.5 13.2 123.7 13.1 Bread and bake goods 127.8 2.5 119.5 1.7 Meat and meat food 134.0 4.7 113.9 1.8 Fruits 137.8 1.5 160.3 1.9 Housing, water, power, gas and other fuels 128.2 3.7 112.3 1.4 Transport 122.5 0.9 114.1 0.6 Core CPI 121.3 11.7 110.8 5.9

The inflation processes were developing irregularly in the consumer market: – In January-May, the CPI grew swiftly (up to 131.1% on the annualized basis) (See Figure 12), primarily because of a hike in the prices for foodstuff. On the one hand, it was pro- voked by the poor yield of 2007, on the other hand, by raising social standards (minimum wages, pension, subsistence wages), salaries of employees in the budget sector, as well as by the reimbursements of losses from savings depreciation paid to the population; – In June, the inflation pressure weakened, whereas in July and August, a decrease in the prices for foodstuff, as a result of the highest for the last 4 years yield of cereal crops, fruits and vegetables, stimulated deflation; 21 Annual Report 2008

– In September-December, the CPI began to grow again, however, on the annualized basis the prices continued going down. Starting with September, the CPI increase was fed basically by a rise in utility payments.

Figure 12. Consumer price index, producer price index and core CPI (on annualized basis)

In 2008, prices for foodstuff and nonalcoholic beverages added 24.5% against 23.7%, in 2007 (See Figure 13), and made the largest contribution to the CPI growth (13.2 percentage points). During the year, the prices rose for the whole range of foodstuff, except for sunflower oil and vegetables (here, the prices fell by 1.7 and 0.4%, respectively).

Figure 13. Consumer price index and its major components (annualized basis)

In the reporting year, the utility payments and price for fuels grew by 28.2% (their share in the CPI made up 3.7 percentage points). The prices for natural gas for the population recorded the biggest hike as they had increased by 54.1%. Prices for transport services added 22.5%, in the reporting year, their share in the CPI accounting for 0.9 percentage points. It was provoked by a rise in prices for motor vehicle trans- portation on public highways (by 53.0%) and railways (by 25.3%). At the same time, as a result of downfall of the world prices for oil and petroleum derivatives, the prices for fuel and lubricants went down in value by 8.3%. All other components of the consumer basket according to the By-purpose Classification of Individual Consumption got up, however, this fact did not affect so much the CPI growth. In 2008, the core consumer price index (CCPI) accounted for 121.3% as compared with 110.8%, in the previous year. During the year, it remained high. Its acceleration at the end of 22 General Economic Situation the year was driven by high inflation and devaluation expectations of economic entities. A share of core inflation in the CPI constituted 11.7 percentage points, or more than a half of the total rise in consumer prices. After the escalation in the first half of the year the headline inflation remained the same as in the previous year and amounted to 123.8% (See Figure 14). Its sudden spike in May (146.4% on the annualized basis) was driven by a hike in prices for low-processed goods. As a conse- quence of downfall of the prices for raw materials and fuels, starting with June, the headline inflation showed a downward trend.

Figure 14. Headline inflation and its components (on annualized basis)

2007 2008

In 2008, producer price index (PPI) made up 123.0% versus 123.3%, in 2007 (See Table 6). The PPI dynamics in the reporting year were influenced by the domestic and foreign demand for metal products, and trends in the world prices for oil and petroleum derivatives. The prices in all industries grew, except for the production of crude oil, natural gas, and petro- leum derivatives.

Table 6. PRODUCER PRICE INDEX 2008 For information: 2007 Before Share in CPI Before Share in CPI December percentage December percentage Indicators of the points of the points previous year, previous year, %%

PPI 123.0 23.0 123.3 23.3 Mining industry 122.3 2.2 127.3 2.4 Processing industry 118.4 14.8 123.4 17.8 Production of coke and petroleum derivatives 84.4 –1.3 150.4 4.6 Metallurgy and manufacture of ready-made products 119.2 4.7 122.2 5.4 Machine-building2 121.8 3.1 111.9 1.5 Power, gas, and water generation and supply 142.2 6.0 120.9 3.1

2 Machine-building industry comprises the manufacture of machinery, equipment, electric, electronic, and optical equipment and devices, as well as the manufacture of motor vehicles and transport facilities.

23 Annual Report 2008

Power, water, and gas generation and supply had the largest share in the PPI growth (6.0 percentage points), being followed by metallurgy and manufacture of finished metal articles (4.7 percentage points) and the machine-building industry (3.1 percentage points). The dynamics of producer price index were also irregular as: – In January-August, the producer prices showed an accelerating pace upward and reached 146.9% (on the annualized basis), thanks to a rise in prices for metallurgical products and finished metal articles (by 72.5% on the annualized basis) and an increase in both the external and domestic demand for metal; – In September-December, the PPI tended downward as a result of the aggravation of sit- uation in the external markets which led to a decline in the demand for Ukrainian metal prod- ucts. So, the prices started to go down and, at the end of the year, the PPI fell to 119.2%. In addition, the world prices for oil and petroleum derivatives dropped (price for "Brent" oil sank by 57.4% in the fourth quarter).

1.1.3. Finance Corporate finance In 2008, the dynamics of profit before tax gained by the Ukrainian companies and enter- prises were uneven. In January-August, they tended upward for the favorable external and domestic conditions. However, starting with September 2008, they slowed down the pace because of a decline in the domestic demand arising from a sharp drop of the real population income and wages, as well as from the aggravation of the economic conditions caused by strong dependence on the situation in foreign markets (See Figure 15).

Figure 15. Financial results before tax of the Ukrainian companies and enterprises (cumulative, from the beginning of the year)

In 2008, Ukraine's companies and enterprises gained net operating profit before tax worth UAH 57.9 billion, by 55.5% less than in the previous year (in 2007, it grew by 72.9% and totaled UAH 121.4 billion). Operating profit before tax amounted to UAH 140.9 billion, losses UAH 83.0 billion (See Table 7).

24 General Economic Situation

Table 7. FINANCIAL RESULTS BEFORE TAX OF UKRAINE'S COMPANIES AND ENTERPRISES 2008 For information: 2007 . Increase/ Increase/ UAH Share, decrease as UAH Share, decrease as Industry billion % compared billion % compared witn the witn the previous previous year, % year, % Financial results of Ukraine's companies and enterprises, total 57.9 100.0 –55.5 121.4 100.0 72.9 Including: Industry 31.1 53.8 –26.1 42.1 34.7 25.2 Including: Mining industry 21.9 37.8 2.7 times 8.1 6.7 12.6 more Processing industry 6.7 11.6 –78.6 31.3 25.7 48.6 Power, water, and gas generation and supply 2.6 4.4 –5.8 2.6 2.2 50.6 Financial activities 18.8 32.5 –16.8 17.0 14.0 38.7 Wholesale trade and brokerage in wholesale trade –2.2 –3.9 õ 13.4 11.0 2.7 times more Real estate operations, leasing, engineering, and services to companies and businesses –2.7 –4.6 õ 2.8 23.2 6.7 times more Transport and communication 9.5 16.4 –4.0 9.9 8.2 17.4 Operating profit before tax 140.9 õ –4.3 147.3 õ 33.1 Operating losses before tax 83.0 õ 3.2 times 25.8 õ –24.9 more

Starting with October, the companies and enterprises began to incur losses almost in all spheres of economic activities, except for the industry and financial sector. On the annualized basis, in 2008, the worst situation was registered for the companies dealing with real estate operations, leasing, engineering and services to business entities ("minus" UAH 2.7 billion), as a result of the dropping output in construction and allied sectors, as well as for wholesale operators and brokers ("minus" UAH 2.2 billion) for weakening purchase power of the population. The financial results of industrial enterprises totaled UAH 31.1 billion, or 26.1% less than in the previous year. The mining industry increased its financial results 2.7 times, whereas the processing industry decreased by 78.6%. Among the industrial enterprises the outsiders were foodstuff, nonalcoholic beverages produc- ers and tobacco companies ("minus" UAH 3.8 billion) and producers of coke and petroleum deriva- tives ("minus" UAH 1.2 billion), where losses exceeded profit 1.9 and 1.4 times, respectively. Despite the losses of the three last months, metallurgical enterprises and manufacturers of finished metal articles showed the positive financial results worth UAH 7.7 billion. At the end of 2008, the share of unprofitable enterprises increased by 5.0 percentage points and accounted for 33.9%. Unlike the previous years, for the nine months of 2008, both receivables and payables swiftly escalated. As of October 1, 2008, the receivables (excluding small enterprises and budget institutions) reached UAH 706.7 billion and grew by UAH 197.3 billion or by 38.7% as compared with the begin- ning of the year (in 2007, they increased by UAH 103.1 billion or by 25.6%). The escalation was basi- cally driven by an increase in the short-term receivables (by UAH 167.6 billion) that had a share of 94.7% in the total receivables in Ukraine. At the end of September of 2008, the payables came up to UAH 886.4 billion having grown by UAH 226.9 billion or by 34.4% as compared with the beginning of the year (in 2007, they added UAH 127.3 billion or 24.6%). Like the receivables, payables chiefly rose due to a rise in the short-term 25 Annual Report 2008

payables (by UAH 185.1 billion), their share being equal to 88.1%. At the same time, the share of long-term payables showed ascending dynamics. The increase in both receivables and payables, in January-September of the reporting year, exceeded the total growth for the whole year 2007 (receivables grew 1.9 times, payables 1.7 times). Starting with the second quarter, receivables had been growing with a higher pace than payables, which meant worsening of companies' solvency. Government finance In 2008, revenues of the Consolidated Budget of Ukraine totaled UAH 297.8 billion or 31.3% of GDP, while expenditures (with loans minus repaid amount included) amounted to UAH 312.0 billion or 32.8% of GDP (See Table 8). As compared with 2007, the pressure on economic entities increased as allocation of GDP through revenues of the Consolidated Budget of Ukraine grew by 0.9 percentage points, while through expenditures by 1.2 percentage points.

Table 8. FULFILLMENT OF THE CONSOLIDATED BUDGET OF UKRAINE

2008 For information: 2007 . Increase/ Increase/ UAH % of Share, decrease as % of Share, decrease as Industry billion GDP % compared GDP % compared witn the witn the previous previous year, % year, % Revenues of the Consolidated budget of Ukraine 297.9 31.4 100.0 35.4 30.5 100.0 28.0 Including: Tax revenues 227.2 23.9 76.3 40.9 22.4 73.3 28.2 Including: Income tax of individuals 45.9 4.8 15.4 32.0 4.8 15.8 52.6 Corporate profit tax 47.9 5.0 16.1 39.1 4.8 15.6 31.5 VAT 92.1 9.7 30.9 55.1 8.2 27.0 17.8 Non-tax revenues 60.5 6.4 20.3 24.6 6.7 22.1 19.7 Expenditures of Consolidated Budget of Ukraine 312.0 32.8 100.0 37.1 31.6 100.0 29.7 Including: Public administration 30.8 3.2 9.9 27.1 3.4 10.7 22.0 Economic activities 51.3 5.4 16.5 26.8 5.6 17.8 48.2 Healthcare 33.6 3.5 10.8 25.6 3.7 11.7 35.4 Education 61.0 6.4 19.5 37.5 6.2 19.5 31.2 Social insurance and protection 74.0 7.8 23.7 52.6 6.7 21.3 17.1 Balance of the Consolidated Budget of Ukraine –14.2 –1.5 – 84.2 –1.1 – 2.1 times more

In 2008, the budget policy was targeted towards current consumption, the expenditure pace exceeding that of the revenues. Notwithstanding the above facts, in January-November, the bal- ance of the Consolidated Budget was positive, inasmuch as almost in all months the expendi- tures were not fulfilled entirely. Only in December, a deficit of the Consolidated Budget worth UAH 14.2 billion (1.5% of GDP) was reported (See Figure 16) and exceeded 1.8 times the deficit of 2007.

26 General Economic Situation

Figure 16. Fulfillment of the consolidated budget of Ukraine in 2008 (cumulative, from the beginning of the year)

The revenues of the Consolidated Budget of Ukraine added 35.4% (8.2%, with CPI taken into account). The basic source of the revenues was the tax revenues, their share accounting for 76.3% of the total revenues of the Consolidated Budget of Ukraine (in 2007, it was equal to 73.3%). The revenues from VAT increased by 55.1% as compared with 2007 and throughout the year had the biggest share in the structure of tax revenues. This share rose by 3.9 percentage points and made up 30.9% (See Figure 17). At the same time, the revenues from VAT were ful- filled for 93.4%, inasmuch as in the fourth quarter of 2008 they decreased (especially, from imported goods), which resulted in under-fulfillment of the annual plan.

Figure 17. Structure of revenues of the Consolidated Budget of Ukraine

As far as the economic situation in the country aggravated, and consequently, the wages growth pace decelerated, the annual revenues from tax on individual income were fulfilled only for 96.2%. The share of income tax of individuals in the total tax revenues fell by 0.5 percent- age points as compared with the previous year and amounted to 15.4%. 27 Annual Report 2008

The only tax that generated revenues exceeding the planned amount was the corporate profit tax that was fulfilled for 112.0% of the annual plan. The failure to fulfill the annual plan for the revenues from taxes entailed under-fulfillment of the plan for the revenues of the Consolidated Budget of Ukraine (97.7%). Like the State Budget of Ukraine, in 2008, the local budgets also were not entirely fulfilled, the index of their fulfillment being the lowest since 1999. Expenditures from the Consolidated Budget of Ukraine increased by 37.1% (by 9.5%, with CPI taken into account) as compared with 2007. The expenditure plan was fulfilled for 92.1% and this index was the lowest as compared with the previous years, for a lack of sources of funding (the revenues from T-bills placement were gathered for 42.4%, the borrowings from for- eign institutions for 70.3% of the plan as established in the last version of the Budget). During the reporting year, the expenditure targeted on current consumption was the priority direction; its share in the total expenditures grew by 3.8 percentage points against the previous year and accounted for 86.7%. The capital expenditures were financed for 81.0%, this index being among the lowest for the last years. In 2008, it added only 6.5%. The public debt As of January 1, 2009, the public and government-guaranteed debt of Ukraine reached UAH 189.4 billion or USD 24.6 billion (See Figure 18). In the hryvnia equivalent it increased 2.1 times, in US dollars by USD 7.0 billion or by 40.0%. The growth was driven by both the public debt (83.3% of the total increment), and the government-guaranteed debt (3.4 times). A hike in the government-guaranteed debt in November arose from an increase in the loans from inter- national organizations (the first tranche of the International Monetary Fund within the framework of the standby program for support of the banking sector).

Figure 18. Public and government-guaranteed debt

At the end of 2008, the ratio of public and government-guaranteed debts to GDP made up 19.9% and added 7.6 percentage points as compared with the previous year. In 2008, the actual public debt exceeded the limit by UAH 18.1 billion.

28 General Economic Situation

1.1.4. INCOME AND EXPENDITURES OF THE POPULATION Income of the population In 2008, the nominal income of population totaled UAH 856.6 billion having grown by 37.4% against 2007 (See Table 9, Figure 19).

Figure 19. Income and expenditure of the population of Ukraine (cumulative, to the respective period of the previous year)

The population spent its disposable income for purchase of consumer goods and services. In the reporting year, the disposable income added 37.2% due to raising social standards, increase in pensions, etc. In 2008, social aid and other current transfers received grew with a higher pace (143.3%) than wages and salary (133.0%). Their share in the total population's income increased by 1.0 percentage point and made up 37.7%.

Table 9. INCOME OF UKRAINE'S POPULATION For information: 2007 2008, Increase/ Increase/ Indicators UAH share, decrease share, decrease billion % during the % during the year, % year, %

Income of Ukraine's population 856.6 100.0 37.4 100.0 32.0 Including: Wages and salary 371.1 43.3 33.0 44.8 36.0 Profit and mixed income 131.7 15.4 38.4 15.3 37.6 Social aid and other current transfers received 323.0 37.7 43.3 36.7 24.5 For information: Disposable income 646.3 x 37.2 x 29.5 Real disposable income x x 9.6 x 14.8

The share of wages and salary in the structure of population's income remained almost the same as in the previous year (43.3%). The pace of real disposable income decelerated because of the aggravation of economic situation in the country, especially, in the second half-year; it reached 109.6% versus 114.8 in 2007.

29 Annual Report 2008

Wages and salary As compared with 2007, the nominal average monthly wages per one employee grew by 33.7% (in 2007, by 29.7%) and amounted to UAH 1806.40. In the industry the wages increased by 29.8% and reached UAH 2016.64, which was higher by 11.6% than the average wages in the whole economy; in the construction sector it added 23.3% and came to UAH 1832.98, in agriculture it grew by 46.8% and was equal to UAH 1076.46. In the first half of 2008, the nominal wages continued their ascending dynamics. However, starting with May of the reporting year, in some economic activities the pace of wages sharply decelerated because of the business recession (See Figure 20). In 2008, the highest growth was registered in agriculture (by 46.8%), whereas the lowest in the forestry and related servic- es (by 19.2%). In 2008, the highest salaries were paid to employees of the financial sector (UAH 3747.14 or 2.1 times higher than the average wages for the whole economy), whereas the lowest wages were paid in fishery and agriculture (UAH 913.07 and UAH 1076.46, respec- tively). Hence, the highest nominal wages exceeded 4.1 times the lowest ones.

Figure 20. Dynamics of nominal average wage (cumulative, to the respective period of the previous year)

In 2008, the rate of the real wages growth significantly slowed down and made up 106.3% (in 2007, 112.5%). In November-December 2008, the real wages decreased for slumping out- put in the industry, construction, and other sectors. During the year, the arrears of wages added UAH 443.5 million or 59.5% and, as of January 1, 2009, came to UAH 1188.7 million (in 2007, they reduced by 17.1%). The arrears chiefly grew in the industry and construction, where they had the largest shares (57.0 and 16.0% of the total arrears, respectively) (See Figure 21). The share of arrears of wages at oper- ating enterprises rose by 64.0% against 36.8% reported as of January 1, 2008.

Figure 21. Arrears of wages in major sectors of the economy UAH million

30 General Economic Situation

Expenditures of the population Expenditures and savings of Ukraine's population in 2008 totaled UAH 856.6 billion and grew by 37.4% as compared with 2007, which influenced the ascending trend in the general domestic demand. In the reporting year, the population's expenditures increased by 36.7%, while savings added 46.0% (See Table 10).

Table 10. EXPENDITURES OF UKRAINE'S POPULATION 2008 For information: 2007 Increase/ Increase/ Indicators UAH share, decrease share, decrease billion % during the % during the year, % year, %

Expenditures and savings of Ukraine's population 856.6 100.0 37.4 100.0 32.0 Including: Purchase of goods and services 689.1 80.4 35.2 81.7 32.1 Current income tax, property tax and other current transfers paid 67.4 7.9 37.4 7.9 45.1 Accumulation of non-financial assets 17.7 2.1 78.2 1.6 38.8 Growth of financial assets 52.1 6.1 37.6 6.1 2.1

The lion's share of the population's funds was spent for purchase of goods and services (80.4%) which was by 1.3 percentage points less than in the previous year. During the year, as far as the population began to accelerate repayment of loans, the share of purchase of goods and services in the total expenditures shifted from 82.5%, in January, to 80.4%, at the end of the year.

1.1.5. The labor market In 2008, the labor market dynamics mirrored the general economic development and faced drastic changes during the year. At the beginning of 2008, the number of discharged employ- ees, as well as unemployment rate tended downward, whereas the number of unemployed peo- ple per a vacancy reduced, and the number of unemployed people who found work went up. In the last two months of 2008, the demand for labor force fell down. Consequently, the basic indices of the labor market worsened. In 2008, the average monthly number of economically active population aged from 15 to 70 years made up 22.4 million people, 21.0 million out of them were engaged in economic activi- ties, the rest 1.4 million being unemployed. The employment rate of the population aged from 15 to 70 years was 63.3%; that of the able-bodied people accounted for 72.3%3. As of January 1, 2009, the State Employment Service of Ukraine registered 876.2 thousand unemployed people or by 32.7% more than as of January 1, 2008. 96.4% of the unemployed people were officially recognized unemployed, 77.2% of them received unemployment benefits. More than a half of the unemployed people were inhabitants of rural regions. As regards the gender structure, 55% of the unemployed people were women. In the reporting year, in Ukraine, the rate of registered unemployed people increased by 0.7 percentage points and, as of January 1, 2009, came to 3.0% of the able-bodied population (See Figure 22). The increment in the registered unemployment was fed, basically, by rural regions, where the unemployment rate rose by 1.3 percentage point and accounted for 5.2% of the able- bodied rural inhabitants, whereas the urban regions reported unemployment growth by 0.5 per- centage points and the rate of 2.1%.

3 As of January 1, 2009, the total number of pensioners in Ukraine reached 13.9 million people. 31 Annual Report 2008

Figure 22. Official unemployment rate and number of unemployed people per 10 vacancies (at the end of period)

Official unemployment rate, at the end of period (left scale)

Supply and demand for labor force were imbalanced from the standpoint of both vocation- al-qualification and geographical structure which entailed regional differentiation of the regis- tered unemployment. The highest unemployment rate was observed in Ternopil Region (5.1%), the lowest in Kyiv (0.6%). The demand for the labor force tended downward. In the second half-year of 2008, the number of vacancies also showed descending dynamics and caved in the last two months (91.1 thousand vacancies, in December, versus 177.7 thousand vacancies at the beginning of the year). About a half of the vacancies were destined for workers, more than one-third for servants and every seventh vacancy required unqualified labor force. The number of unemployed people applying to the State Employment Service per a vacan- cy increased 2.5 times as compared with the beginning of the reporting year and amounted to 96 people per 10 vacancies, at the end of 2008 (in 2007, 39 unemployed persons per 10 vacan- cies). The regional structure of the ratio of unemployed people per vacancy was within the range from 4, in Kyiv, to 767, in Cherkasy Oblast, at the end of 2008. Thanks to the State Employment Service of Ukraine, in 2008, 1084.0 thousand people or 43.3% of the registered unemployed population found the job. In 2008, UAH 2.5 billion from the Fund of Mandatory Social Insurance against Unemployment or 0.4% of GDP were spent for unemployment benefits.

1.2. EXTERNAL ECONOMIC SECTOR 1.2.1 Balance of payments In 2008, the foreign economic sector of Ukraine underwent drastic changes. In January- August, the dynamics of the previous years continued and even strengthened, when revenues from the financial account allowed Ukraine not only to finance the current account deficit, but also to accumulate reserves. However, starting with September, the situation turned upside down, as the adverse effect of the world financial and economic crisis on Ukraine's economy led to a double current account deficit in the fourth quarter of 2008.

Current account balance In 2008, the current account deficit reached USD 12.9 billion or 7.1% of GDP (in 2007, 3.7% of GDP), primarily, through an increase in commodity balance (up to USD 17 billion) and neg- ative balance of income (up to USD 1.5 billion) (See Figure 23).

32 General Economic Situation

Figure 23. Current account balance

Exports of goods Despite deepening of the economic crisis at the end of the year, in 2008, exports increased by 35.9% and totaled USD 67.7 billion (See Figure 24).

Figure 24. Exports of goods

The export growth in 2008 was stimulated chiefly by an increase in the export value: for metallurgical products by 32.9% (38.3% in the total export growth); for agricultural products 1.7 times (25.6% of the export growth); for machine-building products by 28.6% (13.6% of the export growth). In the first three quarters of 2008, export of metallurgy products constituted a half of the export growth, but in the 4th quarter the value of this group of products fell by 50.7% as com- pared with the 3rd quarter. This fall was caused by both sinking prices for ferrous metals (near- ly by 40%) and declining physical volumes of ferrous metal supplies (by 27.8%), as a result of the dropping external demand. Export of agricultural products showed the most consistent dynamics due to both the rise in prices for the agricultural products and a material increase in supplies of cereal crops. In the first half-year of 2008, the high investment and consumer demand, primarily, in the CIS countries, boosted dynamic growth of export of machine-building products. However, as far as the demand from the Russian Federation declined, in the 4th quarter, export of machine- building products showed the result of the 1st quarter (USD 2.4 billion).

33 Annual Report 2008

In 2008, the share of the CIS countries in Ukraine's export trended downward: totally for the year, it accounted for 35.7% (in 2007, 37.9%). Asia and America increased their shares in the regional export structure by 1.7 and 0.7 percentage points, respectively. Imports of goods The value of import of goods rose by 40.1% and totaled USD 84.7 billion, as a result of escalating domestic demand, principally, for consumer goods, as well as of rising world prices for energy, raw materials, and stock, in the 1st quarter of the year. The import breakdown by wide economic groups showed that import of consumer goods paced the most intensively, by 57.1%. Consequently, in 2008, the share of consumer goods in the total import came up to 22.9% versus 20.1%, in 2007. Effect of the financial crisis (swift devaluation of hryvnia, unavailability of credit resources, especially, for individuals, decline in the investment demand and construction output) provoked a sharp drop of imports in November-December of 2008 down to the average monthly rate of 2007 (See Figure 25).

Figure 25. Imports of goods (change as compared with the respective period of the previous year)

The largest shares in the value of import in 2008 belonged to mineral products (31.6% of the total import, grew by 50.1%), machine-building products (28.4% of the total import; grew by 34.8%); and chemical products (12.1% of the total imports, increased by 32.4%). In 2008, machinery, equipment, and transport facilities worth USD 26.6 billion were import- ed to Ukraine which was by USD 6.9 billion more than in the previous year. One and a half time increase in import of motorcars, spare and service parts for them made up more than 35.0% of the machine-building import growth and 10.0% of the total imports. In the reporting year, the far-abroad countries gradually increased their share in the geo- graphical structure of import of goods and contributed thereto 61.3% (in 2007, 58.9%), the pace of imports from these countries (45.9%) exceeding by 14.0 percentage points that from the CIS countries (31.9%).

Services The year 2008 saw a positive balance of services totaling USD 2.4 billion. Nonresidents were provided with services worth USD 17.9 billion, whereas the services received from non- residents amounted to USD 15.5 billion. The growth of services import therewith far exceeded the increase in exports and amounted to 31.9 and 26.4 per cent, respectively.

Income Negative balance of income grew 2.3 times as compared with 2007 and made up USD 1.5 billion which, first of all, was caused by a double increase in the payment of dividends on direct

34 General Economic Situation investments and a 1.5-time growth of expenses for the foreign debt servicing. A 1.5-time increase in revenues as compared with 2007 was due to a rise in the wages and salary paid to the Ukrainian citizens working abroad, as well as thanks to income from allocation of reserves.

Current transfers In 2008, the positive balance of current transfers decreased by 11.6 per cent as compared with the previous year and amounted to USD 3.1 billion. The received current transfers remained nearly at the level of the previous year and made up USD 4.2 billion due to a decline by 6.6 per cent in incoming money transfers from the employees working abroad (up to USD 2.1 billion). The paid current money transfers rose during the year 1.7 times and achieved USD 1 billion.

Financial account In 2008, the balance of financial account was positive and came to USD 9.5 billion, 37.1 per cent less than in 2007. The reduction took place because of the outflow of funds in the fourth quarter of 2008 (USD 6.1 billion), which was observed for the first time during the recent two and a half years and resulted from influence of the world financial crisis on the Ukrainian econ- omy.

Direct investments During 2008, net inflow of the foreign direct investments in Ukraine made up USD 9.7 bil- lion, which is 5.0 per cent more than in 2007. The world financial crisis adversely affected, first of all, the volume of direct foreign investments received. In the fourth quarter of 2008, the net inflow of foreign direct investments accounted for USD 934 million, which is 3.5 times less than during three previous quarters, in average (See Figure 26).

Figure 26. Direct investments in Ukraine's economy

Despite the crisis, the financial sector remained the most attractive for foreign investors: its share in the growth of foreign direct investments in 2008 made up 69.2 per cent versus 38 per cent, in 2007. The total direct investments in Ukraine, at the end of 2008, accounted for USD 46.8 billion4, shareholder equity having a lion's share of 90.9 per cent. The amount of foreign direct invest- ments per capita rose during the year by 23.5 per cent and came to UAH 1014.

4 With taking into account negative translation difference worth USD 4.1 billion for the fourth quarter of 2008, which resulted from hryvnia devaluation against world leading currencies. 35 Annual Report 2008

The biggest foreign direct investments were accumulated in the financial activities, 29.8 per cent of the total amount, 20.9 per cent in real estate operations, and 13.0 per cent in metallurgy. The biggest share in the capital of domestic corporations with foreign investments belonged to investors from Cyprus (31.2 per cent), Germany (15.0 per cent), and Austria (10.5 per cent).

Medium-term and long-term credits and Eurobonds In 2008, the total amount of net borrowings related to the long-term credits and Eurobonds in the banking and real sectors came to USD 14.6 billion and practically remained fixed, at the level of the previous year.

Figure 27. Net borrowings related to medium- and long-term nonguaranteed credits and Eurobonds

Net long-term borrowings of the banking sector from the external markets decreased by 1.8 per cent and totaled USD 8.8 billion, while those of the real sector decreased by 2.5 per cent and were equal to USD 5.8 billion. As a whole, in 2008, the structure of net long-term loans remained identical with that in 2007: the share of the banking sector and the real sector was 60.5 per cent and 39.5 per cent, respectively (See Figure 27). The main peak of long-term borrowings was observed in the third quarter of 2008 (40.2 per cent of the total net borrowings). However, in the fourth quarter, one could see a rise in the repayment on the previous credits and loans, whereas issue of the new loans decreased by 60 per cent. This contributed to a decline in the net borrowings of long-term resources three times as much compared with the previous quarter.

Other capital In 2008, the negative balance of other capital was by 7.6 per cent higher than in 2007 and made up USD 13.9 billion. The negative balance for nine months of 2008 was by 39.8 per cent less than in the respective period of 2007; essential outflow of capital worth USD 8.4 billion was reported in the fourth quarter (See Figure 28). The outflow of capital was brought on by high devaluation expectations of the population which increased demand for FX cash that, in the fourth quarter of 2008, stimulated accumula- tion of FX cash worth USD 5.1 billion (USD 12.9 billion for 2008, as a whole) outside the bank- ing system. Repayment of the banking sector short-term loans and credits previously received from non-residents and a lack of new short-term resources which resulted in the negative balance of other capital in the fourth quarter of 2008 worth USD 2.8 billion was another important factor of the capital outflow. For the whole year, the capital outflow totaled USD 1.6 billion.

36 General Economic Situation

Figure 28. Other capital dynamics

Reserve assets As a whole, the consolidated balance of payments deficit in 2008 came to USD 3.2 billion which was financed at the expense of the first tranche of the Standby credit worth USD 4.6 bil- lion. Owing to this, the reserve assets in 2008 increased by USD 1.1 billion5 and, as of January 1, 2009, amounted to USD 31.5 billion which made it possible to finance import of goods and services during 6.4 months of the future period (See Figure 29).

Figure 29. International reserves of the National Bank of Ukraine

1.2.2. External debt of Ukraine Having increased during the year by USD 21.7 billion or by 27.1 per cent (See Table 11) the gross external debt of Ukraine, as of January 1, 2009, accounted for USD 101.6 billion (55.9 per cent of GDP). The increase in the gross external debt resulted from growth of liabilities in the banking sector by USD 8.5 billion or 27.4 per cent; by USD 7.9 billion or 25.6 per cent in other sectors of the economy; and by USD 4.3 billion or 10.2 times in the monetary authority sector.

5 Irrespective of currency translation difference.

37 Annual Report 2008

During 2008, the government debt grew by 27.6 per cent and, as of January 1, 2009, came to USD 19.3 billion, including: – Debt of the public administration sector for 2008 declined by USD 0.1 billion to USD 14.6 billion (14.1 per cent of the gross external debt of Ukraine or 8.0 per cent of GDP); – Debt of the monetary authority sector grew by USD 4.3 billion up to USD 4.7 billion; During 2008, the private debt rose by 27.0 per cent and, as of January 1, 2009, came to USD 82.3 billion, including: – Private debt of the banking sector worth USD 39.4 billion (38.8 per cent of the gross exter- nal debt or 21.7 per cent of GDP); – Private debt of other sectors of the economy worth USD 42.9 billion (42.2 per cent of the gross external debt or 23.6 per cent of GDP).

Table 11. EXTERNAL DEBT OF UKRAINE (according to the IMF methodology) USD million Indicators As of As of As of As of As of 01.01.2008 01.04.2008 01.07.2008 01.10.2008 01.01.2009

Public administration sector 14673 15135 14873 14152 14590 Long-term 14673 15135 14873 14152 14590 Monetary authority sector 462 329 290 135 4725 Long-term 462 329 290 135 4725 Banks 30949 33870 38450 42134 39424 Short-term 11723 12059 12793 12884 9330 Long-term 19226 21811 25657 29250 30094 Other sectors 30793 35129 37528 41333 38666 Short-term 8955 11830 12931 14496 10970 Long-term 21838 23299 24597 26837 27696 Direct investments: Inter-company debt 3079 3339 3727 4685 4249 Gross external debt 79956 87802 94868 102439 101654

1.3. SURVEY OF THE WORLD ECONOMY AND INTERNATIONAL MARKETS In 2008, the world economy experienced the worst since the thirties financial shocks. The financial crisis that started in September 2007 from the collapse of the mortgage lending mar- ket became deeper in the first half of 2008 and took some features of deep recession of the world economy. One could see an essential decline in economic activities, growth of unem- ployment, credibility gap in both consumers and business circles, slump of prices for real estate, increase in the number of bankrupts among insurance and financial companies, collapse of stock exchange indices, and dissolution of exchanges. Growth of the world economy slowed down from 5.2 per cent, in 2007 to 3.4 per cent, in 2008. Growth of the advanced economies reduced as well, in particular, in the USA from 2.0 per cent, in 2007 to 1.3 per cent, in 2008; in Euro Zone from 2.6 per cent, in 2007 to 0.7 per cent, in 2008; in Japan from 2.4 per cent, in 2007, to 0.7 per cent, in 2008. The economic recession in the advanced countries influenced the developing or emerging markets because of slowing down of the world trade, outflow of private capital, and decline in investments. Thus, by estimate of the Institute for International Finance (IIF), the inflow of pri- vate funds to the emerging market economies reduced almost twice, from the historical maxi- mum of USD 929 billion, in 2007, to USD 466 billion, in 2008. Such additional factors as social tension, speculations in the foreign exchange and capital markets aggravated the recession. Consequently, the economic growth in the developing and emerging markets slowed down to 6.3 per cent, in 2008, which was 2.0 percentage points less than in 2007.

38 General Economic Situation

The decline in the global demand and rise in the cost of financing of trade operations led to reduction in the world trade in goods and services from 7.2 per cent, in 2007, to 4.1 per cent, in 2008 (See Figure 30).

Figure 30. The world trade and economic growth (annual change)

Conditions in the world markets of raw materials were marked with a hike in prices, in the structure of main commodity groups, registered its peak in the first half of the year. Prices for the exchange commodities essentially grew, mainly due to the rise in prices for oil from 10.7 per cent, in 2007, to 36.4 per cent, in 2008. The downfall of prices for raw material commodities adversely affected the exporters, for example, in 2008, GDP of the Russian Federation rose by 5.6 per cent which was the lowest since 2002, significantly below the expectations, and GDP of China grew by 9.0 per cent. In the second half of the year, because of decrease in the world demand the prices began to sink to the level of 2006 and below, including, major Ukraine's exports (See Figure 31). In particular, prices for steel reduced because of a slump in prices for the expendable materials (energy resources, scrap metal) and decrease in demand (first of all, from the motorcar build- ing and construction industry).

Figure 31. Price dynamics of foodstuff and basic raw materials, index, year 2000 = 100

In 2008, one could see escalation of the consumer prices in both the advanced economies and developing and emerging markets, by 1.4 percentage points and 2.8 percentage points, respectively (See Figure 32).

39 Annual Report 2008

Figure 32. Consumer price dynamics (annual change)

Devaluation of national currencies was an additional challenge for the economic policy makers. Concurrent with a trend towards revaluation of US dollar as a world reserve currency which was reasonable under conditions of prevailing instability in the world financial markets, since the middle of 2008, the majority of currencies of the emerging markets have devaluated. Brazilian real lost by 21.9 per cent of its value, Russian ruble 19.7 per cent, Polish zloty 24.1 per cent, Indian rupee 23 per cent, and Turkish lira 29.9 per cent. Among the reasons for the national currency devaluations there were a decline in demand for the raw material resources (major export products of many of them) and the investment demand for risky assets. Ukraine had the highest rate of risk premium growth and the most drastic fall of the stock exchange index among the emerging market economies. Spread of profitability of Ukraine's Eurobonds with respect to the USA's underlying assets expanded to 2735 basis points by the end of the year (nearly by 2500 basis points for the year against 451 basis points for this group of countries, in average)6. Five-year credit default swaps for Ukraine (CDS) reached their max- imum and made up 3200 basis points, at the end of the year. The levels of credit default swaps pointed to the essential probability of default which, in its turn, pushed up the panic expecta- tions of investors (See Figure 33).

Figure 33. Risk premium dynamics for Ukraine

6 Å̲ index+ (Emerging Market Bond Issue +) spread is calculated by JPMorgan company as a difference between profitability of liquid Eurobonds of sovereign issuers and state-owned companies of emerging market economies (Ukraine inclusive) and profitability of the US sovereign bonds with the same maturity. 40 General Economic Situation

The PFTC index was falling with a higher pace (74.3 per cent) than MSCI of the emerging market economies7 that collapsed most swiftly for the whole period of its monitoring since December 2003 (by 47.1 per cent from the beginning of the year), and regional index (almost by 70 per cent) (See Figure 34).

Figure 34. Dynamics of stock indices of emerging market economies (31.12.2007 = 1)

Governments of different countries either together with or independently of the central banks began to implement the national programs for stabilization of their financial markets, renewal of lending, and stimulation of the economy growth. The national budgets and target funds of the countries and, in much less proportion, funds of the central banks were the basic source of financing. Scrupulous harmonization and coordination of the government and central bank economic policies and measures related to the exchange rate policy, interest rates, accu- mulation of liquid funds in the financial system, strengthening of prudential regulation in the financial sphere, recapitalization of the banking system, stimulation of lending, guaranty of prop- erty protection, in particular, deposits and pledged property were the key principle of imple- mentation of these programs. Government guarantees, re-capitalization, recovery of confidence, and keeping of liquidity at a due level through refinancing credits were the main trends in policy for overcoming the recession after-effects. The governments of countries implemented a set of fiscal incentives, namely, budget measures of stimulant nature to intensify the inflow of foreign investments, stir- ring up of business activity and reactivation of trade. The international financial organizations helped the countries suffered from the crisis both with making recommendations as to a way- out of the crisis and credits aimed at supporting the exchange rates of national currencies, inter- national reserves, and BOP. Central banks changed the interest rates for preventing the threat of default on external debt servicing under conditions of probable national currency devaluation and high current and probable inflation. Majority of the advanced economies reduced the refinancing rates of the cen- tral banks: the USA Federal Reserve System down to 0-0.25 per cent, the European Central Bank down to 2.5 per cent, the Bank of England down to 2.0 per cent; in this case, the rates remained higher than the expected inflation and in some countries even higher than the real one (See Figure 35).

7 MSCI index for the emerging market economies is calculated by Morgan Stanley Capital International on the basis of equity indices of 25 emerging market economies. It is calculated as an indicator of dynamics of stock markets in emerging market economies. 41 Annual Report 2008

Figure 35. Base interest rates of central banks of advanced economies

Other countries, mainly, the emerging market economies resorted to an increase in the refi- nancing rates of central banks: Romania by 2.75 percentage points since the beginning of 2008, Russia by 3.00 percentage points, Belarus by 4.00 percentage points, Indonesia by 1.25 percentage points, and Iceland by 4.25 percentage points (See Figure 36).

Figure 36. Dynamics of central bank refinancing rates in some countries

In the opinion of IMF experts, the existing drawbacks of the economic policy in the sphere of financial regulation, macroeconomics, and global architecture accounted for the market dys- function. The financial regulation was unfitted to large exposure concentrations and unreason- able incentives that led to rapid growth of financial innovations. The macroeconomic policy did not take proper account of the increase in the systemic risks of the financial system and the housing market. Fragmentation of the global supervision system aggravated incapacity to detect increasing vulnerability and interference of market participants.

42 Part 2

ACTIVITIES OF THE NATIONAL BANK OF UKRAINE Annual Report 2008

2.1. MONETARY POLICY 2.1.1. Implementation of the monetary policy guidelines in 2008 In 2008, implementation of the monetary policy, with the use of a spectrum of mechanisms and instruments, was directed towards achieving the aims and tasks determined by the Monetary Policy Guidelines for 2008 (with amendments). Variability of macroeconomic conditions, taking place during the reporting year, called for a prop- er flexibility on the part of the National Bank of Ukraine in conducting the monetary policy and a prompt response to changes in the environment through considered application of monetary instruments and mechanisms. Development of the money and credit market during the previous year may be divided into two stages: the first one (January-September 2008) was marked by growth of the main monetary indicators, and the second (October – December 2008) – by an essential deterioration of the situa- tion. At the first stage, deceleration of the monetary indicators growth displayed a moderate direction- ality of the monetary policy in the conditions of the necessity to decrease the inflation and to take pre- ventive measures for leveling the impact of external shocks on the money and credit system of Ukraine. In spite of acceleration of the inflationary processes in the first half of 2008, the actions of the National Bank of Ukraine with regard to regulation of the money supply volume were governed by the dynamics of the banking system liquidity combining the conduct of operations on money mobilization, as well as on the banks' liquidity support. Notwithstanding significant inflationary pressure, the vol- umes of operations on banks' liquidity support (UAH 64.1 billion for 9 months of 2008) were far in excess of the volumes of the money mobilization operations (UAH 46.5 billion). The anti-inflationary orientation of the monetary policy in the period mentioned had no detrimen- tal effect on banks' liquidity dynamics. Under the conditions of increase, during 9 months of 2008, of the monetary base by 20.4% and the money supply by 20.6%, during this period the volumes of funds on the banks' correspondent accounts augmented by 27.0%, which rendered proper credit support of the economic development processes by the banks. The growth rates of crediting by the banking sec- tor for 9 months amounted to 132.2%. Over this period, the National Bank of Ukraine twice increased the discount rate (from 1 January 2008 up to 10% per annum and from 30 April 2008 – to 12% per annum) and actively used the rates on mobilization operations, as well as increased the refinancing rates. In spite of the positive dynamics of the monetary indicators during the first three quarters of 2008, considering the increase in macroeconomic risks and imbalances and within its competence, the National Bank of Ukraine took measures to diminish their influence on the state of the money and credit market. With this aim in view, the National Bank of Ukraine: – strengthened the prudential ratios of activity of banks (including with regard to the capital ade- quacy requirements), stimulating them to making the agreements in the national currency and to a more weighted approach to the risk management; – enhanced the capabilities of banks to support their liquidity, specifically through enlargement of the list of eligible collateral taken as security when providing the refinancing loans; – augmented the international reserves that continued to enable to balance the demand on and sup- ply for the foreign currency in the period of aggravation of the situation in the foreign exchange market; – tried, by way of taking measures in the area of foreign exchange regulation and strengthening of the exchange rate flexibility, to mitigate the impact of the external shocks on the money and credit market and to balance the demand and supply in the foreign exchange market. The mentioned actions ensured a significant basis for counteracting the crisis phenomena. Despite taking such measures, at the second stage of development of the money and credit mar- ket the situation drastically deteriorated. The scale of aggravation of the situation in the economy and in the financial markets turned out to be larger than it had been anticipated. The situation in the mar- ket was essentially affected by artificially provoked mistrust of the households in the financial stand- ing of some banks and the banking system as a whole and by outflow of funds. The funds drawn from deposit accounts were transferred into cash and partially directed to the cash foreign exchange mar-

44 Activities of NBU ket, which decreased the resource base and reduced the credit activity of the banking system.

Required reserves Taking into account the factors that influenced the situation in the money and credit market, dur- ing 2008, the National Bank of Ukraine deliberately used restrictive measures. During January – November 2008, the ratios for forming by banks the required reserves and the level of required reserves to be kept daily at the operational day start on the correspondent account with the National Bank of Ukraine remained unchanged. In particular, the ratios of required reserves to be formed by banks were as follows: – on time funds and deposits of legal entities and individuals in the national currency – 0.5%; – on time funds and deposits of legal entities and individuals in foreign currency – 4%; – on demand deposits of legal entities and individuals in the national currency and on funds on the current accounts – 1%; – on demand deposits of legal entities and individuals in foreign currency and on funds on the cur- rent accounts – 5%. The required reserve funds kept daily by an operational day start on a bank's correspondent account with the National Bank of Ukraine, were imposed at a level of not less than 100% of the amount of the specified and formed required reserves for the previous reporting period of reserving. In the period of aggravation of the situation in the financial market by the year end the National Bank of Ukraine liberalized the requirements with regard to formation of the required reserves by banks, in order to differentiate the required reserve ratios for fostering the deposit and credit agree- ments in the national currency. Since 5 December, 2008, the ratios of required reserves to be formed by banks were as follows: – on time funds and deposits, on funds of demand deposits and on funds on the current accounts in the national currency – 0%; – on time funds and deposits of legal entities and individuals in foreign currency – 3%; – on funds of demand deposits of legal entities and individuals in foreign currency and on funds on the current accounts – 5%. The required reserve funds, kept daily by an operational day start on a bank's correspondent account with the National Bank of Ukraine, were imposed at a level of not less than 90% of the amount of the specified and formed required reserves for the previous reporting period of reserving. From 13 October to 5 December, 2008, the banks formed their required reserves with taking into account balances of the funds in the national currency at the cashiers' desks and T-bills whose redemption was due in 2008. By the results of the decisions taken, in 2008, the average calculated ratio of required reserves amounted to 2.4%, or decreased from 2.4% in January to 2.2% in December (for 2007 it was 2.1% and augmented from 2.1% in January to 2.4% in December). During 2008, the required reserves, formed by the banking system, augmented from UAH 10.2 billion in January to UAH 13.7 billion – in December. During the year, the average balances of funds on the banks' correspondent accounts ranged from UAH 14.7 billion to UAH 21.0 billion.

Interest rates During 2008, the interest rate policy of the National Bank of Ukraine was carried out adequately to the situation in the money and credit market and it was aimed at disabling the inflationary process- es in the economy from strengthening. In order to restrain the inflationary pressure and to prevent the imbalance deepening within the structure of active and passive operations of the banks, from 1 January, 2008, the National Bank of Ukraine increased the discount rate from 8.0% per annum up to 10.0% per annum, and from 30 April, 2008, – up to 12.0% per annum. To promote the savings activity of households in January-September, as well as to bring the funds back to the banking system whose outflow had place in the 4th quarter of 2008, the National Bank of

45 Annual Report 2008

Ukraine took measures concerning the increase in the value of the national currency by raising the interest rates on active and passive operations. While on the whole for the year the average weighted interest rate on all refinancing instruments augmented to 15.3% annually (compared with 10.1% per annum for 2007), in December it changed modestly as compared with January – by 0.2 percentage point to 14.8% annually in December, includ- ing on: – overnight credits – by 5.1 percentage points (from 14.6% annually in January to 19.7% annu- ally in December); – refinancing credits, extended on tender results – by 2.8 percentage points (from 15.5% annu- ally in January to 18.3% annually in December). For 2008, the average weighted interest rate on the operations of exchange of foreign currency for the national currency (swap) amounted to 15.1% per annum, on direct repo operations (calculat- ed) – 13.8% per annum and on short-term loans extended to the banks in September-December 2008 under the financial rehabilitation programs – 14.1% per annum.

Refinancing of banks During 2008, the National Bank of Ukraine ensured the support of banks' liquidity by provision of overnight credits through the permanently acting refinancing line and of refinancing credits for a term of up to 14 days and up to 365 days, as well as stabilization credits, direct repo operations and oper- ations on the exchange of foreign currency for the national currency to support the banks' liquidity (swap). In October 2008, in order to mitigate the impact of the external financial crisis and to ensure sta- bility of banks, the National Bank of Ukraine, in line with Board Decision No.319 of 11 October 2008 "On Additional Measures Concerning the Banks' Activities" introduced a liquidity support mechanism based on the financial rehabilitation programs for a term up to 1 year and the operative support of the banks' liquidity. By the results of the measures taken by the National Bank of Ukraine in order to prevent the cri- sis phenomena in the banking system, Decision No.413 of the Board of the National Bank of Ukraine, dated 4 December 2008, "On Some Aspects of the Banks' Activities" was approved which abolished the liquidity support mechanism based on the financial rehabilitation program. At the year end, the Temporary Regulations on Granting Loans by the National Bank of Ukraine (Decision No.459 of the Board of the National Bank of Ukraine, dated 25 December 2008) were approved. To support the banks' liquidity in the case of a real danger for the banking system stability, a procedure was defined for extending the loans by the National Bank of Ukraine to the banks in con- nection with worsening of their liquidity reasoned by instability and fall in the exchange rate of hryvnia, other circumstances that brought about an essential reduction of solvency of a large part of banks or their borrowers. In 2008, the credits for refinancing of banks totaled UAH 169.5 billion (in 2007 – UAH 2.5 billion). At that, using the permanently acting mechanism of the credit line for banks' refinancing, the National Bank of Ukraine extended the overnight credits to the amount of UAH 91.8 billion, or 54.2 % of the total refinancing (in 2007 – UAH 0.4 billion, or 17.1 %), the credits received by banks through the ten- der – UAH 15.2 billion, or 9.0% (in 2007 – UAH 2.0 billion, or 78.0%), through the direct repo opera- tions – UAH 23.1 billion, or 13.6%, through operations on exchange of foreign currency for the nation- al one for the support of banks' liquidity (swap) – UAH 2.6 billion, or 1.5%, by provision of short-term loans based on the financial rehabilitation program – UAH 36.8 billion, or 21.7% of the total refinanc- ing. For this period, the banks repaid the refinancing credits to the total amount of UAH 110.4 billion ( in 2007 – UAH 2.1 billion).

Deposit operations For the purpose of operative regulating the banks' liquidity and ensuring the equilibrium in supply of the money funds and demand for them, during 2008, the National Bank of Ukraine performed the deposit operations with banks through the placement of deposit certificates of the National Bank of Ukraine.

46 Activities of NBU

With this aim in view, announced were 641 tenders by whose results the deposit certificates at the nominal value of UAH 1 000 thousand were placed to the total amount of UAH 57.2 billion (in 2007 – UAH 109.6 billion). The interest rates on the funds attracted through deposit certificates were set in accordance with the general situation in the money and credit market with due regard for the interest rates on credits and deposits in the interbank market. The average weighted interest rate on the funds attracted on the deposit certificates in 2008 was 3.9% annually (in 2007 – 0.7% annually). In 2008, advanced repayment of the deposit certificates to the amount of UAH 1.6 billion was made.

2.1.2. Non-cash emission by the National Bank of Ukraine During 2008, in accordance with the authorities delegated by the laws of Ukraine, the National Bank of Ukraine made the primary emission of the national currency in a cashless form through three channels: foreign exchange (currency purchase in the interbank market for leveling the fluctuations of the exchange rate of the national currency and replenishing the international reserves), credit (refi- nancing of banks to support their liquidity) and stock exchange one (making the operation on pur- chase-sale of government securities in the secondary market in order to balance the demand and supply in the money and credit market). While in 2007, within the structure of emission operations, the performance of operations through the foreign exchange channel prevailed (nearly 95% of the total cashless emission made), then in 2008 – through the credit channel (about 80%). In the conditions of emerging tension in the financial market, starting from October 2008, the foreign exchange channel was used mainly for drawing out the money from circulation, since the National Bank of Ukraine car- ried out the operations on selling the foreign currency. At the same time, the outflow of funds from the deposit accounts of banks took place, which significantly influenced their liquidity. In such conditions, the National Bank of Ukraine enhanced the volumes of the banks' liquidity support through the refi- nancing mechanisms, which increased the share of operations with use of the credit channel within the emission operation structure. During 2008, the National Bank of Ukraine issued into circulation the funds totaling UAH 218.2 billion, which was UAH 174.3 billion, or nearly 5.0 times more, than in 2007, including: – UAH 169.5 billion (in 2007 – UAH 2.5 billion) to support the banks' liquidity through different refi- nancing mechanisms, which amounted to 77.7% of the non-cash emission; – UAH 40.1 billion (in 2007 – UAH 41.4 billion) to acquire the foreign currency in the interbank market for forming the international (gold and foreign exchange) reserves of the National Bank of Ukraine, which amounted to 18.4% of the non-cash emission; – UAH 8.6 billion, or 3.9% of the non-cash emission, to acquire the government securities of Ukraine in the secondary market. Within the structure of the non-cash emission, made by the National Bank of Ukraine, in 2008, the share of funds directed to the banks' liquidity support augmented by 71.9 percentage points due to the reduction in liquidity of some banks starting from October 2008 in view of the outflow of funds from the deposit accounts, as well as owing to the active operations of the National Bank of Ukraine on the foreign currency sale. In 2008, the emission funds totaling UAH 179.6 billion, that is 44.0 times more than in 2007, were withdrawn from circulation by the National Bank of Ukraine. The emission funds withdrawal was car- ried out by way of the repayment by banks of the refinancing credits, extended earlier, to the amount of UAH 110.4 billion (61.5% of the total sum of the funds withdrawn), the sale of foreign currency by the National Bank of Ukraine to the amount of UAH 69.1billion (38.4%), as well as at the expense of operations on repayment of the external government loan securities worth UAH 129.2 billion (0.1%). Net non-cash emission (difference between the funds put into circulation and those withdrawn from circulation) in 2008 equaled UAH 38.6 billion and was by UAH 1.2 billion, or by 3.0% more than in 2007. As at 1 January 2009, the non-cash emission of the National Bank of Ukraine accounted for UAH 181.4 billion, that is by UAH 38.6 billion, or by 27.0% more than as at 1 January 2008.

47 Annual Report 2008

2.1.3. Money circulation By the results of 2008, the National Bank of Ukraine carried out the discreet money and credit pol- icy aimed at ensuring the stability of the national monetary unit by way of balancing the money demand and supply and preventing the monetary factor influence on the inflationary processes. As at 1 January 2009, the monetary base equaled UAH 186.7 billion8 and augmented for 2008 by 31.6% (in 2007 – by 46.0%). In total, for 2008, the monetary base grew by UAH 44.8 billion. At the same time, the liabilities of the National Bank of Ukraine to the banking sector, not included in the monetary aggregate M3 (the banks' funds on the correspondent accounts with the National Bank of Ukraine), diminished by UAH 0.4 billion (by 2.2%) to UAH 18.6 billion. As at 1 January 2009, the estimated level of temporally free liquidity of the banking system was UAH 5.0 billion against UAH 9.3 billion as at 1 January 2008. In the reporting year, the direction of the National Bank of Ukraine operations concerning the banks' liquidity regulation was defined on the basis of the liquidity dynamics in the banking system. In particular, at the start of 2008, a high level of free liquidity was noted due to signifi- cant budgetary payments in December 2007. Under such conditions, the National Bank of Ukraine mainly performed operations on mobilization of the banks funds. Later on, noted was the banks' liquidity augmentation, above all due to accumulation of considerable funds on the Single Treasury Account (in January-September 2008 the funds of the Government of Ukraine in the national currency on accounts with the National Bank of Ukraine increased 3.6 times up to UAH 15.9 billion), and the National Bank of Ukraine more actively supported the banks' liq- uidity through the refinancing operations (see Figure 37).

Figure 37. Funds of banks on correspondent accounts with the National Bank of Ukraine

During 2008, the money multiplier value reduced from 2.79 to 2.76 which reflected the outflow of funds from deposit accounts during the last quarter of the previous year and the decrease in the banks' crediting activity. During the reporting year, downward dynamics of the monetary aggregate Ì3 (in the annualized calculation) was seen. As at 1 January 2009, the money supply in circulation amounted to UAH 515.7 billion. For 2008, the growth rates of money supply were the lowest for the last ten years and corre- sponded to 130.2% (see Figure 38). As at 1 January 2009, the money velocity decelerated to 2.08 compared with 2.19 as at 1 January 2008, alongside the increase in the calculated economy monetization up to 48.00% compared with 45.60% at the year beginning.

8 As at December-end 2008, the National Bank of Ukraine ensured observance of the quantita- tive criteria of efficiency on the monetary base of the Stand-by Program (not more than UAH 190 billion) supported by the International Monetary Fund. 48 Activities of NBU

In 2008, the money supply in the national currency enlarged by 16.9% (in 2007 – by 60.5%), in foreign currency – by 75.2% (the previous year – by 28.1%). The significant growth of money supply in foreign currency was primarily due to reduction of the exchange rate of hryvnia against main for- eign currencies. At that, the share of money supply in the national currency diminished for the year from 77.2% to 69.4% with appropriate growth of the money supply share in foreign currency.

Figure 38. Money supply dynamics UAH, bln.

As at 1 January 2009, within the money supply, the money in cash outside the banks amounted to UAH 154.8 billion and grew for 2008 by 39.3% (by UAH 43.6 billion), though com- pared with 2007 (148.2%) its growth rates slowed down. During the year, the largest indicator of the cash augmentation was noted in December of the reporting year – by 9.5% due to sharp spending of funds of the Government of Ukraine in the national currency (funds of the Government of Ukraine in the national currency on the accounts with the National Bank of Ukraine diminished by UAH 9.3 billion for the month) and a seasonal increase in payments of salaries, premiums, etc at the end of the year. The mentioned had also some influence during the last month on the growth of the cash share within the total monetary aggregate Ì3 (by 0.8 percentage point). On the whole, for 2008, the share of money in cash outside the banks with- in monetary aggregate Ì3 augmented by 2.0 percentage points and, as at 1 January 2009, equaled 30.0%. By December-end 2008, the balances of other deposits in foreign currency attracted into the banking system amounted to UAH 122.5 billion and increased for the reporting year by 75.9%, primarily at the expense of augmenting the funds of the households' sector – by 68.7%. By the results of 2008, the funds on other deposits in foreign currency that belonged to the sub- sector of other financial corporations grew 5.3 times, however, due to their insignificant share within total monetary aggregate Ì3, this had no essential influence on the general dynamics of other deposits in foreign currency. At the end of the reporting year, balances on the transferable deposits in foreign currency amounted to UAH 35 billion, or enlarged for 2008 by 73.0% due to their growth on the accounts of institutional units of the non-financial corporations sector by 87.4% and the households' sec- tor by 68.7%. During 2008, the growth dynamics of other deposits in the national currency were uneven. Thus, during the first three quarters, there was a tendency towards their increase (by 25.9%), but, in the 4th quarter, on account of dampening of the economic activity and uncertainty with regard to further dynamics of the exchange rate of hryvnia against the main foreign currencies, other deposits in the national currency diminished by 13.9% to UAH 129.9 billion. This had an

49 Annual Report 2008

impact on the slowdown in the growth rates of other deposits in the national currency for the year as a whole (in 2008 – to 108.5% versus 181.5% – in 2007). The mentioned funds growth was at the expense of other deposits in the national currency belonging to the households' sec- tor which augmented for 2008 by 68.7%. A restraining factor for the rise in monetary aggregate M3 in 2008 was the outflow of trans- ferable deposits in the national currency (by 0.3%), in particular the funds of corporations of the subsector of other financial corporations – by 15.8% and the households' sector – by 11.1% on a reason of artificially provoked failure of trust of the population to the financial situation of some banks and the banking system as a whole. At the same time, the funds of transferable deposits in the national currency of the sector of non-financial corporations increased for the year by 12.3%.

2.1.4. Cash circulation As at 1 January, 2009, the cash outside the banks equaled UAH 154.8 billion and during 2008 it increased by UAH 43.6 billion, or by 39.3% (for 2007 – by UAH 36.1 billion, or by 48.2%). The cash growth was primarily reasoned by the increase in social guarantees and salary payments to the population. Moreover, the aggravation of tension in the world financial markets and artificially provoked distrust to some depository corporations caused outflow of funds from the banking system in October 2008 – during the month, the volume of cash outside the banks went up by UAH 12.7 billion (specifically in the first decade of October – by UAH 8.3 billion). In order to ensure sta- ble functioning of the banking system and to reduce the impact of the financial crisis, the National Bank of Ukraine took a number of measures, prevention of the funds outflow from the banking system among them. In November, the cash funds already diminished by UAH 4.9 bil- lion. The highest increase in cash was noted in December (by UAH 13.4 billion). It was a sea- sonal phenomenon and related to an essential decrease of the Government's funds in the national currency on the accounts with the National Bank of Ukraine and advanced payments of salaries and other social payments. The share of cash outside the banks within the money supply grew for 2008 by 2.0 percentage points to 30.0% (see Figure 39).

Figure. 39. Share of cash (Ì0) in money supply (Ì3)

The level of cash concentration in circulation amounted to 4.1% compared with 4.6% in 2007. Under conditions of accelerated inflationary processes, the tendency towards an increase in both the issue of cash from the cashiers' desks and its return to them persisted. The returns of cash to the cashiers' desks of banks in 2008 equaled UAH 1014.7 billion and grew compared with 2007 by UAH 260.1 billion, or by 34.5%. Within the returns to the cashiers' desks of banks, 46.0% were receipts from the trade network enterprises and the enterprises providing all the types of paid services. Their proceeds compared with 2007 rose by UAH 124.4 billion, or by 36.4%, which was primarily caused by rise in the consumer price index and growth of the retail turnover. Also increased were incomings to the accounts on individuals' deposits (by UAH 47.8 billion, or by 45.1%), as well as on the payment cards (by UAH 28.4 billion, or by 86.6%).

50 Activities of NBU

The issues of cash from the cashiers' desks of banks of Ukraine for 2008 totaled UAH 1058.3 bil- lion and augmented, compared to 2007, by UAH 267.6 billion, or by 33.9%. The largest was the growth of payments on payment cards (by UAH 118.1 billion, or by 56.3%), from the accounts on deposits of individuals (by UAH 83.5 billion, or by 49.1%). At the same time, significantly lower were the growth rates of issue of cash for the acquired foreign currency, for 2008 its volume augmented by UAH 8.0 billion, or by 5.8%, whereas for 2007 the increase equaled UAH 57.8 billion, or 72.0%. During 2008, the National Bank of Ukraine secured the needs of the economy in cash money within necessary volumes and optimal denomination composition of banknotes and coins. For this purpose, the continuous analysis and control of the cash supply at the regional branches' stocks (time- ly cash support and cash excess taking out) and balances of banknotes and coins in the reserve funds of the National Bank of Ukraine were carried out. In 2008, the support of the regional branches with banknotes and coins from the reserve funds totaled over UAH 80.7 billion, which is by UAH 27.0 bil- lion more than in the previous year. Alongside, replenishment of the cash stock at the regional branch- es through reallocation of cash between them increased. The total value of such supports in the reporting year made up UAH 6.8 billion, against UAH 7.2 billion in 2007. By the end of 2008, in circulation there were 2520.9 million pieces of banknotes and 7398.6 mil- lion pieces of change and circulating coins (as at 1 January 2008– 2202.3 and 6549.3 million pieces, respectively). By the reporting date, there were 54 pieces of banknotes per capita and 152 pieces of change and circulating coins per capita of all denominations (as at 1 January, 2008, 47 pieces and 134 pieces per capita, respectively). In order to maintain the proper view of the banknotes put in circulation, the worn cash was with- drawn from circulation. In 2008, withdrawn were the worn banknotes to the amount of 868.8 million pieces (against 771.3 million pieces in 2007). In 2008, the banking institutions of Ukraine found out and withdrew from circulation 6.4 thousand pieces of false banknotes of the national currency (by 27.0% more than in 2007) for the total value of UAH 420.1 thousand (by 45.0% more compared to 2007), with a prevailing share of banknotes of 20, 50 and 100 Hryvnia denominations, being respectively 24.3%, 24.6% and 21.3% of the total amount of false banknotes revealed in circulation. Nearly 99% of the false banknotes were those produced with the use of reproducing equipment in the jet and laser printers. 743 pieces of US dollar banknotes amounting to over USD 71.8 thousand, 194 pieces of Euro banknotes for the value of over EUR 34.5 thousand, and 282 pieces of Russian rubles for the value of 288.6 thousand rubles were acknowledged false and withdrawn from the banking system. Over 90% of the false US dollar and Euro banknotes and 13% of the false Russian rubles withdrawn were produced by the printing technology. In accordance with the approved Plan for Issuing the Commemorative and Jubilee Coins of Ukraine, in 2008, produced were 40 names of commemorative and jubilee coins (44 types), including 6 golden, 19 silver and 19 non-precious metal coins. Alongside, in the reporting year, an essential work was arranged on selling the commemorative and jubilee coins, numbering 916.3 thousand pieces for the total value of nearly UAH 92.7 million. To further upgrade the organization of cash circulation and to perfect the legislative and norma- tive provision of operations with cash, in 2008, the National Bank of Ukraine approved the Concept of Improving the Organization of Work with Cash within the System of the National Bank of Ukraine for 2008–2012, the Instruction on Organizing the Issue and Cash Work within the System of the National Bank of Ukraine, made were amendments to the Instructions: On Organizing the Work with Valuables in the Central Vault of the National Bank of Ukraine, as well on Organizing the Foreign Exchange Valuables Transportation and Money Collection in the Banking Institutions of Ukraine. Moreover, sin- gle tariffs for the banks' cash servicing were defined that permitted to create equal servicing conditions in all the regions of Ukraine.

51 Annual Report 2008

2.2. EXCHANGE RATE POLICY 2.2.1. Dynamics of the exchange rate of Hryvnia. Real effective exchange rate In 2008, the dynamics of the exchange rate of hryvnia versus foreign currencies offered more flex- ibility. At that, evident were significant changes not only in levels of the interbank and cash exchange rate but also of the official exchange rate of hryvnia (see Table 12).

Table 12. THE OFFICIAL EXCHANGE RATE OF HRYVNIA AGAINST FOREIGN CURRENCIES (per 100 units of currency, nominal and real changes: "–" – devaluation, "+" – revaluation) For reference: Rate of hryvnia against foreign currencies (by the year end) 2008 2007

against the US dollar 770.0 505.0 nominal change (%) –52.5 0 real change (with regard to the inflation difference, %) –18.5 +12.0 Against Euro 1085.546 741.946 nominal change (%) –46.3 –11.6 real change (with regard to the inflation difference, %) –13.5 –2.2 Against Russian ruble 26.208 20.579 nominal change (%) –27.4 –7.3 real change (with regard to the inflation difference, %) –17.7 –2.6 For reference: the consumer price index versus December of the previous year (%) 122.3 116.6

During January-August 2008, stable revaluation pressure on hryvnia both in the interbank and cash foreign exchange market was noted. For this period, the exchange rate of hryvnia against the US dollar in the foreign exchange mar- ket revaluated (see Figure 40): – average weighted one on cashless transactions from UAH 503.29 to UAH 464.21 per USD 100; – on cash transactions: of purchasing the US dollar – from UAH 504.65 to UAH 462.46 per USD100; of selling the US dollar – from UAH 507.59 to UAH 466.59 per USD100.

Figure 40. Dynamics of exchange rate of Hryvnia against US Dollar in 2008

52 Activities of NBU

The stable appreciation of hryvnia both in the interbank and cash markets, as well as neces- sity to reduce the inflationary pressure, reasoned by augmentation of social payments, result- ed, since 22 May, 2008, in the revaluation of the official exchange rate of hryvnia against the US dollar by 3.96% (to UAH 4.85/USD1). Starting from September 2008, the situation in the foreign exchange market altered. Against the background of the world economic crisis deepening, a significant curtailment of export rev- enues on a par with complication of the access to external lending took place, which caused the deficit of foreign currency in the internal market. The above mentioned had an adverse effect on the exchange rate dynamics of hryvnia versus the basic foreign currencies: devaluation of its offi- cial exchange rate, as well as of the exchange rate in the interbank and cash markets. For 2008 as a whole, the official exchange rate of hryvnia against the US dollar reduced by 52.5%. The dynamics of the exchange rate of hryvnia versus other world currencies mirrored the conjuncture of international markets. During the year, the US dollar against the euro revaluat- ed by 8.6 %. The hryvnia devaluated respectively against the euro by 46.3 %, and against the Russian ruble – by 25.4%.

Real effective exchange rate (REER) of hryvnia In 2008, the REER of hryvnia decreased, compared to December of 2007, by 14.8% (see Figure 41). During the reporting year, the dynamics of the REER of hryvnia was uneven: in January – October it grew by 18.4 % due to strengthening of the nominal effective exchange rate (NEER) of hryvnia (by 7.3%), as well as to excess by 11.1 percentage points of the infla- tion in Ukraine over its level in the countries – main trade partners.

Figure 41. Dynamics of UAH REER

However, the hryvnia devaluation that started in October of 2008 caused the reduction of the REER of hryvnia. Thus, for November – December 2008 the REER of hryvnia diminished by 32.0%. Moreover, considerable difference in inflation in Ukraine and other countries contributed to a moderate reduction of the real effective exchange rate of hryvnia by the year results.

2.2.2. Development of the foreign exchange market of Ukraine In 2008, in the foreign exchange market of Ukraine there were fluctuations of demand for and supply of foreign currency. Thus, during January-August, in the interbank market a stable excess of foreign currency supply over its demand was noted. At that, the incomings of foreign currency from non-residents augmented, compared to the similar period of the previous year, by 31.3%, and its supply in the interbank foreign exchange market enlarged by 48.5%.

53 Annual Report 2008

The National Bank of Ukraine adjusted the exchange rate primarily through the purchase of foreign currency. During January-August 2008, foreign currency interventions totaled USD 6.6 billion. By August-end, the international reserves equaled over USD 38 billion and had enlarged since the beginning of 2008 by USD 5.6 billion. Starting from September of the reporting year, the interbank market of Ukraine exhibited the foreign currency deficit that was reasoned by aggravation of the world financial crisis and by decrease in external consumption which provoked reduction of the foreign exchange proceeds on export operations of residents and on their external borrowings. As a consequence, daily incomings of foreign currency on the accounts of enterprises reduced from USD 595 million in August to USD 357 million in December 2008 (see Figure 42).

Figure 42. Dynamics of interbank foreign exchange market indicators

To minimize the foreign currency deficit and to diminish the devaluationary pressure on hryv- nia, during the 4th quarter, the National Bank of Ukraine carried out active foreign currency inter- ventions by selling of USD 10.3 billion. In 2008, the balance of foreign currency interventions of the National Bank of Ukraine equaled "minus" USD 3.9 billion versus "plus" USD 7.6 billion in 2007. In the cash segment of the foreign exchange market, in 2008, there was mainly the excess of demand for foreign currency in cash that accounted for USD 6.1 billion against USD 4.4 bil- lion in 2007 (see Figure 43).

Figure 43. Volume of operations on cash FX market of Ukraine (in daily average calculation)

In 2008, the majority of transactions on the foreign currency purchase and sale were car- ried out in the cashless segment of the foreign exchange market (see Table 13).

54 Activities of NBU

Table 13. STRUCTURE OF THE FOREIGN EXCHANGE MARKET OF UKRAINE ON OPERATIONS OF THE FOREIGN CURRENCY PURCHASE AND SALE (%) Year Non-cash Cash market market 2004 81.1 18.9 2005 78.4 21.6 2006 73.3 26.7 2007 70.8 29.2 2008 75.9 24.1

At that, in 2008, in the non-cash foreign exchange market there was the increase in the share of transactions with US dollars by 4.0 percentage points to 77.7% and the decrease in the share of transactions with euros and Russian rubles. On the transactions with foreign cur- rency in cash the tendency was opposite: the share of operations with US dollars diminished by 7.7 percentage points to 71% with appropriate growth of the share of transactions with euros and Russian rubles (see Table 14).

Table 14. STRUCTURE OF OPERATIONS ON THE FOREIGN CURRENCY PURCHASE AND SALE ON THE INTERBANK AND CASH SEGMENTS OF THE FOREIGN EXCHANGE MARKET OF UKRAINE Total volume of transactions, Structure by currency types, % Year USD, bln. (in the dollar USD Euro Russian Other equivalent) ruble currencies

Interbank foreign exchange market 2004 77.7 79.1 11.5 5.9 3.5 2005 91.4 80.6 12.5 5.8 1.1 2006 102.4 77.7 14.1 6.8 1.4 2007 148.0 73.7 16.4 6.9 3.0 2008 208.8 77.7 14.2 6.0 2.1 Cash foreign exchange market 2004 18.1 80.8 12.9 4.8 1.5 2005 25.2 79.6 14.0 4.7 1.7 2006 37.3 82.0 12.1 4.2 1.7 2007 61.1 78.7 15.2 4.5 1.6 2008 66.2 71.0 22.0 5.4 1.6

2.2.3. Improvement of the foreign exchange system regulation. Preventive measures with regard to outflow of foreign currency abroad During January – September of 2008, improvement of the foreign exchange regulation ratios was aimed at optimizing the functioning of the interbank foreign exchange market of Ukraine, the interrelations between banks and their customers in performing the operations on purchase and sale of foreign exchange valuables, which enabled the National Bank of Ukraine to implement, in the real time mode, the monitoring of demand for and supply of foreign currency in the interbank foreign exchange market of Ukraine, to ensure the speed-up of crediting the receivers' accounts on international transactions, to simplify for individuals the procedure of making transfers of for- eign exchange funds outside Ukraine and to adapt to the EU legislative ratios the requirements related to transferring the foreign exchange valuables across the border of Ukraine. 55 Annual Report 2008

To neutralize the negative consequences of the world financial crisis, starting from October 2008, a number of decisions were approved by the Board of the National Bank of Ukraine: No.216 "On Approval of the Regulations about the Order of Fulfillment by the Banks of Documents for Transfer, Forced Write-off and Arrest of Funds in Foreign Currencies and Banking Metals and Amendments to Some Normative and Legislative Acts of the National Bank of Ukraine" dated 28.07.2008; No.319 "On Additional Measures Related to Activity of Banks" dated 11.10.2008; No.336 "On Making Amendments to the Regulations on the Order and Terms of the Foreign Currency Trade" dated 23.10.2008; No.413 "About Some Aspects of Banks' Activity" dated 04.12.2008, aimed at prevention of the unreasonable outflow of foreign curren- cy abroad, as well as at mitigation of negative market expectations Staring from 4 November, 2008, 5-day mandatory term of placement on a separate analyt- ic account of a bank's balance account of the customers' funds intended for purchase of foreign currency in order to return foreign investments (or investment income) outside of Ukraine, that contributed to strengthening the control of such operations by banks. At the same time, in accordance with the resolution of the National Bank of Ukraine, dated 18.12.2008, No.435 "On Functioning of the Non-Cash Interbank Foreign Exchange Market of Ukraine", set was a new order of functioning of the interbank foreign exchange market of Ukraine with introduction of prohibition of speculative operations with foreign currency by banks between themselves, that contributed to limitation of demand for foreign currency. To improve the transparency of foreign exchange interventions by the National Bank of Ukraine, since December 2008, foreign exchange auctions were initiated. In the context of commitments to the European Union (EU) taken by Ukraine with regard to simplification of the procedure of investing the funds of residents of Ukraine into the EU coun- tries, improved was the order of issuing by the National Bank of Ukraine of individual licenses for making the investments abroad (Instruction on the Order of Issue of Licenses for Making the Investments Abroad, approved by decision of the Board of the National Bank of Ukraine No.122, dated 16.03.1999), in particular, regarding the cut in the number of documents needed to obtain an appropriate license, and the abolishment of some requirements for their execution. To improve the system of regulating the export-import of lending capital and to upgrade the monitoring of short-term external loans of authorized banks aimed were amendments to the Order of Getting the Credits, Loans in Foreign Currency by Residents from Non-Residents and to registration of the agreements that became effective since 1 January 2008 and in whose accordance introduced was the registration of agreements about getting the short-term loans by authorized banks from non-residents. As for using the preventive measures, in 2008, in the conditions of unwinding of the world financial crisis, the National Bank of Ukraine applied a wide spectrum of appropriate instru- ments and mechanisms for foreign exchange regulation of the capital export-import. To limit the short-term external loans, being of extra instability and able, as a result, to pro- voke essential foreign exchange imbalances, temporarily (from 01.08.2008 to 13.10.2008) introduced was 20-percent provisioning9 by banks of funds under the short-term external loans and the deposits for a term not more than 183 days. With due consideration of rising in price of borrowings in the external capital markets, that made complicated their volume support by banks on reasonable terms, from 27 October 2008, the limitations, concerning the marginal cost of external borrowings of residents in foreign cur- rencies of Group 1 of the Classifier of Foreign Currencies and Banking Metals, were applied only to the short-term credits and loans – not more than 11% per annum.

9 Decision of the Board of the National Bank of Ukraine of 18.06.2008, No.171 "On Approval of the Rules of Reserving the Funds under Attracted by the Authorized Bank of Deposits and Credits (Loans) in Foreign Currency from Non-residents ", amended. 56 Activities of NBU

2.2.4. International reserves As at 1 January 2009, the international reserves amounted to USD 31.5 billion and reduced for the year by USD 0.9 billion, or by 2.8%. In August 2008, the volume of international reserves was the largest and equaled USD 38.0 billion. The primary source of the international reserve growth were interventions of the National Bank of Ukraine that resulted in acquiring USD 7.0 billion (in the dollar equivalent) in the inter- bank foreign exchange market, during 2008. At the same time, in the 4th quarter of the report- ing year, in the conditions of worsening of the situation in the foreign exchange market of Ukraine, the National Bank of Ukraine sold foreign currency to the total amount of UAH 10.3 bil- lion (in the dollar equivalent) (95% of the total foreign currency sold for the reporting year), which caused the reduction in international reserves as a whole (see Figure 44). Among the sources of replenishing the international reserves there were the funds received from the International Monetary Fund to the amount equivalent to SDR 3 billion, or USD 4.6 billion.

Figure 44. International reserves and interventions of the National Bank of Ukraine

An additional factor of the international reserve growth was the yield obtained from the inter- national reserve management that in 2008 amounted to USD 1.9 million. The main aim of the international reserve management was ensuring an optimum relation- ship of the levels of international reserve security, liquidity and yield that provided for the fulfill- ment by the National Bank of Ukraine of its functions defined by the effective law of Ukraine.. In the reporting year, the National Bank of Ukraine carried out the international reserve management in line with "The Investment Declaration of the Gold and Currency Reserve of the National Bank of Ukraine for 2008" to receive an additional yield. In 2008, the international reserves were kept on the accounts of banks-correspondents, as well as in the financial instruments with the long-term credit rating not lower than "A". The cred- it risk control was ensured through establishing the credit limits to banks-counteragents. The optimum foreign exchange and interest risks were provided through diversification of interna- tional reserves. The larger portion of the international reserves was put into government secu- rities of the industrially developed countries, as well as kept in the banks of the USA, Switzerland and Great Britain. All the obligations of banks-counteragents to the National Bank of Ukraine on deposits and operations with securities were timely and fully performed. The international reserve liquidity was defined by the liquidity level of hard currencies, finan- cial instruments or of the financial market. In the process of managing the international reserves the National Bank of Ukraine used the main financial instruments like short-term deposits and securities.

57 Annual Report 2008

In order to enlarge the assets with high liquidity, in 2008, the share of securities within the international reserve structure was raised (from 47% to 52%). The larger portion of the monetary gold of the National Bank of Ukraine was kept at the State Vault, and the rest was placed as the long-term deposits. The total average yield of transactions on the international reserve management for 2008 amounted to 5.4%. In the reporting year, the international reserve growth was accompanied by timely repay- ment and servicing of the external state debt.

2.3. DEVELOPMENT OF THE BANKING SECTOR OF UKRAINE 2.3.1. Indicators of activities of the banks of Ukraine In 2008, activity of the banking sector of Ukraine was under the effect of the macroeconomic situation and the consequences of the world financial crisis that were intensifying during the year. In 2008, noted was the increase in the ratio of the banks' assets to the GDP, that as of 1 January 2009 amounted to 102.4% (as at 1 January 2008 – 84.5%), the loans to the GDP – 83.4% (as at 1 January 2008 – 68.4%), the liabilities to the GDP – 84.9% (as at 1 January 2008 – 74.7%) (see Figure 45).

Figure 45. Main indicatiors of activity of Ukrainian banks

The banks' assets and liabilities growth was, to some extent, influenced by the decline in the exchange rate of hryvnia against the main foreign currencies in the 4th quarter of 2008. For 2008, the total assets of banks of Ukraine augmented by 54.5% (for 2007 – by 75.3%) and as at 1 January 2009 equaled UAH 973.3 billion. Within the banks' assets, the share of loans amounted to 81.4% (as at 1 January 2008 – 78.4%), highly liquid assets – 8.2% (as at 1 January 2008 – 10.3%), investments in securities – 4.2% (as at 1 January 2008 – 4.6%), fixed assets and intangible assets – 4.0% (as at 1 January 2008 – 4.5%), other assets – 2.2% (as at 1 January 2008 – 2.2%). For the reporting year, the total liabilities of banks augmented by 52.3% (for 2007 – by 78.0%) and as at 1 January 2009 equaled UAH 806.8 billion. Within the banks' liabilities, the share of funds attracted to the accounts of individuals as at 1 January, 2009, made up 26.4% (as at 1 January, 2008 – 30.9%), the economic entities – 17.8% (as at 1 January, 2008 – 21.1%). The share of credits received from other banks amounted to 30.9% (as at 1 January, 2008 – 29.1%), funds of the National Bank of Ukraine – 7.5% (as at 1 January 2008 – 0.3%), own debt securities – 1.3% (as at 1 January, 2008 – 3.7%), the loans received from interna- tional and other financial organizations – 6.4% (as at 1 January, 2008 – 3.7%), funds of non- banking financial institutions – 2.2% (as at 1 January, 2008 – 2.7%), balances of funds on other banks' correspondent accounts -1.4% (as at 1 January, 2008 – 2.4%), subordinated debt – 2.0% (as at 1 January, 2008 – 1.5%), other liabilities – 4.1% (as at 1 January, 2008 – 4.6%).

58 Activities of NBU

During 2008, the equity of banks of Ukraine grew by 71.4% (for 2007 – by 63.5%) and by the year end amounted to UAH 119.3 billion. As at 1 January, 2009, the share of capital in lia- bilities of banks made up 12.9% (as at 1 January, 2008 – 11.6%). A considerable growth rate of the capital of banks of Ukraine in 2008 raised their capital- ization level. For the year, the ratio of the banks' equity to the GDP increased by 2.7 percent- age points to 12.5% due to, in particular, the enlargement of the authorized capital of the state- owned banks to the amount of UAH 13.8 billion. Within the equity structure of the banks of Ukraine, as at 1 January, 2009, a portion of the paid-in registered statutory capital amounted to 69.1% (as at 1 January, 2008 – 61.6%), the revaluation result of fixed assets, intangible assets and investments in associated and sub- sidiary companies – 9.4% (as at 1 January, 2008 – 11.8%), general reserves, funds and other funds of a bank – 8.6% (as at 1 January, 2008 – 9.7%), the current year result – 6.1% (as at 1 January, 2008 – 9.5%), issue differences – 5.1% (as at 1 January, 2008 – 4.6%), the previ- ous years' result – 1.3% (as at 1 January, 2008 – 2.4%), dividends directed to the enlargement of the statutory capital – 0.4% (as at 1 January, 2008 – 0.4%). For 2008, the foreign capital in the registered statutory capital of banks of Ukraine aug- mented 2 times and as at 1 January, 2009, accounted for UAH 30.3 billion (as at 1 January, 2008 – UAH 15.1 billion). The portion of the foreign capital in the registered statutory capital of banks of Ukraine respectively increased to 36.7% as at 1 January, 2009, or by 1.7 percentage point. The regulatory capital of the banks of Ukraine rose for 2008 by 50.8% to UAH 123.1 billion (EUR 11.3 billion) and the capital adequacy of the banking sector as at 1 January, 2009 – to 14.01% from 13.92% as at 1 January, 2008. The number of banks with the regulatory capital of over EUR 20 million, for 2008, enlarged from 72 to 89 banks, and their share within the total quantity of acting banks as at 1 January 2009, grew from 41.1% to 48.4%. In line with the decision of the Commission of the National Bank of Ukraine on the Supervision and Regulation of Activities of Banks of Ukraine of 21 December, 2007, the limits of regulatory capital and assets for the groups of banks for 2008 were defined as follows: group I (regulatory capital of over UAH 1000 million, assets of over UAH 10000 million), group II (regulatory capital of over UAH 300 million, assets of over UAH 3000 million), group III (reg- ulatory capital of over UAH 100 million, assets of over UAH 1000 million), group IV (regulatory capital of less than UAH 100 million, assets of lower UAH 1000 million) (see Table 15).

Table 15. CONCENTRATION OF ASSETS, CAPITAL AND LIABILITIES BY GROUPS OF BANKS (in percent) Group Assets Equity Liabilities 01.01.2008 01.01.2009 01.01.2008 01.01.2009 01.01.2008 01.01.2009

Group ² 64.8 68.0 57.2 62.9 65.8 68.7 Group ²² 17.2 16.6 16.8 16.3 17.2 16.7 Group ²²² 10.2 7.3 12.9 9.3 9.9 7.1 Group ²V 7.8 8.1 13.1 11.5 7.1 7.5

In 2008, the process of concentration of assets, capital and liabilities in the banks of group ² continued, where, as at 1 January, 2009, 68.0% of the assets of banks of Ukraine, 62.9% of the capital and 68.7% of the total liabilities (including in the market of the individuals' deposits – 67.3%) were concentrated. The income of the banks of Ukraine as at 1 January, 2009, amounted to UAH 122.6 billion, or grew for the year by 79.8% (see Figure 46). During 2008, within the structure of the banks' income, diminishing was the share of inter- est income (to 72.1% from 74.6% as at 1 January, 2008), commission income (to 16.2% from

59 Annual Report 2008

18.3% as at 1 January, 2008) and other operational incomes (to 1.9% from 2.3% as at 1 January, 2008) with increase in the share of the trade operations result (to 9.4% from 4.3% as at 1 January, 2008). In 2008, compared with the previous year, the expenditures of banks of Ukraine increased by 87.2% and as at 1 January, 2009, equaled UAH 115.3 billion.

Figure 46. Dynamics of income, expenses and profit of Ukrainian banking sector

For 2008, within the general expenditures of banks, the share of interest expenses reduced from 46.5% to 44.1% as at 1 January, 2009, the general administrative expenses – from 30.6% to 24.9% and commission expenses – from 2.3% to 1.9%, with increase in the share of alloca- tions to reserves from 11.8% to 21.0% as at 1 January, 2009. The expense to income ratio of banks equaled 94.0% (for 2007 – 90.3%). The return on assets of banks for 2008 accounted for 1.03% (for 2007 – 1.50%), the return on capital – 8.51% (for 2007 – 12.67%).

Table 16. CONCENTRATION OF INCOME, EXPENDITURES AND PROFIT BY GROUPS OF BANKS (in percents) Group Income Expenses Profit 01.01.2008 01.01.2009 01.01.2008 01.01.2009 01.01.2008 01.01.2009 Group ² 64.8 66.1 63.9 66.1 73.0 66.8 Group ²² 15.1 16.4 15.4 16.1 12.7 21.3 Group ²²² 11.6 7.9 11.9 8.1 8.1 4.9 Group ²V 8.5 9.6 8.8 9.7 6.2 7.0

By the results of 2008, the acting banks of Ukraine got the profit that, compared with the previous year, grew by 10.3% and equaled UAH 7.3 billion (for 2007 – UAH 6.6 billion), with 66.8% of the amount secured by the profit of banks of group ² (see Table 16).

2.3.2. Survey of the sector of other depository corporations (banks)10 Complication of access to external sources of financing, especially in the second half of the year, and slowdown in the money receipts to the banks from residents resulted in deceleration of the growth rate of transferable (to 116.0% against 147.8% in 2007) and other deposits included in the monetary aggregate M3 (to 133.3% against 153.8% in the previous year – see Table 17).

10 This is an analytic form of presenting the statistical data of other deposit corporations (banks) compiled on the basis of data of the standardized reporting form by the IMF methodology. In accor- dance with international standards the money and credit indicators are given within financial instru- ments and sectors of the economy. 60 Activities of NBU

Table 17. DATA RELATED TO THE SURVEY OF THE OTHER DEPOSITORY CORPORATIONS (BANKS) SECTOR, AS AT 1 JANUARY 2009 Change For reference: for 2008 Change for 2007 Indicators By the period UAH By the period UAH end, billion % end, billion % UAH, billion UAH, billion

Net external assets –226.1 –112.2 – –113.9 –69.7 – Claims on the National Bank of Ukraine 34.3 0.7 2.2 33.6 11.0 48.5 Net claims on central government bodies 13.0 10.3 – 2.7 0.6 – Claims on other residents 753.9 310.7 70.1 443.2 188.2 73.8 Liabilities to the National Bank of Ukraine 61.0 59.2 3.5 1.7 0.3 20.6 times more Transferable deposits included in monetary aggregate Ì3 104.8 14.4 16.0 90.4 29.2 47.8 Other deposits included in monetary aggregate Ì3 252.4 63.0 33.3 189.4 66.3 53.8 Shares and other equity 135.8 58.4 75.4 77.4 30.1 63.6

During 2008, noted were downward dynamics of net external assets of the other deposito- ry corporations (banks) sector, that, as at 1 January 2009, equaled "minus" UAH 226.1 billion against "minus" UAH 113.9 billion at 1 January 2008 due to excess of the liabilities to non-res- idents over the claims on non-residents. The main reduction in net external assets of the sec- tor of other depository corporations (banks) in the 4th quarter of the reporting year (from "minus" UAH 163.7 billion as at 1 January, 2008, to "minus" UAH 226.1 billion as at 1 January, 2009) was primarily due to devaluation of hryvnia against the main currencies. The growth rate of claims on other residents decelerated to 170.1% compared with 173.8% in 2007. However, during the year, the situation development was uneven: during January- September, their notable slowdown took place – to 153.4% in the annual calculation as at 1 October 2008. Starting from October, the claims on other residents began to rise at a quickened pace, mainly, due to growth of claims in foreign currency in view of devaluation of hryvnia against the main foreign currencies. The largest influence on the dynamics of claims on other residents was caused by the dynamics of claims on other non-financial corporations (that cov- ered more than a half within the structure of claims on other residents). From the year start, there was an essential slowdown in their growth rate to 151.4% in the annual calculation as at 1 October, 2008, compared with 162.4% for 2007 due to deceleration of the growth rate of the banks' resource base for reasons of complication of the terms of access to external sources of financing and necessity to fulfill the requirements of the National Bank of Ukraine aimed at restraining the credit activity of those banks that had no necessary resources of the proper duration. Then their acceleration to 162.2% in the annual calculation took place as at 1 January, 2009, primarily at the expense of augmentation of the claims in foreign currency.

Claims of other depository corporations (banks) As at 1 January, 2009, claims of other depository corporations (banks) on the National Bank of Ukraine amounted to UAH 34.3 billion and augmented for the year by 2.2%, primarily due to growth of the cash balances in the national currency by 12.6%. At the same time, the balances on deposits and funds invested in securities other than shares reduced by 1.9% and 11.1% respectively. By December-end of 2008, net claims of other depository corporations (banks) on central government bodies equaled UAH 13.0 billion and enlarged during the reporting year 4.7 times

61 Annual Report 2008

on account of augmenting the claims on the central government bodies 2.9 times. Liabilities of other depository corporations (banks) to central government bodies grew for the year by 45.5%, mainly due to the growth (by 53.7%) of other accounts payable.

Liabilities of other depository corporations (banks) Liabilities of other depository corporations (banks) to the National Bank of Ukraine as at 1 January, 2009, amounted to UAH 61.4 billion and augmented for the year 35.1 times, entirely due to enlargement of the loans received. Funds allocated to shares and other equity, by the end of December 2008, totaled UAH 135.8 billion and rose for the year by 75.4% compared with 63.6% increase in 2007. By the results of 2008, transferable deposits and other deposits of other depository corpo- rations (banks), that are included in monetary aggregate Ì3, increased by 16.0% and 33.3%, respectively. Within the transferable deposits, the largest was the growth of deposits of the pub- lic non-financial corporations sector (by 69.5%), among other deposits – balances of funds of other sectors of the economy (by 39.5%).

2.3.3. Deposit Market Deposits attracted from residents as at 1 January, 2009, amounted to UAH 359.7 billion. For the year, the growth rate of deposits was 126.7% against 152.7% by the end of December 2007 (see Table 18).

Table 18. MAIN INDICATORS OF DEVELOPMENT OF THE DEPOSIT MARKET OF UKRAINE 2008 For reference: 2007 Growth % to Growth % to Indicators UAH, Share, UAH, previous UAH, Share, UAH, previous billion % billion year billion % billion year

Liabilities, total including: 359.7 100.0 75.8 126.7 283.9 100.0 98.0 152.7 By types of currencies in national currency 201.8 56.1 9.5 105.0 192.3 67.7 77.2 167.1 in foreign currency 157.9 43.9 66.3 172.4 91.6 32.3 20.8 129.3 By terms of repayment demand 107.6 29.9 14.2 115.2 93.4 32.9 30.8 149.3 short-term 92.9 25.8 32.3 153.3 60.6 21.4 17.9 141.8 long-term 159.2 44.3 29.3 122.6 129.9 45.7 49.3 161.1 By sectors of the economy non-financial corporations 118.2 32.9 22.6 123.6 95.6 33.7 30.0 145.7 households 217.9 60.6 50.6 130.3 167.2 58.9 58.4 153.6 other11 23.6 6.5 2.6 112.5 21.1 7.4 9.6 184.0

Variations of dynamics of the deposit growth were in line with dynamics of the economic growth. A gradual slowdown in the growth rate was notable from April 2008. In May, reduction in deposits was mainly due to revaluation of hryvnia against the main foreign currencies. Moreover, more active usage of own working capital to finance the business (in the conditions of deceleration of the crediting rate, strengthening of financial discipline and continuation by the Government of Ukraine of the funds accumulation policy) resulted in decrease of the balances of funds in national currency on the accounts of the institutional units of the non-financial cor- porations sector. In July-September, due to slowdown in the economy growth, decreasing were the incomings of proceeds to the demand accounts of corporations of the non-financial corpo- rations sector; current expenses grew (seasonal factor and rise in prices) and the households'

11 Included are other financial corporations, general government bodies and non-profit organizations serving the households/ 62 Activities of NBU disposition towards savings lowered. At the end of September, on account of artificially pro- voked non-confidence of the population in the financial situation of some banks and the bank- ing system as a whole, that occurred at the background of worsening of external conjuncture and economic situation in the country, the outflow of funds from the deposit accounts of cus- tomers, in particular, of the households sector started. At November-end, certain signs of sta- bilization began to come out in the money and credit market. However, a significant portion of growth was due to devaluation of hryvnia against the main foreign currencies. During 2008, the deposits structure by types of currency changed: the share of deposits in the national currency decreased by 11.6 percentage points to 56.1%. Deceleration of the growth rate of deposits in the national currency was notable from April up to the end of the reporting year. In the 1st half of 2008, the growth rate of deposits in foreign currency fluctuated at the level of the year start. In August-September their slowdown took place reasoned by reduction in the incoming of export receipts on the accounts of institutional units of the non-financial cor- porations sector. In October-December, the growth rate of deposits in foreign currency consid- erably exceeded the rate of their growth in 2007, that was reasoned by devaluation of hryvnia against the main foreign currencies, while in the 4th quarter deposits in these currencies even decreased (see Figure 47).

Figure 47. Growth rate of deposits attracted from residents by other depository corporations (in percent to the year start)

By the attraction terms, in 2008, deceleration of the growth rate of long-term deposits occurred (to 122.6% versus 161.1% in 2007) and of the demand deposits (to 115.2% versus 149.3%, respectively). At the same time, the growth rate of short-term deposits accelerated and amounted to 153.3% versus 141.8% in 2007. In the conditions of unfavourable economic envi- ronment, fluctuations of the exchange rate and uncertainty with regard to the direction of the economic situation development, the depositors preferred short-term deposits to long-term ones, and also the outflow of funds from the demand accounts (as the most accessible) increased. The deposits structure by sectors of the economy for 2008 changed in a minor way. As before, the largest amount of deposits was formed at the expense of funds of the households sector, as at 1 January 2009 – 60.6% of the total deposits (versus 58.9% as at 1 January 2008). Funds of institutional units of the nonfinancial corporations sector within the deposits structure equaled 32.9%, of the other financial corporations subsector – 5.4%, of the general government sector – 0.7% (see Figure 48). As at 1 January 2009, deposits of the households sector amounted to UAH 217.9 billion. During the year, their growth dynamics depended on the dynamics of incomes and expenditures of the population being influenced by a social direction of the budget policy, rise in retail prices of goods and services, etc.. Within deposits of the households sector, the deposits in the national currency prevailed – 50.5% (that is by 10.7 percentage points less than at the year start). By attraction terms, a larger portion of deposits was made by those whose term was from 1 to 2 years – 45.3%.

63 Annual Report 2008

Figure 48. Deposits dynamics by sectors of the economy

The growth rate of deposits of the households sector during the reporting year slowed down to 130.3% compared to 156.7% (in the annual calculation) in April, when they were the largest, and 153.6% in December 2007. Mass withdrawal of deposits by households and increase in the demand for foreign currency in cash was evident at the beginning of October. At the end of November, observed was the deceleration of the outflow rate of deposits from the banking system. This was contributed to some extent by enlargement of the remuneration on the individuals' deposits, guar- anteed by the Individuals' Deposits Guarantee Fund from UAH 50 thousand to UAH 150 thousand. As at 1 January 2009, deposits of the nonfinacial corporations sector amounted to UAH 118.2 billion, among them belonging to the public nonfinancial corporations subsector – UAH 12.3 billion, or 10.4%. Within the funds of the nonfinancial corporations sector the deposits in the national currency traditionally prevailed – 63.7% (by 11.7 percentage points less than at the year start). The demand deposits had the largest portion by terms (51.8%). In the annual calculation, the growth rate of deposits of the nonfinancial corporations sec- tor was lower than the growth rate of deposits of the households sector and in December 2008 decreased to 123.6% versus 150.0% in March, when they were the highest (in December 2007 – 145.7%). The tendency towards excess of the growth rate of funds on accounts in the nation- al currency compared to foreign one, that continued from May 2007, starting from October of the reporting year, changed for opposite (due to reduction in the exchange rate of hryvnia against the US dollar and euro). The working capital deficit made the corporations to diminish the time deposits using these funds to finance the needs of current activities. While in the 1st quarter 2008 the main increase in funds on the accounts of the other finan- cial corporations subsector was formed at the expense of funds of the subsector of other finan- cial intermediaries and auxiliary financial organizations, then in April-December the growth of funds was observed on the accounts of the subsector of insurance corporations and non-gov- ernment pension funds. Among the main factors of such dynamics there were a decrease in the stock market attractiveness and decline in the investors' interest to investment funds. Moreover, in expectation of decline in the exchange rate of hryvnia, free funds were directed to the foreign currency purchase instead of other forms of investing the funds. At the same time, significant volumes of crediting enabled the insurance corporations to enhance insurance services on the agreements of insuring the borrowers' collaterals and lives. Accumulative insurance was also among the alternatives of the free funds allocation. Within the regions, as at 1 January, 2009, the largest volumes of deposits (61.7%) were attracted by banks of the city of Kyiv and Kyiv region (43.5%), the Dnipropetrovsk region (9.8%) and the Donetsk region (8.4%). The cost of deposits attracted from residents, after decrease in the 1st half of the year to 7.0% per annum (versus 8.0% per annum in January 2008), rose in the 2nd half of the year and in December amounted to 11.3% per annum (see Figure 49). The average weighted interest rate for 2008 equaled 8.3% per annum compared to 7.2% per annum in 2007, including in the

64 Activities of NBU national currency – 9.9% against 8.2% per annum, respectively. The main growth of interest rates on deposits both in national and foreign currencies was noted in September-December of the reporting year and determined by prevention of the funds outflow from the banking system, by buildup of the resource base and support of the banking sector liquidity.

Figure 49. Dynamics of average weighted interest rates on deposits

2.3.4. Credit market The credits extended by banks to residents as at 1 January, 2009, totaled UAH 734.0 bil- lion. During 2008, the growth rate of debt under the credits granted amounted to 172.0% and was a little bit lower than for 2007 (174.1%) (see Table 19).

Table 19. MAIN INDICATORS OF DEVELOPMENT OF THE CREDIT MARKET OF UKRAINE 2008 For reference: 2007 Balances, Growth % to Balances Growth % to Indicators UAH, Share, UAH, previous UAH, Share, UAH, previous billion % billion year billion % billion year

Credits, total 734.0 100.0 307.2 172.0 426.9 100.0 181.6 174.1 including: By type of currency in national currency 300.2 40.9 86.5 140.4 213.8 50.1 90.0 172.7 in foreign currency 433.8 59.1 220.7 2.0 times more 213.1 49.9 91.6 175.4 By term of repayment short-term 221.9 30.2 90.5 168.8 131.5 30.8 45.3 152.6 long-term 512.1 69.8 216.7 173.4 295.4 69.2 136.3 185.7 By sector of the economy to non-financial corporations 443.7 60.4 183.2 170.3 260.5 61.0 100.0 162.3 to households 280.5 38.2 120.1 174.9 160.4 37.6 78.4 195.6 to others 9.8 1.4 3.9 164.3 6.0 1.4 3.2 2.2 t.m.

During 2008, the dynamics of volumes of crediting the residents were uneven. After accel- eration of the growth rate of crediting to 178.0% in January in the annual calculation, in February-September 2008 the tendency towards a gradual deceleration of the growth rate of credits (154.1% in September in the annual calculation) was noted. Such a situation was caused by reduction in the growth rate of banks' resource base through: – complication of the conditions of access to external sources of financing, – worsening of the financial situation of enterprises, – decrease in the households' solvency, – necessity for fulfillment of the requirements of the National Bank of Ukraine aimed at

65 Annual Report 2008

restraining the credit activity of the banks having no necessary credit resources with appropri- ate terms. Starting from October 2008, the tendency changed for opposite. Took place a noticeable accel- eration of the growth rate of credit investments of banks (in the annual calculation to 162.1%, 166.4% and 172% in October, November and December, respectively), primarily, due to growth of credits in foreign currency on account of revaluation of hryvnia against the main foreign currencies. During 2008, the credits structure by types of currencies changed. In view of reduction in the banking sector liquidity, devaluation of the hryvnia, slowdown in the deposits growth rate since the 2nd quarter, the rate of crediting in the national currency decreased. As a result, redis- tribution of indebtedness under credits took place at the expense of decrease of its portion in the national currency by 9.2 percentage points to 40.9% (see Figure 50).

Figure 50. Growth rate of credits extended to residents by other depositary corporations (in percent by beginning of the year)

The slowdown in the rate of crediting in foreign currency was evident during February- September, taking place mainly due to deceleration of the growth rate of the long-term credit- ing. The factors for such dynamics were measures of the National Bank of Ukraine directed to diminution of foreign exchange risks, as well as unwinding of the world financial crisis that lim- ited attraction by the banking sector of the funds from abroad for active operations. In October- December 2008, the growth rate of credit investments in foreign currency significantly acceler- ated, and, by the year results, exceeded the growth rate in 2007 (2.0 and 1.7 times, respec- tively) (see Figure 49). This was primarily attributable to devaluation of hryvnia against the US dollar and euro. The indebtedness under credits in these currencies somewhat reduced. By terms of the credits allocation, in 2008, there was slowdown in the growth rate of indebt- edness on long-term credits to 173.4% versus 185.7% in 2007. In particular, this was the response to fulfillment of the requirements of the National Bank of Ukraine imposed in February 2008 and aimed at limiting the gap between the terms of deposits attracted and of credits allocated. Moreover, in April of the reporting year, the National Bank of Ukraine took a decision, that, when considering a question about the liquidity support of banks through refinancing, the information related to conduct by them of the credit policy within the credit resources available by terms and volumes should be taken into account. At the same time, the growth rate of short-term credits, compared to 2007, accelerated and amounted to 168.8 % against 152.6% in the previous year. The credits structure by sectors of the economy in 2008 remained practically unchanged. As before, the largest volumes of credits were directed to the nonfinancial corporations sector (60.4% of the total credits to residents) and the households sector (38.2%). Small volumes of credits were extended to the other financial corporations sector and the general government sector; compared to 2007, their share remained unchanged and amounted to 1.4% (see Figure 51).

66 Activities of NBU

Figure. 51. Dynamics of credits by sectors of the economy

The indebtedness under credits extended to the nonfinancial corporations sector as at 1 January, 2009, totaled UAH 443.7 billion, among which the credits to the state nonfinancial corporations subsector equaled UAH 37.4 billion, or 8.4% of the total volume. Though in February-September 2008 the growth rates of crediting the nonfinancial corporations sector were steadily decreasing in the annual calculation, in October-December they significantly accelerated and, by results of 2008 (170.3%) exceeded the level of 2007 (162.3%) (see Figure 52), mainly due to the growth of credits in foreign currency.

Figure 52. Credits extended to non-financial corporations (yoy)

Among the credits extended to the nonfinancial corporations sector more than a half was indebtedness on credits in foreign currency that for the year enlarged 2.1 times. The main incre- ment in this indebtedness was observed in the 4th quarter due to the devaluation of the exchange rate of hryvnia against the US dollar and euro. The mentioned debt portion within the structure of credit investments by types of currencies augmented for 2008 by 9.6 percentage points (in particular, for the 4th quarter – by 6.2 percentage points) to 51.6%. The credits to the nonfinancial corporations sector in the national currency during 2008 grew at much lower rate compared with credits in foreign currency and augmented for the year by 42.1%. Within the terms the highest demand was for credits to 5 years both in national and foreign currency. The rate of crediting the households sector was higher than that of crediting the nonfinan- cial corporations sector. However, an essential reduction in their growth rate, that started from January 2007, was precisely on credits of this sector. For 2008, their growth rate slowed down to 174.9% versus 195.6% in 2007 (see Figure 53).

67 Annual Report 2008

Figure 53. Credits granted to households (yoy)

At that, a stable tendency towards reduction in the rate of crediting the households sector was observed to September 2008 (but January), which was due to strengthening of the banks' requirements to assessment of customers' credibility, that, in its turn, suspended the growth rate of consumer credits. From October to the end of the year, monthly absolute increment of claims on credits of the households sector accelerated exclusively at the expense of enlargement of credits in foreign currency as a result of devaluation of the exchange rate of hryvnia against the main foreign currencies. As at 1 January, 2009, credits in national currency diminished by 3.9% compared to 1 January, 2008. Credits extended to the households sector, as at 1 January, 2009, amounted to UAH 280.5 billion, being directed primarily to the current needs, whose portion in the total indebtedness equaled 67.3%. Preference was given to credits in foreign currency for the term of over 5 years. By the end of 2008, within the regions, the largest volumes of credits were extended by banks of the Kyiv region and the city of Kyiv (45.6%), the Dnipropetrovsk region (10.5%) and the Donetsk region (7.3%), which directed most of credits (63.4% of the total volume) to the nonfinancial corporations sector and the households sector. During 2008, in conditions of the lasting reduction in free liquidity of the banking system and in order to cover increasing credit risks due to worsening of the borrowers' credibility, observed was a general tendency towards gradual growth of the cost of credits extended to residents (without taking into account operations on overdraft) to 19.4% per annum in December 2008 compared to 13.4% per annum in December 2007 (see Figure 54).

Figure 54. Dynamics of average-weighted interest rates on credits

For 2008, the average weighted interest rate under credits equaled 15.5% per annum com- pared to 13.0% per annum for 2007, including in the national currency – 17.6% against 13.9% per annum, respectively.

68 Activities of NBU

2.3.5. Credits and deposits in the interbank market During 2008, development of the interbank credit and deposit market was unsteady. The balances on the credits granted and deposits attracted by banks at the end of December 2008 totaled UAH 50.2 billion, among them the credits extended to banks equaled UAH 29.7 billion, or 59.2% of the total volume. During January – August, observed was a gradual slowdown of the growth rate of credits in the interbank market, and from the end of September – decrease in their volumes. This was pri- marily caused by contraction of free liquidity of the banking system due to outflow of deposits, increase in demand for the credit resources and reduction in their supply. For the year, as a whole, credits in the interbank market curtailed by 36.8% (for 2007 they grew 2.5 times), which was conditioned by reduction in indebtedness on the credits extended for a term of up to 1 year in all types of currencies (see Table 20).

Table 20. CREDITS EXTENDED IN THE INTERBANK MARKET

2008 For reference: 2007 Growth Change, Growth Change, Indicators UAH, Share, UAH, % of previous UAH, Share, UAH, % of previous billion % billion year billion % billion year

1.1. Credits, total 29.7 59.2 –17.3 –36.8 47.0 100.0 28.4 152.6 including: 1.1. By types of currencies in national currency 12.6 42.5 –9.4 –42.8 22.0 46.9 13.0 143.4 in foreign currency 17.1 57.5 –7.9 –31.5 25.0 53.1 15.4 161.4 1.2. By terms of repayment to 1 year 27.9 94.1 –17.6 –38.7 45.6 96.9 27.4 151.2 over 1 year 1.8 5.9 0.3 22.0 1.4 3.1 1.0 208.8

At the same time, in 2008, starting from June, in the interbank market the balances of indebtedness on long-term credits were gradually increasing. For June-December of the report- ing year their volume grew by 22.0%. However, the portion of long-term credits in the interbank market was insignificant and amounted to 5.9% of the banks' credit portfolio. Dynamics of attracting the deposits in the interbank market during the reporting year was formed under the influence of essential demand for credits on a part of borrowers and restrained increase in the money supply. As a result, the deposits attracted, for the year, aug- mented by 45.8%, or by UAH 6.4 billion (against 54.7%, or UAH 5.0 billion in 2007). During sev- eral months only (in July, August and October), decrease in the deposits attracted in the inter- bank market was noted (see Table 21). At that, the growth rate of deposits in foreign currency in the interbank market for 2008 was much higher (190.1%), than their growth rate in national currency (118.1%). This resulted from the fact that banks needed additional funds in foreign currency to support current and short- term liquidity at a proper level, as well as to serve the agreements on attraction of funds abroad. Needs of banks in additional credit resources to optimize the liquidity level were the main factor that influenced the formation of demand for and supply of credit resources in the inter- bank market. The volumes of operations on the credits extended to banks in 2008 grew by 86.6% to UAH 1720 billion, and on the deposits attracted from banks – 4.3 times to UAH 47.3 billion. The dynamics of interest rates on credits in the interbank market were adequate to the changes in the dynamics of the banks' liquidity. In April-June, due to the banks' low liquidity level, the cost of credit resources in the interbank market was the highest and fluctuated from 11.2% to 13.5% per annum. In July-September, it somewhat lowered (to 6.9% per annum in September) and in October-December, due to reduction in the resource base, motivated by the

69 Annual Report 2008

outflow of deposits from the banking system, grew again up to 20.3% per annum in November and some reduction of its level occurred in December (to 17.6% per annum).

Table 21. DEPOSITS ATTRACTED IN THE INTERBANK MARKET 2008 For reference: 2007 Growth Change, Growth Change, Indicators UAH, Share, UAH, % of previous UAH, Share, UAH, % of previous billion % billion year billion % billion year

1.1. Deposits, total 20.5 40.8 6.4 45.8 14.0 100.0 5.0 54.7 including: 1.1. By types of currencies in national currency 10.2 49.6 1.5 18.1 8.6 61.3 4.2 94.4 in foreign currency 10.3 50.4 4.9 90.1 5.4 38.7 0.8 16.9 1.2. By terms demand 10.6 51.7 –1.4 –11.3 11.9 85.0 4.9 68.3 to 1 year 9.5 46.5 7.5 371.6 2.0 14.4 0.1 5.6 over 1 year 0.4 1.8 0.3 317.0 0.1 0.6 … 22.2

Similar were the dynamics of the deposits cost in the interbank market. The highest inter- est rates were notable in April-June (from 9.8% to 12.0% per annum) with later reduction in July- September to 6.9% per annum. In October-November 2008, the cost of deposits attracted in the interbank market rose to 18.5% per annum, and in December diminished to 15.6% per annum (see Figure 55).

Figure 55. Average-weighted interest rates on credits and deposits in the interbank market

As a whole, for 2008, the average weighted interest rate on interbank credits increased compared to 2007 from 4.0% to 10.3% per annum, on interbank deposits – from 10.9% to 13.7% per annum. Changes in the cost of the interbank credits and deposits were reflected somewhat in the cost of credits and deposits of other sectors of the economy.

2.3.6. Operations of banks in the securities market In keeping with the laws of Ukraine "On the Banks and Banking Activities" and "On the Securities and the Stock Market", the banks of Ukraine may carry out operations with securities as the issuers of securities, as investors and as intermediaries that perform the operations with securities in the interests and by order of their customers (see Table 22).

70 Activities of NBU

Table 22. LIST OF OPERATIONS WITH SECURITIES, PERFORMED WITH A WRITTEN PERMIT OF THE NATIONAL BANK OF UKRAINE AND NUMBER OF BANKS THAT GOT IT Number of banks at For reference: No. Name of transactio 01.01.2009 01.01.2008 1. Issuing the own securities 175 169 2. Organizing the purchase and sale of securities by order of customers 177 171 3. Performing the transactions in the securities market in one's own name (including the underwriting) 177 171 4. Making the investments in the statutory funds and shares of other legal entities 129 171 5. Fiduciary management by funds and securities under the agreements with legal entities and individuals 145 144 6. Depository activity of the securities custodian 127 112 7. Activity on keeping the registers of owners of inscribed securities 49 49

The banks' investments on securities by the end of 2008 amounted to UAH 34.7 billion, or grew for the year by 60.1% (for 2007 – by 58.7%). In the securities portfolio of banks the share of investments in securities (other than shares) equaled 81.1% (by the end of 2007 – 70.1%). The banks' investments in securities (other than shares) for 2008 augmented by 85.1% (for 2007 – by 59.2%) to UAH 28.1 billion as at 1 January, 2009. In the securities portfolio of banks the debt commitments (other than shares) of residents of the nonfinancial corporations sector amounted to 28.5% (as at 1 January, 2008 – 48.9%), the general government sector – 61.9% (as at 1 January, 2008 – 41.1%), the other financial corporations sector – 9.6% (as at 1 January, 2008 – 10.0%) (see. Table 23).

Table 23. SECURITIES IN THE BANKS' PORTFOLIO 2008 For reference: 2007 Balance by the Balance by the Indicators period end, Change for period end, Change for UAH, billion the year, % UAH, billion the year, % 1. Securities (other than shares) 28.1 85.1 15.2 59.2 1.1. By sectors: other financial corporations sector 2.7 84.7 1.5 187.8 general government sector 17.4 266.2 6.3 37.2 nonfinancial. corporations sector 8.0 0.4 7.4 66.6 1.2. By type of portfolio: portfolio available for sale 22.6 143.4 9.3 70.5 trading portfolio 2.7 10.4 2.4 48.8 portfolio held to maturity 2.9 –18.0 3.5 41.1 2. Shares in banks' portfolio 6.6 1.5 6.5 57.7 including: sector of other depository corporations (banks) 0.4 54.6 0.3 16.2 sector of other financial corporations 2.9 19.4 2.4 138.2 sector of nonfinancial corporations 2.6 –19.0 3.2 19.6 nonresidents 0.6 14.7 0.5 249.2

For 2008, the funds balances on securities held in the banks' portfolio available for sale grew 2.4 times (for 2007 – by 70.5%) and in the total funds attracted on securities (other than shares) accounted for 80.3%, in the trading portfolio – by 10.4% (for 2007 – by 48.8%), and in the portfolio held to maturity reduced, compared with the year start, by 18.0% (for 2007 aug- mented by 41.1%). Within the banks' investments on securities (other than shares) 66.7% were securities with over 2 year maturity. Investments in shares of residents and non-residents for 2008 enlarged by 1.5% (for 2007 71 Annual Report 2008

– by 57.7%) to UAH 6.6 billion, and their portion in the securities' portfolio of banks amounted to 18.9% (by the end of 2007 – 29.9%). Banks of Ukraine remained the major owners of T-bills that were in circulation in terms of the principal debt amount, their portion in the assets of the consolidated balance sheet of banks of Ukraine as at 1 January, 2009, equaled 1.7% (as at 1 January, 2008 – 0.93%). In the secu- rities portfolio of banks as at 1 January, 2008, there was the largest volume of T-bills (UAH 17.0 billion, or 58.2%), that were in circulation in terms of the principal debt sum, whereas non-resi- dents owned T-bills to the amount of UAH 0.5 billion (or 1.6%). During 2008, the T-bills volume in the portfolio of other depository corporations increased by UAH 11.4 billion (see Figure 56).

Figure 56. T-Bills in circulation on the principal debt amount during 2007–2008

The presence of banks as issuers in the stock market of Ukraine was reasoned by the necessity to diversify the sources of funds in the domestic financial market. Thus, during 2008, the banks of Ukraine continued to issue the corporate bonds. Within their liabilities the share of own debt securities as at 1 January, 2009, accounted for 1.3% (as at 1 January, 2008 – 3.7%). The banks' indebtedness under own debt securities to residents, taken into account as a part of the money supply, equaled UAH 3.2 billion versus UAH 4.9 billion in 2007, or 1.7% of the total monetary aggregate Ì3 against 3.5% in 2007.

Table 24. DYNAMICS OF ISSUING THE BONDS OF BANKS OF UKRAINE IN 2004–2008 Year 2004 2005 2006 2007 2008*

Total bond issue by enterprises (UAH, million) 4106.59 12748.28 22070.80 45441.03 28452.89 Total bond issue by banks of Ukraine (UAH, million) 217.93 2564.73 4994.0 19647.0 7500.75 The share of the banks' bonds in the total bond issue by enterprises (%) 5.31 20.12 22.63 43.23 26.36

* Source: Data of the State Commission on Securities and Stock Market.

For 2008, the State Commission on Securities and Stock Market registered the banks' bonds to the amount of UAH 7.5 billion that was 26.36% of the total issue of bonds by issuers (see Table 24). The reduction in the issue volume of these debt commitments by banks was rea- soned by the general decline in the stock market in 2008.

72 Activities of NBU

2.4. REGULATION OF ACTIVITIES OF BANKS OF UKRAINE AND SUPERVISION OF THEIR ACTIVITIES 2.4.1. Regulation of activity of banks of Ukraine In 2008, the banking sector was characterized by vulnerability and slowdown of the growth rate. The world financial crisis, the individuals' funds' outflow from the banking system, the increase in demand for foreign currency, high inflationary pressure and the decrease in the indi- viduals' confidence in some banks had an adverse impact on the development of the banking sector of Ukraine. One of the main factors of decelerating the banking sector development was worsening of the assets quality. Positive trends were the long-term liabilities portion growth, the banks' reserves augmenta- tion, the adequate capitalization level, the disclosure of information about the banks' actual owners, improvement of the risk management practice, reduction in external borrowings by banks, the banks' higher potential with regard to stress-testing, upgrading of the risk manage- ment system, implementation of more strict prudential requirements to the banks whose liquid- ity position was worsening. During 2008, the work on improvement of the legislative support of the banks' activities was carried out. A number of draft laws were handled and proposals and comments were given on the issues of: revealing the real owners and setting special requirements to them; defining the rules of protection of the banks' funds and property, order of keeping, trans- portation and collection of cash, organizing the banks' premises protection; simplifying the mechanism of state registration of the economic entities' activity termination; corporate management and information disclosure; strengthening the role of the Fund for Guaranteeing the Individuals' Deposits in the devel- opment of the banking system, expanding its regulatory functions, step-by-step enlargement of the guaranteed compensation amounts, ensuring equal compensation conditions for depositors of banks – participants of the Fund, enhancing the list of sources for the Fund's money resources formation; improving the legislative support of realization of the uniform state foreign exchange policy, as well as stability of the currency of Ukraine and the foreign exchange market of Ukraine; preventing the consequences of the world crisis in the financial sector of the economy, sta- bilizing the banking market and implementing the measures for the trade balance support; adjusting the use of enforcement measures in case of the banking activity with a high risk level; improving the procedures related to the temporary administration and liquidation of banks etc. The work has been done on improvement of the normative and legal base of the National Bank of Ukraine that regulates activities of banks and banking supervision. In order to strengthen the requirements to the banks' capitalization level, the National Bank of Ukraine made alterations to some normative and legal acts of the National Bank of Ukraine, in particular: to the Instruction on the Order of Regulation of the Banks' Activities in Ukraine – with regard to defining the minimum regulatory capital to the amount of EUR 10 million – for the banks that are established, and a step-by-step enlargement to this amount of the regulatory capital of the acting banks whose regulatory capital is less than EUR 10 million; to the Regulations on the Order of Issuing to Banks of Banking Licenses, Written Permits and Licenses to Perform Some Operations with regard to strengthening the requirements related to the statutory capital size of not less than the equivalent of EUR 10 million for getting the banking license by a bank. A similar ratio related to the size of regulatory capital is foreseen when issuing to banks of a written permit of the National Bank of Ukraine to carry out certain operations. Higher requirement to the regulatory capital has been set when providing the permit to make foreign 73 Annual Report 2008

exchange operations, operations in the international markets and to make investments. In order to stimulate the banks to enlargement of the regulatory capital to make active oper- ations, a new economic ratio (coefficient) of the regulatory capital to the total assets (R3) was introduced. This ratio has defined a part of active operations to be carried out at the expense of capital. By separate Decision of the Board of the National Bank of Ukraine a bank's minimum reg- ulatory capital in national currency was determined for 2008. In February 2008, effective became the changes to the Instruction on the Order of Regulating the Activity of Banks of Ukraine that had been worked out to facilitate the mortgage lending to individuals. These changes in particular: have decreased the value of the weighing factors when calculating the ratio of regulatory capital adequacy/solvency (R2) for the State Mortgage Institution's bonds, the liabilities which are guaranteed by the Cabinet of Ministers of Ukraine, as well as the mortgage loans extend- ed to individuals and fully secured by the real estate for living, owned by the borrower; have foreseen the cover by capital of foreign exchange risk, as well as determined addition- al weighing on 50% risk coefficient on long-term active operations executed with excess of the funds placement terms over the funds allocation terms to ensure lessening the risks in the finan- cial system of Ukraine when calculating the ratio of regulatory capital adequacy/solvency (R2). In order to prevent the performance by banks of transactions with securities of improper quality, as well as highly risky operations that might endanger the security of funds trusted to such banks, or harm the proper banking activity, by Decision No.211 of the Board of the National Bank of Ukraine, dated 23.07.2008, approved were the changes to some normative and legal acts which strengthened the requirements related to determining by banks of the fair value of securities and ensuring the risk coverage by a bank's capital on transactions with the securities accounted in the trading portfolio. The changes provide for a bank's right to define the fair value of securities in the bank's available-for-sale portfolio by the official quotations data of only the listed securities. Banks should determine the risks of unlisted securities through assessment of an issuer's risk and anticipated money flows. Moreover, set was the requirement to cover at the expense of a bank's regulatory capital the risks on the transactions with: – unlisted securities in the bank's trading portfolio (but securities issued by central govern- ment bodies, the National Bank of Ukraine and the State Mortgage Institution); – securities, that are not circulated on the stock exchanges (by promissory notes), in the bank's trading portfolio; – securities of undiversified investment funds (in the trading portfolio and the portfolio for sale). To improve the financial rehabilitation and procedures of banks' liquidation, changes were made in the Regulations on the Enforcement Measures by the National Bank of Ukraine for the banking legislation infringement, in particular with regard to determining (Decision of the Board of the National Bank of Ukraine No.405, dated 01.12.2008): – a detailed order of attracting the investors to a bank's financial rehabilitation; – requirements of the National Bank of Ukraine to the liquidator and persons involved in the bank's liquidation, the order of signing the agreement and payment for his/her work, as well as approval of the expense budget. In 2008, approved were the Regulations about the Peculiarities of a Bank's Reorganization by its Owners' Decision. In order to ensure stability of the banks' work in case of occurring of the unforeseen cir- cumstances, approved were the Methodological Recommendations for Planning the Emergency Measures in the Banks of Ukraine. To analyze the banks' activities and tendencies in their developments, to timely reveal the problems and risks, to determine stability of the banking system with regard to potential shocks

74 Activities of NBU in the event of crisis situations, the National Bank of Ukraine took a number of measures: – worked out was the Complex system of indicative ratios of the banks' activity, their limit values and risk factors that enables to analyze the banks' activity by separate directions, as well as Rules of work according to this Complex system; – implemented was the stress-testing of influence on the banks' activity of the interest rate change and fluctuations of the exchange rates of currencies in order to make quantitative assessment of risks incurred by banks, and to determine a maximum change value of external factors (exchange rates, interest rates); – approved were the Methodological recommendations related to the order of analyzing the financial situation of a bank and making the report about the bank – legal entity's monitoring. In 2008, the new version of the Regulations on the Appeal Commission of the National Bank of Ukraine was approved. In an effort to optimize the authorities of the Commission of the National Bank of Ukraine on the Issues of Supervising and Regulating the Banks' Activities with regard to simplification of the order of considering some issues, changes were made in the normative and legal acts of the National Bank of Ukraine related to registration, regulation of the banks' activity and use of the enforcement measures. Focusing the citizens on the considered approach to getting a credit, in October 2008, the National Bank of Ukraine prepared and placed in the Internet, on the Official Web-Site of the National Bank of Ukraine the Instruction Sheet of a Bank's Borrower of a Consumer Credit, that paid attention of borrowers to the risks concerning a credit in foreign currency. To constrain providing new loans in foreign currency to borrowers having no sources of for- eign currency earnings, to improve quality and liquidity of the collateral taken by banks as secu- rity under credits, as well as to form by banks sufficient provisions under credit operations, the changes were made in the Regulations about the Order of Forming and Using the Provisions for Possible Losses on Credit Operations of Banks, by which: significantly enlarged were the provisioning coefficients (by a risk degree) on credit opera- tions in foreign currency with borrowers having no sources of foreign currency earnings; strengthened were the requirements regarding the assessment of the financial situation of borrowers – individuals and legal entities, in the credit agreements with whom there was no writ- ten consent to collect, keep, use and disseminate through the credit history bureau the infor- mation about them; increased were requirements with regard to quality of the eligible security. By the same decision the banks were obliged to reserve the funds on a separate account with the National Bank of Ukraine in the size of the reserve formed on credit operations with borrowers having no sources of foreign currency earnings. In connection with the significant outflow of funds from the banking system reasoned by the financial crisis that had a detrimental effect on the situation in the banking system, primarily, on the banks' capitalization, as well as in order to fulfill the requirements of the Law of Ukraine "About High Priority Measures for Prevention of the Financial Crisis Consequences and about Making the Changes in Some Legislative Acts of Ukraine", by the decision of the National Bank of Ukraine approved was the Special Order of Taking the Measures Related to Financial Rehabilitation of the Banks, that determined the peculiarities of financial rehabilitation of banks and their capitalization in the conditions of preventing the adverse consequences of the financial crisis, namely: simplified were the procedures and shortened were the terms for adjusting the banks' statutes and the banks' registration procedures; defined were simplified orders of increasing the authorized capital at the expense of the banks' shareholders (participants) and investors, as well as the banks' reorganization by the owners' decision; determined were the procedures of banks' capitalization with the participation of the state and the measures of the banks' financial rehabilitation in the conditions of applying the tempo- rary administration. 75 Annual Report 2008

During the recapitalization process of the banking system the National Bank of Ukraine ini- tiated a wide scale work related to determining the current and prospective solvency of banks of Ukraine and their resiliency in the crisis conditions, namely, the order of conducting the diag- nostic study of banks and the methodology of assessing the current and prospective solvency of banks. Also, worked out were the Regulations about Establishment and Activity of the Committee of the National Bank of Ukraine on the issues of determining the current and prospective sol- vency of banks of Ukraine and their resiliency in the crisis conditions, that defines the order of processing the reports about results of a bank's diagnostic study by audit firms and preparation on their basis of the proposals, concerning further actions of the regulator with regard to the bank's activity. In order to arrange for the issue about provision by the National Bank of Ukraine of credits to support the banks' liquidity in case of a real threat to the banking system soundness caused by instability and fall in the exchange rate of hryvnia against foreign currencies, other circum- stances that contributed to the essential reduction in the solvency of a significant part of banks and their borrowers, the following documents were developed: – Temporary Regulations about Provision by the National Bank of Ukraine of Credits to Support the Banks' Liquidity in the Case of a Real Threat to Stability of the Banking System; – The Temporary Order of Interaction of the Structural Units of the National Bank of Ukraine on the Issues Regarding the Banks' Liquidity Support through the Provision of Loans. Keeping the confidence and adjustment of the legislative, normative and legal base to the requirements of the European Union has remained the main task on the way to development of the banking system of Ukraine.

2.4.2. Supervision of the banks' activities During 2008, the activity of the National Bank of Ukraine was aimed at further development of the banking supervision system including the improvement of the procedure instruments. The National Bank of Ukraine arranged and ensured supervision over 184 banks, having licenses for carrying out the banking operations, and also exercised control over the realization of supervisory functions by the regional branches of the National Bank of Ukraine. In 2008, the activities of the National Bank of Ukraine were turned to ensuring the sound operation of banks and supporting the liquidity level required for the timely fulfillment of the com- mitments to the creditors and the depositors. The banking supervision system was based on the assessment of the banks' activities according to the ÑÀMELS-system, which consisted in estimating the general situation based upon the uniform criteria covering the bank operation in all directions of its activities and deter- mining the major risks which the bank came across. The National Bank of Ukraine started the transition to supervising the banks' activities based on the risk assessment, and it would enable Ukraine to converge as much as practical to the Basle Core Principles for the effective banking supervision and to initiate the stage-by- stage transition to the implementation of the Basle Committee for Banking Supervision docu- ment on the Capital Measure and Capital Standards (Basle II) and also to effect the reorienta- tion of the retrospective supervision to the perspective (advanced) one. Risk assessment of a particular bank promoted the determination of the most risky aspects of its activities in order to develop the individual supervision strategy. In the context of the bank- ing system it would provide with the possibility to determine the highest risk areas and to focus the attention of the supervisory authority on the banks and areas of the activities which appear to be the most risk affected. In order to transfer to the risk-based supervision, the National Bank of Ukraine has elabo- rated the basic normative and legal acts which establish the inspection procedures for the bank supervision officers and provide the banks with recommendations on the arrangement and oper-

76 Activities of NBU ation of the risk management systems with the purpose of ensuring their integrity and reliability. During 2008, the National Bank of Ukraine continued the training related to the new approaches to the banking supervision for the National Bank of Ukraine officers and also con- ducted the educational work with the bank employees regarding the supervision lines and the best practice on the establishment of the risk management systems with the banks. The primary factors of the banking sector risks appeared to be the following: consumer credit growth; rise of the foreign exchange credits; rapid increase in commitments to the non- residents; growth of the mortgage credit risks, etc. In 2008, an extraordinary enforcement measure was applied to one bank, namely, the deci- sion of the Board of the National Bank of Ukraine on the bank liquidation. Because of the considerable danger to the bank creditworthiness as of 1 January 2009, the National Bank of Ukraine, seeking to ensure the safe-keeping of assets, to have the compre- hensive assessment of the financial situation and in order to apply the proper measures on bring- ing the banks to compliance with the requirements of the banking legislature, has appointed the temporary administration for 1 year period in 2 banks: the closed JSC "Prominvestbank" and the JSC "National Credit". With the purpose of establishing favorable conditions for the recovery of the financial state, the moratorium on satisfying the creditor claims was declared for the banks for a six month period since the day when the temporary administration was appointed. In the closed JSC "Prominvestbank" the temporary administrator together with the investors were realizing measures on the financial rehabilitation of the bank that were established in the Financial Recovery Plan for the "Prominvestbank" approved by the temporary administrator order and agreed by a resolution of the Board of the National Bank of Ukraine. As of 1 January 2009, there were implemented the measures on increasing to the required level of the authorized and regulative capital of the "Prominvestbank" and on the improvement of its liquidity ratio; it is anticipated that the financial situation and creditworthiness of the bank will be improved. In the JSC "National Credit" the temporary administrator made the inventory of valuables kept in the bank cash offices and vaults, inventory of the fixed assets, intangible assets and payables and receivables; by the results of the inventory check neither violation in accounting nor shortage of valuables have been revealed. Control over the activities of banks was exercised based upon the statistical reporting of banks, inspection reports, auditor opinions and information of banks about the performance of the plans of actions on the improvement of the financial situation and the removal of shortcom- ings and violations in the bank activities with the purpose of ensuring compliance of banks with the requirements of the law in force and the normative and legal acts of the National Bank of Ukraine as well as observing the commitments taken by the banks regarding improvement of their activities and reduction of risks available in their operation. In order to analyze and control the banks' activities, the Off-site Banking Supervision Department used the software products and stress-testing estimations. Based upon the results of the analysis in accordance with the Methodological Recommendations on the procedure of analyzing a bank' financial situation and compilation of the reporting on monitoring of a bank-legal entity, which (recommendations) were approved by the instruction of the National Bank of Ukraine for each bank there was prepared the Report on moni- toring of a bank-legal entity, and it was placed in the bank monitoring module AIS "Dossier of Banks". The Off-site Banking Supervision Department sent letters to the banks of Groups I and II, requiring to present the estimated performance indicators for 2009 and the development strat- egy for the next 3 years. The performance indicators and the bank development strategies, that had been provided, were analyzed taking into account the actual bank performance indicators; and in case, the estimated indicators lacked provision of the stable development, the banks were sent letters with recommendations to adjust and improve the estimated indicators. During the year, quarterly control was exercised regarding adherence to the estimated indicators by the banks of Groups I and II.

77 Annual Report 2008

Moreover, the banks of Groups I and II were sent letters requiring to provide the informa- tion on the substantial amounts of the foreign loans (if any) and their repayment, as well as the information on the considerable amounts of the mortgage credits and construction credits. Permanent control (on the daily basis) was ensured over complying by banks with the eco- nomic ratios and the balance sheet indicators. Banks were forwarded the letters requiring to enhance control and apply measures on adhering by banks to the ratios of capital adequacy, credit risk, liquidity risk and foreign exchange risk. The banks were sent letters requiring to apply measures on the removal of shortcomings in their activities, on realization of the plan of actions as regards the improvement of the financial situation, in particular, increasing the level of capitalization, improvement of the asset quality, growth of the operating efficiency and cost effectiveness, improvement of the quality of the asset and liability management system, and others. The regular control was performed over the internal audit activities of the banks, over the time period of reporting on the internal audit work, and such reporting was analyzed as regards the compliance with the requirements of the law in force. In case of revealing any breaches of the banking laws and the normative and legal acts of the National Bank of Ukraine, the ade- quate enforcement measures were applied to the banks. Moreover, there were reviewed and analyzed the auditor opinions of the annual financial statements and consolidated reporting for 2008; determined was their conformity to the require- ments of the normative and legal acts of the National Bank of Ukraine and the international audit standards and also the agreements on the auditor check of the financial statements for 2009 concluded by the banks were analyzed. The constant control was made over the timeliness and compliance with the requirements of the law in force and the normative and legal acts of the National Bank of Ukraine as regards the disclosure of the financial statements of banks. In 2008, a special emphasis was made on increasing the capitalization and liquidity levels of banks, in particular, the improvement of asset and liability equilibrium related to the time peri- ods (maturity). Thus, in order to promote the capitalization of the state-owned banks "Oschadbank" (Savings Bank) and "Ukreximbank", the Cabinet of Ministers of Ukraine was sent a letter on the necessity to increase the authorized capital of those state-owned banks follow- ing the results of the diagnostic study performed in accordance with the Procedure of the State Participation in Capitalization of Banks approved by a resolution of the Cabinet of Ministers of Ukraine. Taking into consideration the requirements of the Law of Ukraine "On the Priority Measures in Order to Prevent the Adverse Effect of the Financial Crisis and on Amendments to Some Legal Acts of Ukraine", the authorized capital of the state-owned banks has been increased by UAH 13.8 billion by means of acquiring the shares issued by those banks in exchange for the T-bills of Ukraine. The increased capital of the state-owned banks will essen- tially enhance their opportunity to realize the national investment and innovation programs and projects, in particular, relating to the energy market crediting, as well as to the common projects in the consortium of the state-owned banks. In addition, the National Bank of Ukraine Commission on supervision and regulation of the banks' activities prepared the decisions as regards permitting the banks to include in their cap- ital those funds that were attracted on condition of the subordinated debt. In order to meet the requirements of the resolution of the Board of the National Bank of Ukraine "On Particular Issues of the Banks' Activities", the banks of Groups I and II were for- warded letters related to providing the plan of measures on increasing the capitalization (capi- talization programs). Shareholders and management of 11 banks were recommended to focus attention on the necessity to bring the organization and legal form to compliance with the requirements of the Law of Ukraine "On Banks and Banking". The banks, having a considerable amount of retained profits of the past years, were sent letters with suggestion to forward the profits to the reserve fund.

78 Activities of NBU

During 2008, a special emphasis was made on the banks' liquidity situation in order to per- form timely settlements with the creditors and the depositors, in particular, starting from October 2008. With this aim in view the Board of the National Bank of Ukraine took decisions to render the refinancing loans and the stabilization credits for the banks. The National Bank of Ukraine Commission on supervision and regulation of the banks' activities prepared the decisions as regards the coordination of the financial recovery programs for banks, by which the banks have been obliged to report to the National Bank of Ukraine as regards the realization of the financial recovery program. In addition, during 2008, 17 banks were forwarded letters as regards their discrepancy in timing of the fund attraction and the fund allocation; and management of those banks was obliged to take measures in order to balance the timing of attraction and allocation of the assets and liabilities, in particular, for the long-term period, as well as to provide measures and sched- ules to shorten the gaps (mismatching). Realization of the measures by banks and adhering to the schedules on shortening of the gaps was under the regular control. Control was also effected over the submission and realization of the plans for a step-by-step (monthly) reduction of the assets and liabilities mismatching available during more than 1 year in case it exceeded the amount of the registered authorized capital actually paid. During 2008, the meetings with management of the banks were arranged as regards the particular issues in the bank activities. Complaints of the people made in the paper form and through the telephone "line of trust", whose number substantially grew, were further handled. Substantiated answer and advice regarding the essence of the problem concerned were given to each person. Decrease in the liquidity level of the banking system of Ukraine tightened the requirements to the transparency of banks. However, the current level of transparency remained low in com- parison with the level of transparency of the leading international financial organizations. The best incentives for increasing the transparency appeared to be two factors, namely: growth of credits granted to individuals and attraction of funds on the external markets. In addition, the National Bank of Ukraine introduced the practice of publications made on the official web-site of the National Bank of Ukraine concerning the shareholders (both legal and natural entities) of the Ukrainian banks on a quarterly basis.

2.4.3. Inspection of banks Inspections of banks of Ukraine were carried out according to the plan approved. During 2008, there were conducted 157 inspections of banks as legal entities, including 64 scheduled inspections and 93 inspections made out of schedule. 13 inspections were performed related to the financial monitoring. The primary goal of the inspections was to establish control over observing by banks the requirements of laws and the normative and legal acts as regards the following: compliance with the economic ratios; establishment and use of the provisions (reserves); realization of the business-plan; implementation of the financial recovery plan (in case of the enforcement meas- ures being applied to the bank) and assessment of the bank activities according to the CAMELS system within its components and the risk assessment system. Based upon the inspection results, the proposals were elaborated as to applying the enforcement measures to banks and removal of breaches revealed. Measures have been applied in order to restrict risks of the operations in the financial markets, specifically, the capi- tal adequacy regarding the credit risk and the market risk. The National Bank of Ukraine took the important measures to enhance the self-organiza- tion of the bank operation, namely, strengthening requirements to the internal control system, implementation of the risk assessment on the consolidated basis. Requirements of the banking supervision to the high-quality operation of banks related to the adequate assessment of the banking risks and the national policy interests on improvement

79 Annual Report 2008

of the real effectiveness in the work of the economic entities coincide. During the inspections, primary attention was focused on ensuring the priority trends from the point of view of securing the regulation conditions for the implementation of the banking technologies for the development of the real sector of the economy: – ensuring the provisions adequacy; – strengthening the attention to the assets and liabilities structure by the time priority; – developing the supervision on the consolidated basis. The key factor remains the establishment of provisions for the possible losses under cred- its. Based both on the prudential supervision and on the inspections, the National Bank of Ukraine worked thoroughly at ensuring the establishment of the necessary provisions in the banks. As of 1 January 2009, the provisions for possible losses under active operations grew to UAH 48.4 billion. The establishment of provisions appears to be the fulfillment of the National Bank of Ukraine requirements as an element of the inter-bank risk management. Developing the inter- nal mechanisms and instruments for the credit risk assessment, the banks solved the problems on the improvement of the management quality as one of the primary objects of applying the banking supervision instruments. Growth of the credit amounts raised the level of risks that demanded the enhanced control over the banking sector by the National Bank of Ukraine. The establishment of control over the large exposure operations carried out by the banks of Ukraine was aimed at prevention of the risk growth for a short-time period and allowed to reduce the factors of vulnerability. During the inspections, a particular emphasis was given to covering the liabilities by the assets of the correspondent maturity in a sufficiently large time range and the possibility of oper- ative resource management in the banks: sources of funding and possibility for the profitable short-term allocation of the temporary free funds. Based upon the data of the risk assessment system, the activities of banks were classified as those of low risk, moderate risk and high risk. Bank inspections were one of the National Bank of Ukraine tasks on effecting control aimed at revealing of the possible components of the prudential infringements of law, and such con- trol consisted of three stages: – obtaining necessary information; – legal qualification of the infringement; – taking decision on applying the enforcement measures. Bank inspections permitted the National Bank of Ukraine to clarify a number of issues: – accuracy (preciseness) of reports provided by the bank; – actual operations performed by a bank and the general financial situation of a bank; – adequacy of the risk management system and the internal control procedures in the bank; – credit portfolio quality; – adequacy of provisions to cover possible losses; – management competence; – adequacy of accounting and management information systems; – problems revealed during the previous inspection; – compliance of the bank activities with the laws and the normative and legal acts, as well as with the terms and conditions of the license granted for carrying out the banking operations. Upon revealing the infringements of the law in force and of the normative and legal acts of the National Bank of Ukraine and the high risks available in the activities of banks, in 2008, the

80 Activities of NBU

National Bank of Ukraine forwarded written warnings, including those by the results of the com- plex inspections and thematic surveys; imposed penalties on the banks and administrative fines on the bank managers; written agreements were concluded with the banks as regards the improvement of their financial situation; temporary administrations of the banks and bank liqui- dation processes were launched. During 2008, the National Bank of Ukraine also applied to the banks some other enforce- ment measures. Thus, the banks were sent written notices, demands to provide letters of the bank commitments and the list of measures aimed at the improvement of the financial situation and adhering to the prudential norms. During 2008, the National Bank of Ukraine, within the Program of cooperation of the National Bank of Ukraine with the law enforcement authorities on promptly revealing of the operations performed in breach of the laws in the banking area for 2007-2008 and the Protocols of Information Exchange signed with the law enforcement bodies (Prosecutor's General Office of Ukraine, Ministry of Internal Affairs of Ukraine, Security Service of Ukraine, State Committee of Financial Monitoring of Ukraine, State Tax Administration of Ukraine), cooperated with the law enforcement authorities and conducted joint inspections of the banking institutions. Observing the law of Ukraine "On the Organizational and Legal Principles of Fight against the Organized Criminal Activities" and in accordance with the Program of cooperation of the National Bank of Ukraine with the law enforcement bodies, the National Bank of Ukraine for- warded 20 notifications with information that could testify to the facts of the organized criminal activity. Inspections of the National Bank of Ukraine were aimed at providing the effectiveness and stability of the banks' activities as the ground for trust of the society to the banking system. They contributed to prevention of conducting the high risky banking business and to the protection of depositors and creditors from the possible losses of funds in the result of applying the enforce- ment measures upon revealing the violation of the bank activities' norms.

2.4.4. Registration and licensing of banks As of 1 January 2009, 198 banks were registered in the State Register of Banks, including 167 joint stock companies (among them 127 open type joint stock companies and 40 closed type companies); 31 banks were established as companies with limited responsibilities. Among the banks registered in the State Register of Banks, 184 banks possessed licens- es for carrying out the banking operations, including 182 banks having the written permits for conducting the banking operations and operations with foreign exchange valuables. In order to distinguish the supervision functions between the head office and regional branches of the National Bank of Ukraine and to review the activities of the banks of Ukraine, there have been formed groups of the banks in accordance with the parameters determined. For 2008, four groups of banks were determined relative to the amount of the regulatory capital and assets: Group I consisted of 18 banks (or 9.8% of the total number) whose regulatory capital exceeded UAH 1 500 million and assets of more than UAH 14 000 million; Group II consisted of 20 banks (or 10.9% of the total number) whose regulatory capital exceeded UAH 500 million and assets of more than UAH 4 000 million; Group III consisted of 24 banks (or 13% of the total number) whose regulatory capital was more than UAH 200 million and assets of more than UAH 1500 million; Group IV included 122 banks (or 66.3% of the total number) whose regulatory capital was less than UAH 200 million and assets of less than UAH 1500 million In Ukraine there were functioning 2 banks having 100% state-owned authorized capital. Those were the open JSC "State Savings Bank of Ukraine" and the open JSC "State Export- Import Bank of Ukraine". By the results of 2008, the state-owned banks belonged to the top ten banks of Ukraine by the amount of the regulatory capital and assets. The activities of the JSC

81 Annual Report 2008

"State Export-Import Bank of Ukraine" were purposed to granting credits for the fundamental and perspective areas of the economy of Ukraine, primarily, the export-oriented and demon- strating the stable indicators of growth. The JSC "State Savings Bank of Ukraine" was the only Ukrainian bank that possessed the government insurance for deposits of the population in accordance with the laws of Ukraine. The share of capital of the state-owned banks in the stockholder ownership capital of the banking sector of Ukraine amounted to 16.8% (6.8% in 2007), in assets – 11.5% (8.0% in 2007), in credits granted – 9.6% (7.1% in 2007), in liabilities – 10.7% (8.1% in 2007) and in income 12.7% (10.7% in 2007). During 2008, the number of acting banks with the foreign capital participation grew from 47 banks to 53 banks (forming 28.8% of the total active banks against 26.9% in 2007), including 17 banks (no changes in number) established with 100% foreign capital. Portion of the direct foreign capital participation in the authorized capital (registered) of banks of Ukraine formed 41.14%, and taking into account the indirect possession through the bank shareholders it formed 43.16% that was by 7.96 percentage points more than in 2007 (see Table 25).

Table 25. ORIGINATION OF THE FOREIGN CAPITAL IN THE BANKING SECTOR OF UKRAINE 2008, % For referebce: 2007 Country of registration Indirect participation Direct participation Direct No of non-resident of Ukraine through bank of foreign foreign capital as bank member shareholders capital participation, %

1. Cyprus 0.77 7.1 7.15 2. Austria 1.25 5.97 7.15 3. Russian Federation 5.45 3.42 4. France 3.77 4.41 5. Hungary 2.95 1.53 6. The Netherlands 2.78 2.90 7. Greece 2.20 0.12 8. Sweden 2.17 2.14 9. Poland 1.88 2.78 10. Germany 1.51 0.21 11. Italy 1.41 – 12. Other12 2.88 3.39 Total 2.02 41.14 35.20

Increase of participation in the statutory capital of the banking sector of Ukraine was marked from the non-residents of Cyprus, Russian Federation, Austria, Hungary, Sweden, Georgia, Greece (18 times more) and Germany (7 times more). During 2008, the foreign capital amount in the authorized (registered) capital of banks of Ukraine raised by UAH 15.2 billion or twice, and equaled UAH 30.3 billion. Foreign capital share in the registered statutory capital of acting banks of Ukraine grew from 35.0% to 36.7%. During 2008, the banks with the foreign capital increased their share in the banking market of Ukraine: portion of assets in the total assets of the banking sector grew from 49.4% to 56.6%, including the credit operation growth from 50.5% to 57.6%, and liabilities from 50.4% to 57.8%. The number of branches according to the State Register of Banks formed 1343 that was by 77 units less than in 2007, including 1 306 acting branches and almost 22 000 units. The num- ber of acting representative offices of the Ukrainian banks reduced by 8 units and amounted to 52 including 40 active offices on the territory of Ukraine (48 in 2007) and 12 working abroad.

12 Kazakhstan, Ireland, United Kingdom, Luxemburg, United States of America, Georgia, Turkey, Canada, Switzerland, the Virgin Isles (British), Latvia, Finland, Island, the Bahama Isles, Slovakia, the Cayman Isles, Lithuania, Slovenia. 82 Activities of NBU

Major part of the banking institutions was concentrated in the developed industrial regions of Ukraine: 62.0% of the total banking institutions located in Kyiv-city and in the Kyiv region, and 25.0% concentrated in four regions: (7.6% and 5.4% in Dnipropetrovsk and Odesa regions, respectively; Donetsk and Kharkiv regions had 6% each). Ten regions have no acting bank (Vinnytsia, Zhytomyr, Kirovohrad, Mykolaiv, Rivne, Ternopil, Kherson, Khmelnytskyi, Cherkasy and Chernivtsi), and the banking services to the population were rendered by the branches and units. Other regions of Ukraine had about 13% of the banking institutions. More uniform territorial concentration was observed as regards the bank branches. The largest portion of acting branches is located in Kyiv-city and the Kyiv region (128 branches or 9.8% of the total number) and in the Donetsk region (121 branches forming 9.3% of the total number). The smallest number of branches (approximately, 2% of the total number per each region) was concentrated in three regions: Volhynian, Rivne and Chernivtsi. Each of the fol- lowing seven regions (namely, Dnipropetrovsk, Luhansk, Lviv, Odesa, Kharkiv, Poltava and the Autonomous Republic of the Crimea and Sevastopol-city numbered from 4.5% to 6% of the total branches available. In other 13 regions there were concentrated from 2.5% to 4% of the total number of branches per each of the regions. During 2008, the following work was performed: 1) in the bank registration issue: – newly established banks registered in the State Register of Banks: 7; – banks withdrawn from the State Register of Banks: 7; – branches included to the State Register of Banks: 19; – branches withdrawn from the State Register of Banks: 87; – representative offices of foreign banks, accredited: 6, including the following: – representative office of HSBC Bank PLC in Ukraine (England); – representative office of the Bank of Cyprus, Public Company Limited, in Kyiv-city, Ukraine; – representative office of the Standard Chartered Bank (England); – representative office of the Balkan Investment Bank, AD Banja-Luka, in Kyiv-city, (Republic of Serbia, Bosnia and Herzegovina); – representative office of the JSC ,,Balticums in Ukraine" (Latvia); – representative office of Bayerische Landesbank in Ukraine (Germany); – prior permits granted to establish a foreign capital bank: 2; – permits granted for banks to acquire the status of a foreign capital bank: 6; – representative office of the Ukrainian bank opened abroad: 1 (the JSC "Imexbank" in Bucharest, Romania); – permits granted to the Ukrainian banks to establish the representative offices abroad: 4; – certificates of the bank registration, issued: 30; – permits granted to establish subsidiaries abroad: for 3 banks, namely: – JSB "Pivdennyi" (subsidiary "A/S Regionala Investiciju Banka", Republic of Latvia); – closed JSC "Privatbank" (subsidiary in Georgia, JSC "TAOBANK"); – JSB "Industrialbank" (subsidiary in the Republic of Latvia). 2) in the bank licensing issue: – banking licenses granted to the newly established banks: 9; – written permits granted to the newly established banks for carrying out particular opera- tions: 7; – banking license and written permit granted to the bank which renewed its activities: 1; – banks for which the list of operations to be performed upon the written permit for particu- lar transactions was enlarged: 33;

83 Annual Report 2008

– banking licenses and written permits to perform particular operations were replaced in connection with change of the bank name: 16; – written permits for carrying out particular operations were replaced in connection with change of the list of operations. 3) in the issue of modifications and amendments to the banks' articles of association: – permits granted for acquiring or increasing the qualifying shareholding: for 40 banks; – modifications and amendments to the bank articles of association, registered and included in the State Register of Banks: 199, including 116 made in view of the authorized capital increased. 4) in other issues: – appointments approved for managing positions: 389 . One branch of the bank of Ukraine functioned abroad: the closed JSC "Privatbank" branch in Cyprus, Nicosia, operating as an international banking unit. During 2008, no alterations in the legislative framework of Ukraine related to the bank reg- istration and licensing took place. In order to improve the procedures for bank registration and licensing, norms and regula- tions of the National Bank of Ukraine were amended as regards the following: – bringing in compliance with the Law of Ukraine "On Banks and Banking" of the require- ment related to the amount of fully paid authorized capital necessary for a bank to obtain the banking license (not less than ˆ 10 million by the official exchange rate of hryvnia against for- eign currencies as set by the National Bank of Ukraine on the day of entering into the estab- lishment agreement); – increasing the requirements to the regulatory capital amount, necessary for a bank to obtain the written permit for carrying out the particular operations with foreign exchange valu- ables (to ˆ 10 and 15 million, respectively); – canceling the requirements related to obtaining by a bank branch of the written permit from its bank for performing operations and further conformance of the permit with the region- al NBU branch at the place of the branch location; – bringing in compliance with the Law of Ukraine "On Banks and Banking" of the require- ments related to the organizational and legal form according to which the banks may be estab- lished in Ukraine and to the authorized capital minimum at the time of the bank registration; – canceling the requirements related to the regulatory capital minimum of not less than ˆ 3 million, when opening a bank separate structural unit (branch, unit) on the territory of the bank location region, and of not less than ˆ 5 million when opening a structural unit on the territory of Ukraine. The additional requirement was introduced and if the bank complied with the norm regarding, specifically, the regulatory capital minimum set by the National Bank of Ukraine, such a bank might open the units; – canceling the requirements concerning the decisions to be considered and taken by the NBU Commission on the supervision and regulation of the bank activities in relation to the pro- fessional skills and business reputation of candidates for the vacancies of deputy governors, board (of directors) members and deputy chief accountants and also concerning the informa- tion about the professional skills and business reputation of candidates for the vacancies of the governor, his/her deputies and members of the supervisory board; – introduction of the procedure for qualifying the candidates for vacancies of the deputy governors, board members, deputy chief accountant and also the governor, his/her deputies and members of the supervisory board in compliance with the Law of Ukraine "On Banks and Banking" based upon the examination of documents (files) submitted.

84 Activities of NBU

2.4.5. Termination of the banks' activities During 2008, the number of banks under the liquidation procedure reduced by 6 units and as of 1 January 2009, 13 banks were in the liquidation process (6.6% of those registered in the State Register of Banks), including 10 banks being liquidated according to the decision of the National Bank of Ukraine and 3 banks – according to the economic court judgments. The assets of banks under liquidation formed 0.2% of the total assets of the banking sector of Ukraine. Reduction of banks under liquidation resulted from the following: – completion of the liquidation procedure in 6 banks and withdrawal of those banks from the State Register of Banks of Ukraine; – renewal of the activities of 1 bank owing to its adhering to financial recovery measures. In 2008, in accordance with the resolution of the Board of the National Bank of Ukraine the banking license was withdrawn from the open JSC "European Bank for Development and Savings" and the liquidation procedure was initiated for that bank. As of 1 January 2009, the liquidation balance sheets and liquidator reports were approved for 3 banks: JSC "Alonge", JSB "Vidrodzhennia" (Renaissance) and the JSB "Donvuglecombank". Liquidation procedures for those banks are considered to be finalized. The liquidation procedure for the "Ukraina" Bank comes to its end (the liquidation balance sheet and the bank's liquidator report were on the consideration of the NBU Commission on supervision and regulation of the banks' activities as of 29.12.2008). Unsold assets and the list of the "Ukraina" Bank claims were passed to the management of the legal entity (Tornado Co. Ltd.) according to the agreement for further realization and satisfying the creditors' claims. Unsold assets and the list of the JSB "Alonge" were passed to the management of the legal entity (Votum Co. Ltd.) according to the agreement, while unsold assets and the list of claims of the liquidated "Ukrspetsimpexbank" were under the management of the commercial bank "Misto Bank" Ltd. As of 1 January 2009, the remaining balance of assets in the banks under liquidation amounted to UAH 1676.9 million, the assets realized (returned) amounted to UAH 1210.5 mil- lion, payables acknowledged (according to the registers approved) were equal to UAH 3513.7 million, payables satisfied by the liquidators were equal to UAH 981.8 million, the compensa- tion payments guaranteed by the Deposit Insurance Fund for Individuals were UAH 552.3 mil- lion, and the liquidator (liquidator commissions) costs were UAH 194.6 million. In 2008, the work of liquidators (liquidation commissions) on returning of the banks' funds and on settlements with creditors was marked by the following indicators: during the year, the realized (returned) assets amounted to UAH 69.4 million, which was 5.7% of the total assets real- ized (returned) for the whole period of liquidation of the banks mentioned; creditor claims paid by the liquidators amounted to UAH 41.0 million (1.2% of the creditor claims acknowledged): the liq- uidator (liquidation commission) expenses formed UAH 10.4 million; the balance of the accumu- lated accounts of the banks as of 1 January 2009 was equal to UAH 43.6 million The portion of creditor claims paid has increased by 5.4 percentage points (from 38.3% to 43.7%). In 2008, a substantial amount of funds from realization (returning) of the assets came from the following banks: JSB "Premier Bank" (UAH 61.6 million, open type JSC "European Bank for Development and Savings" (UAH 16.9 million) and "Kyiv Universalny Bank" Co. Ltd. (UAH 11.9 million). The National Bank of Ukraine and the Deposit Insurance Fund for Individuals applied meas- ures to improve situation with payment of the creditor claims on the banks under liquidation and, primarily, payments for depositors – natural persons. According to the Law of Ukraine "On the Priority Measures on Prevention of the Adverse Effect of the Financial Crisis and on the Amendments to Some Legal Acts of Ukraine", the Deposit Insurance Fund for Individuals, proceeding from the funding resources and owing to the financial support of the National Bank of Ukraine, increased the amount of funds ensured for each depositor of the Fund member (temporary member), including the interest as accrued on the day they became inaccessible, to UAH 150 thousand.

85 Annual Report 2008

In 2008, the payments on claims of individual depositors that were effected by the Deposit Insurance Fund for Individuals amounted to UAH 232.7 million, or 42.1% of the total payments within the compensation amount guaranteed.

Table 26. DYNAMICS OF MAJOR PERFORMANCE INDICATORS OF BANKS UNDER LIQUIDATION (UAH, mln.) Growth (reduction) Indicators 01.01.2008 01.01.2009 rates, % Number of banks 19 13 –31.6 Assets 1 388.4 1 676.9 20.8 Vis-a-viz total assets of the banking sector, % 0.2 0.2 – Assets (realized (returned) 1 141.1 1 210.5 6.1 Debtors' funds 1 404.4 1 299.7 –7.5 Accounts to pay (according to recent balance sheets) 2 820.4 2 987.8 5.9 Payables acknowledged, – out of the total 3 289.8 3 513.7 6.8 to natural entities 761.1 1 035.8 36.1 Creditor claims paid by liquidators, out of them 940.8 981.8 4.4 to natural entities 339.7 336.4 –1.0 Claims paid by the Deposit Insurance Fund for Individuals 319.6 552.3 72.8 Portion of creditor claims paid, (%) 38.3 43.7 +5.4 p.p. Liquidation commission costs 184.2 194.6 5.6 Balance of the accumulated account 15.6 43.6 2.8 times

As of 1 January 2009, the performance indicators of liquidators (liquidation commissions) on the realization of the bank liquidation procedure improved as compared with 2007 (see Table 26). Growth rates of the realized (returned) bank assets formed 6.1% and those of the payments made by the Deposit Insurance Fund for Individuals – 72.8%. Funds accumulated for the settlements with creditors amounted to UAH 43.6 million For 2008 the amount of creditor claims paid by the liquidators was equal to UAH 41.0 mil- lion, which was by 1.02% more than the correspondent amount in 2007. The Deposit Insurance Fund for Individuals paid the compensation funds for depositors – individuals to the amount of UAH 232.7 million (by 63.8% more than in 2007). Assets realized (returned) were equal to UAH 69.4 million which was by 68.4 % more than in 2007. In 2008, the re-organization of the joint-stock commercial bank "HFB Bank, Ukraine" took place through merging to the "Unicredit Bank" Co. Ltd. with the right of the non-balance sheet unit (the re-organization period was from 18.05.2007 to 25.02.2008). There was launched the re-organization procedure through merging of the joint-stock bank "Factorial Bank" to the open type JSC "CEB Bank" with the right of the non-balance sheet unit. According to the requirements of the final provisions of the Law of Ukraine "On the Amendments to Some Legal Acts of Ukraine on the Forms of Bank Establishment and the Amount of the Authorized Capital", 4 banks which had been established as the closed type joint stock companies or companies with limited responsibilities were re-organized through transfor- mation into the open type companies. Those were the following: open type JSC "Volodymyrskyi", open JSC "Lviv", open JSC "BM Bank" and open JSC "Artem Bank". In 2008, the National Bank of Ukraine applied measures on the improvement of the nor- mative and legal acts which regulated the realization of the liquidation procedure and the bank re-organization. Amendments have been made to Chapter VI "Withdrawal of the banking

86 Activities of NBU license and liquidation of the bank" of the Regulations on applying the enforcement measures by the National Bank of Ukraine for violation of the banking laws related to the following: requirements of the National Bank of Ukraine to the liquidator and the persons involved in the bank liquidation; entering into agreement with the liquidator; payment procedure for the liq- uidator work and approval of the cost budget for the liquidator; notification of the withdrawal of the banking license and the appointment of the liquidator; procedure for opening of the accu- mulated account purposed for the fulfillment of the liquidation procedure in the bank under liq- uidation; preparatory measures to be applied by the liquidator to satisfy the creditor claims; approval by the National Bank of Ukraine of the sale procedure for the bank property (assets), its composition, terms and conditions of acquiring; list of priority for satisfying the creditor claims; transfer of the bank assets unsold under the management of the legal entity determined by the National Bank of Ukraine; finalizing the liquidation procedure of a bank, etc. The National Bank of Ukraine has developed and approved the Regulations on the partic- ular features of the bank re-organization according to the decision of the bank owners. Problems, related to the completion of the bank liquidation procedure within the time deter- mined and to the fulfillment of the primary task of the liquidators on accumulation of the liqui- dation mass (funds) in order to satisfy the creditor claims as much as possible, still remained pressing. Evasion of debtors and their guarantors from observing the commitments to banks under the credits received and delaying the court processes brought to violation of the periods of the bank liquidation procedure specified by Article 88 of the Law of Ukraine "On Banks and Banking". The liquidation procedures with 8 banks under liquidation (62% of the total number under liquidation) have been running for more than 4 years. Breaking the periods of the bank liquidation procedures needs the control to be enhanced by the National Bank of Ukraine over the work of liquidators (liquidation commissions) and the improvement of the effective law of Ukraine in the bank liquidation issue.

2.5. FOREIGN EXCHANGE CONTROL AND LICENSING During 2008, the National Bank of Ukraine granted 644 individual licenses, general licens- es, approvals and special permits (in 2007 it was 1524). The banks were granted 35 individual licenses for conducting operations with foreign exchange valuables. Legal entities – non-banking institutions, and natural persons were given 609 individual licenses, general licenses, approvals and special permits, including the following: – individual licenses for conducting operations with foreign exchange valuables: 571; – general licenses given to the non-banking financial institutions for conducting operations with foreign exchange valuables: 20; – approvals to transfer funds by the residents outside Ukraine under the agreements that stipulate for the works and services to be rendered by the non-residents: 17; – special permits to import foreign exchange valuables in Ukraine: 1. Alongside with the above mentioned, in 2008, 212 amendments were made to the previ- ously granted individual licenses, general licenses and approvals; 71 individual licenses and 1 general license were cancelled and the cancellation of 1 individual license was withdrawn. During 2008, the National Bank of Ukraine effected control over compliance by the author- ized banks and the non-banking institutions with the requirements of the foreign exchange laws by means of the following: – conducting the on-site and paper (off-site) inspections of the authorized banks and the non-banking institutions; – control over the justification of conclusions made by the regional branches by the results of the authorized banks' examinations;

87 Annual Report 2008

– applying penalties to banks with regard to the revealed facts of violations of the foreign exchange legislature; – participation in the review of appeals from the authorized banks and elaboration of the conclusions (opinions) for the Appeal Commission of the National Bank of Ukraine concerning the appropriateness of calling the authorized banks to account for the infringement of the for- eign exchange legislature of Ukraine. 1003 examinations of banks have been conducted, including 621 scheduled examinations and 382 out of plan; 403 examinations were of the complex nature. In view of the facts of violating the foreign exchange laws, 894 resolutions were passed on calling the authorized banks to account for the infringement of the foreign exchange legislation (specifically, the Decree of the Cabinet of Ministers of Ukraine "On the System of Foreign Exchange Regulation and Foreign Exchange Control) to the amount totaling UAH 2.8 million. Among the violations of the foreign exchange legislation 74.9% of the cases were related to the delayed information, concealing or distortion of the reporting on the foreign exchange trans- actions of banks; 18.6% were connected with failure to perform the agent functions of the foreign exchange control; 3.1% related to violation of the terms and conditions of foreign currency trades in the inter-bank foreign exchange market; 2.3% resulted from using the foreign currency as a legal tender on the territory of Ukraine with no individual license of the National Bank of Ukraine; 1.1% came from the failure to meet the terms and procedure to declare the foreign exchange valuables that belonged to the residents of Ukraine and were outside of Ukraine. Penalties charged upon the major part of the resolutions (812) on bringing to responsibility for violations by banks of the foreign exchange legislature, amounted to UAH 1.3 million. In 2008, the National Bank of Ukraine conducted 2359 checks of the exchange centers (their total number was 1104), including 886 checks of the exchange centers belonging to the banks and 1473 checks of the exchange centers which operated based upon the agent agree- ments concluded with banks. During the said examinations of the foreign exchange centers, 401 violations of the bank- ing laws were revealed, including 128 violations made by the exchange offices belonging to the banks and 273 cases – by the exchanges operating according to the agent agreements with banks. In order to optimize the procedure for granting licenses to carry out the foreign exchange operations in 2008, the National Bank of Ukraine made alterations to the Regulations on the procedure for granting general licenses to the non-banking financial institutions and the nation- al post operator for carrying out the foreign exchange operations. In addition, the instruction on the order of exercising control over the export-import opera- tions was brought in compliance with the requirements of the Law of Ukraine "On the Procedure of Effecting Payments in the Foreign Currency".

2.6. PAYMENT SYSTEM OF UKRAINE 2.6.1. Interbank settlements The year of 2008 has become the second year of the commercial operation of the System of Electronic Payments (SEP) of the new generation in the National Bank of Ukraine (SEP-2). As of 1 January 2009, the total number of institutions being the SEP members was 1550, including 182 banks of Ukraine, 1304 bank branches, 28 State Treasury bodies of Ukraine and 36 institutions of the National Bank of Ukraine. The SEP embraced the whole banking system of the country, carrying out 98.5% of the interbank transfers in the national currency. The number of electronic settlement documents under the initial payments and the elec- tronic settlement notices that were processed in the SEP during 2008 grew by 9% as regards their number and by 38.8% as regards the amount of the initial payments (see Figure 57).

88 Activities of NBU

During 2008, 349.0 million of initial payments and the payment orders totaling UAH 7992.4 bil- lion were processed in the SEP, including 348.3 million file mode payments of UAH 7594.5 bil- lion and 691 thousand payments in the real time mode of UAH 397.9 billion. 318.6 million trans- actions were made by the banking institutions (91.3% of the total initial payments).

Figure 57. Number of initial payments in SEP in the file mode

Portion of the settlement documents processed in the SEP under the initial payments of less than UAH 1000 formed 71.0% of their total number and the amount of transfers against those documents was insignificant being equal to 0.6% of the total funds transferred. Daily average balance of the SEP members' accounts formed UAH 30.9 billion. Turnover factor of the accounts of the SEP members during the year was 1.0 compared to 0.7 in 2007. According to the rules of the SEP operation, the SEP members in view of their needs may determine their mode of operation on their own. Therefore, as of 1 January 2009, 72 members (39.1% of their total number) were working in the SEP with one of the models servicing the con- solidated correspondent account, and the rest 112 participants (60.9% of the total number) operated with the independent correspondent account.

Figure 58. Settlements distribution by models of consolidated account servicing as at 1 January 2009

Among the participants operating with the models servicing the consolidated correspondent account, the third model appeared to be the most demanded (favored by 52 banks); 14 banks preferred the forth model; 5 banks chose the seventh model and the State Treasury of Ukraine operated with the eighth model. In 2008, the largest number of payments was made by the banks operating with the third model (see Figure 58).

89 Annual Report 2008

2.6.2. Development of the payment card systems As of 1 January 2009, 139 banks (75.5% of the total number of banks possessing the bank- ing licenses) were the members of the national and international payment card systems and made issuance and acquiring of the payment cards. During 2008, 12 more banks became the members of the relevant payment systems and started the issuance and servicing of the pay- ment cards. Total number of the payment cards issued by the banks of Ukraine (payment cards against which at least one operation per year was performed) reduced by 6.3% in the reporting year and amounted to 38.6 million pieces. Out of the total number of payment cards, the share of personal cards was 98.7%, the magnetic strip cards formed 93.7%, the debit cards formed 76.6% and those with the payment and cash delivery functions – 96.5% . In 2008, the number of automatic telling machines servicing the payment cards formed 28.0 thousand units, of the payment terminals – 116.7 thousand units and the number of imprinters – 82.1 thousand units, which was by 33.6%, 23.8% and 50.9% more, respectively, than in 2007. As of 1 January 2009, over 634.4 million operations with applying the payment cards issued by the banks of Ukraine were carried out to the amount of UAH 372.4 billion, which was by 19.3% and 65.4% more, respectively, than in 2007 (see Figure 59).

Figure 59. Dynamics of operations number and volume on payment cards issued by Ukrainian banks

In 2008, the major portion of operations was made by the holders of the payment cards of the Ukrainian banks within the own network of the issuing bank (86.7%), 12.5% operations were performed in the network of other resident banks and 0.8% operations performed abroad. By the amount of operations performed in 2008 on the payment cards issued by the banks of Ukraine, 97.4% of their total amount fell on the operations carried out on the territory of Ukraine, including 92.7% in the own network of the issuing bank and 7.3% in the network of other resident banks. The operations performed abroad formed 2.6 %. During 2008, the amount of operations on cash delivery grew by UAH 138.4 billion as com- pared with 2007, and was equal to over UAH 355.4 billion (95.4 % of the total operations per- formed with applying the payment cards); non-cash payments rose by UAH 8.9 billion (to the amount of UAH 17.0 billion that formed 4.6 % of the total operations performed with applying the payment cards) (see Table 27). During 2008, the average annual turnover per one payment card grew by 53.8% as com- pared with 2007 and amounted to UAH 9.3 thousand. The highest average annual turnover per one payment card in 2008 was marked with the NSMEP (National System for Mass Electronic Payments)– UAH 16.4 thousand; compared to 2007 the increase was equal to 33.3%. Much lower average annual turnover per one card in 90 Activities of NBU

2008 was marked with the international payment system VISA (UAH 9.8 thousand) and MasterCard (UAH 8.1 thousand), as well as with the group of the domestic one issuer systems (UAH 6.9 thousand).

Table 27. USE OF PAYMENT CARDS IN 2008 Amount of operations, UAH, billion Number of operations, million units Use of Cash Cashless Cash Cashless payment cards delivery payments Total delivery payments Total

In the own network of issuing bank 330.9 5.3 336.3 512.5 37.6 550.1 In the network of other resident banks 20.0 6.4 26.4 53.0 26.2 79.2 In the network of other non-resident banks 4.5 5.3 9.7 1.7 3.4 5.1 Total 355.4 17.0 372.4 567.2 67.2 634.4

In 2008, the NSMEP development was still in progress; the banks and the Payment organ- ization of the system implemented the innovation projects and technologies (see Table 28). As of 1 January 2009, the NSMEP consisted of 52 member banks (including the National Bank of Ukraine) and 7 participants. During the reporting year, 12 more banks joined the NSMEP, including 4 banks from the 1st and 2nd groups of banks.

Table 28. NSMEP PERFORMANCE INDICATORS IN 2004–2008 Number of Annual Average sum payment cards Number of turnovers, of interbank Year issued, terminal UAH operations, Thous. Pcs equipment, pcs. million UAH

2004 373 846 6931.1 345 2005 240 576 9739.2 331 2006 287 778 12472.9 353 2007 385 1266 18117.3 593 2008 607 1291 25049.7 730 Total 2382 5752 76691.7 –

In 2008, the implementation of the pilot project "Student Payment Card" went on for the uni- versities of the I-IV accreditation levels. By the start of 2009, almost 70 thousand of the elec- tronic student payment cards have been issued which was by 31 thousand pieces more than at the beginning of 2008. During 2008, the dynamic progress of the Internet payments through the NSMEP was observed. In order to provide the Internet payments through the NSMEP, two special payment sites were functioning, and their technological facilities were similar to payments made through a bank's cashier's desk. In 2008, the commercial operation of the mobile payments (known as "BANK-O-PHONE" trademark) was launched, and it allowed to control and manage the banking account and to effect payments with the mobile phone. During 2008, the work on realization of the projects using the NSMEP know-how and soft- ware was maintained between the National Bank of Ukraine, the State Treasury of Ukraine and the State Customs Service of Ukraine and also the Deposit Insurance Fund for Individuals.

91 Annual Report 2008

2.6.3. Basic results of the international systems' operation for transfer of funds between individuals without opening the accounts in 2008 As of 1 January 2009, 20 international systems established by the non-residents for the transfer of funds between the individuals without opening of the accounts were operating on the territory of Ukraine (18 systems as of 1 January 2008). Participants of such systems were about 150 banks of Ukraine, one non-banking financial institution and the National Post Operator UNPPO "UkrPost". In 2008, the total trans-border transfers received in Ukraine with applying the international transfer systems and established by the non-residents grew almost by one fourth as compared with the previous year and amounted to USD 2.5 billion, while the amount of funds transferred outside Ukraine grew twice and was equal to USD 0.4 billion in the equivalent. The average amount of one transfer into Ukraine grew by USD 69 in 2008 as compared with the average amount in 2007 and formed USD 618 in the equivalent. The average amount of one transfer outside Ukraine grew by USD 244 and formed USD 625 in the equivalent. Moreover, during 2008, the amount of funds transferred by the natural entities within Ukraine with applying the international transfer systems implemented by the non-residents formed USD 29 million in the equivalent. The largest amounts of funds came to Ukraine with applying the international transfer sys- tems established by the non-residents from Russia (47.9%), USA (9.2%), Italy (6.5%), Spain (6.3%) and Great Britain (3.5% of the total funds received); the largest amounts of funds trans- ferred from Ukraine were sent to Russia (35.2%), Georgia (9.0%), Armenia (6.5%), Uzbekistan (6.5%) and USA (4.3% of the total funds transferred). The portion of transfers that came to Ukraine with applying four systems established by the USA residents formed 55.4% of the funds received, and with those established by the residents of Russian Federation (10 systems)) – 41.7%. The largest amounts of funds were transferred into Ukraine with applying the following international transfer systems: Western Union (USA) – 43.2%, "Unistream" (Russian Federation) – 16.3% and MoneyGram (USA) – 12.0% of the total funds received. Also, in Ukraine, the international systems for transfer of funds were operating, the payment organizations for which were the banks of Ukraine. Using the international transfer system PrivatMoney, established by the closed type JSC "PrivatBank", USD 0.3 billion came to Ukraine in 2008 and USD 58.5 million in the equivalent were transferred outside Ukraine. Particular banks of Ukraine which established their systems for transfer of funds between the individuals, concluded agreements of cooperation with the international transfer systems, the payment organizations for which were the non-residents of Ukraine. By the result of such cooperation, USD 68 million came to Ukraine in 2008, and USD 38 million in the equivalent were transferred abroad. The total amount of funds which came into Ukraine with applying the international systems for transfer of funds between the individuals that had been established both by the residents and the non-residents was equal to USD 2.9 billion in 2008, and funds transferred from Ukraine amounted to USD 0.5 billion in the equivalent. Ukraine remained to be a recipient country for the international money transfers, as far as the amount of funds transferred into Ukraine exceeded 6 times the amount of funds transferred outside Ukraine.

2.6.4. Cash performance of the budgets of Ukraine In accordance with the Budget Code of Ukraine (Art. 48 and Art. 78) the treasury form for servicing of the state and local budgets was applied in Ukraine, that specifically stipulated for the management of funds available with the State Budget of Ukraine and with the public off- budget funds to be made by the State Treasury of Ukraine, as well as for the cash servicing of the budget fund administrators.

92 Activities of NBU

The National Bank of Ukraine was a treasurer of funds of the State Budget of Ukraine that was realized through opening of the Single Treasury Account with the National Bank of Ukraine and servicing its payments through the System of Electronic Payments (SEP) of the National Bank of Ukraine with applying the internal payment system of the State Treasury of Ukraine. Terms and procedure for servicing funds of the State Budget and local budgets accounted on the Single Treasury Account were determined in the Agreement concluded between the National Bank of Ukraine and the State Treasury of Ukraine. According to Article 30 of the Law of Ukraine "On the State Budget of Ukraine for 2008 and Amendments to be Made to Some Legal Acts of Ukraine", the services of processing the payment documents and the information within the system of electronic payments of the National Bank of Ukraine were free of charge. Functioning of the Single Treasury Account in the SEP of the National Bank of Ukraine pro- vided the high quality of settlements under the budget funds, their reliability and security; con- siderably reduced the payment transfer periods; increased the budget fund turnover; provided with the possibility to compile daily operative reporting on accounting of incomings and expen- ditures of the state budget and allowed more effective management of the general balance (residual) of cash resources. As of 1 January 2009, the total residual funds of the state and local budgets, off-budget funds and other funds of customers amounted to UAH 13 billion which was by UAH 2.4 billion less than the relevant residual funds on the appropriate date of the previous year. However, the balance of funds on the Single Treasury Account grew almost 1.8 times and as of 1 January 2009, amounted to UAH 7.7 billion against UAH 4.3 billion, as of 1 January 2008. Number of payments performed by the State Treasury of Ukraine and its bodies through the SEP of the National Bank of Ukraine amounted to over 21.1 % of the total payments in the sys- tem, including the initial payments of about 8.6% of the total documents which came to the SEP of the National Bank of Ukraine in the reporting year. According to the laws in force and the normative and legal framework of the National Bank of Ukraine, as of 1 January 2009, 7278 budget institutions had 22430 deposit accounts with the banks of Ukraine, including 20554 demand deposits and 1876 time deposits.

2.7. SERVICING OF THE INTERNAL (DOMESTIC) DEBTS OF UKRAINE According to the laws in force, the National Bank of Ukraine kept on to perform operations on servicing of the public debts related to allocation of the government securities, their redemp- tion and paying the securities income. During 2008, 212 auctions on the allocation of T-bills were arranged, of which only 50 were realized. By their results, UAH 9.8 billion were attracted to the State Budget of Ukraine, that was 2.7 times more than in 2007 (see Table 29). As regards the other 162 auctions, the Ministry of Finance of Ukraine took the decision not to realize the T-bills because of the disparity between the price proposals (bids) of the potential buyers and the real value of money or because of the absolute lack of bids to acquire the T-bills. Opposite to the previous year, in 2008, the alloca- tion of T-bills was carried out during the whole year. In addition, in order to observe Article 2 of Law ¹639-VI of Ukraine dated 31.10.2008 "On the Priority Measures to Prevent the Adverse Effect of the Financial Crisis and on Amendments to Some Legal Acts of Ukraine" with the purpose to increase the establishment of the author- ized capital for banks, the Ministry of Finance of Ukraine issued the T-bills totaling UAH 13.8 billion during November through December 2008, that formed 58.5% of the total T-bills allocat- ed in 2008. During 2008, the Ministry of Finance of Ukraine was allocating the middle-term T-bills, the average maturity of which was 1047 days and it rose by 181 days as compared with 2007. Only by the end of December the Ministry of Finance of Ukraine allocated the short-term and long- term T-bills with the average maturity of 44 days and 2653 days, respectively.

93 Annual Report 2008

Table 29. T-BILLS ALLOCATION ON THE PRIMARY MARKET Information: Change to Change to Indicators 2008 previous 2007 previous year year Number of auctions 212 47 165 87 Realized 50 22 28 –9 Non-realized 162 25 137 96 Funds attracted to the State Budget of Ukraine, UAH, billion 9.8 6.2 3.6 2.0 T-bills issued to increase the establishment of the authorized capital for banks, UAH, billion 13.8 – – – Average weighted yield 11.86 5.15 p..p. 6.71 –2.55 p.p. Average weighted yield of T-bills attracted to the State Budget, % 14.85 8.14 p.p. 6.71 –2.55 p.p. Average weighted yield of T-bills issued to increase the establishment of the authorized capital for banks, % 9.74 – – – Average maturity, days 1047 181 866 –119 Redemption amount and income payment of the previous issue T-bills, UAH, billion. 4.4 1.5 2.9 –1.9

During the reporting period, the T-bills were in demand of, primarily, the domestic investors. Notwithstanding the high reliability of the T-bills in comparison with other financial instruments, in 2008, the interest of non-residents in acquiring the government securities that was observed in 2006 and 2007, tended to reduce. Thus, during 2008, the amount of T-bills with the non-res- ident possession decreased by UAH 1.6 billion and as of 1 January 2009 it was equal to UAH 467.3 million, that formed 1.6% of the total T-bills in circulation (reduction in 2007 was equal to UAH 0.6 billion). Along with increasing the average turnover period of the T-bills, their average weighted yield also grew (11.86% in 2008 vis-à-vis 6.71% in 2007). In 2008, the Ministry of Finance of Ukraine redeemed the T-bills and paid the income to their holders totaling UAH 4.4 billion, including the principal debt redemption of UAH 3.4 billion, and the yield payment of UAH 1.0 billion, and thus, it fulfilled all its commitments against various types of the government securities. Because of the fact that the amount of T-bills redeemed was higher than the amount of T-bills allocated, the indebtedness of the Government of Ukraine against the public bonds (at face value) grew by UAH 20.0 billion in 2008 and by the end of the year it amounted to UAH 29.2 billion.

2.8. LEGAL ENVIRONMENT OF THE BANKING SYSTEM During 2008, the National Bank of Ukraine kept on to improve the banking laws and nor- mative framework, and actively participated in search of the methods for the legal settlement of pressing issues related to the capitalization of banks at the government expense; prevention of the one-party change in terms and conditions of the credit agreements; granting the credit sup- port for the construction, agricultural/industrial and bread-baking areas. More than 26 "anti-cri- sis" draft laws were reviewed and by the results of their consideration the remarks and propos- als were submitted to the Parliament of Ukraine. In addition, in the reporting year the National Bank of Ukraine elaborated and presented proposals to 58 draft laws that had been worked out by the central executive authorities and to 54 draft laws submitted to the Parliament for consideration. Also prepared were the legislative proposals which were used by the people's deputies as the fundamental principles for the fol- lowing draft laws: "On Amendments to Some Laws of Ukraine" (concerning the bank liquida- tion); "On Amendments to the Law of Ukraine "On the Deposit Insurance Fund for Individuals" (new edition). 94 Activities of NBU

In 2008, the National Bank of Ukraine issued 120 norms and regulations, out of which 61 were registered in the Ministry of Justice of Ukraine and 59 – in the Legal Department of the National Bank of Ukraine, since they were not subject to the state registration. In 2008, no rejec- tions for the state registration of the normative and legal acts of the National Bank of Ukraine by the Ministry of Justice of Ukraine took place. Major part of the normative acts, that were adopted by the National Bank of Ukraine in 2008, introduced the alterations to the valid norms and regulations, improving the normative base. A small part of the acts regulated the new areas of the bank activities. Thus, the National Bank of Ukraine approved the Regulations on the electronic money in Ukraine, the Rules for provision- ing funds under the deposits and credits (loans) attracted by the authorized bank from the non- residents in foreign currency, the Accounting rules for operations with applying the payment cards of the National System for Mass Electronic Payments in the National Bank of Ukraine. The regulatory activities of the National Bank of Ukraine was performed in accordance with the Plan of elaboration of the draft regulatory acts for 2008. There were worked out 6 draft reg- ulatory acts, of which 4 were made public. Almost 90 proposals and remarks from the legal enti- ties, including the banking associations, were addressed to the two draft regulatory acts pub- lished and some proposals were partially accounted by the National Bank of Ukraine. No pro- posals or remarks came from the legal and natural entities as regards two other draft regulato- ry acts published. At the present time, none of the prepared draft regulatory acts were approved. Further work in accordance with the Plan of Actions on the realization in 2008 of the National Program for adjustment of the laws of Ukraine to the laws of the European Union was in progress. The National Bank of Ukraine worked out and participated in the elaboration and tracking of 6 draft laws and the Concept for protection of rights of the consumers of the non- banking financial services in the Parliament of Ukraine. Moreover, the provisions of the European Union laws as regards the regulation of the electronic money activities in Ukraine and monitoring of the said activities were implemented in 10 norms and regulations of the National Bank of Ukraine. In particular, it was stipulated to establish the regulatory limits permitting the electronic money to take its potential advantages and also to implement the prudential super- vision over the institutions operating in the area of the electronic money issue and circulation in order to ensure its reliable operation and financial integrity. Law adjustment was also performed in the areas of using the additional instruments of refinancing and the mechanisms for regula- tion of the money and credit market; establishing the additional measures to ensure the bank- ing secret during the bank rehabilitation and realization of the bank liquidation procedure, etc. In 2008, the National Bank of Ukraine kept on to submit claims and complaints. In particu- lar, the National Bank of Ukraine, its regional branches and structural units submitted the fol- lowing: – 49 claims totaling UAH 9.5 million were directed to the court (18 claims of UAH 1.7 mil- lion were satisfied; 4 claims of UAH 0.2 million were rejected; 8 claims of UAH 0.04 million were stopped to consider; 17 claims of UAH 7.5 million are under consideration; 1 claim was with- drawn and 1 case was terminated); – 35 complaints of UAH 2.0 million (20 complaints of UAH 1.1 million were satisfied; 2 com- plaints of UAH 0.04 million were withdrawn; 1 complaint of UAH 0.04 million was rejected; 1 complaint of UAH 0.08 million is under consideration and 11 complaints of UAH 0.8 million remained with no consideration). In 2008, the National Bank of Ukraine, its regional branches and structural units were claimed as follows: – 71 claims to the total amount of UAH 3.4 million (5 claims of UAH 0.6 million were satis- fied; 15 claims of UAH 0.7 million were rejected; 42 claims of UAH 1.8 million are under con- sideration; 3 claims of UAH 0.2 million remained with no consideration; 4 claims of UAH 0.1 mil- lion were terminated and 2 cases were stopped to consider); – 2 claims of UAH 2.4 thousand, of which one claim was rejected and another one was ter- minated (closed). 95 Annual Report 2008

2.9. RISK MANAGEMENT IN THE NATIONAL BANK OF UKRAINE In 2008 the risk management in the National Bank of Ukraine was performed on the regu- lar basis in order to maintain the safe risk level in the banking activities that promoted to the effective realization of the bank primary functions determined by the laws of Ukraine. Risk influence on the assets, liabilities and the capital of the National Bank of Ukraine was reduced through the establishment of certain conditions, quality restrictions and quantity limits related to the operating processes that was reflected in the normative and legal acts of the bank. Safe level of risks in the activities of the National Bank of Ukraine stipulated for the effec- tive management of assets and liabilities of the National Bank of Ukraine, observing the required liquidity ratio of assets and meeting the restrictions imposed by the legislature. The risks which affected the operating processes of the National Bank of Ukraine were under control in order to ensure that the possible losses, if any, were not higher than the level determined by the bank authorities.

2.10. FINANCIAL MONITORING ON PREVENTION OF USING THE BANKING SYSTEM FOR LEGALIZATION (LAUNDERING) OF PROCEEDS OBTAINED FROM CRIME In 2008, the National Bank of Ukraine kept on to take measures aimed at prevention of using the banking system for legalization of criminal proceeds and terrorism financing. The National Bank of Ukraine was active in the elaboration of the draft law of Ukraine "On Amendments to Some Legal Acts of Ukraine Related to Prevention of the Legalization of Proceeds Obtained from Crime or Terrorism Financing", purposed to introduce the differential approach to the identification and learning of the customers based on the assessment of the appropriate risks. Moreover, it was aimed at the implementation to the laws of Ukraine of the current edition of 40 Recommendations and IX Special Recommendations of the FATF, norms of Directive 2005/60/EC of the European Parliament and Council dated 26.10.2005 "On Prevention of Using the Financial System for Money Laundering and Terrorism Financing" and Directive 2006/70/ÅÑ dated 01.08.2006 "On Determining the Implementation Measures for Directive 2005/60/ÅÑ of the European Parliament and Council as regards the definition of the term "statesmen" and the technical criteria to simplify the procedure of the due diligence as regards the customers and to withdraw the principles of the financial activities conducted from time to time or within the limits set". During the year, the National Bank of Ukraine regularly traced and informed the banks of Ukraine on the decisions of the UN, FATF, MONEYVAL (EC Special Committee) and the rele- vant national bodies, specifically, the Office on Prevention of the Financial Crimes attached to the USA Ministry of Finance (FinCEN) as regards prohibition and restriction of establishing the business relations and performing the financial operations with the states and natural and legal entities not applying or applying insufficiently the FATF Recommendations. The representatives of the National Bank of Ukraine within the Government of Ukraine del- egation took part in the 26th meeting of the EC Special Committee (MONEYVAL) held in Strasbourg and also in preparing of the 3rd Round arranged in September – October of the assessment of the effectiveness of the system for prevention of legalization (laundering) of pro- ceeds obtained from crime and terrorism financing in Ukraine. The National Bank of Ukraine participated in preparing and realization of the Plan of Actions for 2008 on prevention and counteraction of the legalization (laundering) of proceeds obtained from crime and terrorism financing. The Plan was approved by the joint resolution of the Cabinet of Ministers of Ukraine and the National Bank of Ukraine. The NBU also took part in the work of the Standing Working Group on the investigation of methods and trends in laundering of the proceeds obtained from crime. In 2008, in order to establish the cooperation between the controlling and law enforcement

96 Activities of NBU bodies, the National Bank of Ukraine realized measures stipulated by the Program of coopera- tion between the National Bank of Ukraine, General Prosecutor Office of Ukraine, Ministry of Internal Affairs of Ukraine, Security Office of Ukraine, State Committee for Financial Monitoring of Ukraine and State Tax Administration of Ukraine as regards the promptly revealing of opera- tions performed in breach of the laws in the banking area for 2007-2008. According to the Law of Ukraine "On Banks and Banking" the banks and the bank branch- es were examined as regards their compliance with requirements of the legislature in the area of prevention and counteraction of the legalization (laundering) of proceeds obtained from crime and terrorism financing. During 2008, 322 inspections were conducted including 190 inspec- tions of banks and 132 inspections of the branches. By the result of the inspections, 4301 cases of violation of the laws in force have been revealed in the mentioned area. The National Bank of Ukraine applied the enforcement measures to the banks and bank officials, namely: – written warnings sent (28); – penalties imposed on the banks (23); – administrative penalties charged from the bank managers and officials (14); – resulted from the inspections, two banks were restricted to perform certain banking oper- ations with high risk level and four bank officials were temporary removed from the positions. In 2008, in Ukraine there were registered 1.1 million financial operations totaling nearly UAH 1.1 trillion that appeared to be the objects of financial monitoring, of which 91.5% opera- tions to the amount of about UAH 831.6 billion were informed to the State Committee of Financial Monitoring of Ukraine that formed 90% of the total information received by the men- tioned body.

2.11. INTERNATIONAL COOPERATION 2.11.1. Relationships of the National Bank of Ukraine with central banks and banking institutions of other countries In 2008, cooperation of the National Bank of Ukraine with central banks and banking insti- tutions of other countries was developing rather dynamically. Management and officials of the National Bank of Ukraine took part in more than 40 international events, specifically, in the vis- its of the delegation of the National Bank of Ukraine headed by the NBU Governor to the People's Bank of China and headed by the First Deputy Governor to the Central Bank of Iceland; delegations of the National Bank of Ukraine to the Mint in Pert (Australia). The coop- eration between the National Bank of Ukraine and the National Bank of the Republic of Belarus kept on within the Advisory Council of the central banks of Ukraine and the Republic of Belarus. In order to exchange experience and get to know the current economic situation and the banking system progress, there were meetings arranged between the management and officers of the National Bank of Ukraine and the representatives of central banks of other countries, for- eign and diplomatic institutions, namely: National Banks of the Republic of Belarus, Kazakhstan, Czechia, Israel, Poland, Slovakia, the USA and Japan Embassies to Ukraine, Japan Bank for International Cooperation, Japan Banking Corporation "Sumitomo Mitsui", Deutche Bank, public corporation "CEB Bank", UniCreditbank (Italy), the bank "Intesa SanPaolo" (Italy), Savings Bank of Russia, Bank of Latvia, and others. The National Bank of Ukraine participated in the regular meeting of the Central Bank Governors' Club of the Central Asia, the Black Sea and the Balkan countries (Sarajevo, Bosnia and Herzegovina); in the 3rd joint meeting of the Ukrainian/German Top Level Group in the economic cooperation between Ukraine and the Federative Republic of Germany (Berlin, FRG) and in the work of the joint bilateral inter-government commissions, in particular, the Inter-gov- ernmental Ukraine-Poland Commission in the economic cooperation issue.

97 Annual Report 2008

2.11.2. Cooperation of the National Bank of Ukraine with the international financial and other organizations In 2008, the National Bank of Ukraine developed further cooperation with the international organizations and also provided the realization of the Strategy for cooperation with the interna- tional financial organizations for 2006-2008 approved by the Cabinet of Ministers of Ukraine and of the new Strategy for Partnership of the World Bank and Ukraine for 2008-2011.

Cooperation with the World Bank Cooperation with the International Bank for Reconstruction and Development (hereinafter, IBRD or World Bank) was realized according to the Strategies approved. Aimed at the financial support of the State Budget of Ukraine, the National Bank of Ukraine together with the Government of Ukraine launched implementation in 2008 of the third stage of the WB project "Development Policy Loan" (hereinafter, DPL-3) through the realization of the Plan of Actions on keeping to the DPL-3 terms and conditions with taking into account the com- mitments of Ukraine specified in the letter of the Government of Ukraine addressed to the World Bank as regards the development policy and the Matrix of the institutional and strategic results within the above project. During the reporting period, the National Bank of Ukraine cooperated with the Government of Ukraine in order to elaborate and realize joint with the World Bank projects which promoted to the development of the banking system, in particular, the following projects: "Enlarged Access Policy to the Markets of Financial Services", "Development of the State Statistics System for Monitoring of the Social and Economic Transformations", "Export Development-II". In 2008, the elaboration of the new project related to the financial system recovery was initiat- ed together with the World Bank. In 2008, within the Credit Line for support of the local executive bodies which took on their balance sheets the social infrastructure objects in the regions where the coal mines have been closed, three new projects of USD 1.4 million were approved, of which USD 1.3 million were disbursed. During the time of realizing the credit lines for micro-, small and medium-sized enter- prises in the regions where the coal industry mines have been closed (MSME Credit Line) and to support the local executive bodies which took on their balance sheets the social infrastruc- ture objects in the regions where the coal mines have been closed (municipal credit line), USD 33.7 million were disbursed to finance 35 sub-projects under the MSME credit line and USD 7.2 million to realize 26 municipal projects. In 2008, the National Bank of Ukraine kept on monitoring of servicing debts to the Ministry of Finance of Ukraine executed by the participating banks and the municipal authorities under the World Bank credit lines. As of 1 January 2009, the indebtedness of banks under the credit lines amounted to USD 4.2 and USD 1.8 million, respectively. Within the Agreement on lending policy between Ukraine (in person of the Ministry of Finance of Ukraine) and the World Bank, the National Bank of Ukraine performed the agent servicing of credits, which were assigned by the Ministry of Finance of Ukraine to the banks of Ukraine. According to the Project on the enlarged access to the market of financial services, USD 150 million would be directed through the authorized banks for granting loans to the small and medium-sized enterprises (SME) in the rural area for 7 year maturity. In 2008, the National Bank of Ukraine checked the eligibility of 37 credit applications of USD 45 million, of which 24 SME sub-projects of USD 23.1 million and 6 applications for refinancing of the micro-credit tranches of USD 17 million granted in the rural area were approved; 7 SME sub-projects of USD 5.1 million were rejected; together with the participating banks the pack- age of documents on the bank security, acceptable for the Ministry of Finance of Ukraine, were worked out. During 2008, the National Bank of Ukraine conducted monitoring of the bank compliance with the project participation criteria and the bank adherence to the commitments to the Ministry of Finance of Ukraine.

98 Activities of NBU

The National Bank of Ukraine kept on maintenance of the project within the World Bank technical assistance "Reforming of the Financial Sector of Ukraine-II" in order to meet the agreement signed in 2005 as regards the Grant of the Government of the Netherlands TF 054948 of Euro 1.5 million. In 2008, the meetings of the management of the National Bank of Ukraine with Mr. H. Wijffels, Executive Director, and Mr. Shigeo Katsu, Vice-President of the World Bank for Europe and Central Asia, took place concerning the cooperation of Ukraine with the World Bank.

Cooperation with the European Bank for Reconstruction and Development In order to support the small and medium-sized business in Ukraine, the second credit line SME-2 totaling USD 88.2 million that was opened by the European Bank for Reconstruction and Development (hereinafter, EBRD) in 2000, was further implemented. As of 1 January 2009, within the SME-1 and SME-2 credit lines, the EBRD granted credits for 248 projects of USD 218.4 million with maturity of up to 5 years and 2-year beneficial peri- od of LIBOR+8. Micro-credits extended to the final borrowers at the expense of funds re-used, were equal to USD 1.3 billion. In 2008, the SME credits were not rendered by the participating banks in view of shortening the maturity period for possible use of funds attracted to 3-4 years, that was attributed to the fact that the SME-2 credit line should terminate in 2010. In the report- ing year, only USD 24 million were extended by the authorized banks to micro-entrepreneurs within the Program of micro-credits. The banks went on to increase the micro-credit amounts both at their own fund expense and at the expense of funds paid by the beneficiaries. As of 1 January 2009, remained out- standing 1940 credits of USD 30.9 million, of which USD 24 million in the current portfolio of the Program participating banks were formed at the expense of the banks' own funds. In 2008, the National Bank of Ukraine met in full its liabilities to the EBRD at the regular maturities, having paid the amount of USD 14.7 million. As of 1 January 2009, the outstanding credits under the SME-2 amounted to USD 16.1 million. The outstanding debts of the partici- pating banks to the National Bank of Ukraine reduced to the amount of USD 16.5 million. Within the cooperation framework with the European Bank for Reconstruction and Development, the NBU worked out the Memorandum of Understanding between the Government of Ukraine and the EBRD and the Law of Ukraine "On Ratification of the Agreement between the Government of Ukraine and EBRD on the cooperation and activities of the EBRD Resident Representative Office in Ukraine". The Annual Meeting of the EBRD Board of Governors was arranged in Kyiv on May 18-19 with participation of the NBU management; during the event Volodymyr Stelmakh, Governor of the National Bank of Ukraine, had a meeting with Jean Lemier, the EBRD President. Also there were other meetings arranged with the EBRD management related to strengthening and broad- ening of the effective cooperation on the operation of the EBRD correspondent accounts being opened with the authorized banks for granting credits denominated in hryvnia to the residents and also related to the EBRD participation in the program of banks' recapitalization, etc.

Cooperation with the International Monetary Fund Because of the deep adverse effect of the world financial crisis on the economy of Ukraine, the basic directions for cooperation of the National Bank of Ukraine and the International Monetary Fund (hereinafter, the IMF) appeared to be the elaboration and realization of the joint Stand-by Program according to which the IMF would render the financial support for Ukraine during next two years in order to promote the stable and long-term growth to be achieved through pursuing the economic policy developed. Basic directions of the program were reflect- ed in the Memorandum on the Economic and Financial Policy for 2009-2010 signed on 31.10.2008. Within the Stand-by Program, the first tranche of USD 4.6 billion came to Ukraine in November 2008. The cooperation on providing the technical assistance and advisory support from the IMF

99 Annual Report 2008

experts went on. In general, in 2008, the experts of 14 IMF missions worked in the National Bank of Ukraine, specifically, as regards the following: – European Department on Article IV of the IMF By-laws (the annual advices/consultations to be arranged), from 20.03 to 01.04.08; review of the current economic situation in the coun- try; assessment of influence of the world financial crisis on the Ukraine situation and coordina- tion of the terms and parameters of the Stand-by lending program for Ukraine (October 16 to 29); assessment of the current economic and financial situation in the country; adhering to the provisions of the Memorandum on the economic and financial policy within the joint Stand-by Program (December 1 to 9); – Financial Department on the assessment of the protective mechanisms of the National Bank of Ukraine (December 8-17); – Legal Department on the general review to be conducted and the assessment of meas- ures and legislative acts approved by the National Bank of Ukraine and the Government of Ukraine to arrange and conduct the foreign exchange auctions and the operation of the inter- bank foreign exchange market (December 8-12). The cooperation with the IMF advanced and its representatives rendered the advisory sup- port to the officers of the National Bank of Ukraine in the issue of external sector statistics, investigation study, re-organization and recapitalization of banks, foreign exchange and mone- tary policies, macro-economics. By results of the technical missions, the IMF experts provided the Ukrainian party with the reports consisting of the appropriate recommendations used by the NBU officers in their work. The NBU management took part in the Spring Meeting of the IMF and the World Bank Governors (April 10-14, Washington, USA); annual meetings of the IMF and the World Bank Constituency Group Governors headed by the Netherlands and Ukraine (October 9-14, Washington, USA).

Cooperation with the CIS Inter-state Bank During 2008, the representatives of the National Bank of Ukraine participated in the meet- ings of the CIS Inter-state Bank Council, tracking the process of its reforming in compliance with the official position of Ukraine, and also in the elaboration of the draft Strategy for the CIS eco- nomic development. In order to improve the work with credits and to enhance the quality control and manage- ment of the CIS Inter-state Bank, the Working group consisting of the central (national) banks' experts from the establishing countries, including Ukraine, conducted the inspection of the lend- ing activities of the CIS Inter-state Bank.

Implementation of the German-Ukrainian Fund Program In 2008, the National Bank of Ukraine kept on monitoring of funds of the German-Ukrainian Fund (GUF) as regards the observance of the "Grant Agreement" signed by the National Bank of Ukraine and the German Reconstruction Credit Institution (KfW). During 2008, the final borrowers were granted credits within the GUF program by the JS Bank "Forum", open JSB "Nadra", open JSB "CrediPromBank" and open JSC "MegaBank". As of 1 January 2009, 9 credit agreements concluded between the GUF and the participating banks of ˆ 17.6 million were acting. As of 1 January 2009, 730 credits amounting to ˆ 10.9 mil- lion remained outstanding. Because of the financial crisis, the credit activities of the participat- ing banks in the IV quarter essentially fell as compared with the previous quarter. On the whole, as of 1 January 2009, the banks, participating in the GUF Program of micro- credits, extended 160.4 thousand credits of ˆ 672.8 million, including over 1 thousand credits of ˆ 22.7 million, rendered in 2008. By the end of the year, the current credit portfolio formed 0.7 thousand loans of ˆ 10.9 million. During 2008, the National Bank of Ukraine went on to take measures on the implementa- tion of the "Refinancing Program to Support the Rural Area Credits". According to that project,

100 Activities of NBU the Government of the Federative Republic of Germany extended to Ukraine (in the person of the Ministry of Finance under condition that the GUF should be the project executor) the pref- erential credit line of ˆ 7 million for 45-year period. The Project was implemented within the framework of the Inter-government Agreement on the financial cooperation between Ukraine and Germany and the Sub-credit Agreement on the transfer of the loan and the grant to finance the Project signed by the GUF and the Cabinet of Ministers of Ukraine. In 2008, based upon the due diligence results, the GUF Supervisory Council approved three banks to be the project participants: the type open JSB "Dnister", the JSC "Finance & Credit" and the JSB "ImexBank". The GUF approved in full the amount of funds to be delivered as the first tranche, received by the GUF from KfW (ˆ 3 million), having concluded the Credit agreements with the banks-partners. The GUF credits within the Credit agreements have been extended to the open JSB "Dnister" and the JSB "ImexBank". Credit funds for the final borrow- ers were granted within the GUF Project only by the open JSB "Dnister"

Cooperation with other international institutions In conformity with the strategic course of Ukraine in the external economic activities, in 2008, the National Bank of Ukraine continued to pay an important attention to the cooperation with the European Union (EU). In view of the fact that in the reporting year the negotiations on the establishment of the free trade zone were officially launched between Ukraine and the EU, the National Bank of Ukraine took active part in preparing the negotiating materials and the position documents, as well as in the elaboration of the draft Agreement on the establishment of the free trade zone, including the participation in the very negotiating process. Similar work was conducted as regards the conclusion of the new Agreement on the association between Ukraine and the EU that should renew the general institutional framework of the Ukraine/EU cooperation and promote the enhancement of the relationships in all areas. The National Bank of Ukraine also participated in the elaboration of the issues related to financing of the EU Foreign Assistance Program "Support of the Implementation of the Energy Strategy of Ukraine". During the reporting period, the National Bank of Ukraine went on the active participation in the organizational structures ensuring the cooperation with EU in the different areas: Ukraine/EU Cooperation Committee, its sub-committees, in the Ukraine/EU Cooperation Council. During 2008, the National Bank of Ukraine provided realization of the Ukraine-NATO Target Plan for 2008 in the part, related to the competence of the National Bank of Ukraine. In 2008, the National Bank of Ukraine participated in the elaboration of measures (on the general government level) on the adaptation of the Ukraine economy to the requirements of the World Trade Organization (WTO), which would enable to optimize the integration process to the world economic environment. Upon joining Ukraine into the WTO (May 2008) and obtaining the right to participate in the working groups on the consideration of applications for entering into the WTO , the National Bank of Ukraine draw proposals as regards the position of Ukraine in the multilateral negotia- tions on the access to the markets of goods and services of other countries. Joining Ukraine into the WTO also pushed the initiation of talks with other WTO member- countries on the establishment of the free trade zones. In the reporting year, such talks were launched with Singapore. In view of the above, the National Bank of Ukraine was involved in the elaboration of the draft Agreement on the free trade purposed to promote the development of the bilateral economic relationships through the extension of the mutual trade. In conformity with the national Strategy of Cooperation with the International Financial Organizations for 2006-2008, further cooperation with the Black-Sea Bank for Trade and Development was in progress. In particular, in 2008, the National Bank of Ukraine participated in the elaboration of the issue related to increasing Ukraine's participation in the authorized cap-

101 Annual Report 2008

ital of the said regional development bank that would contribute to the possibility of attracting the future long-term financial resources to realize the investment projects in Ukraine. In 2008, the work went on as regards the intensification of cooperation between the National Bank of Ukraine and the European Investment Bank, the National Bank of Ukraine and the Northern Investment Bank and as regards joining the Bank for International Settlements.

2.12. BASIC TRENDS OF ECONOMIC WORK OF THE NATIONAL BANK OF UKRAINE 2.12.1. Statistical and information support of the National Bank of Ukraine activity In 2008, the National Bank of Ukraine ensured handling of economic work directed towards fulfilling the functions in compliance with the Law of Ukraine "On the National Bank of Ukraine" under the following directions: – compilation of monetary and banking statistics; – compilation of the balance of payments, its analysis and forecasting; – compilation and analysis of international investment position; – compilation and analysis of the state external debt; – analysis and forecasting of macroeconomic and monetary indicators; – optimization of the statistical reporting that is submitted to the National Bank of Ukraine; – preparation of information as regards extended credits, attracted deposits and invest- ments into securities; – preparation of information as regards interest rates on deposits and credits; – preparation of statistical publications, analytical reviews and presentation materials as regards the situation and tendencies of the economy and banking system development; – monitoring of putting into effect the measures on fulfillment of decrees and orders of the President of Ukraine on economic issues, etc. During the reporting year, compilation of the monetary and banking statistics indicators was ensured, the statistical reporting was provided to the International Monetary Fund and the infor- mation was disseminated through the official editions of the National Bank of Ukraine and the NBU web-site. In cooperation with the Secretariat of the President of Ukraine and the Cabinet of Ministers of Ukraine, the National Bank of Ukraine ensured fulfillment of measures related to the develop- ment of the banking system and raising its role in the development of the economy of the state. In order to ensure transparency concerning the banking activity, the National Bank of Ukraine issued over the year the following official periodicals: analytical and statistical edition "Bulletin of the National Bank of Ukraine" and magazine "Herald of the National Bank of Ukraine" on a monthly basis and the "Balance of Payments and External Debt of Ukraine" quarterly. In 2008, the work on optimization of the statistical reporting, submitted to the National Bank of Ukraine, was continued and contributed to ensuring the compilation of the monetary statis- tics, balance of payments statistics, international investment position, as well as external debt under international standards, and to fulfillment of regulative and supervisory functions by the National Bank of Ukraine. During the reporting year, two amendments were made to the Rules of Organizing the Statistical Reporting submitted to the National Bank of Ukraine and, as a result, 34 forms were changed, six new forms were introduced and one form of statistical report- ing was cancelled. Proposals as to amendments to the acting forms of statistical reporting, can- cellation of some forms of reporting, changes in the procedure, periodicity and terms of report- ing, as well as software adjustment were coordinated with the working group organized in March 2008 with participation of specialists of the Central Office of the National Bank of Ukraine, Association of Ukrainian Banks, "Ukrainian Credit and Banking Union" Association and some leading banks of Ukraine. 102 Activities of NBU

In 2008, the statistical reporting on monetary and banking statistics was monthly presented to the International Monetary Fund for the indicators inclusion in the statistical digest "International Financial Statistics" and Annual Report of the International Monetary Fund. Initiated was the development and implementation of the system of statistical data dissem- ination in electronic format, whose underlying principles are data actuality and promptness in submitting the information to users in accessible and agreeable form. This system corresponds to modern practice of data dissemination in the European System of Central Banks. During 2008, on the web-site of the National Bank of Ukraine, there was placed the Statistical Bulletin (electronic edition) with the monetary statistics data in a new format, as well as express publi- cations "Monetary Aggregates Statistics. Analytical Review" and "Statistics of Formation and Allocation of Financial Resources of Depository Corporations". In order to comply with the IMF's Special Data Dissemination Standard, the work on preparation and dissemination of data and metadata according to the indicators of the financial and external sec- tors of the economy was carried out. Prepared and disseminated were the metadata in the new for- mat including the basic data page, the general methodology page and fundamentals of assessing the quality of data by the indicators of the financial and the external sectors of the economy. During the year, on the web-site of the National Bank of Ukraine ensured was the compila- tion and dissemination of quarterly statistical information regarding financial stability indicators of the depository corporations sector. Starting from October 2008, initiated was the information preparation under a new format of submitting the data and metadata regarding the financial sta- bility indicators to be presented to the International Monetary Fund for publication on the web- site of the International Monetary Fund. In 2008, the work, aimed at making the financial passport of regions by the indicators of economic development, monetary and banking statistics for the economic analysis of regions and economic researches, was going on. During 2008, the work on implementing the World Bank's project "Development of the state statistics system for monitoring of the social and economic transformations" continued. In the context of the above project, teaching English was provided for employees of the National Bank of Ukraine, a full range of procedures was conducted to select an external consultant for provi- sion of services as to improving the methodology of monetary statistics and balance of pay- ments statistics. Economic work in the NBU regional branches was carried out by the divisions of economic work and money-and-credit relations and was aimed at a permanent monitoring of relevant region's economic development, analysis of the activity of banking institutions, as well as the money and credit, securities and foreign exchange markets according to their distinguished indicators. During the reporting year, the work on improving the information content and updating the web-site of the National Bank of Ukraine continued. Increase in publications of information, ana- lytical and statistical materials such as press releases and official announcements, statistical publications and analytical reviews, information on foreign currency auctions, foreign currency sales in the interbank market, banks' liquidity regulation, etc., that attracted more and more attention of users. This is evidenced by increased number of visitors of the NBU web-site in 2008 (by more than 80%). For the purpose of all-round elucidation of the activity of the National Bank of Ukraine, "The National Bank of Ukraine" exhibition continued its work at the "Expocenter of Ukraine" National Complex, which represented products of the Banknote Printing and Minting Works of the National Bank of Ukraine, official publications, booklets with information about training institu- tions of the National Bank of Ukraine, "Development of the Economy and the Banking System of Ukraine" presentation materials, materials concerning the development of the National System of Mass Electronic Payments, as well as samples of electronic (plastic) cards issued in Ukraine for making the settlements etc. For the artistic design of illustrative photos, text and numerical materials, exhibits, video and information materials of the exposition, the National Bank of Ukraine in 2008 was awarded a diploma of the "Expocenter of Ukraine" National Complex. 103 Annual Report 2008

In 2008, in order to improve the information awareness of the National Bank of Ukraine spe- cialists with consideration for professional needs, provided was the operational support of the management and structural units of the National Bank of Ukraine with materials of internation- al financial organizations, particularly the International Monetary Fund, the World Bank, as well as central banks and leading analytical and rating agencies. During the year, more than 170 documents were placed on the bank's intranet special web-site, which covers the activities of international financial organizations. At the end of the year, the information and analytical bulletin for the management started to be issued, which publishes the most sensitive announcements of leading foreign experts deal- ing with the problems of the world economy development, assessments, recommendations, forecasts, comments of the official representative of Ukraine in the IMF and other information needed for decision-making. In execution of the management requests, when preparing the analytical and reference notes, the documents of the International Monetary Fund executive directors, which the National Bank of Ukraine is authorized to be familiarized with, were used. A special emphasis was placed on the work of experts of the International Monetary Fund and cooperation with the official representative of Ukraine in the International Monetary Fund.

2.12.2. Economic research and forecasting In 2008, in order to improve the process of preparing the draft decisions and to introduce the procedures of public policy adapted to European practice, the Policy Analysis Group pre- pared and placed the Green Book "Consultations on Strengthening the NBU Role in Ensuring the Price Stability" on the web-site of the National Bank of Ukraine, as well as published the White Book "The Way of Strengthening the NBU Role in Ensuring the Price Stability". In the reporting year, the economic research based on a quarterly poll of business expec- tations of Ukrainian enterprises continued. The aim of the polls was to get information regard- ing the mood of economic entities and supplementary data for the macroeconomic forecast. The information was received by the voluntary questioning of 1256 enterprises selected on a basis of regional structure and according to the economic activity types. Analytical materials and poll results were placed on the Internet web-site of the National Bank of Ukraine and were given to enterprises-participants, as well as state authorities. In progress was the work on improving the analytical and forecasting system's basic com- ponents, the main of which was the "Quarterly Predictive Model" (QPM) that was used to sim- ulate the influence of monetary policy on the real economy sector and enabled to analyze dif- ferent scenarios of monetary policy for pursuing the stated objectives, in particular regarding the inflation. Forecasting methods used at the National Bank of Ukraine were made public in some presentations and widely elucidated in a number of scientific articles and publications.

2.13. SCIENTIFIC RESEARCH OF THE NATIONAL BANK OF UKRAINE During 2008, in conditions of worsening of the situation in the world financial markets, the National Bank of Ukraine carried out a number of scientific researches aimed at the sustain- ability strengthening of the banking system of Ukraine, in particular regarding: – substantiating the system of factors for forecasting the dynamics of the banking system stability indicators; – capital requirements to banks to cover the interest risk in compliance with the Amendment to Basle 1; – generalizing the international experience in regulation and assessment of a bank's hybrid capital and prospects of its instruments' introduction; – methods of the shadow economy calculation and construction of the econometric model for valuation of the shadow economy of Ukraine; – econometric models for the exchange rate policy making and macroeconomic effects of changes in the exchange rate dynamics;

104 Activities of NBU

– international experience regarding the instruments and approaches to quality control of banks' consumer credits. The work on elaboration of "Financial Sector Development Strategy up to 2015" project was continued. In the reporting year, the National Bank of Ukraine, in the context of international coopera- tion, participated in preparing the "Development of Communicative Policy of the National Bank of Ukraine" project During the year, the National Bank of Ukraine, with assistance of international financial organizations, interested ministries, departments and associations, organized scientific confer- ences, seminars, round-tables with discussion of problem issues of scientific research, propos- als and practical recommendations as to the directions of developing the banking system com- petitiveness.

2.14. IMPROVEMENT OF ACCOUNTING AND FINANCIAL REPORTING During 2008, the National Bank of Ukraine directed its activity towards improvement of the methodological tools in order to give to the users the complete, true and impartial information about the financial situation of the Ukrainian banks in compliance with the requirements of inter- national standards of financial reporting. In accordance with the aims and lines of the banking system development for 2008, the work of the National Bank of Ukraine was directed towards: – continuation of improving the accounting operations with financial and payment instru- ments, drawing up of reliable and transparent financial reports by Ukrainian banks taking into account the requirements of the international standards of financial reporting; – harmonization of methodological grounds of accounting with basic legal norms of the European Union. The above tasks were fulfilled by means of improving the acting normative and legal acts, namely: – improved were the methodological grounds of representation in the banks' accounting of the operations with the use of payment cards through the self-servicing hardware and software complexes; – improved were the rules of use of accounting of the banks' operations with cash and bank- ing metals in the part of using the self-servicing hardware and software complexes during the acceptance and subsequent transfer of cash, loan repayment by a borrower, etc. During 2008, the National Bank of Ukraine worked with banks as to applying the require- ments of international standards for representation in accounting of credits, deposits and finan- cial guarantees, as well as to raising the requirements to disclosure in the financial reporting of information about financial instruments, character and level of risks emerging in operations therewith. The new approach will ensure getting of the reliable, complete and unbiased infor- mation about the financial situation of a bank and results of its activity and will base on the data of internal management reporting submitted to the bank top management in order to make proper decisions.

2.15. AUDIT OF THE NATIONAL BANK OF UKRAINE In 2008, the audit of the National Bank of Ukraine structural units was carried out in com- pliance with the approved plan of auditing the structural units of the National Bank of Ukraine. When carrying out the audit, the main attention was paid to authenticity of the financial and statistical reporting, estimation of risks in the activity of structural units of the National Bank of Ukraine, observance of the requirements of the Ukrainian Law and normative and legal acts of the National Bank of Ukraine, evaluation of efficiency of the system of internal control of the NBU structural units, as well as improvement of auditing forms and methods.

105 Annual Report 2008

The work continued aimed at attaining the conformity of the Audit Department activity with the International Standard of Professional Activity and Internal Audit developed by the Institute of Internal Auditors. In 2008, the audit plan was fulfilled, according to which 289 audits were conducted on different issues, among them 263 audits of regional branches (25 complex audits and 238 audits on sepa- rate issues of the activity), 10 audits on separate issues of the activity of structural units of the cen- tral office and 16 audits of activity of the structural units and divisions of the National Bank of Ukraine. By the audits' results, structural units of the National Bank of Ukraine accepted for execu- tion 1728 recommendations, or 95.1% of the submitted ones.

2.16. BANKNOTE AND COIN PRODUCTION 2.16.1. Activities of the Banknote Printing and Minting Works of the National Bank of Ukraine Production activity of the Banknote Printing and Minting Works of the National Bank of Ukraine in the year under review was carried out in compliance with the established production capacities and the tasks of the National Bank of Ukraine regarding the manufacture of money and concluded agreements with other customers. Within the established tasks and concluded agreements the Banknote Printing and Minting Works in 2008 produced: – 1.5 billion pieces of banknotes of different denominations; – 1 billion pieces of small coins; – 1 billion pieces of commemorative coins; – 70 million pieces of banknotes to the order of "Giesecke & Devrient GmbH" (Germany); – 30 thousand state awards, departmental medals and badges. Production volume in 2008, compared to 2007, increased by 26.8% and amounted to UAH 434.6 million. Increase in output of products of the Banknote Factory in terms of value was caused by both the cost increase and growth of the banknote production volume under the order of the National Bank of Ukraine (by 104.7 million banknotes, or by 6.9%). Volumes of the Mint output increased in terms of cost in consequence of the cost growth of production of commemorative, jubilee and small coins, mainly due to the increase in cost of blanks and the augmentation of production volumes of commemorative coins (by 134.4 thou- sand pieces, or by 12.9%) and small coins to order of the National Bank of Ukraine (by 80.0 mil- lion pieces, or by 8.0%). In 2008, the Banknote Printing and Minting Works of the National Bank of Ukraine realized products (services) to the total amount of UAH 427.6 million, including: – to the order of the National Bank of Ukraine – UAH 406.2 million; – to the order of governmental institutions and other organizations – UAH 18.0 million. By Decision of the Board of the National Bank of Ukraine of July 1, 2008, No.197, approved were the Measures on replacement of worn-out equipment and introduction of modern tech- nologies at the Banknote Printing and Minting Works of the National Bank of Ukraine. The Investment Program of the Banknote Printing and Minting Works of the National Bank of Ukraine for 2008-2011 was adopted (Decision of the Board of the National Bank of Ukraine of August 6, 2008, No. 233). In compliance with these decisions, concluded were the agreements on updating the Super Numerota-212 machines, on supply of the BPS-2000 quality control sys- tems and "GRABENER" coining presses. Complex automation of financial and economic processes of the Banknote Printing and Minting Works, as part of the corporative project of automation of the National Bank of Ukraine on the SAP basis, was anticipated as one of the strategic lines of automation of the Banknote Printing and Minting Works' intra-business activity. 106 Activities of NBU

2.16.2. The Banknote Paper Mill activity In 2008, according to the production activity results, the Banknote Paper Mill of the National Bank of Ukraine produced 1704 tons of banknote and 383 tons of secured paper that enabled to load production facilities by 81.1% and 18.2%, respectively. Volume of sales in 2008 was 1725 tons of banknote paper to the amount of UAH 72.9 mil- lion, and 410 tons of secured paper to the amount of UAH 7.3 million. The order of the National Bank of Ukraine was executed in full and in due time. For execution of the government energy saving program, the section of electricity and process steam production was put into operation. According to the plan tasks of manufacture technical re-equipment, the complex computer- aided security system of the Banknote Paper Mill was put into operation. With the purpose of paper production for a new generation of banknotes, the modernization of automated control system of technological processes of paper production started. In 2008, due to introduction of the technology of mechanically made watermark print pro- duction, the term for production of a special pattern of a new design decreased by 50.0%. In execution of production quality improvements, a small-diameter forming roll was installed, owing to which the output increased by 3.0% as long as large denomination banknote paper is produced. Refined was the composition of banknote paper with the use of cheaper cotton raw mate- rial for production of banknote paper with improved consumer properties. In order to improve paper durability of banknotes in the process of their circulation, worked out were practical recommendations as to the use of flaxen bast-fibers for banknote manufac- ture. Research and industrial samples of banknote paper were made involving flax fibers. Examined were technical and printing characteristics of the paper during manufacturing the monetary units at the Banknote Factory of the National Bank of Ukraine and positive results were obtained.

2.17. STAFFING AND PERSONNEL TRAINING AND RETRAINING As at January 1, 2009, the personnel of the National Bank of Ukraine numbered 11314 per- sons, including 6226 civil servants and 5088 other employees (see Table 30).

Table 30. BREAKDOWN OF CIVIL SERVANTS OF THE NATIONAL BANK OF UKRAINE BY POSITION CATEGORIES (as of December 31, 2008 ) Indicators Total persons Men Women

Number 6226 2404 3822 Senior officials whereof: 1745 853 892 1st category 5 5 0 2nd category 121 85 36 3rd category 567 228 339 4th category 1034 517 517 5th category 18 18 0 Professionals, specialists, employees 4481 1551 2930 whereof: 2nd category 6 4 2 3rd category 447 124 323 4th category 417 118 299 5th category 3611 1305 2306

107 Annual Report 2008

The qualitative composition of the personnel of the National Bank of Ukraine's system over two last years was as follows (see Table 31).

Table 31. QUALITATIVE COMPOSITION OF THE NATIONAL BANK OF UKRAINE PERSONNEL Personnel Qualitative Indicators 2008 For reference: 2007 Specialists (senior officials, professionals, specialists) with complete higher education (number of persons) 6645 6451 Doctors and Candidates of Sciences (number of persons) 385 368 Specialists with work experience (%): up to 5 years 19.1 19.6 5 years and more 80.9 80.4 Staffing level (%): in the National Bank of Ukraine 96.7 96.5 in the Central Office 92.5 94.0 Average age of employees: in the National Bank of Ukraine 42.6 41.8 in the Central Office 39.9 40.2 Employees of retirement age (number of persons) 600 485 Dismissed (%) 7.1 7.3 Resigned by choice (%) 3.8 4.2

For upgrading the qualifications of employees of the system of the National Bank of Ukraine and banking and financial institutions of Ukraine over 2008, in 1428 training events (seminars, conferences, courses, round tables, probation etc.), 1202 of them were held in Ukraine and 226 abroad, 10906 students participated, including 7097 employees of the system of the National Bank of Ukraine and 3809 persons from banking and other institutions of Ukraine. The total number of employees of the system of the National Bank of Ukraine who raised their qualification in the reporting year exceeded 3.6 thousand persons (32.2 % of total number of employees). High emphasis in personnel training was placed on the issues of information technologies, monetary policy, monetary and banking statistics, balance of payments, macroeconomic fore- casting, banking supervision, financial monitoring, foreign exchange regulation, cash circula- tion, accounting and financial reporting, personnel management, audit, payment systems, legal support of banks' activities, banking security, public purchases, other important aspects of the activity of the central bank and the banking system as a whole (see Figure 60).

Fugure 60. Structure of the training events topics in 2008 in Ukraine and abroad

108 Activities of NBU

As at January 1, 2009, 7149 persons studied at subordinated educational institutions under all directions and specialties, including 4207 full-time and 2942 external students. At the expense of the National Bank of Ukraine budget, 1935 persons studied (including 1798 full-time students and 137 NBU employees as external students). In 2008, 1556 specialists graduated from higher educational institutions of the National Bank of Ukraine, including 697 full-time and 859 external students. The stock of the Central Library of the National Bank of Ukraine had 105989 published pieces, including 45548 books, 31743 newspapers, 23837 magazines and 4861 other items. The Library has 1896 registered readers. Number of visits equaled 14194.

2.18. DEVELOPMENT OF THE MATERIAL AND TECHNICAL BASE ACCORDING TO MAIN DIRECTIONS The capital investment plan for 2008 stipulated UAH 210.2 million for construction of the NBU own facilities and their financing, including UAH 204.6 million at the expense of centralized funds and UAH 5.6 million at the cost of own amortization allowances. Actual fulfillment of the capital investment plan amounted to UAH 208.7 million, or 99.3%. At the expense of centralized funds, UAH 203.5 million were spent for design and survey, construction and installation, start-up and other works, as well as for the equipment mounting, that accounted for 99.5% of the capital invest- ment plan at the expense of centralized funds. These were sites of regional branches, education- al institutions, the Central Office and the Banknote Paper Mill. The capital investment plan at the expense of own amortization was fulfilled to the amount of UAH 5.2 million, or 92.9% under the sites of the Banknote Printing and Minting Works and the Banknote Paper Mill (see Table 32). A high level of capital investment plan fulfillment was under the sites of educational institu- tions and establishments (by 106.1%) financed at the expense of centralized funds and at the Banknote Paper Mill (by 175.0%) financed at the expense of own amortization. The capital investment plan at the expense of centralized funds was fulfilled under the sites of the Central Office by 96.2%, and under sites of regional branches by 89.3%. Basic assets were put into operation to the amount of UAH 172.4 million, that totaled 96.5% of the plan, including UAH 167.3 million, or 96.8% at the expense of centralized funds and UAH 5.1 million, or 86.4% at the expense of own depreciation charges. The plan of putting into operation the sites at the expense of centralized funds was fulfilled by the Central Office (by 100.8%) and at the expense of its own depreciation charges by the Banknote Paper Mill (by 100.0%). The plan of putting into operation the sites at the expense of centralized funds was not ful- filled by regional branches (by 97.1%), educational institutions and establishments (by 94.9%) and the Banknote Printing and Minting Works (with UAH 0.8 million planned). In 2008, the design and survey works were fulfilled to the amount of UAH 6.8 million. At the end of 2008, volumes of non-fulfilled construction amounted to UAH 156.3 million. Energy saving innovative technologies were introduced at the following fixed assets put in operation: – power module to supply the Banknote Paper Mill with electricity and process steam – complex generation of electric and thermal power (cogeneration) for process needs of the Banknote Paper Mill, which allowed to enhance considerably the reliability of power supply and to cut the natural gas consumption almost by 30%; – use of solar energy for premises heating and hot water supply as a result of reconstruc- tion of the recreation center "Pivdenni Zori" in the village of Zatoka, Odesa Region; – use of a modern ventilated fa?ade construction for fa?ade warmth-keeping of the admin- istrative building, as a result of which power consumption for heating and air conditioning decreased by 33%. Adopted was construction of the 13th category antiburglar vault at the Khmelnytskyi Regional Branch of the National Bank of Ukraine according to the Program of staged bringing 109 Annual Report 2008

of cash operating units and vaults of the National Bank of Ukraine institutions into conformity with acting requirements for the technological reinforcement.

Table 32. CAPITAL CONSTRUCTION WORKS BY SITES OF THE NATIONAL BANK OF UKRAINE IN 2008 (UAH million) Fulfillment, No. Indicators Plan Fact % 1. Capital investments under the construction sites of the National Bank of Ukraine 210.2 208.7 99.3 1.1 at the expense of centralized funds including: 204.6 203.5 99.5 1.1.1 sites of the Central Office 13.0 12.5 96.2 1.1.2 sites of regional branches 73.2 65.4 89.3 1.1.3 sites of training institutions and organizations 118.4 125.6 106.1 1.2 at the expense of own amortization including: 5.6 5.2 92.9 1.2.1 Banknote Printing and Minting Works 2.8 0.3 10.7 1.2.2 Banknote Paper Mill 2.8 4.9 175.0 2. Sites put into operation to the amount of basic assets 178.7 172.4 96.5 2.1 at the expense of centralized funds including: 172.8 167.3 96.8 2.1.1 of the Central Office 24.5 24.7 100.8 2.1.2 of regional branches 83.5 81.1 97.1 2.1.3 of training institutions and organizations 64.8 61.5 94.9 2.2 at the expense of own depreciation including: 5.9 5.1 86.4 2.2.1 Banknote Printing and Minting Works 0.8 0 õ 2.2.2 Banknote Paper Mill 5.1 5.1 100.0 3 Uncompleted construction of the sites of the National Bank of Ukraine õ 156.3 õ

2.19. RESULTS OF THE FINANCIAL ACTIVITIES OF THE NATIONAL BANK OF UKRAINE In the income statement of the National Bank of Ukraine for 2008, income and expenses are represented on the accrual basis. The total income of the National Bank of Ukraine in 2008 as compared to 2007 increased by 60.4%, or by UAH 4636 million and amounted to UAH 12307 million. In 2008, the income growth took place primarily due to the increase in income on opera- tions with debt securities that are accounted at fair value with recognition of the revaluation result in financial results. Within the general structure of income of the National Bank of Ukraine the share of this item augmented up to 52.1% from 47.2% in 2007 (see Figure 61). Changes took place in the structure of interest income, whose share in the income of the National Bank of Ukraine for 2008 was 41.8% (47.5% in 2007): income under the extended credits equaled 28.4%, whereas in 2007 it was 3.2% only; the share of income on the placed deposits decreased up to 68.6% from 97.7% in 2007. Total volume of current expenditures of the National Bank of Ukraine in 2008 as compared with 2007 increased by 45.4%, or by UAH 924.0 million, and amounted to UAH 2960 million.

110 Activities of NBU

Figure 61. Structure of income of the National Bank of Ukraine for 2004–2008

In 2008, the structure of expenditures of the National Bank of Ukraine did not change essen- tially, except commission expenditures whose share in the reporting year grew up to 4.6% from 0.2% in 2007. This item growth (by UAH 129 million) took place as a result of commission pay- ment for servicing the first IMF tranche within the credit line, as well as expenditures for creation of provisions for devaluation of the National Bank of Ukraine foreign exchange assets (by UAH 145 million). In addition, during 2008, expenditures caused by manufacture of commemorative and jubilee coins, souvenir and other products increased (by UAH 84 million) due to increase in their variety and production costs, as well as amortization (by UAH 75 million). However, the share of these expenses in bulk decreased by 3.9 percentage points (see Figure 62).

Figure. 62. Structure of expenses of the National Bank of Ukraine for 2004–2008

Profit from day-to-day activity of the National Bank of Ukraine for 2008 increased by 66.0%, or by UAH 3712 million and amounted to UAH 9347 million.

Governor of the National Bank of Ukraine V.S. Stelmakh

111

Part 3

CALENDAR OF BASIC EVENTS HELD IN 2008 Annual Report 2008

CALENDAR OF BASIC EVENTS HELD IN 2008

January y Increasing the discount rate from 8.0% to 10.0% annually. y Introducing the registration of agreements on obtaining short-term credits by authorized banks from non-residents. y Putting into circulation of the commemorative coin "The Year of the Rat" at the face value of UAH 5 (silver). y Approving the amendments to the Regulations on Handling by the National Bank of Ukraine of Liquidity of the Banks of Ukraine. y Putting into circulation of the jubilee coin "Vasyl Stus" at the face value of UAH 2 (German silver). y Approving the amendments to the Regulations on Taking the Enforcement Measures by the National Bank of Ukraine for Banking Law Violation. y Putting into circulation of the jubilee coin "Leo Landau" at the face value of UAH 2 (German silver). February y Approving the amendments to the Instruction on the Order of Regulation of Ukrainian Banks' Activity. y Putting into circulation of the commemorative coin "Scythian Gold" (The Goddess Api) at the face value of UAH 2 (gold). y Putting into circulation of the jubilee coin "Sydir Holubovych" at the face value of UAH 2 (German silver). March y Putting into circulation of the commemorative coin "Annunciation" at the face value of UAH 5 (German silver) and UAH 10 (silver). April y Approving the amendments to the Regulation on the Procedure of Forming the Required Reserves by Banks of Ukraine. y Approving the amendments to the Regulations on Taking the Enforcement Measures by the National Bank of Ukraine for Banking Law Violation. y Putting into circulation of the jubilee coin "100 Years to Kyiv Zoo" at the face value of UAH 2 (German silver). y Increasing the discount rate from 10.0% to 12.0% annually. May y Putting into circulation of the jubilee coin "600 Years of the City of Chernivtsi" at the face value of UAH 5 (German silver). y Putting into circulation of the jubilee coin "Yevhen Petrushevych" at the face value of UAH 2 (German silver). y Putting into circulation of the commemorative coin "Black Griffin" at the face value of UAH 10 (silver) and UAH 2 (German silver). y Putting into circulation of the commemorative coin "Swallow's Nest" at the face value of UAH 50 (gold) and UAH 10 (silver). y Putting into circulation of the jubilee coin "225 Years of the City of Sevastopol" at the face value of UAH 10 (silver). June y Approving the amendments to the Regulation on Carrying Out the Operations with Banking Metals by Authorized Banks. y Approving the Rules of Provisioning under Attracted Deposits and Credits (Loans) in Foreign Currency by an Authorized Bank from Non-Residents. y Putting into circulation of the commemorative coin "Cancer" at the face value of UAH 2 (gold) and UAH 5 (silver).

114 Calendar of Events

y Putting into circulation of the jubilee coin "Roman Shukhevych" at the face value of UAH 5 (silver). y Putting into circulation of the jubilee coin "850th Anniversary of Sniatyn" at the face value of UAH 5 (German silver). y Approving the Regulations on the Procedure of Ensuring Inspections by Government Control Authorities and External Auditors within the System of the National Bank of Ukraine. y Approving the Regulation on the Distinctions of a Bank's Reorganization by the Decision of Its Owners. y Approving the amendments to the Instruction on Inter-Bank Transfer in the National Currency in Ukraine. y Approving the amendments to the Regulations on the Procedure of Registration of Agreements of Membership or Participation in International Payment Systems and Adjustment of Rules of Money Transfer Systems Created by Resident Banks. y Approving the Regulations on Electronic Money in Ukraine. y Approving the amendments to the Rules of Statistical Reporting to be Submitted to the National Bank of Ukraine. July y Putting into circulation of the commemorative coin "Christianization of Kyiv Rus" at the face value of UAH 100 (silver). y Putting into circulation of the commemorative coin "Leo" at the face value of UAH 5 (silver) and UAH 2 (gold). y Putting into circulation of the commemorative coin "Tereschenko Family" at the face value of UAH 10 (silver). y Approving the Regulations on the Procedure of Execution by Banks of Documents for Transfer, Forced Writing Off and Sequestration of Foreign Exchange Amounts and Banking Metals. y Approving the amendments to the Instruction on the Procedure of Issuing the Individual Licenses to Invest Abroad. y Introducing the 20% reserve requirement for short-term bank FX loans. y Putting into circulation of the jubilee coin "Heorhii Voronyi" at the face value of UAH 2 (German silver). August y Approving the amendments to the Instruction on the Procedure of Regulation of Banks' Activity in Ukraine. y Approving the amendments to the Regulation on the Procedure of Creation and State Registration of Banks and Opening of their Branches, Representative Offices and Departments. y Approving the amendments to the Regulation on the Procedure of Issue to Banks of Banking Licenses, Written Permits and Licenses to Perform Individual Transactions. y Putting into circulation of the commemorative coin "Virgo" at the face value of UAH 5 (silver) and UAH 2 (gold). September y Putting into circulation of the commemorative coin "Christianization of Kyiv Rus" at the face value of UAH 5 (German silver). y Accepting the Methodical recommendations on planning the measures in Ukrainian banks in case of unforeseen circumstances.

115 Annual Report 2008

y Putting into circulation of the jubilee coin "Nataliia Uzhvii" at the face value of UAH 2 (German silver). y into circulation of the jubilee coin "175 Years of the State Arboretum "Trostianets" at the face value of UAH 5 (German silver). y Approving the amendments to the Instruction on the Organization of Transportation of Foreign Exchange Valuables and Collection Activity in Banking Institutions of Ukraine. y Putting into circulation of the commemorative coin "Libra" at the face value of UAH 5 (silver) and UAH 2 (gold). y Putting into circulation of the jubilee coin "725th Anniversary of City of Rivne" at the face value of UAH 5 (German silver). y Putting into circulation of the commemorative coin "On the Way to the Independence. Ukrainian-Swedish Politico-Military Alliances of the 17th -18th Centuries" at the face value of UAH 10 (silver). October y Approving the amendments to the Instruction on the Procedure of Regulation of Banks' Activity in Ukraine. y Putting into circulation of the commemorative coin "In Honor of Ecumenical Patriarch Bartholomew I Visit to Ukraine" at the face value of UAH 50 (silver). y Putting into circulation of the commemorative coin "Decennial of Entry of the Historical Center of the City of Lviv in the UNESCO World Heritage List" at the face value of UAH 10 (silver). y Introducing the moratorium on the pre-schedule withdrawal of deposits by depositors and on the credit portfolio growth. y Approving the Instruction on the Preparation and Publication of Financial Reporting of the National Bank of Ukraine. y Approving the amendments to the Regulation on the Procedure and Conditions of Foreign Exchange Trade. y Increasing the amount of reimbursement under deposits to individuals by the Individuals Deposit Insurance Fund in case of bankruptcy from UAH 50 thou- sand to 150 thousand. y Introducing the 11% annual limitation at the most as to the boundary cost of external borrowings of residents in foreign currencies of the 1st group of the Classifier of foreign currencies and banking metals for short-term credits. November y Introducing the mechanism of accounting the open balance FX positions of the bank for each individual currency under FX purchase-sale operations. yPutting into circulation of the jubilee coin "90th Anniversary of Establishment of the West Ukrainian People's Republic" at the face value of UAH 2 (German silver). y Putting into circulation of the commemorative coin "Millennium of Mintage in Kyiv" at the face value of UAH 20 (silver). y Putting into circulation of the commemorative coin "Hlukhiv" at the face value of UAH 10 (silver). y Approving the Instruction on the Arrangement of Issuing and Cash Work with- in the System of the National Bank of Ukraine. y Putting into circulation of the jubilee coin "Hryhorii Kvitka-Osnovianenko" at the face value of UAH 2 (German silver). December y Approving the amendments to the Regulation on the Procedure of Creation and Use of Provisions for Recovery of Possible Losses under Credit Operations of Banks. 116 Calendar of Events y Introducing the temporary ban on FX purchase and exchange in settlements for import of products and services. y Introducing the temporary permit for foreign exchange purchase at the inter- bank foreign exchange market on the instruction of natural persons in order to transfer outside Ukraine under current foreign exchange noncommercial oper- ations the amounts not exceeding in the equivalent UAH 75000 per month. y Introducing the temporary zero rate of provisioning under agreements on attraction by banks of foreign currency from non-residents for the period of 183 calendar days or less. y Approving the Special Procedure of Taking the Measures as to Financial Recovery of Banks. y Putting into circulation of the jubilee coin "140 Years of Taras Shevchenko All- Ukrainian "Prosvita" Society" at the face value of UAH 5 (bimetallic coin of base metals). y Putting into circulation of the jubilee coin "975 Years of the City of Bohuslav" at the face value of UAH 5 (German silver). y Approving the amendments to the Rules of Statistical Reporting to be Submitted to the National Bank of Ukraine. y Approving the amendments to the Instruction on the Procedure of Preparation and Publication of Financial Reporting of Ukrainian Banks. y Putting into circulation of the jubilee coin "Vasyl Symonenko" at the face value of UAH 2 (German silver). y Approving the Temporary Regulations on Extension of Credits by the National Bank of Ukraine to Support Bank Liquidity in Case of a Real Threat to the Banking System Stability. y Approving the Temporary Procedure of Interaction of the Structural Units of the National Bank of Ukraine as to Strengthening the Banks' Liquidity by Extension of Credits. y Approving the Regulations on Creation and Activity of the Committee of the National Bank of Ukraine on Determining the Current and Prospective Solvency of Banks and Their Vitality Amid the Crisis. y Introducing the temporary procedure of functioning of the non-cash inter- bank foreign exchange market in Ukraine. y Putting into circulation of the jubilee coin "Church Complex in the Village of Buky" at the face value of UAH 10 (silver). y Putting into circulation of the jubilee coin "Maria Prymachenko" at the face value of UAH 5 (silver). y Accepting the Procedure of Provisioning under Formed Reserves on Credit Operations in Foreign Currency with Borrowers Having no Sources of Foreign Currency Earnings. y Approving the Regulations on Holding of Foreign Currency Auctions by the National Bank of Ukraine. y Approving the amendments to the Regulations on Taking the Enforcement Measures by the National Bank of Ukraine for Banking Law Violation. y Approving the amendments to the Regulations on the Procedure of Creation and State Registration of Banks, Opening of Their Branches, Representative Offices and Departments.

117

Part 4

METHODOLOGICAL COMMENTS TO THE ANNUAL REPORT Annual Report 2008

Gross Domestic Product (GDP) means an indicator featuring the final result of the pro- duction activity of manufacturers – residents during the reporting year. It is defined as a sum of gross values added, that have been created as the result of economic activity and taxes on goods less subsidies for goods. Nominal GDP is the GDP volume represented in current (actual) prices. Real GDP is the GDP volume measured in prices of the period taken as a comparative base. Foreign exchange position of a bank is a ratio (difference) of a bank's claims and liabili- ties in foreign currency and banking metals. Open foreign exchange position is an imbalance between claims and liabilities of a bank in foreign currency. The open position is short if the volume of liabilities on the currency and banking metals sold exceeds that of the claims, and it is long if the volume of claims for the pur- chased currency and banking metals exceeds that of the liabilities. The open foreign exchange position is associated with an additional risk in case of change of the exchange rate. Percent of cash concentration in circulation is a portion of emission result (excess of the issue of cash from the cashier's desks over its incomings) in the issues of cash from the cashier's desks. Monetary base is the sum total of liabilities of the National Bank of Ukraine in the national currency that ensure growth of the money supply and crediting of the economy. Its regulation is going on due to the conduct by the National Bank of Ukraine of operations with government securities, operations in the foreign exchange market and refinancing of banks. The monetary base growth is subject to control with the aim of preventing the spontaneous enlargement of money in circulation and the inflationary pressure. Monetary base is an indicator of the financing base that is the basis for forming the mone- tary aggregates but it is not a monetary aggregate itself. Monetary base includes the curren- cy issued into circulation by the National Bank of Ukraine, as well as the transferable deposits in national currency with the National Bank of Ukraine. Currency in circulation comprises ban- knotes and coins issued by the National Bank of Ukraine except banknotes and coins held in the vaults of the National Bank of Ukraine, cashier's desks and ATMs of the institutions of the National Bank of Ukraine. Transferable deposits include liabilities of the National Bank of Ukraine under the funds on the correspondent accounts, funds of required reserves and other funds on demand of other depository corporations (banks), as well as funds on the accounts of the state non-financial corporations and households (employees of the National Bank of Ukraine) in national currency with the National Bank of Ukraine. Monetary aggregates comprise liabilities of other depository corporations and the National Bank of Ukraine to other sectors of the economy, except the sector of general government and other depository corporations. Components of monetary aggregates are financial assets in the form of national currency in cash, transferable deposits, other deposits, funds on securities other than shares that are issued by other depository corporations and belong, on the owner- ship right, to other financial corporations, non-financial corporations, households and nonprofit institutions serving households. Depending on the liquidity reduction level, financial assets are grouped into different monetary aggregates Ì0, Ì1, Ì2 òà Ì3. Monetary aggregate Ì0 comprises currency in circulation outside the other depository cor- porations. Monetary aggregate Ì1 includes monetary aggregate Ì0 and transferable deposits in national currency. Monetary aggregate Ì2 comprises monetary aggregate Ì1 and transferable deposits in foreign currency and other deposits. Monetary aggregate Ì3 (money supply) comprises monetary aggregate Ì2 and securities other than shares. Transferable deposits include the funds that are exchangeable on short notice to cash at their nominal values and directly used to make payments. Other deposits include non-transferable deposits that are exchangeable on short notice to cash or transferable funds, namely, the funds on demand that are not used directly to make pay- ments, time funds and savings deposits. Devaluation means the decrease in the exchange rate of the national currency against for- eign currencies.

120 Tables

Deposits are the funds, in cash or non-cash forms, in the currency of Ukraine, or in foreign currency, placed by customers on their personal accounts on an agreement basis for a fixed term of storage, or without indication of such a term and be repaid to the depositor in accor- dance with the law of Ukraine and the agreement terms. Budget deficit is an excess of budget expenditures over its revenues. Households are hired employees, employers, self-engaged workers, pension receivers, receivers of income from property and other transfers. Acquiring means activity related to the technological, informational servicing of traders and settlements with them on the operations performed with the use of special means of payment. Effective exchange rate – Nominal (NEER) is an index of the average-weighted change in the exchange rate of national currency versus the currency basket of the countries – main trade partners. For its calculation used are the weighting coefficients that reflect the average share of countries – main trade partners of Ukraine for the last three years in its total external turnover of goods. Effective exchange rate – Real (REER) is a nominal effective exchange rate adjusted to the change in the price level or other indicators of production expenses that reflects the dynam- ics of the real exchange rate of a certain country versus currencies of the countries – main trade partners. Index of the real effective exchange rate of hryvnia reflects the change of price compatibil- ity of national goods with regard to their analogues, produced in the countries – main trade part- ners. Consolidated budget of Ukraine includes indicators of the state budget of Ukraine, the budget of the Autonomous Republic of the Crimea and local consolidated budgets of regions and the cities of Kyiv and Sevastopol. Change year on year is 12-month interest rate change at for the reporting month that is calculated by the formula:

⎡ 11 ⎛ ⎞ ⎤ ⎜ ⎟ = ⎢ L −it −1⎥ ×100 , where L – balances by the end of month t. at ⎢∏⎜ ⎟ ⎥ t ⎣⎢ i=0 ⎝ L 1−− it ⎠ ⎦⎥

GDP index-deflator is the ratio of the GDP in actual prices of the reporting period to that in constant prices. Consumer price index (CPI) characterizes variations of the overall level of prices and tar- iffs for the goods and services purchased by households for the nonproductive consumption. Base consumer price index (BCPI) characterizes the inflation caused by the pressure on the part of demand, i.e. reflects the effects of the change in real monetary conditions, fiscal pol- icy, as well as unforeseen demand shocks. However, under significant supply shocks, the BCPI estimates may be somewhat offset due to the secondary effects whose contribution cannot be removed by statistical methods. The main purpose of the BCPI calculation is to determine a stable dynamics of prices with minimization of short-term erratic price changes caused by supply shocks, seasonal factors, administrative regulation of tariffs and prices. Therefore, when calculating the BCPI, changes in prices of foods with a high level of industrial processing, non-foods except fuel, as well as serv- ices administratively non-regulated are taken into account. The BCPI is a sub-index of the consumer price index (CPI), since its design is based on the available methodological principles with regard to the CPI calculation. Narrow base inflation index is the index of prices of non-foods, except fuel. Broad base inflation index is the CPI, except price indices of fuel, administratively regu- lated services and foods with a low level of industrial processing. Index of non-base inflation is the index of prices for raw materials, services administra- tively regulated, and fuel. The weighted amount of broad base inflation and non-base inflation equals the consumer inflation. Industrial producer price index reflects the price changes in the industrial production.

121 Annual Report 2008

Foreign currency means foreign money signs in the form of banknotes that are in circula- tion and are a legal tender in the territory of a respective foreign country, as well as those with- drawn from circulation, or those that are withdrawn from it but are subject to be exchanged for the money signs being in circulation. Credit emission is an excess of the means of payment issued by the National Bank of Ukraine over those withdrawn from circulation. Liquidity of a bank is a bank's ability to ensure timely fulfillment of its money liabilities that is determined by the balance between the terms and amounts of repayment of the allocated assets and the terms and amounts of a bank's liabilities fulfillment, as well as the terms and amounts of other sources and directions of using the funds (credits extension, other expendi- tures). A bank's liquidity (instant) is an economic indicator of a bank's activity that is determined as a ratio of the funds at the cashier's desk and on the correspondent accounts of the bank to the bank's liabilities accounted on the current accounts. A bank's liquidity (current) is an economic indicator of a bank's activity that is determined as a ratio of the primary and secondary liquidity assets to the bank's liabilities with certain ful- fillment terms. A bank's liquidity (short-term) is an economic indicator of a bank's activity that is deter- mined as a ratio of the liquid assets to the short-term liabilities. Liquidity (international) is a country's ability to fulfill its international liabilities, to repay debts. Models for servicing a bank's consolidated correspondent account in the SEP are the models enabling a bank to unite its funds on the consolidated correspondent account in order to use them effectively. Model 3 allows for the availability with a bank of the consolidated correspondent and tech- nical accounts and its own intrabank interbranch payment system (further – IIPS) to effect trans- fers between branches and interbank transfers. Thus, branches make transfers by the IIPS means through the bank with reflecting the settlement results on the bank's technical account. The work of banks with Models 4, 7 and 8 does not imply the use of the IIPS. Model 4 allows availability of a bank's consolidated and technical accounts, and branches' technical accounts. The bank and its branches perform transfers through the SEP independ- ently of one another, but the bank has opportunity during the operational day to set the limits of technical accounts and of initial turnovers for the branches and to get from the SEP the result- ing technological information about their work. Model 7 is a variation of Model 4 that differs from it by the fact that the bank is enabled to perform initial payments on behalf of branches, as well as to limit authorities of branches with regard to fulfillment of the settlement operations. Model 8 is distinguished from Model 4 by the fact that the bank may get information about the work of branches during the banking day in the real time mode. Nonfinancial corporations are corporations engaged primarily in the production of market goods or nonfinancial services and that are subdivided into subsectors: public nonfinancial cor- porations, private nonfinancial corporations and foreign-controlled nonfinancial corporations. Reserve requirement ratio is the amount of required reserves, set by the National Bank of Ukraine, as a percentage of the liabilities with regard to the attracted funds by a bank in national and foreign currencies (including in banking metals). A single procedure of determining and forming the required reserves by all the banks of Ukraine is approved by the Board of the National Bank of Ukraine. The National Bank of Ukraine Survey is an analytical form of presenting the statistical data of the National Bank of Ukraine that are consolidated into the generalized categories of assets and liabilities. The Survey comprises data on liabilities of the National Bank of Ukraine that are included in the monetary base and are the basis for forming the monetary aggregates. The Depository Corporations Survey (including the National Bank of Ukraine) is an ana- lytical form of presenting the statistical data of the depository corporations (the National Bank of Ukraine and other depository corporations) that are consolidated in the generalized cate-

122 Tables gories of assets and liabilities. The Survey comprises data on the liabilities of depository cor- porations that are included in the monetary aggregates. The balance sheet identity in the Survey ensures the link of monetary aggregate M3 and other items with claims of depository corporations on residents and non-residents. Financial assets and liabilities in the Surveys are classified in accordance with the Classification of Institutional Sectors of the Economy of Ukraine (CISE) by the following institu- tional sectors: financial corporations, general government sector, nonfinancial corporations, households, and nonprofit organizations serving the households. Official reserve assets (international reserves) are external assets that are controlled by the National Bank of Ukraine and are readily available for direct financing of the balance of pay- ments deficit, for indirectly regulating the magnitude of such deficit through interventions in the foreign exchange market to influence the exchange rate of hryvnia versus foreign currencies and/or for other purposes. Official reserve assets are compiled in accordance with the method- ology given in the IMF Manual "International Reserves and Foreign Currency Liquidity Guidelines for a Data Template" (2001). Official reserve assets are claims on non-residents in hard currency and comprise: foreign exchange reserves, reserve position in the IMF, special drawing rights (SDRs), gold and other reserve assets that are available for use by the National Bank of Ukraine. Foreign exchange reserves comprise cash in hard currency and claims of the National Bank of Ukraine on non-residents in the form of short-term deposits in hard currency (except deposits in gold), and securities issued by non-residents. Reserve position in the IMF are claims of an IMF member on the IMF that are determined as a difference between the quota and IMF holdings in its (member's) currency minus the IMF holdings received by the member-country as IMF loans and balances on the IMF account No.2 which does not exceed 0.1% of the member's quota. The reserve position in the IMF is a part of the member's international reserves. Special drawing rights (SDRs) are Ukraine's assets within the special drawing rights that are held on the account of the National Bank of Ukraine with the IMF Treasury. Gold is monetary gold placed with foreign banks and held in the vault of the State Treasury of the National Bank of Ukraine. Monetary gold is high-fine gold in the form of coins, bullions, or bars of not less than 995 fineness, that belong to the National Bank of Ukraine. The weight of gold is defined in troy ounces. One troy ounce equals 31,103480 g. The data (except gold and SDRs) are estimated in the US dollars based on the cross rates of foreign currencies against the US dollar, that are calculated with the use of the official exchange rate of hryvnia versus foreign currencies specified by the National Bank of Ukraine at the end of the period. Official exchange rate of the hryvnia against foreign currencies is the rate of the national monetary unit, the hryvnia, officially set by the National Bank of Ukraine versus every of the foreign currencies. It is set on the basis of exchange rate quotations in the inter-bank for- eign exchange market of Ukraine for the previous day, as well as based on other indicators. The exchange rate of the hryvnia, average for the period, against foreign currencies is esti- mated: for the monthly data – as the average weighted value of foreign currency in hryvnias per month; for a quarter and a year – as the arithmetic average of monthly values. Interest income on a repo operation is the income received by a buyer of government securities of Ukraine or banking metals in case of performing the repo operation based on a bilateral agreement between a bank and the National Bank of Ukraine about purchase/sale from its portfolio of government securities of Ukraine or banking metals with a simultaneous obliga- tion of their repurchase at the agreed price and on the agreed date under a direct agreement with banks or through a tender of banks' applications for participation in repo operations. Interest income on a repo operation is measured as a difference between the price of reverse sale (repurchase) of the portfolio of government securities of Ukraine or banking metals and the price of purchase. Revaluation is an increase in the exchange rate of the national monetary unit against for- eign currencies.

123 Annual Report 2008

Dolarization of the economy is the ratio of deposits in foreign currency in the banking sys- tem to the total money supply (ÌÇ) available. Monetization of the economy is the ratio of the available money supply (ÌÇ) to the nom- inal GDP. Interest rates. The system of interest rate indicators comprises the main types of rates used in the economy of Ukraine. The interest rates are subdivided into interest rates of the National Bank of Ukraine and interest rates of the banks. The interest rates on credits and deposits are given according to the statistical reporting data of the banks operating in the terri- tory of Ukraine. In Ukraine the interest rates are calculated in percents per annum. Monthly indicators are estimated according to the compound percent scheme (data on the credits extended and the deposits attracted serve as the weight base). Quarterly and annual values are defined as the arithmetic average of the monthly values. Discount rate is a monetary instrument whereby the National Bank of Ukraine sets a price benchmark of money for the entities of the money and credit market and is the main interest rate that depends on the trends of the general economic development, macroeconomic and budgetary processes, as well as on the situation in the money and credit market. Overnight rate is determined by the National Bank of Ukraine based on the discount rate and taking into account the current situation in the money and credit market, the analysis of interest rates in the inter-bank credit market, as well as the demand and possible supply with regard to the issue of money into circulation by the National Bank of Ukraine. The overnight rate may be differentiated depending on the credit security. Credits are granted to banks for one working day on the collateral of government securities (except bonds of external government loan of Ukraine) or deposit certificates of the National Bank of Ukraine, and without collateral (blank ones). Interest rate on credits and deposits is an average weighted rate with consideration of actual volumes under agreements between banks and economic entities, individuals and state bodies. Refinancing rate is the interest rate defined by the National Bank of Ukraine on refinanc- ing credits when holding with banks of the quantity tender or interest rate tender depending on the bids for funds of the National Bank of Ukraine that are received from banks. The refinanc- ing rate is estimated on the basis of the discount rate and depending on the term and type of refinancing and cannot be lower than the discount rate. Securities other than shares are instruments that are negotiable and serving as evidence of the obligations to be settled by means of providing cash, a financial instrument, or some other item of economic value. These are bonds, treasury bills, promissory notes, savings (deposit) certificates of corporations, etc. Financial corporations are corporations engaged in financial services or in auxiliary finan- cial activities: the National Bank of Ukraine, other depository corporations (banks established and operating in the territory of Ukraine) and other financial corporations (insurance companies, non-government pension funds, credit institutions, financial companies, etc).

124 Part 5

CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2008 Annual Report 2008

National Bank of Ukraine Consolidated Balance Sheet as at 31 December 2008 (in UAH millions)

Notes 2008 2007

Assets Foreign currency funds and deposits 5 115,325 87,753 Foreign securities 6 126,983 77,436 SDR Holdings 66 14 Monetary gold 4,078 2,475 State securities of Ukraine 7 9,027 395 Loans to banks and other borrowers 8 60,926 1,692 Internal State debt 9 10,349 8,099 IMF quota contributions 10 16,272 10,949 Fixed assets and intangible assets 11 5,568 5,492 Other assets 12 1,403 981

Total assets 349,997 195,286

Liabilities Banknotes and coins in circulation 167,538 122,471 Accounts of banks 13 18,904 19,417 Accounts of State and other institutions 14 13,016 15,438 Profits payable to the State Budget 18 4,455 4,834 Deposit certificates issued by the National Bank of Ukraine 15 2,809 3,117 Loans received 124 156 Liabilities to the IMF 16 52,649 13,146 Other liabilities 17 531 347

Total liabilities 260,026 178,926

Equity Statutory capital 100 100 Funds and other reserves 3,861 2,468 Revaluation reserve for foreign currency, monetary gold and bank metals 82,009 9,787 Revaluation reserve for fixed assets 4,001 4,005

Total equity 19 89,971 16,360

Total liabilities and equity 349,997 195,286

Governor V. S. Stelmakh

Chief Accountant – Director of Accounting Department V.I.Rychakivska

The notes set out on pages 131 to 177 form an integral part of these consolidated financial statements.

126 Consolidated Financial Statements

National Bank of Ukraine Consolidated Income Statement for the year ended 31 December 2008 (in UAH millions)

Notes 2008 2007

Interest income 21 5,139 3,643 Interest expense 21 (354) (262)

Net interest income 21 4,785 3,381

Fee and commission income 22 512 266 Fee and commission expense 22 (136) (5)

Net fee and commission income 22 376 261

Results from operations with debt securities at fair value through profit or loss 6,423 3,622 Other income 23 233 140

Total net income 11,817 7,404

Staff costs 24 (1,174) (832) Expenses for production of banknotes, coins, souvenirs and other products (529) (445) Administrative and other expenses 25 (444) (327) Net increase in provisions 26 (323) (165)

Profit available for distribution 19 9,347 5,635

Governor V. S. Stelmakh

Chief Accountant – Director of Accounting Department V.I.Rychakivska

Deputy Director of Finance Department L.G.Ivashkevych

The notes set out on pages 131 to 177 form an integral part of these consolidated financial statements.

127 Annual Report 2008

National Bank of Ukraine Consolidated Statement of Cash Flows for the year ended 31 December 2008 (in UAH millions)

Notes 2008 2007

Operating activities Profit available for distribution 9,347 5,635 Adjustments to reconcile profit available for distribution to cash provided by operations: Depreciation and amortisation 11 293 222 Net increase in provisions for assets 26 323 165 Accrued income (133) (687) Accrued expense 86 (8) Unrealised revaluation of foreign securities (1,784) (983) Other non-cash movements (2) (5)

Net cash inflow before changes in operating assets and liabilities 8,130 4,339

Net increase in foreign securities (10,663) (30,698) Net increase in loans to banks and other borrowers (59, 011) (299) Net increase in other assets (252) (142) Net increase/(decrease) in other liabilities 18 (3) Transfer of profit to the State Budget 18 (8,334) (1 889)

Net cash used in operating activities (70,112) (28,692)

Investment activities Net decrease/(increase) in term deposits placed 28,891 (5,699) Purchase of State securities of Ukraine (8,568) – Redemption of State securities of Ukraine – 16 Purchase of monetary gold (78) (108) Investment in associate 12 (20) – Acquisition of fixed assets and intangible assets (456) (336) Proceeds from disposal of fixed assets 2 3

Net cash from/(used in) investment activities 19,771 (6,124)

The notes set out on pages 131 to 177 form an integral part of these consolidated financial statements.

128 Consolidated Financial Statements

National Bank of Ukraine Consolidated Statement of Cash Flows for the year ended 31 December 2008 (in UAH millions)

Notes 2008 2007

Financing activities Issue of banknotes and coins in circulation 45,067 40,337 Repayment of internal State debt 9 255 253 Repayment of liabilities to the IMF 16 (1,737) (2,157) Proceeds of loans from IMF 16 25,948 – Net decrease in term deposits received (55) (255) (Repayment)/ issue of deposit certificates of the National Bank of Ukraine (300) 2,925 EBRD loans repaid (80) (99)

Net cash from financing activities 69,098 41,004

Effect of changes in exchange rates on cash and cash equivalents 29,301 1,319

Net increase in cash and cash equivalents 48,058 7,507

Cash and cash equivalents Cash and cash equivalents at the beginning of the year (2,908) (10,415)

Cash and cash equivalents at the end of the year 20 45,150 (2,908)

Governor V. S. Stelmakh

Chief Accountant – Director of Accounting Department V.I.Rychakivska

The notes set out on pages 131 to 177 form an integral part of these consolidated financial statements.

129 Annual Report 2008

National Bank of Ukraine Consolidated Statement of Changes in Equity for the year ended 31 December 2008 (in UAH millions)

Revaluation reserve for foreign Notes Statutory Funds currency, Revalua- Total capital and other monetary tion reserve equity reserves gold and for fixed bank metals assets

Balance as at 31 December 2006 10 1 756 3 357 759 5 882 Revaluation of foreign currency, monetary gold and bank metals – – 6 430 – 6 430 Revaluation of fixed assets –– – 3 247 3 247 Upward revaluation –– – 3 248 3 248 Downward revaluation –– – (1) (1) Realised revaluation of fixed assets – 1 – (1) – Net income recognised directly in equity – 1 6 430 3 246 9 677 Profit available for distribution – 5 635 – – 5 635 Total recognised income for 2007 – 5 636 6 430 3 246 15 312 Contributions into statutory capital 90 (90) – – – Excess of budgeted income over budgeted expenditure for 2007 18 – (4 834) – – (4 834)

Balance as at 31 December 2007 100 2 468 9 787 4 005 16 360 Revaluation of foreign currency, monetary gold and bank metals – – 72 222 – 72 222 Downward revaluation of fixed assets –– – (3) (3) Realised revaluation of fixed assets – 1 – (1) – Net income recognised directly in equity – 1 72 222 (4) 72 219 Profit available for distribution – 9 347 – – 9 347 Total recognised income for 2008 – 9 348 72 222 (4) 81 566 Excess of budgeted income over budgeted expenditure for 2008 18 – (7 955) – – (7 955)

Balance as at 31 December 2008 100 3 861 82 009 4 001 89 971

Governor V. S. Stelmakh

Chief Accountant – Director of Accounting Department V.I.Rychakivska Deputy Director of Finance

Department L.G.Ivashkevych

The notes set out on pages 131 to 177 form an integral part of these consolidated financial statements.

130 Consolidated Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Principal activities The National Bank of Ukraine (the "NBU") is the central bank of Ukraine and operates in accordance with the Constitution of Ukraine, the Law of Ukraine "On the National Bank of Ukraine" and other laws of Ukraine. In accordance with the legislation, the primary function of the NBU is ensuring the stability of the national currency of Ukraine. The NBU's objectives are also to ensure the stability of the banking system and, within the scope of its power, price stability. The NBU does not aim to earn profits. The financial results of the NBU's activities, as well as the structure of its assets, liabilities and equity are defined by the functions of the NBU as a special central government authority. In accordance with the Law of Ukraine "On the National Bank of Ukraine" the main func- tions of the NBU are the following: in accordance with the main principles of monetary policy developed by the NBU Council, to determine and carry out the monetary policy; in a monopoly capacity, to carry out the issue of national currency of Ukraine and to organ- ise its circulation; to ensure accumulation and maintenance of foreign (gold and foreign currency) reserves (hereinafter referred to as "international reserves") and perform operations with international reserves and bank metals; be a lender of the last resort for banks and to organise a system of refinancing; to exercise banking regulation and supervision; to represent Ukraine in other central banks, international banks and other credit institutions where co-operation is maintained between the central banks; to exercise other functions in financial and credit areas within the competence defined by the Law. According to the Law of Ukraine "On the National Bank of Ukraine", the NBU provides loans to banks to support their liquidity, buys and sells securities in the secondary market, buys and sells foreign currency valuables, precious metals, sells commemorative coins made of precious and non-precious metals in the domestic and foreign markets, performs operations of servicing of the State debt in respect of placement of State securities, their redemption and interest pay- ments, maintains accounts of the State Treasury of Ukraine, accounts of international organi- sations and conducts other operations necessary for the performance of its functions. The NBU also performs functions of a depository for State securities of Ukraine. The statutory capital of the NBU is owned by the State. The NBU system includes 25 regional offices throughout Ukraine. Additionally, the NBU's structure includes Operating Department, Household and Maintenance Department, the Central Vault, the State Treasure-House of Ukraine, the Project Monitoring Unit for International Credit Lines, the Central Clearing House, Printing and Minting Works and Banknote Paper Mill. The NBU's subsidiaries are Ukrainian Banking Academy (Sumy) and Banking University (Kyiv), both of which are 100% owned by the NBU. The structure of the Banking University includes Lviv, Kharkiv and Cherkassy Banking Institutes. Registered address and place of business of the NBU's central office is 9, Institutska St., 01601, Kyiv-8, Ukraine.

2. Basis of presentation and accounting policies The NBU's accounting policies are defined in accordance with the NBU regulations and are developed based on International Financial Reporting Standards ("IFRS"), except for the cases when the NBU applies specific accounting policies to comply with the requirements of the cur- rent Ukrainian legislation, in particular the Law of Ukraine On the National Bank of Ukraine. Management of the NBU believes this is an appropriate and robust accounting framework which can be, and has been, consistently applied. Major differences between the NBU's accounting policies and IFRS are as follows: 131 Annual Report 2008

the result from the revaluation of assets and liabilities denominated in foreign currencies, monetary gold and bank metals resulting from changes in official exchange rate of Ukrainian hryvnia to foreign currencies, monetary gold and bank metals, including the realised revalua- tion result, are posted directly to revaluation reserve in the equity section. This differs from the requirements of International Accounting Standard (IAS) 21 "Effect of Changes in Exchange Rates" in respect of recognition of the revaluation result as income and expenses in the state- ment of income; internal State debt and State securities of Ukraine held to maturity are accounted for at cost less provision for impairment. Provision for impairment is raised in the amounts approved by the NBU's Board and agreed with the NBU Council or as stipulated by the current Ukrainian legis- lation. This is different from the requirements of IAS 39 "Financial Instruments: Recognition and Measurement" in respect of assessment of provisions, interest recognition and carrying value of these assets respectively. Refer to Notes 6, 9 and 34. These financial statements have been prepared in accordance with the NBU's accounting policies set out below under the historical cost convention, as modified by the revaluation of premises and constructions and financial instruments categorised as at fair value through prof- it or loss. The accounting policies have been consistently applied to all the periods presented, except as stated in the following paragraph. As disclosed in Note 4, during October-December 2008 due to a sharp deterioration of eco- nomic conditions and lack of liquidity in the banking market, the NBU significantly increased the volume of refinancing operations with Ukrainian banks. Due to significant uncertainty associat- ed with the current economic conditions, the NBU is not able to reliably estimate future cash- flows in respect of loans issued to Ukrainian banks during the fourth quarter of 2008 for the pur- poses of calculating provision for impairment of these loans. The functional and presentation currency of the NBU is the national currency of Ukraine, the Ukrainian hryvnia ("UAH"). The financial statements of the NBU are prepared in millions of Ukrainian hryvnia. Adoption of new and revised standards and interpretations Certain new or amended IFRSs and interpretations are mandatory for application from 1 January 2008. Listed below are those amended IFRS which are relevant to the NBU's opera- tions in the reporting period: Reclassification of Financial Assets-Amendments to IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures and a subse- quent amendment, Reclassification of Financial Assets: Effective Date and Transition. The amendments allow entities the options (a) to reclassify a financial asset out of the held for trad- ing category if, in rare circumstances, the asset is no longer held for the purpose of selling or repurchasing it in the near term; and (b) to reclassify an available-for-sale asset or an asset held for trading to the loans and receivables category, if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity (subject to the asset otherwise meeting the definition of loans and receivables). The amendments may be applied with retro- spective effect from 1 July 2008 for any reclassifications made before 1 November 2008; the reclassifications allowed by the amendments may not be applied before 1 July 2008 and retro- spective reclassifications are only allowed if made prior to 1 November 2008. Any reclassifica- tion of a financial asset made on or after 1 November 2008 takes effect only from the date when the reclassification is made. The NBU has not elected to make any of the optional reclassifica- tions during the period. Listed below are those amended IFRS which became effective from 1 January 2008 but are not relevant to the NBU's operations: IFRIC 11, IFRS 2-Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007); IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008);

132 Consolidated Financial Statements

IFRIC 14, IAS 19-The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008). As at the date of approval of these financial statements certain changes to IFRS have been published that become effective for annual periods beginning on or after 1 January 2009. Changes to IFRS which the NBU has not early adopted and which the NBU intends apply- ing in subsequent reporting periods: IAS 1, Presentation of Financial Statements The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (bal- ance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The NBU expects the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions and balances. IAS 27, Consolidated and Separate Financial Statements The revised IAS 27 will require an entity to attribute total comprehensive income to the own- ers of the parent and to the non-controlling interests (previously "minority interests") even if this results in the non-controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised stan- dard specifies that changes in a parent's ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The NBU does not expect the amended standard to have any material effect on its consolidated financial statements. IFRS 3, Business Combinations The revised IFRS 3 will allow entities to choose to measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquiree's identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in a business combination achieved in stages, the acquir- er will have to remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss. Acquisition-related costs will be accounted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. An acquirer will have to recognise at the acquisi- tion date a liability for any contingent purchase consideration. Changes in the value of that lia- bility after the acquisition date will be recognised in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope busi- ness combinations involving only mutual entities and business combinations achieved by con- tract alone. The NBU does not expect the amended standard to have any material effect on its consolidated financial statements. Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments consist of a mixture of substantive changes, clarifications, and changes in ter- minology in various standards. The substantive changes relate to the following areas: classifi- cation as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as non-current under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash

133 Annual Report 2008

flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtail- ment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restric- tions over manner of determining fair value of biological assets under IAS 41. Further amend- ments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or edito- rial changes only, which the IASB believes have no or minimal effect on accounting. The NBU does not expect the amendments to have any material effect on its consolidated financial state- ments. Improving Disclosures about Financial Instruments – Amendment to IFRS 7, Financial Instruments: Disclosures (issued in March 2009; effective for annual periods beginning on or after 1 January 2009) The amendment requires enhanced disclosures about fair value measurements and liquid- ity risk. The entity will be required to disclose an analysis of financial instruments using a three- level fair value measurement hierarchy. The amendment (a) clarifies that the maturity analysis of liabilities should include issued financial guarantee contracts at the maximum amount of the guarantee in the earliest period in which the guarantee could be called; and (b) requires dis- closure of remaining contractual maturities of financial derivatives if the contractual maturities are essential for an understanding of the timing of the cash flows. An entity will further have to disclose a maturity analysis of financial assets it holds for managing liquidity risk, if that infor- mation is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk. The NBU is currently assessing the impact of the amendment on disclosures in its consolidated financial statements. New standards, changes to standards and interpretations that are not relevant to the NBU's operations: IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009); Puttable Financial Instruments and Obligations Arising on Liquidation-IAS 32 and IAS 1 Amendment (effective for annual periods beginning on or after 1 January 2009); IAS 23, Borrowing Costs (revised March 2007; effective for annual periods beginning on or after 1 January 2009); Vesting Conditions and Cancellations-Amendment to IFRS 2, Share-based Payment (issued in January 2008; effective for annual periods beginning on or after 1 January 2009); IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008); IFRIC 15, Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2009); IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October 2008); Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate-IFRS 1 and IAS 27 Amendment (issued in May 2008; effective for annual periods beginning on or after 1 January 2009); Eligible Hedged Items-Amendment to IAS 39, Financial Instruments: Recognition and Measurement (effective with retrospective application for annual periods beginning on or after 1 July 2009); IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods begin- ning on or after 1 July 2009); 134 Consolidated Financial Statements

IFRS 1, First-time Adoption of International Financial Reporting Standards (following an amendment in December 2008, effective for the first IFRS financial statements for a period beginning on or after 1 July 2009); IFRIC 18, Transfers of Assets from Customers (effective for annual periods beginning on or after 1 July 2009). Key measurement terms Depending on their classification the financial assets and liabilities are carried at fair value, cost or amortised cost. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm's length basis. In other than active markets, the most recent arm's length transactions are the basis of cur- rent fair values. Fair value is not the amount that an entity would receive or pay in a forced transaction, involuntary liquidation or distress sale. Valuation techniques such as discounted cash flows models and consideration of financial data of the investees are used to fair value certain financial instruments for which external mar- ket pricing information is not available. Valuation techniques may require assumptions not sup- ported by observable market data. Disclosures are made in these financial statements if chang- ing any such assumptions to a reasonably possible alternative results in significantly different profit, income, total assets or total liabilities. Cost is the amount of cash or cash equivalents paid or the fair value of the other consider- ation given to acquire an asset at the time of its acquisition and includes transaction costs. Measurement at cost is only applicable to investments in equity instruments that do not have a quoted market price and whose fair value cannot be reliably measured, as well as to internal State debt and promissory notes of State Treasury of Ukraine. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. The incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost is the amount at which the financial asset or liability was recognised at ini- tial recognition less any principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and for financial assets less any write-down for incurred impairment losses. The effective interest method is a method of calculating amortised cost of financial asset or financial liability and allocating interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial asset or financial lia- bility. Transactions in foreign currency and monetary gold Monetary assets and liabilities denominated in foreign currency and monetary gold are ini- tially recorded at the official exchange rates of hryvnia to foreign currencies and gold at the date of settlement – the date of initial recognition of assets and liabilities. Subsequently they are revalued after each change in the official exchange rate*.

* The official exchange rate of hryvnia to US dollar is set based on the currency quote on interbank foreign exchange market based on results of functioning of Deal confirmation system for interbank foreign exchange market for the previous working day. The official exchange rate of hryvnia to other foreign cur- rencies is set based on the official exchange rate of hryvnia to US dollar and cross-rates of respective cur- rencies on international markets. 135 Annual Report 2008

Monetary assets and liabilities in foreign currency and monetary gold are recorded at the official exchange rates of hryvnia to foreign currencies at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currency are recorded at his- torical cost (at the official exchange rate of hryvnia to foreign currencies at the settlement date). Monetary gold consists of the stocks of gold bars of international standard held in the State Treasure-House of Ukraine. Monetary gold represents a part of international reserves. Monetary gold is recorded in physical weight in troy ounces and is valued in hryvnias at the offi- cial exchange rate of the NBU. The official exchange rate is calculated based on information on precious metals prices determined (fixed) by participants of the London Bullion Market Association in US dollars translated into UAH at the NBU official UAH/US dollar exchange rate. Interest-bearing gold placements with foreign banks are included in foreign currency funds and deposits. The principal official exchange rates of hryvnia to foreign currencies and monetary gold used for translating monetary balance sheet items were:

31 December 2008 31 December 2007 (UAH) (UAH)

USD 1 7,7000 5,050000 SDR 1 11,8601 7,980253 EUR 1 10,8555 7,419460 1 troy ounce of gold 6 699,000 4 183,925

Operations with International Monetary Fund The NBU acts as the depository and fiscal agent of Ukraine in the relationship of Ukraine with the International Monetary Fund (IMF). All claims of Ukraine on and liabilities to the IMF are recorded in the financial statements of the NBU. The IMF asset balances include holdings of Special Drawing Rights (SDR) and IMF quota contributions. Liabilities to the IMF include securities issued to the IMF by the Ministry of Finance of Ukraine and the NBU as a fiscal agent and balances on IMF accounts No. 1 and No. 2. IMF account No. 1 is used for IMF transactions including subscription payments, purchase and repur- chase of funds. Account No. 2 is used for settlements with the IMF in Ukrainian currency. Assets and liabilities denominated in SDRs are translated into hryvnia at the NBU offi- cial exchange rate of hryvnia to SDR at the balance sheet date. The official exchange rate of hryvnia to SDR is calculated based on information on the exchange rate of SDR to USD set by the IMF and the NBU official UAH/USD exchange rate. Interest received in respect of SDR holdings is disclosed as interest income and charges paid in respect of use of the IMF funds are disclosed as interest and fee expense, as appropriate, in the statement of income. Operations with financial instruments Financial assets of the NBU are classified depending on intentions of their acquisition as follows: Foreign currency funds and deposits Foreign currency funds and deposits are recorded when the NBU advances foreign currency funds to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates. Debt securities at fair value through profit or loss This category includes securities which the NBU intends to hold for the purposes of managing international reserves and which are designated at initial recognition into this category. The NBU manages a group of these financial instruments and evaluates its per- formance on a fair value basis in accordance with a documented investment declaration,

136 Consolidated Financial Statements and information on that basis is regularly provided to and reviewed by management of the NBU. The fair value of these securities is determined by reference to market quotations. Securities from this category may not be reclassified to securities available for sale or held to maturity. Investments available for sale are equity investments (investments into share capi- tal of companies which are not associates or subsidiaries), which the NBU intends to hold for an indefinite period of time. Securities held to maturity are debt securities with fixed or determinable payments and fixed maturity which the NBU has both the intent and ability to hold to maturity. Loans to banks and other borrowers Loans to banks and other borrowers are recorded when the NBU advances money to originate an unquoted non-derivative receivable from a counterparty bank or other bor- rower due on fixed or determinable dates and has no intention of trading the receivable. Financial instruments recognition and measurement Financial instruments other than internal State debt are recognised as follows: transactions with financial instruments are recorded in the balance sheet at settlement date, the date when the ownership right for these assets is transferred to (from) the NBU; debt securities at fair value through profit or loss are initially recorded at fair value; foreign currency funds and deposits, investments available for sale, debt securities held to maturity, loans to banks and other borrowers and all financial liabilities are initial- ly recorded at fair value plus transaction costs. Subsequent measurement of the NBU's financial instruments is as follows: debt securities at fair value through profit or loss are revalued to fair value after each change in market price. The result from changes in fair value is recognised in the state- ment of income in the period in which it arises; equity investments available for sale whose fair value cannot be reliably determined are recorded at cost less provision for impairment, if any; foreign currency funds and deposits, debt securities held to maturity, State securities classified as loans and receivables and loans to banks and other borrowers are recorded at amortised cost using effective interest method. Provisions for impairment of financial assets Impairment losses are recognised in the statement of income when incurred as a result of one or more events ("loss events") that occurred after the initial recognition of the financial asset and which have an impact on the estimated future cash flows of the finan- cial asset or group of financial assets that can be reliably estimated. The objective evidence of impairment of financial assets is information on the follow- ing loss events: the borrower experiences significant financial difficulties; breach of contract by the borrower; possibility of bankruptcy or other financial reorganisation of the borrower; the lender, for economic or legal reasons relating to the borrower's financial difficulty, granting to the borrower a concession that the lender would not otherwise consider (such as a change in interest rate or extension of payment terms); observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets. If the NBU determines that no objective evidence exists that impairment has been incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collec- tively assesses them for impairment.

137 Annual Report 2008

Losses from impairment are recognised through inclusion of respective amount into expenses. The amount of impairment is calculated as a difference between the financial asset's carrying amount and the present value of expected cash flows discounted at the original effective interest rate of the asset. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment has been recognised, the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss. When impaired financial assets are renegotiated or their terms otherwise modified because of financial difficulties of the borrower, impairment is measured using the original effective interest rate before the modification of terms. Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Provisions against internal State debt are raised in accordance with the requirements of the Ukrainian legislation and decisions approved by the NBU Council. Internal State debt Internal State debt includes loans granted to the Government of Ukraine in national and foreign currencies. The loans are stated at the principal amounts outstanding net of provisions created in accordance with the requirements of the Ukrainian legislation and decisions approved by the NBU Council. The Law of Ukraine "On Restructuring the Debt of the Cabinet of Ministers of Ukraine to the National Bank of Ukraine" of 20 April 2000 (hereinafter referred to as "the Law on Restructuring") provides for interest payment on loans to Government in national curren- cy. However, the Law does not clearly specify when the interest payment period should commence in respect of historical debt. Additionally, the Law does not contain any provi- sion in respect of interest payment on loans to Government in foreign currency and so no interest has been accrued to date (see Note 9). Sale and repurchase agreements Funds paid under agreements for purchase and sale of securities ("repo") are record- ed as loans to banks. The differences between the purchase and resale prices are treat- ed as interest income and accrued evenly over the life of the repo agreement. Funds received under sale and repurchase agreements are included in accounts of banks. Securities sold under sale and repurchase agreements are retained as the assets of the NBU. The differences between the sale and repurchase prices are treated as inter- est expense and accrued evenly over the life of the repo agreement. Fixed assets Fixed assets are stated at cost, or revalued amounts, as described below, less accu- mulated depreciation. Premises and constructions of the NBU are subject to revaluation on a regular basis. The frequency of revaluation depends upon the movements in the fair values of the prem- ises and constructions being revalued. The revaluation reserve for fixed assets is includ- ed in equity. The revaluation reserve is transferred directly to retained earnings when the surplus is realised, i.e. either on the retirement or disposal of the asset. Costs of enhancement of any item of fixed assets which increases the expected eco- nomic benefits embodied in this item of fixed assets increase the asset's historical cost or revalued amount. Costs of minor repairs and maintenance are expensed when incurred. Cost of replacing major parts or components of fixed assets items are capitalised and the residual value of the replaced part is charged to expenses of current period. If impaired, fixed assets are written down to the higher of their value in use and fair

138 Consolidated Financial Statements value less costs to sell. The decrease in carrying amount is charged to profit or loss to the extent it exceeds the previous revaluation surplus in equity. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset's value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss. Construction in progress is carried at cost. Upon completion, assets are transferred to buildings and constructions at cost. Construction in progress is not depreciated until the asset is available for use. Depreciation Depreciation of fixed assets commences after the assets are available for use and is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives as follows: buildings and constructions 20–50 years; motor vehicles and transport 8–28 years; machinery and equipment 4–30 years; fixtures and fittings 4–10 years; other 2–10 years.

The residual value of an asset is the estimated amount that the NBU would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the NBU expects to use the asset until the end of its physical life. Intangible assets All of the NBU's intangible assets have a definite useful life and primarily include capitalised computer software and licences. Historical cost of acquired intangible assets includes costs incurred to acquire and bring them to use. Acquired intangible assets are amortised on a straight line basis over expected useful lives of 3 to 8 years. Consolidation of subsidiaries Subsidiaries are those companies in which the NBU has the power to govern their financial or operating policies normally through an interest of more than 50% of the voting rights. All the NBU's subsidiaries are wholly owned by the NBU (refer to Note 1). Subsidiaries are consoli- dated from the date on which control is transferred to the NBU (acquisition date) and are de- consolidated from the date that control ceases. Intra-company transactions, balances and unrealised gains on transactions between group companies are eliminated on consolidation. The NBU and its subsidiaries use uniform account- ing policies. Investments in associates Associates are entities in which the NBU has between 20% and 50% of the voting rights. Investments in associates are accounted for under the equity method and recognised in other assets. The NBU's share of the post-acquisition profits or losses of associates is record- ed in the statement of income as other income. Bank metals and other precious metals Bank metals include stocks of gold which is not monetary, silver, platinum and palladium held in the State Treasure-House of Ukraine. Bank metals are recorded in physical weight in troy ounces and are valued at the official exchange rate of the NBU. The official exchange rate is calculated based on information on precious metals prices determined (fixed) by participants of the London Bullion Market Association and participants of the London Platinum and Palladium Market and the NBU official UAH/USD exchange rate.

139 Annual Report 2008

The official exchange rates of bank metals to UAH at which bank metals are stated in the balance sheet were as follows: 31 December 2008 31 December 2007 (UAH) (UAH)

1 troy ounce of gold 6,699.000 4,183.925 1 troy ounce of silver 83.391 74.488 1 troy ounce of platinum 6,983.900 7,721.450 1 troy ounce of palladium 1,412.950 1,823.050

Interest-bearing placements in bank metals with foreign banks are included in foreign cur- rency funds and deposits. Other precious metals include gold and other scrap metal and bars which are not of a recog- nised standard. Other precious metals are recognised as inventory and are carried at historical cost. Bank metals and other precious metals are included in other assets item.

Banknotes and coins in circulation The amount of banknotes and coins in circulation represents the nominal value of ban- knotes and coins (small change, circulating and commemorative coins) that can be used as payment instruments and were issued into circulation by the NBU after the introduction of hryv- nia into circulation in September 1996. The banknotes and coins in circulation are recorded as a liability at their nominal value when cash is issued by the NBU to banks and clients of the NBU. Cash in national currency held in the NBU's vaults and cash offices is not included in ban- knotes and coins in circulation.

Accounts of banks Accounts of banks are recorded when money are advanced to the NBU by counterparty banks. The non-derivative liability is carried at amortised cost.

Accounts of State and other institutions Accounts of State and other institutions are non-derivative liabilities to state or other cus- tomers and are carried at amortised cost.

Deposit certificates issued by the NBU Deposit certificates issued by the NBU are initially recorded at fair value and subsequently are measured at amortised cost using effective interest method. Upon redemption of deposit certificates issued by the NBU, the difference between the consideration paid and amortised cost is included in gains or losses arising from retirement of debt in the statement of income.

Loans received Loans received by the NBU are carried at amortised cost using effective interest method. Loans received represent long-term loans granted under credit lines of the European Bank for Reconstruction and Development ("EBRD") for the purposes of providing financing to banks for support of small and medium enterprises ("SME").

Income and expense recognition Interest income and expense are recorded in the income statement on an accrual basis using the effective interest method for all debt instruments, except for debt securities at fair value through profit or loss. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.

140 Consolidated Financial Statements

Expenses for money issuance The NBU produces Ukrainian national currency banknotes and coins. Expenses associat- ed with the banknotes and coins production (excluding commemorative coins made of precious metals) are charged to the NBU's expenses when produced banknotes and coins are trans- ferred by Printing and Minting Works to the Central Vault of the NBU. Expenses for money issuance include depreciation of plant and machinery, staff costs and other production costs. Expenses associated with the production of commemorative coins made of precious met- als are recorded as an asset within other assets line item of the NBU balance sheet and are charged to expenses in the period when the coins are sold.

Staff costs Wages, salaries, contributions to the State social funds, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the NBU.

Expenses for contributions to obligatory State social funds Under the Ukrainian legislation, the NBU makes contributions to the obligatory State social funds including pension fund, social security for temporary disability, obligatory State social security fund for unemployment and accident social security fund. Contributions to the obliga- tory State social funds are expensed as incurred.

Corporate Non-State Pension Fund The NBU established a corporate non-State pension fund which is a defined contribution plan. The NBU pays contributions to this fund on a contractual basis. The NBU has no further payment obligations once the contributions have been paid. The contributions are recognised as staff costs when they are due. The NBU acts as administrator, asset manager and custodian of Corporate non-State pen- sion fund of the National Bank of Ukraine.

Revaluation reserve for foreign currency, monetary gold and bank metals The result arising from revaluation of monetary assets and liabilities denominated in foreign currency, monetary gold and bank metals due to changes in exchange rates of hryvnia to for- eign currency, monetary gold and bank metals, including realised revaluation surplus, is charged or credited to the revaluation reserve for foreign currency, monetary gold and bank metals in the equity section of the balance sheet and is not taken into account when calculat- ing the net profit or loss.

Cash and cash equivalents For the purposes of reporting cash flows reflecting changes in both foreign and domestic liquidity, cash and cash equivalents include financial assets which are on demand or maturing within three months and which are available for use at short notice and are subject to insignifi- cant risk of changes in value, as well as liabilities which are on demand except for banknotes and coins in circulation. As the NBU is the issuer of national currency, the source of liquidity in the national currency is represented by liabilities which are on demand (correspondent accounts of banks, accounts of Government, IMF accounts and other). Financial assets that cannot be freely converted into cash due to insufficient liquidity or due to restrictions on their use are excluded from cash and cash equivalents.

Offsetting Financial assets and liabilities are offset and the net amount is reported in the balance sheet only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultane- ously.

141 Annual Report 2008

Amendments of the financial statements after issue The NBU's Board has the power to amend the financial statements after issue.

3. Critical accounting estimates and judgements in applying accounting policies The NBU makes estimates, assumptions and judgements that affect the amounts of assets and liabilities reported in the financial statements for the current year and those reported within the next financial year. Estimates and judgements are continually evaluated and are based on manage- ment's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The most significant estimates and judgements include:

Impairment of loans to banks and other borrowers The NBU regularly reviews its loan portfolio (excluding internal State debt) to assess impair- ment. In determining whether an impairment loss should be recorded, the NBU makes judge- ments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows. The NBU uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. To the extent that the net present value of estimated cash flows differs by +/-5 percent, the provision would be estimated UAH 20 million lower or UAH 20 million higher (2007: UAH 16 million lower or UAH 16 million higher). As disclosed in Note 4, during October-December 2008, due to the sharp deterioration of economic conditions and lack of liquidity in the banking market, the NBU significantly increased the volume of refinancing operations with Ukrainian banks. Due to significant uncertainty asso- ciated with the current economic conditions, the NBU is not able to reliably estimate future cash- flows in respect of loans totalling UAH 60,716 million issued to Ukrainian banks to support their liquidity during 2008, for the purposes of calculating provision for impairment of these loans and fair value disclosure.

Fair value of buildings and constructions As stated in Note 2, buildings and constructions of the NBU are subject to revaluation on a regular basis. Such revaluations are based on the results of work of independent valuers. The basis for their work is sales comparison and income capitalisation approach, except for those items that are of a highly specialized nature which are valued at depreciated replacement cost. When performing the revaluation certain judgements and estimates are applied by the valuers in determination of the comparative premises to be used in sales comparison approach. The valu- ation was based on comparative sales of premises with the price per square meter varying from UAH 213 for household premises to UAH 39,612 for office premises depending upon the loca- tion of premises. To the extent that the price per square meter differs by +/-5 percent, the fair value of buildings and constructions would be UAH 174 million higher or UAH 174 million lower.

Related party transactions In the normal course of business the NBU enters into transactions with its related parties being mainly Government and State-controlled entities. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if trans- actions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unre- lated parties and effective interest rate analysis. Terms and conditions of related party balances are disclosed in Note 36.

4. Effect of economic conditions on the financial position and results of operations of the NBU The NBU's monetary policy was carried out in 2008 in difficult macroeconomic conditions. GDP growth for the year was 2.1%, being the lowest for the period since recovery of econom- ic growth processes in 1999 (2007: GDP growth was 7.9%). Production output decreased in the last quarter of 2008 which led to an annual decrease of 3.1%.

142 Consolidated Financial Statements

The consumer price index in 2008 was 122.3% as a result of both external and internal fac- tors (2007: consumer price index was 116.6%). In this situation the NBU's monetary policy was of anti-inflationary nature. In particular, the NBU discount rate increased from 31 December 2007 by 4 per cent and was 12% p.a. as at 31 December 2008. Worsening economic situation in Ukraine was to some extent resulting from reduction in global liquidity and economic growth in most of economies in the world. This, on the one hand, limited access of enterprises and banks to external borrowings, on the other hand, due to unfavourable market situation there was a decrease in demand for traditional Ukrainian exports. Additionally, the country ratings by international rating agencies were downgraded in October 2008. These factors led to a significant worsening of the balance of payments and resulted in significant downward pressure on the hryvnia exchange rate. The official exchange rate of hryv- nia to USD as at 31 December 2008 was UAH 7.7000 per USD 1 (31 December 2007: UAH 5.0500 per USD 1). Under conditions of significant decrease in supply of foreign currency during the fourth quarter of 2008, the NBU actively performed interventions in the interbank foreign exchange market to decrease the foreign exchange deficit and downward pressure on Ukrainian hryvnia. As a result international reserves of the NBU were decreasing starting from September 2008. During 2008 international reserves decreased from USD 32.5 billion as at 31 December 2007 to USD 31.5 billion as at 31 December 2008. At the same time the level of international reserves was supported by the receipt of the first tranche of USD 4.5 billion of IMF loan under stand-by programme. The loan is expected to have a positive effect on the Ukrainian economy, easing the effect of the crisis and promoting financial stability, however the receipt of the next tranch- es depends on Ukraine implementing actions envisaged by respective Memorandum of Economic and Financial Policies between Ukraine and the IMF. During the period of particular tension on financial markets, characterised by an outflow of deposit funds from banks, in October-November 2008 the NBU undertook a number of stabili- sation actions in order to ensure timeliness of bank settlements, performance of obligations by banks and prevention of outflow of funds from the banking system. In particular, a range of liq- uidity support instruments was extended (including through extension of the list of assets which may be pledged under refinancing agreements with the NBU), Ukrainian banks' mandatory reserves requirements were temporarily eased. Upon certain stabilisation of the monetary market situation at the end of November 2008, the NBU was taking actions to limit speculative demand for foreign currency. In particular, the NBU decreased the levels of liquidity support to banks and adjusted mandatory reserve require- ments in order to make local currency denominated transactions more attractive (mandatory reserve requirement in respect of local currenñy funds was decreased to zero). Interest rate policy of the NBU during the period was aimed at increasing the cost of money to ease inflationary and devaluation pressure. For this purpose the NBU increased the interest rates on refinancing and deposit operations. The Ukrainian economy displays characteristics of an emerging market. These character- istics include the existence of a national currency that is not freely convertible outside the coun- try, a relatively high level of inflation, a low level of liquidity in the public and private debt and equity markets, and budgetary constraints. As a result in December 2008 the NBU transferred to the State budget of Ukraine UAH 3,500 million in respect of the excess of budgeted income over budgeted expenditure for 2008 (refer to Note 18). Budgetary constraints also impact on the ability of Government to repay amounts due to the NBU. In accordance with the Law on Restructuring, repayment of restructured loans provided to the Government for financing of the budget deficit in foreign currency, which are included in the internal State debt, was scheduled to commence in 2002. However, repayment of the inter- nal State debt in foreign currency commenced only in 2005. During 2008 in accordance with the Law of Ukraine On State Budget of Ukraine for 2008, the Government of Ukraine repaid a cer- tain part of the outstanding balance of loans in foreign currency amounting to USD 33 million

143 Annual Report 2008

(UAH 255 million at the official exchange rate at the date of transaction) (2007: USD 50 million, or UAH 253 million at the official exchange rate at the date of transaction) (refer to Note 9). The balance sheet items representing amounts due from Government are summarised in the table below. (in UAH millions) Note 2008 2007

State securities of Ukraine 7 9 027 395 Internal State debt 9 10 349 8 099

The estimated fair value of amounts due from Government is disclosed in Note 34. The NBU believes that it is not possible to reliably estimate the effects on the NBU's finan- cial position of any further possible deterioration in the liquidity of the financial markets and their increased volatility.

5. Foreign currency funds and deposits (in UAH millions) 2008 2007

Financial assets Foreign currency cash 90 76 Demand deposits 21,591 2,408 Term deposits in foreign currency: 90,144 82,312 Accrued interest receivable on deposits in gold and bank metals 6 11 Total financial assets 111,831 84,807 Non-financial assets Term deposits in gold 1,641 1,025 in bank metals 1,853 1,921 Total non-financial assets 3,494 2,946 Total foreign currency funds and deposits 115,325 87,753

The amount of demand deposits includes balances on special purpose accounts totalling UAH 99 million (2007: UAH 83 million) maintained by the NBU under credit lines received from international financial institutions, UAH 14 million blocked under letters of credit payable and the UAH 8 million (2007: UAH 1 million) margin reserve for settlements under futures operations within the framework of Agreement on investment management and advisory services between the International Bank for Reconstruction and Development and the NBU dated 1 November 2006. The term deposits denominated in bank metals include platinum and palladium deposits. These deposits and deposits of gold earn interest paid in USD. All foreign currency funds and deposits were neither past due nor impaired at 31 December 2008 and 31 December 2007. The foreign currency deposits are not collateralised. All foreign currency funds and deposits are expected to be recovered within 12 months except for term deposits totalling UAH 1,645 million maturing later than in 12 months (2007: UAH 1,026 million). The geographical analysis of the foreign currency funds and deposits is disclosed in Note 28, credit risk analysis is disclosed in Note 29, currency risk analysis is presented in Note 30 and interest rate risk analysis is presented in Note 31.

144 Consolidated Financial Statements

6. Foreign securities As at 31 December 2008 the foreign securities include the following: (in UAH millions) Government Corporate securities securities Total

Debt securities at fair value through profit or loss by issuers: Coupon US Treasury bills denominated in US dollars 29,032 – 29,032 Coupon UK Government bonds, denominated in British pounds: 16,359 – 16,359 Other EU State bonds: denominated in US dollars 807 – 807 denominated in Euro 48,391 – 48,391 Bonds of Bank for International Settlements: denominated in US dollars – 1,035 1,035 denominated in British pounds – 114 114 denominated in Euro – 2,058 2,058 Bonds of other issuers: denominated in US dollars 869 17,561 18,430 denominated in British pounds – 5,140 5,140 denominated in Euro – 5,496 5,496 Total debt securities at fair value through profit or loss 95,458 31,404 126,862 Equity securities available for sale: shares of Black Sea Trade and Development Bank – 120 120 investment in Inter-State Bank – 1 1 Total equity securities available for sale – 121 121 Total foreign securities 95,458 31,525 126,983

All foreign debt securities were neither past due nor impaired at 31 December 2008 and 31 December 2007. Interest income earned on foreign debt securities included in results from operations with debt securities at fair value through profit or loss in the consolidated income statement amount- ed to UAH 3,616 million in 2008 (2007: UAH 2,550 million). All foreign securities are expected to be recovered within 12 months except for equity secu- rities available for sale totalling UAH 121 million (2007: UAH 121 million). Bonds of other issuers include debt securities issued by foreign local governments, for- eign central and investment banks and other issuers. Government securities included in bonds of other issuers are represented by bonds issued by foreign local governments. Corporate securities included in bonds of other issuers include USD denominated bonds issued by Bank of England. Information on nominal value, yield to maturity, coupon income and maturities of foreign debt securities held by the NBU as at 31 December 2008, is presented in the table below:

145 Annual Report 2008

Total nominal Total Yield to Cupon Frequency Maturity value nominal maturity, rate, of coupon in currency, value in % p.a. % p.a. payments in millions hryvnia equivalent, in UAH millions Debt securities at fair value through profit or loss by issuers: Coupon US Treasury bills denominated in US dollars 3,514 27,058 0.20– 0.875– Every 6 From 15 days 1.54% 6.5% months to 5 years Coupon UK Government bonds, denominated in British pounds 1,357 15,117 0.59– 3.25– Every 6 From 2 2.74% 9% months months to 6years Other EU State bonds: denominated in US dollars 100 770 1.703– 3.375– Every 6 Up to 2.5 2.767% 3.5% months years or annually denominated in Euro 4,231 45,931 1.63– 2.5– Annually From 4 3.58% 6.5% days to 5 years Bonds of Bank for International Settlements: denominated in US dollars 130 1,001 1.69– 2.5– Every From 1 to 2.21% 3.88% 6 months 3 years denominated in British pounds 10 111 2.187% 4.6% Every 2.5 6 months months denominated in Euro 185 2,008 1.637– 3–4% Annually From 2.5 1.879% months to 1 year Bonds of other issuers: denominated in US dollars 2,313 17,814 0.431– 0.42– Monthly, From 21 21months or annually 5.52% 6% quarterly, days every to 8 years 6 months or annually denominated in British pounds 436 4,853 1.32– 4.25– Every 6 From 2 3.81% 6.875% months months or annually to 4 year denominated in Euro 498 5,406 1.871– 3-5.56% Quarterly From 6.5 6.483% or annually months to 3 year

146 Consolidated Financial Statements

Information on nominal value, yield to maturity, coupon income and maturities of foreign debt securities held by the NBU as at 31 December 2007, is presented in the table below: Total nominal Total Yield to Cupon Frequency Maturity value nominal maturity, rate, of coupon in currency, value in % p.a. % p.a. payments in millions hryvnia equivalent, in UAH millions Debt securities at fair value through profit or loss by issuers: Coupon US Treasury bills denominated in US dollars 4,879 24,638 3.01– 2.6255– Every 6 From 1 4.48% 6.25% months months to 16 years Coupon UK Government bonds, denominated in British pounds 1,235 12,467 4.30– 4–9% Every 6 From 2 4.92% months months to 4.5 years Other EU State bonds denominated in euro 2,269 16,838 3.8– 2.5– Annually From 4 4.6% 8.5% days to 3 years Bonds of Bank for International Settlements: denominated in US dollars 299.5 1,512 3.825– 3–5% Every 6 From 2.5 4.509% months months to or annually 4 year denominated in British pounds 144.5 1,459 5.061– 0–4.6% Every 6 From 5.183% months months to or at maturity 1 year denominated in Euro 165 1,224 4.351– 2.5–3.5% Every 6 From 1 4.526% months to 2 year Bonds of other issuers: denominated in US dollars 1,820 9,193 3.59– 2.375–7% Every 6 From 1.5 5.07% months months to 9 years denominated in British pounds 454.5 4,589 4.62– 0–5.5% Annually From 8 5.68% months to 5 years denominated in Euro 471 3,495 4.08– 0– Annually From 3 5.0% 4.375% days to 3 years

Shares of Black Sea Trade and Development Bank Investment into the share capital of Black Sea Trade and Development Bank (BSTDB) was made in accordance with the Agreement on establishment of BSTDB dated 30 June 1994. As at 31 December 2008 the amount of the NBU's contribution to the share capital of BSTDB was SDR 24 million (UAH 120 million at the official rate of hryvnia to SDR as at the date of acqui- sition) (2007: SDR 24 million or UAH 120 million). The NBU's share in the share capital of BSTDB was 8% (2007: 8%). Investment in Inter-State Bank Inter-State Bank (ISB) was established under a multi-lateral agreement of member countries of the Commonwealth of Independent States in 1993. ISB is an international settlement and credit and finance institution. The contribution of Ukraine to the share capital of ISB is UAH 1 million and the share in equity equals 20.7%. The NBU does not have actual influence on decisions of ISB and does not earn income. The NBU categorised the investment in the share capital of ISB as an equi- ty instrument available-for-sale, which is stated at cost less impairment. The NBU could not reliably estimate the fair value of its available-for-sale investments in shares

147 Annual Report 2008

of the BSTDB and ISB. The investments are carried at cost of UAH 121 million (2007: UAH 121 million). These investments were made by the NBU in performance of one of its functions as the central bank of Ukraine, i.e. represent Ukraine in those organisations where co-operation is per- formed at the level of central banks. The shares of these banks are not traded as these are spe- cialised international institutions. For the purposes of assessment of impairment of those equity securities for which the fair value cannot be reliably determined, the NBU has considered financial data of the investees and the NBU's share in net assets. The NBU has no intention to dispose of these investments. The geographical analysis of foreign securities is disclosed in Note 28, credit risk analysis for debt securities is disclosed in Note 29, currency risk analysis is presented in Note 30, interest rate risk analysis is presented in Note 31. As at 31 December 2007 foreign securities included the following: (in UAH millions) Government Corporate securities securities Total

Debt securities at fair value through profit or loss by issuers: Coupon US Treasury bills denominated in US dollars 25,443 – 25,443 Coupon UK Government bonds d enominated in British pounds 12,823 – 12,823 Other EU State bonds denominated in Euro 17,235 – 17,235 Bonds of Bank for International Settlements: denominated in US dollars – 1,520 1,520 denominated in British pounds – 1,446 1,446 denominated in Euro – 1,219 1,219 Bonds of other issuers: denominated in US dollars – 9,477 9,477 denominated in British pounds – 4,671 4,671 denominated in Euro – 3,481 3,481 Total debt securities at fair value through profit or loss 55,501 21,814 77,315 Equity securities available for sale: shares of Black Sea Trade and Development Bank – 120 120 investment in Inter-State Bank – 1 1 Total equity securities available for sale – 121 121 Total foreign securities 55,501 21,935 77,436

7. State securities of Ukraine (in UAH millions) 2008 2007 State debt securities in national currency: Debt securities held to maturity: Promissory notes of the State Treasury of Ukraine 395 395 Debt securities categorised as loans and receivables: Internal State debt securities 8,632 – Total State securities of Ukraine 9,027 395

In accordance with the Law of Ukraine "On the National Bank of Ukraine" the NBU performs operations with State securities only on the secondary market. As at 31 December 2008 the held-to-maturity debt securities denominated in national cur- rency held by the NBU represented the promissory notes of the State Treasury of Ukraine received by the NBU in September 2000 from the Ministry of Finance of Ukraine as a part of the restructuring of accrued income on domestic Government bonds due in 2000-2004. The

148 Consolidated Financial Statements total nominal value of the promissory notes amounts to UAH 395 million. The promissory notes of the State Treasury are non-interest bearing. Promissory notes of UAH 196 million are repayable in 2009 with the balancing payment of UAH 199 million in 2010. Debt securities classified as loans and receivables are represented by internal State debt securities ("OVDP") issued by the Ministry of Finance of Ukraine and purchased by the NBU in the second half of 2008 from Ukrainian banks for the purposes of regulating their liquidity. OVDP have nominal value of UAH 1,000 each, yield to maturity from 6.38% to 16.09%, coupon rate from 9.5% to 15.6% payable every 6 months or quarterly and maturity from 3 to 7 years. All State debt securities were neither past due nor impaired at 31 December 2008 and 31 December 2007. All State debt securities of Ukraine are expected to be recovered after more than 12 months except for the promissory notes of the State Treasury of Ukraine and accrued interest on debt securities totalling UAH 384 million payable in 2009 (2007: all State debt securities expected to be recovered after more than 12 months). The credit risk analysis of State debt securities is disclosed in Note 29, currency risk analy- sis is disclosed in Note 30, interest rate risk analysis is presented in Note 31. Information on the estimated fair value of State securities of Ukraine is presented in Note 34.

8. Loans to banks and other borrowers Loans to banks and other borrowers by the purpose of their issue are classified as follows: (in UAH millions) 2008 2007 Loans granted to banks to support their liquidity: under financial recovery programs 35 600 – under repo agreements 12 590 – loans provided through tenders 12 518 1 401 overnight 8 10 other 99 155 Loans granted under credit lines for support of small and medium enterprises from funds received from the European Bank for Reconstruction and Development 295 301 Other 217 149 Provision for impairment of loans to banks and other borrowers (401) (324) Total loans to banks and other borrowers 60 926 1 692

Loans to banks to support liquidity (except for overnight loans) were collateralised by State bonds of Ukraine, claims under agreements in respect of loans granted by banks to business- es and individuals, municipal bonds, corporate bonds, foreign currency deposits, shares of banks and other assets. All loans to banks and other borrowers are maturing within 12 months except for long-term loans totalling UAH 99 million (2007: UAH 208 million).

149 Annual Report 2008

(in UAH millions) Loans granted Loans granted under credit Other Total to banks to support lines for support of small and their liquidity medium enterprises from funds received from the European Bank for Reconstruction and Development: Provision against loans to banks and other borrowers at the beginning of the year 17 161 146 324 Increase in provision 18 71 89 Loans written off against provision account – (12) – (12) Provision against loans to banks and other borrowers at the end of the year 17 167 217 401

During the year ended 31 December 2007 movements in provision against loans to banks and other borrowers were as follows: (in UAH millions) Loans granted Loans granted under credit Other Total to banks to support lines for support of small and their liquidity medium enterprises from funds received from the European Bank for Reconstruction and Development:

Provision against loans to banks and other borrowers at the beginning of the year 17 166 151 334 Reduction in provision – (2) (5) (7) Loans written off against provision account – (3) – (3) Provision against loans to banks and other borrowers at the end of the year 17 161 146 324

The loans to banks and other borrowers as at 31 December 2008 can be classified by cred- it quality as follows: (in UAH millions) Loans granted Loans granted under credit Other Total to banks to support lines for support of small and their liquidity medium enterprises from funds received from the European Bank for Reconstruction and Development:

Neither past due nor impaired 60,799 127 – 60,926 Impaired 17 167 217 401 Provision against loans to banks and other borrowers (17) (167) (217) (401) Total loans to banks and other borrowers 60,799 127 – 60,926

Credit risk analysis of the loans not overdue and not impaired is provided in Note 29. As at 31 December 2008 and 31 December 2007 all the impaired loans are past due over 360 days, except for the loan in the amount of UAH 58 million (2007: UAH 48 million) which was renegotiated after it became past due. For the purposes of impairment calculations, the fair value of collateral for impaired loans was assessed as zero due to problems with legal enforceability of the collateral. The loans to banks and other borrowers as at 31 December 2007 can be classified by cred- it quality as follows: 150 Consolidated Financial Statements

(in UAH millions) Loans granted Loans granted under credit Other Total to banks to support lines for support of small and their liquidity medium enterprises from funds received from the European Bank for Reconstruction and Development:

Neither past due nor impaired 1,549 139 – 1,688 Impaired loans 17 162 149 328 Provision against loans to banks and other borrowers (17) (162) (145) (324) Total loans to banks and other borrowers 1,549 139 4 1,692

Information about the collateral provided for loans at 31 December 2008 is as follows: (in UAH millions) Loans granted Loans granted under credit Other Total to banks to support lines for support of small and their liquidity medium enterprises from funds received from the European Bank for Reconstruction and Development:

Loans secured by: Claims under loans agreements with customers 25,551 – – 25,551 Deposits placed with the NBU 83 – – 83 State securities 14,381 – – 14,381 Corporate and municipal bonds 572 – – 572 Shares of banks provided by owners of significant interest 8,767 – – 8,767 Guarantees provided 8,896 – – 8,896 Other assets 2,549 – 155 2,704 Unsecured loans 16 295 62 373 Total loans to banks and other borrowers (before provision) 60,815 295 217 61,327

Information about the collateral provided for loans at 31 December 2007 is as follows: (in UAH millions) Loans granted Loans granted under credit Other Total to banks to support lines for support of small and their liquidity medium enterprises from funds received from the European Bank for Reconstruction and Development:

Loans secured by: Claims under loans agreements with customers 1,327 – – 1,327 Deposits placed with the NBU 138 – – 138 State securities 73 – – 73 Corporate and municipal bonds 1 – – 1 Other assets – – 98 98 Unsecured loans 27 301 51 379 Total loans to banks and other borrowers (before provision) 1,566 301 149 2,016

The geographical analysis of loans to banks and other borrowers is disclosed in Note 28, credit risk analysis is presented in Note 29, currency risk analysis is presented in Note 30 and

151 Annual Report 2008

interest rate risk analysis is presented in Note 31. The estimated fair value of the loans to banks and other borrowers is presented in Note 34.

9. Internal State debt (in UAH millions) 2008 2007 Internal State debt in respect of loans to Government in national currency: 1994–1996 3 439 3 439 Total internal State debt in national currency 3 439 3 439 Internal State debt in respect of loans to Government in foreign currency: 1995 3 949 2 757 1996 3 757 2 464 Total internal State debt in foreign currency 7 706 5 221 Provision against internal State debt in respect of loans to Government in national currency (69) (69) Provision against internal State debt in respect of loans to Government in foreign currency (727) (492) Total internal State debt 10 349 8 099

Loans in national currency and foreign currency were granted by the NBU in 1991-1996 for financing State budget deficits. Internal State debt is not collateralised. In accordance with the Law on Restructuring, the loans in national currency granted in 1994-1996 totalling UAH 3,439 million and loans granted in foreign currency totalling USD 1,001 million (UAH 7,706 million at the exchange rate of hryvnia to USD as at 31 December 2008) were restructured and included in the internal State debt. In accordance with the Law, the amount of internal State debt in foreign currency was sup- posed to be repaid in equal quarterly instalments starting from 2002 to 2009. Had the repay- ment of internal State debt in foreign currency followed the repayment schedule envisaged by the Law on Restructuring, the principal amount of internal State debt in foreign currency as at 31 December 2008 would have been lower by USD 853 million or UAH 6,567 million at the exchange rate of hryvnia to USD as at 31 December 2008 (2007: lower by USD 738 million or UAH 3,727 million at the exchange rate of hryvnia to USD as at 31 December 2007). In accordance with the Law, the amount of the internal State debt of Ukraine in respect of the loans granted in 1994-1996 in the national currency, is due to be repaid by equal quarterly instalments, with an interest payment of 5% per annum for debt servicing, from 2010 to 2035. However, the Law does not clearly state the period of interest accrual. As such, the interest income on loans to Government in the national currency is not recognised in the statement of income. During 2008 in accordance with the Law of Ukraine on State budget of Ukraine for 2008, a part of the debt in respect of the loans in foreign currency totalling USD 33 million (UAH 255 million at the official exchange rate at the date of payment) was repaid (2007: a part of the debt was repaid in respect of the loans in foreign currency totalling USD 50 million or UAH 253 mil- lion at the official exchange rate at the date of payment). The Law of Ukraine on State budget of Ukraine for 2009 provides for restructuring in 2009 of the balance of debt of the Government to the NBU defined in the Law on Restructuring, through issue of internal State bonds to be transferred to the NBU, however terms and condi- tions of these bonds are not specified. The Law on Restructuring does not provide for payment of interest on the loans to Government in foreign currency included in the internal State debt. As a result, no interest income is recognised in the statement of income. Movements in the provision against internal State debt in respect of the loans to Government were as follows:

152 Consolidated Financial Statements

(in UAH millions) 2008 2007 Provision against internal State debt in respect of loans to Government at the beginning of the year 561 518 Provision for loans to Government in foreign currency during the year 235 172 Loans to Government in national currency written off against provisions – (129) Provision against internal State debt in respect of loans to Government at the end of the year 796 561

In accordance with the Law on Restructuring, in 2000 the NBU raised a provision of 2% of the amount outstanding in respect of the loans to Government in the national currency granted in 1994–1996. Starting from 2001, the Laws of Ukraine on the State budget of Ukraine for 2001– 2008 have suspended this requirement in respect of provisioning. During the year ended 31 December 2008 under the decision of the NBU Board as approved by the NBU Council, the NBU raised provisions against internal State debt in respect of the loans granted to Government in foreign currency totalling UAH 235 million (2007: UAH 172 million). All internal State debt is expected to be recovered after more than 12 months (2007: all internal State debt was expected to be recovered after more than 12 months except for UAH 255 million). The currency risk analysis of internal State debt is disclosed in Note 30 and interest rate risk analysis is presented in Note 31. Estimated fair value of internal State debt is disclosed in Note 34.

10. IMF quota contributions The quota balance represents Ukraine's subscription as a member of the IMF. Quotas vary based on the economic size of each country and are determined by the Board of Governors of the IMF. The quota determines a member's voting power in the Fund, the limits of access to the financial resources of the Fund and a participant's share in the allocation of SDRs, the Fund's unit of account. The major part of Ukraine's quota was paid in the form of non-interest-bearing promissory notes issued to the IMF, the remainder being credited to IMF accounts No 1 and No 2 (Note 16). As at 31 December 2008 Ukraine's quota in the IMF amounted to SDR 1,372 mil- lion or UAH 16,272 million at the year-end official exchange rate of hryvnia to SDR (2007: SDR 1,372 million or UAH 10,949 million at the year-end official exchange rate of hryvnia to SDR). The quota does not earn interest and is non-current asset.

153 Annual Report 2008

11. Fixed assets and intangible assets Buildings Motor Machinery Fixtures Other Construction Intangible and vehicles and and fixed in progress assets Total constructions and equipment fittings assets transport

Cost or valuation at 1 January 2007 1 632 85 911 82 102 57 58 2 927 Accumulated depreciation as at 1 January 2007 89 39 534 50 56 – 40 808 Net book value at 1 January 2007 1 543 46 377 32 46 57 18 2 119 Additions 70 42 155 7 26 67 11 378 Disposals (30) – (1) – – – – (31) Transfer to other category: 18 – 10 – (5) (23) –– Revaluation 3 248 – –– – – – 3 248 Depreciation (amortisation) charge for the year (49) (10) (111) (8) (34) – (10) (222) Net book value at 31 December 2007 4 800 78 430 31 33 101 19 5 492 Cost or valuation at 31 December 2007 5 151 122 1 057 89 111 101 69 6 700 Accumulated depreciation as at 31 December 2007 351 44 627 58 78 – 50 1 208 Net book value at 31 December 2007 4 800 78 430 31 33 101 19 5 492 Additions 42 8 127 24 26 136 32 395 Disposals (22) – (1) – – – – (23) Transfer to other category: 31 – 17 2 28 (79) 1 – Revaluation (3) – –– – – – (3) Depreciation (amortisation) charge for the year (129) (13) (109) (7) (27) – (8) (293) Cost or valuation at 31 December 2008 5 181 125 1 182 113 156 158 101 7 016 Accumulated depreciation as at 31 December 2008 462 52 718 63 96 – 57 1 448 Net book value at 31 December 2008 4 719 73 464 50 60 158 44 5 568

During 2007 the NBU performed revaluation of premises and constructions to adjust the net book value (carrying value) of the assets included in this category, to their fair value. The reval- uation was performed based on the reports of independent appraisers, who hold the relevant professional qualifications and who have recent experience in valuation of the assets of similar category. The basis used for the appraisal of the major part of the NBU's premises and con- structions was the comparative sales method. For the specialised premises or premises that are architectural monuments, the basis used for valuation was the depreciated replacement cost or income capitalisation method. The NBU management believes that during 2008 there was no significant changes in fair value of the NBU's premises and constructions. The carrying amount of fixed assets includes the revaluation surplus of UAH 4,001 million (2007: UAH 4,005 million). At 31 December 2008 fixed assets and intangible assets included the assets totalling UAH 443 million at cost or valuation, which had been fully depreciated (2007: UAH 348 million). These assets are still used by the NBU.

154 Consolidated Financial Statements

12. Other assets (in UAH millions) 2008 2007 Other financial assets Accounts receivable – neither past due nor impaired 219 113 Accounts receivable – impaired 1 2 Provision against other financial assets (1) (1) Total other financial assets 219 114 Other non-financial assets Bank metals 351 467 Inventory 274 178 Prepayments 330 82 Precious metals and jewellery 62 58 Investments in associates 90 46 Non-current assets held for sale 51 30 Commemorative coins, souvenirs and other products 31 12 Provision against other non-financial assets (5) (6) Total other non-financial assets 1,184 867 Total other assets 1,403 981

Other financial assets are not collateralised. Other non-financial assets include non-current assets (buildings and constructions) totalling UAH 51 million, in which respect the decision was taken on their disposal. The carrying value of these assets does not exceed their fair value less costs to sell. Movements in the provision against other assets were as follows: (in UAH millions) 2008 2007 Provision against other assets at the beginning of the year 7 7 Recovery of provision during the year (Note 26) (1) –

Provision against other assets at the end of the year 6 7

At 31 December 2008 investments in associates included the following: (in UAH millions) 2008 2006 Name Country of Type Carrying Share Carrying Share registration of activity amount (%) amount (%)

German-Ukrainian Fund Ukraine Financial institution 69 31,25 46 31,25 of special type OJSC "All-Ukrainian Depository of Securities" Ukraine Depositary 21 25,00 – – ïàïåð³â" activities Total 90 46

German-Ukrainian Fund (GUF) was established by the Cabinet of Ministers of Ukraine rep- resented by the Ministry of Finance, the NBU and Kreditanstalt fur Wiederaufbau (KfW). According to the Charter, the GUF does not have an objective of generating profit. The profit of GUF is allocated to increase the lending pool for SME. Open Joint-Stock Company "All-Ukrainian Depository of Securities" (the "Depository") was established by the NBU, banks and other financial institutions of Ukraine. In accordance with the Charter, the Depository was established to carry out business activities relating to securi- ties custody, recording, accounting, clearing and settlements and conducting other operations provided by Ukrainian legislation in respect of depository activities. Allocation of profits earned by the Depository is determined by general shareholders meet-

155 Annual Report 2008

ing. Net profit is allocated to development of the Depository activities, improvement of its tech- nological and organisational processes, creating and increasing reserve funds etc. Movements in the investments in associates were as follows: (in UAH millions) 2008 2007 Carrying amount of investments at the beginning of the year 46 29 NBU's contribution into associates 20 – Share of the NBU in profits 1 2 Foreign currency revaluation 23 15 Carrying amount of investments at the end of the year 90 46

Information on total assets and liabilities of the associates as at 31 December 2008 and their revenues and profits for the year ended 31 December 2008 is provided below (in UAH millions) 2008 2007 Total assets 316 171 Total liabilities 38 24 Total revenue 31 9 Total expense 26 1 Net profit for the year 5 8

All other assets are expected to be recovered within 12 months except for long-term receivables, bank metals and investments in associates totalling UAH 602 million (2007: UAH 624 million). The geographical analysis of the other financial assets is disclosed in Note 28, credit risk analysis is disclosed in Note 29 and currency risk analysis is presented in Note 30.

13. Accounts of banks (in UAH millions) 2008 2007 Correspondent accounts: in national currency 18,622 19,050 in foreign currency 5 3 Term deposits: in national currency 84 139 Accounts of banks with special use conditions: in national currency 192 149 in foreign currency 1 76 Total accounts of banks 18,904 19,417

Correspondent accounts in national currency include mandatory reserves of banks with the NBU. As at 31 December 2008 the mandatory reserve balance was calculated on the basis of a simple average over a monthly period (as at 31 December 2007: simple average over a monthly period) and should be maintained at a level of 0 to 5 per cent (31 December 2007: 0.5 to 5 per cent) of certain obligations of banks. In accordance with the NBU regulations, as at 31 December 2008, banks were required on a daily basis to maintain on the correspondent account with the NBU at least 90 per cent of the amount of mandatory reserves for the pre- ceding "reserve" period, i.e. for the preceding month (as at 31 December 2007: 100%). The cor- respondent accounts are non-interest bearing. Term deposits in national currency include the funds placed by banks with the NBU as col- lateral against the refinancing loans received from the NBU. Accounts of banks with special use conditions include the funds placed for the purposes of statutory capital formation of newly established banks in the process of registration, accounts for settlements of liquidation committees of banks under the process of liquidation and accounts

156 Consolidated Financial Statements opened for other purposes provided in the law of Ukraine and the NBU regulations. All accounts of banks are maturing within 12 months (2007: all within 12 months). The geographical analysis of the accounts of banks is disclosed in Note 28, currency risk analysis is presented in Note 30, interest rate risk analysis is presented in Note 31 and liquidi- ty risk analysis is disclosed in Note 32.

14. Accounts of state and other institutions (in UAH millions) 2008 2007 Budget funds 12 917 15 328 Other 99 110 Total accounts of State and other institutions 13 016 15 438

The NBU services the accounts of the State budget of Ukraine and local budgets consoli- dated under one treasury account. In accordance with the Law of Ukraine "On the National Bank of Ukraine" all budget accounts are non-interest bearing. Accounts of other institutions include balance of UAH 9 million on account of the Corporate Non-State Pension Fund of the NBU (31 December 2007: UAH 54 million) (refer to Note 24). All accounts of State and other institutions are maturing within 12 months (2007: all within 12 months). The geographical analysis of accounts of State and other institutions is disclosed in Note 28, currency risk analysis is presented in Note 30, interest rate risk is disclosed in Note 31 and liquidity risk analysis is disclosed in Note 32.

15. Deposit certificates issued by the NBU The deposit certificate issued by the NBU is one of its monetary policy instruments. This is a debt security issued by the NBU in non-documentary form evidencing placement of banks' funds with the NBU and the right of banks to receive at maturity the funds placed together with accrued interest. Transactions with placement of the deposit certificates are performed under agreements with banks for the term of one day (overnigh posits), up to 14 days and up to 365 days (2007: up to 14 days and up to 365 days). As at 31 December 2008 the nominal value of deposit certificates issued by the NBU was UAH 1 million each, the initial term of placement from 5 to 15 days, and weighted average inter- est rate was 19.2% per annum (2007: weighted average interest rate of 3.8% per annum and the initial term of placement from 6 to 270 days). The weighted average interest rate for the deposit certificates placed during 2008 was 3.7% per annum, and the initial term of placement varied from 2 to 90 days (2007: weighted average interest rate of 0.7% per annum and initial term of placement from 1 to 270 days). All deposit certificates issued by the NBU are maturing within 12 months (2007: all within 12 months). The currency risk analysis of the deposit certificates is disclosed in Note 30, interest rate risk analysis is presented in Note 31 and liquidity risk analysis is disclosed in Note 32.

16. Liabilities to the IMF (in UAH millions) 2008 2007 IMF accounts No 1 and No 2 41 28 Liabilities to the IMF in settlement of Quota 16,231 10,921 Liabilities to the IMF in respect of purchases of SDR 36,377 2,197 Total liabilities to the IMF 52,649 13,146

157 Annual Report 2008

Liabilities to the IMF include the liability of the Ministry of Finance of Ukraine to the IMF in settlement of quota contribution totalling UAH 2,511 million (2007: UAH 2,511 million). During 2008 the liabilities to the IMF increased as a result of receipt in November 2008 of the first tranche of SDR 3 billion (UAH 24,600 million at the annual IMF exchange rate or UAH 25,948 million at the official exchange rate at the date of receipt) in accordance with the agree- ment between Ukraine and the IMF under stand-by facility totalling SDR 11 billion. During 2008 there was a repayment of IMF funds of SDR 216 million (UAH 1,737 million at the official exchange rate at the date of payment) (2007: SDR 279 million or UAH 2,157 million at the official exchange rate at the date of payment). All liabilities to the IMF are non-current except for IMF accounts No 1 and No 2 and a part of lia- bilities to the IMF in respect of purchases of SDRs totalling UAH 797 million (2007: UAH 1,740 million). The interest rate risk analysis of liabilities to the IMF is presented in Note 31 and liquidity risk analysis is disclosed in Note 32.

17. Other liabilities (in UAH millions) 2008 2007 Other financial liabilities Current accounts of employees 465 305 Accounts payable 52 30 Other 3 – Total other financial liabilities 520 335 Other non-financial liabilities Taxes payable 5 5 Deferred income 6 7 Total other non-financial liabilities 11 12 Total other liabilities 531 347

All other liabilities are current except for UAH 6 million (2007: all current except for UAH 2 million). Geographical analysis of the other financial liabilities is provided in Note 28, currency risk analysis is provided in Note 30 and liquidity risk analysis is provided in Note 32.

18. Profits payable to State Budget In accordance with the Law of Ukraine "On the National Bank of Ukraine", the NBU is obliged to distribute the excess of budgeted income over budgeted expenditure to the State budget of Ukraine based on the results for the preceding year. Budgeted expenditure should ensure the NBU's ability to exercise its functions and includes both expenses presented in the statement of income and expenditures for financing capital investments and formation of funds. The amount of profit payable to the State budget is calculated as the amount of profit earned less the funds used for financing capital investments and formation of funds. The actual excess of budgeted income over budgeted expenditure for the year ended 31 December 2008 amounted to UAH 7,955 million (2007: UAH 4,834 million). The calculation of the profit payable to the State budget of Ukraine is presented below: (in UAH millions) 2008 2007 Profit available for distribution per the statement of income 9,347 5,635 Allocation to funds of the NBU (457) (148) Allocation to general reserves of the NBU (897) (453) Allocation to statutory capital of the NBU – (90) Retained earnings (38) (110) Excess of budgeted income over budgeted expenditure for the year to be transferred to the State budget, including: 7,955 4,834 Advance payment of profits to the State budget (3,500) – Profits payable to the State Budget 4,455 4,834

158 Consolidated Financial Statements

During 2008 the NBU transferred to the State budget of Ukraine the remaining amount of UAH 4,834 million of the excess of budgeted income over budgeted expenditure for the year ended 31 December 2007. Profits payable to the State budget are to be settled within 12 months.

19. Management of capital Capital of the NBU comprises the residual value of the NBU's assets after deduction of its liabilities. No external capital requirements exist for the NBU as the central bank, except for the size of the statutory capital stipulated by the Law of Ukraine "On the National Bank of Ukraine" (the "Law"). The Law does not contain specific provisions defining the NBU's recapitalisation in the event of loss of capital as a result of revaluation of international reserves. In accordance with this Law the amount of statutory capital of the NBU shall be UAH 10 mil- lion. The amount of statutory capital may be increased under the decision of the NBU Council. In accordance with this Law, formation of the NBU's statutory capital, general reserves and other funds is to be from profits of the NBU under decisions of the NBU Council. Based on the results for the year ended 31 December 2007 the NBU Council approved increase in the statutory capital of the NBU to UAH 100 million. The NBU's objectives when managing capital are to maintain an appropriate level of capi- tal to ensure economic independence of the NBU and ability to perform its functions. The NBU considers total capital under management to be equity as shown in the consolidated balance sheet. The amount of capital that the NBU managed as of 31 December 2008 was UAH 89,971 million (2007: UAH 16,360 million). Objectives and policies of managing components of the NBU's capital are defined by the respective internal regulations approved by the decisions of the NBU Council and the NBU Board. Formation of funds and reserves of the NBU for covering financial risks associated with performance of its functions, is carried out in accordance with the regulations approved y the NBU Council. General reserves are formed to cover general risks (potential losses) arising as a result of banking operations. The maximum amount of these reserves is limited by 2 per cent of the amount of international reserves. Annual allocation of profit for formation (increase) of the gen- eral reserves, is defined at a level of 10 per cent of the profit available for distribution. The amount of profit allocated for formation of the NBU funds for the purposes of covering investments into acquisition, construction, improvement of non-current tangible and intangible assets and covering social needs of the NBU employees, is defined within the limits provided in the NBU budget under the respective headings. The composition of the NBU capital as at 31 December 2008 is presented below: (in UAH millions) 2008 2007 Statutory capital 100 100 Funds of the NBU 2,301 1,844 General reserves 1,506 499 Retained earnings 54 125 Revaluation reserve for foreign currency, monetary gold and bank metals 82,009 9,787 Revaluation reserve for fixed assets 4,001 4,005 Total capital 89,971 16,360

159 Annual Report 2008

20. Cash and cash equivalents (in UAH millions) Ïðèì³òêè 2008 2007 Foreign currency cash 5 90 76 Demand deposits (excluding restricted funds) 5 21,470 2,325 Short-term deposits maturing within three months (excluding gold, bank metals and restricted funds) 55,870 29,726 SDR holdings 66 14 Demand accounts of banks 13 (18,821) (19,278) Accounts of State and other institutions 14 (13,016) (15,438) IMF accounts No 1 and No 2 16 (41) (28) Current accounts of employees 17 (465) (305) Other (3) – Total cash and cash equivalents 45,150 (2,908)

21. Interest income and expense (in UAH millions) 2008 2007 Interest income Income on foreign currency funds and deposits 3,527 3,524 Income on loans to banks and other borrowers 1,460 116 Income on State securities of Ukraine 148 – Income on SDR Holdings 1 1 Other 3 2 Total interest income 5,139 3,643 Interest expense Expense on operations with the IMF (158) (173) Expense on deposit certificates issued by the NBU (92) (29) Expense on accounts of banks (11) (7) Other (93) (53) Total interest expense (354) (262) Net interest income 4,785 3,381

Other interest expense includes expenses on loans received, expenses on accounts of State and other institutions and expenses on accounts of employees. During 2008 the interest received and interest paid which are included in cash flows from operating activities in the consolidated statement of cash flows, amounted to UAH 8,622 million (2007: UAH 5,506 million) and UAH 268 million (2007: UAH 270 million) respectively.

22. Fee and commission income and expense (in UAH millions) 2008 2007 Fee and commission income Income on cash and settlement services 205 100 Income on operations with financial instruments 150 10 Income on services of electronic payments system and electronic mail 148 134 Income on valuables transportation services 9 22 Total fee and commission income 512 266 Fee and commission expense Expense on operations with the IMF (129) – Expense on operations with financial instruments (7) (5) Total fee and commission expense (136) (5) Net fee and commission income 376 261

160 Consolidated Financial Statements

23. Other income (in UAH millions) 2008 2007 Income from sale of commemorative coins, souvenirs and other products 99 73 Realized and unrealized gains on transactions with derivatives 41 – Income from activities of educational institutions 22 19 Income from registration and licensing 5 5 Fines and penalties received 4 3 Income from monitoring of credit lines 3 2 Gain from disposal of fixed assets 1 2 Other 58 36 Total other income 233 140

The other income for 2008 includes UAH 40 million credited to Ukraine's holding account in accordance with the decision of the IMF Executive Board. The remaining other income includes income from investments in associates, income from social and consumer services, sales of printed materials, sale of inventory and software maintenance.

24. Staff costs (in UAH millions) 2008 2007 Wages and salaries 530 378 Social assistance and other social payments 265 197 Mandatory State pension scheme contributions 221 165 Social security contributions 27 22 Contributions to the Corporate Non-State Pension Fund of the NBU 91 54 Other 40 16 Total staff costs 1 174 832

The other staff costs include staff training costs, expenditure for special clothes, footwear and other means of protection, the NBU employees housing expenses and other costs. The Corporate Non-State Pension Fund of the NBU is a defined contribution pension plan and after transfer of respective funds the NBU does not incur liabilities in respect of benefits payments. Upon retirement of the NBU employees, all benefits are paid by the Corporate Non- State Pension Fund of the NBU.

25. Administrative and other expenses (in UAH millions) 2008 2007 Depreciation and amortisation 222 146 Expenses for maintenance of fixed assets and intangible assets 64 58 Utilities and household expenses 63 49 Fines and penalties paid 12 10 Telecommunication services and maintenance 11 10 Business trip expenses 10 10 Other administrative services 8 4 Expenses for administration of international credit lines 5 4 Taxes, duties and charges 4 2 Stationery 2 2 Other 43 32 Total administrative and other expenses 444 327

161 Annual Report 2008

The depreciation charge for 2008 excludes depreciation of UAH 71 million (2007: UAH 76 million) in respect of the fixed assets used in the production of banknote paper, banknotes, coins and other products. This part of the depreciation charge is included in the expenses for production of banknotes, coins and other products (refer to Note 2). The other expenses include expenses for purchase of exhibits for the museums, post and mail, stationery, representation, audit, marketing and advertising, sponsorship and other expenses, etc.

26. Net increase in provisions (in UAH millions) Notes 2008 2007 (Increase)/decrease in provisions: against internal State debt 9 (235) (172) against loans to banks and other borrowers 8 (89) 7 against other assets 12 1– Total net increase in provisions (323) (165)

27. Financial risk management Risk management objectives of the NBU are as follows: ensuring that the NBU's risks are kept at a secure level on a continuous basis; ensuring effective management of assets and liabilities of the NBU, in particular prevention of inadequate use of funds; ensuring maintenance of the necessary level of liquid assets of the NBU; compliance with limits set by the legislation, as well as with principles, internal rules, pro- cedures and limits defined by the NBU regulations, during the process of assets and liabilities management; timely provision of the NBU's management with adequate information (reports) on risk man- agement positions in respect of assets and liabilities of the NBU. Main principles of financial risk management of the NBU are as follows: financial risk management is aimed at full avoidance or minimisation of the impact of risks attributable to assets and liabilities of the NBU, with taking into account the NBU's risk appetite defined by the legislation and the NBU regulations; acceptable level of financial risks of the NBU is defined by the NBU Board and Assets and Liabilities Management Committee; control over compliance with the acceptable level of financial risks of the NBU is exercised by management of the structural divisions of the NBU and Risk Control Division of the NBU. Financial risk management of the NBU is carried out through setting quantitative limits and qualitative restrictions and conditions as provided by the NBU regulations. Monthly reports on compliance with these limits and restrictions are prepared by the Risk Control Division and sub- mitted to the NBU's management. Principal types of the financial risks inherent in the NBU's activities are credit, currency, interest rate and liquidity risk. Credit risk. Credit risk is the risk to incur losses as a result of counterparty failing to per- form its financial liabilities to the NBU. Credit risk is inherent to the operations of the NBU with funds of international reserves through placement of the funds on demand accounts and term deposits with foreign banks, investments into foreign securities denominated in foreign currencies, and lending to banks and other borrowers. The NBU's maximum exposure to credit risk is reflected in the carrying amounts of finan- cial assets on the balance sheet.

162 Consolidated Financial Statements

Credit risk management is performed at the NBU through the following actions: defining the minimum acceptable credit ratings of counterparties; setting the long-term credit limits for funds placements by counterparty bank and security issuer; setting the short-term credit limits on total exposures to counterparty banks; setting the limits on standard duration (average maturity) level for placements of funds by currency and type of financial instrument; performing operations on open markets through secured lending and repo and swap operations; monitoring of participating banks' compliance with eligibility criteria defined by respective credit line agreements; monitoring creditworthiness of counterparty banks. Geographical analysis of the NBU's placements (Note 28) shows that during the year ended 31 December 2008 the amount of the NBU's financial assets placed with counterparties in OECD countries, decreased from 88% as at 31 December 2007 to 71% as at 31 December 2008, first of all as a result of increase in the share of financial assets placed in Ukraine. Currency risk Currency risk is the risk of incurring losses as a result of unfavourable changes in exchange rates of hryvnia to foreign currencies. The NBU is exposed to the currency risk through existence of open currency positions in the balance sheet due to management of the international reserves. The level of currency risk of the NBU was assessed using Value-at-Risk (VaR) method by cal- culating the risk value of open currency position of the balance sheet and international reserves as possible change in their UAH equivalent with 95% probability in one business day, ten busi- ness days and one month horizon. The model of the Value-at-Risk method applied by the NBU takes into account the correlation between exchange rates of hryvnia to different foreign curren- cies and hryvnia prices of the monetary gold and bank metals which are treated as components of the open currency position of the balance sheet and international reserves, and is based on volatilities of the components calculated for the period from July 2000 to December 2008. During the year ended 31 December 2008 the risk value of open currency position of the balance sheet increased from 0.51% of UAH equivalent of the open position (4.69% of equity) as at 31 December 2007 to 0.69% (1.64% of equity) as at 31 December 2008 at one-day hori- zon, from 1.63% (15.16% of equity) as at 31 December 2007 to 3.28% (7.78% of equity) as at 31 December 2008 at ten-days horizon and from 2.24% (20.81% of equity) as at 31 December 2007 to 4.58% (10.85% of equity) as at 31 December 2008 at one-month horizon. The above increase in risk value of open currency position of the NBU in percentage terms arises due to noticeable increase in volatility of hryvnia value of international reserves in US dol- lars as a result of devaluation of the official exchange rate of hryvnia to USD in October- December 2008. Relative share of risk value of open currency position as a percentage of equi- ty decreased as a result of significant increase of the NBU's equity during the year ended 31 December 2008. During the process of risk value assessment of the open currency position of the balance sheet and international reserves, in 2008 the NBU performed monthly analysis of the level of impact of specific currency positions on formation of the risk value, as well as changes in amounts and exchange rates of specific currencies, volatility of the exchange rates, correlation of fluctuations of the exchange rates, ratio of the currencies with high volatility and low volatility against hryvnia. For the purposes of analysing possible future levels of the currency risk the NBU performed stress-testing to investigate the level of impact of possible financial market turbulence on the value of international reserves of the NBU as a result of crisis situations. Currency risk is managed through defining the standard currency composition of the NBU's international reserves as a range of allowed shares of each currency within the NBU's interna- tional reserves. Compliance with approved composition and limits is monitored using monthly reports prepared by Risk Control Division of the NBU. These reports are submitted to and 163 Annual Report 2008

reviewed by the top management of the NBU. Interest rate risk Interest rate risk is the risk of incurring losses as a result of unfavourable changes in inter- est rates. During the year ended 31 December 2008 the interest rate risk of the NBU first of all was defined through sensitivity of the market value of foreign securities representing a part of the international reserves, to changes in the interest rates. In order to limit the interest rate risk, the NBU managed its securities portfolio in relation to standard indicators, such as securi- ties indices defined separately for securities portfolio in each currency, and modified dura- tion indicators. The modified duration of the securities portfolio characterizes a degree of influence of the market interest rate change on the change of the market value of the portfolio. During 2008 the modified duration of the foreign currency denominated securities portfo- lio increased from 1.685 (UAH 13.04 million per one basis point) as at 31 December 2007 to 1.818 (UAH 23.54 million per one basis point) as at 31 December 2008, which was deemed to be appropriate due to the increase in the amount of international reserves and expecta- tions of a decrease in the market interest rates in 2008. In particular, if the market interest rates for US Dollars, Euro and British pounds had been 100 basis points higher/ lower with the composition of the foreign securities portfolio held constant, the market value of foreign securities would have been UAH 2,354 million lower/ higher which would result in the respec- tive decrease/ increase in profit and equity (2007: if market interest rates for US Dollars, Euro and British pounds had been 100 basis points lower, the market value of foreign securities would have been UAH 1,304 million higher which would result in the respective increase in profit and equity). Other methods of assessing the level of the NBU's interest rate risk used during the report- ing period, were analysis of changes in weighted average multi-currency interest margin (spread) between interest rates on assets and liabilities of the NBU, as well as interest rate repricing analysis of the assets and liabilities. Reports with analysis of modified duration, changes in interest margin and interest rate repricing of the assets and liabilities are prepared on a monthly basis by the Risk Control Division of the NBU. These reports are submitted to and reviewed by the top management of the NBU. Liquidity risk. The liquidity risk is defined as the risk when an entity has no usable funds for servicing cur- rent liabilities. The NBU's management of the liquidity risk inherent to operations with the international reserves and arising to a significant extent due to volatility in levels of interventions on the inter- nal currency market, envisages four levels of liquidity support as follows: maintaining certain levels of the international reserve assets in the form of cash on nostro accounts (in accordance with the minimum required and maximum allowed daily levels of cash on the NBU's nostro accounts in foreign currencies, defined by respective NBU regulations); availability of highly liquid securities within the international reserves (by major currencies) with the share of each type of securities not exceeding the levels defined by respective NBU regulations; ensuring that the funds placed on term deposits and invested in securities mature evenly; ensuring possibility to perform conversion operations in case of necessity to use liquid assets in one currency for compensating lack of liquidity in another currency. Liquidity risk is managed through monitoring of compliance with the minimum and maximum requirements to liquidity of the international reserves defined in the Investment declaration. Detailed analysis of exposures to the above risks is disclosed in Notes 28 to 32.

164 Consolidated Financial Statements

28. Geographical analysis of financial assets and liabilities The geographical analysis of the NBU's financial assets and liabilities as at 31 December 2008 is set out below: (in UAH millions) Ukraine OECD IMF Other Total countries Financial assets Foreign currency funds and deposits 90 111,741 – – 111,831 Foreign securities – 126,379 – 604 126,983 SDR Holdings – – 66 – 66 State securities of Ukraine 9,027 ––– 9,027 Loans to banks and other borrowers 60,926 ––– 60,926 Internal State debt 10,349 ––– 10,349 IMF Quota contributions – – 16,272 – 16,272 Other financial assets 165 – 54 – 219 Total financial assets 80,557 238,120 16,392 604 335,673 Financial liabilities Banknotes and coins in circulation 167,538 ––– 167,538 Accounts of banks 18,904 ––– 18,904 Accounts of State and other institutions 13,016 ––– 13,016 Deposit certificates issued by the NBU 2,809 ––– 2,809 Loans received – 124 – – 124 Liabilities to the IMF – – 52,649 – 52,649 Other financial liabilities 490 30 – – 520 Total financial liabilities 202,757 154 52,649 – 255,560 Net balance sheet position (122,200) 237,966 (36,257) 604 80,113 Off-balance sheet commitments Commitments to extend credit 2,649 ––– 2,649 Net off-balance sheet position (Note 33) 2,649 – – – 2,649 Net position (124,849) 237,966 (36,257) 604 77,464

The geographical analysis of the NBU's financial assets and liabilities as at 31 December 2007 is set out below: (in UAH millions) Ukraine OECD IMF Other Total countries Financial assets Foreign currency funds and deposits 77 84,730 – – 84,807 Foreign securities – 77,368 – 68 77,436 SDR Holdings – – 14 – 14 State securities of Ukraine 395 ––– 395 Loans to banks and other borrowers 1,692 ––– 1,692 Internal State debt 8,099 ––– 8,099 IMF Quota contributions – – 10,949 – 10,949 Other financial assets 114 ––– 114 Total financial assets 10,377 162,098 10,963 68 183,506 Financial liabilities Banknotes and coins in circulation 122,471 ––– 122,471 Accounts of banks 19,417 ––– 19,417 Accounts of State and other institutions 15,438 ––– 15,438 Deposit certificates issued by the NBU 3,117 ––– 3,117 Loans received – 156 – – 156 Liabilities to the IMF – – 13,146 – 13,146 Other financial liabilities 321 14 – – 335 Total financial liabilities 160,764 170 13,146 – 174,080 Net balance sheet position (150,387) 161,928 (2,183) 68 9,426 Off-balance sheet commitments Commitments to extend credit 1 ––– 1 Net off-balance sheet position (Note 33) 1–––1 Net position (150,388) 161,928 (2,183) 68 9,425

165 Annual Report 2008

29. Credit risk Financial assets of the NBU are classified by the lowest out of the ratings assigned to the NBU's counterparties by the international rating agencies Fitch IBCA, Moody's and Standard & Poor's. The ratings are listed below as per the coding of rating agency Fitch IBCA using the rat- ing correspondence table of Bloomberg information system. Rating ÀÀÀ+ is the rating used for identification of highly reliable international financial institutions such as the Bank for International Settlements. (in UAH millions) 2008 2007 Credit Amount % in Amount % in rating financial financial assets assets Financial assets – neither past due nor impaired Foreign currency funds and deposits – demand deposits AAA+ 40 0.0 16 0.0 AAA 14,365 12.8 23 0.0 ÀÀ 13 0.0 1,299 1.6 ÀÀ– 6,943 6.2 617 0.7 À+ 162 0.1 453 0.5 A 68 0.1 –– – term deposits AAA+ 4 0.0 1 0.0 AAA 7,697 6.9 3,055 3.6 ÀÀ+ 4,106 3.7 2,744 3.2 AA 26,390 23.6 46,116 54.4 ÀÀ– 15 544 13.9 19,746 23.3 À+ 26 254 23.5 9,562 11.3 A 10,155 9.1 1,099 1.3 – foreign currency cash No risk 90 0.1 76 0.1 Total foreign currency funds and deposits 111,831 100.0 84,807 100.0 Foreign securities – Government bonds AAA 91,087 71.8 54,086 70.0 AA+ 3,103 2.4 1,415 1.8 AA 869 0.7 –– A+ 400 0.3 –– – Corporate securities AAA+ 3,206 2.5 4,185 5.4 AAA 18,878 14.9 13,655 17.7 AA+ 2,363 1.9 1,092 1.4 AA 716 0.6 85 0.1 AA– 4,692 3.7 2,082 2.7 A+ 778 0.6 463 0.6 À 770 0.6 252 0.3 Total foreign debt securities 126,862 100.0 77,315 100.0 State securities of Ukraine B+ 8,632 100.0 –– Loans to banks and other borrowers: – loans granted to banks to support their liquidity B+ 500 0.8 –– B 33,381 54.8 305 18.1 B– 4,271 7.0 254 15.0 ÑÑÑ 16,729 27.5 –– Unrated 5,918 9.7 990 58.7 – loans granted under EBRD credit lines  5 0.0 7 0.4 B– 110 0.2 120 7.1 ÑÑÑ 2 0.0 –– Unrated 10 0.0 12 0.7 Total loans to banks and other borrowers 60,926 100.0 1,688 100.0 Other financial assets Unrated 219 100.0 113 100.0

The credit risk of loans granted to banks to support their liquidity has increased subsequent to the reporting date. Following the downgrade of Ukraine's sovereign ratings and significant financial difficulties experienced by some Ukrainian banks, the international rating agencies downgraded a number of Ukrainian banks and subsequently withdrew the ratings for some of the banks. 166 Consolidated Financial Statements

30. Currency risk As at 31 December 2008, the NBU had the following positions in currencies: (in UAH millions) UAH USD EUR SDR GBP Other Non- Total monetary

Financial assets Foreign currency funds and deposits – 61,256 33,638 – 8,353 8,584 – 111,831 Foreign securities – 49,303 55,946 – 21,613 – 121 126,983 SDR Holdings – – – 66 – – – 66 State securities of Ukraine 9,027 – – – – – – 9,027 Loans to banks and other borrowers 60,799 127 – – – – – 60,926 Internal State debt 3,370 6,979 – – – – – 10,349 IMF Quota contributions – – – 16,272 – – – 16,272 Other financial assets 165 – – 54 – – – 219 Total financial assets 73,361 117,665 89,584 16,392 29,966 8,584 121 335,673 Financial liabilities Banknotes and coins in circulation 167,538 – – – – – – 167,538 Accounts of banks 18,897 2 5 – – – – 18,904 Accounts of State and other institutions 7,776 1,822 304 – – 3,114 – 13,016 Deposit certificates issued by the NBU 2,809 – – – – – – 2,809 Loans received – 124 – – – – – 124 Liabilities to the IMF – – – 52,649 – – – 52,649 Other financial liabilities 490 1 6 – – 23 – 520 Total financial liabilities 197,510 1,949 315 52,649 – 3,137 – 255,560 Net balance sheet position (124,149) 115,716 89,269 (36,257) 29,966 5,447 121 80,113

Assets and liabilities in other currencies mainly include positions in Swiss francs and Japanese yen.

167 Annual Report 2008

As at 31 December 2007, the NBU had the following positions in currencies: (in UAH millions) UAH USD EUR SDR GBP Other Non- Total monetary

Financial assets Foreign currency funds and deposits – 38,426 32,424 – 8,640 5,317 – 84,807 Foreign securities – 36,440 21,935 – 18,940 – 121 77,436 SDR Holdings – – – 14 – – – 14 State securities of Ukraine 395 – – – – – – 395 Loans to banks and other borrowers 1,549 143 – – – – – 1,692 Internal State debt 3,370 4,729 – – – – – 8,099 IMF Quota contributions – – – 10,949 – – – 10,949 Other financial assets 114 – – – – – – 114 Total financial assets 5,428 79,738 54,359 10,963 27,580 5,317 121 183,506 Financial liabilities Banknotes and coins in circulation 122,4711 – – – – – – 122,471 Accounts of banks 19,338 2 77 – – – – 19,417 Accounts of State and other institutions 4,476 7,824 35 – – 3,103 – 15,438 Deposit certificates issued by the NBU 3,117 – – – – – – 3,117 Loans received – 156 – – – – – 156 Liabilities to the IMF – – – 13,146 – – – 13,146 Other financial liabilities 321 1 13 – – – – 335 Total financial liabilities 149,723 7,983 125 13,146 – 3,103 – 174,080 Net balance sheet position (144,295) 71,755 54,234 (2,183) 27,580 2,214 121 9,426

31. Interest rate risk As at 31 December 2008 the NBU had the following structure of the weighted average inter- est rates by major currencies for monetary financial interest-bearing instruments. The analysis has been prepared using the weighted-average contractual rates at the balance sheet date. (in %) UAH USD EUR SDR GBP Other Total weighted average interest rate Financial assets Term deposits in OECD countries – 3.10 4.02 – 5.60 1.78 3.53 Foreign securities – 1.22 2.38 – 1.97 – 1.85 SDR Holdings ––– 0.82 –– 0.82 State securities of Ukraine 11.60 ––––– 11.60 Loans to banks and other borrowers 14.15 4.32 –– – – 14.09 Financial liabilities Term deposits of banks 9.60 ––––– 9.60 Accounts of Government and other institutions 4.43 ––––– 4.43 Deposit certificates issued by the NBU 19.20 ––––– 19.20 Loans received – 3.57 –– – – 3.57 Liabilities to the IMF in respect of purchases of funds under credit facilities ––– 1.84 –– 1.84

The sign "–" in the table above means that the NBU has no respective interest bearing assets or liabilities in corresponding currency. 168 Consolidated Financial Statements

Interest is accrued at floating rates on the following assets and liabilities: on SDR holdings and liabilities to IMF the interest rate changes on a weekly basis; on the loans to banks and other borrowers granted under EBRD credit line and loans received from EBRD, the interest rate is LIBOR +3% and LIBOR +1% respectively which is revised twice a year. If the interest rate on liabilities to the IMF in respect of purchases of funds under credit facil- ities had been 100 basis points higher / lower, with all other variables held constant, profit and equity of the NBU would have been UAH 363 million lower / higher as a result of higher / lower interest expense on variable interest liabilities to the IMF. Changes in LIBOR rate applicable to loans issued to banks granted under EBRD credit line and loans received from EBRD would not have significant impact on the NBU's profit or equity as the amount of performing loans grant- ed to banks approximates the amount of loans received from EBRD. As at 31 December 2007 the NBU had the following interest rates on assets and liabilities: (in %) UAH USD EUR SDR GBP Other Total weighted average interest rate Financial assets Term deposits in OECD countries – 5.05 4.43 – 6.13 2.28 4.74 Foreign securities – 3.49 4.24 – 4.63 – 3.98 SDR Holdings – – – 3.50 – – 3.50 State securities of Ukraine – – – – – – – Loans to banks and other borrowers 9.95 6.50 – – – – 9.42 Financial liabilities Term deposits of banks 6.40 – – – – – 6.40 Accounts of Government and other institutions 3.1 – – – – – 3.1 Deposit certificates issued by the NBU 3.75 – – – – – 3.75 Loans received – 5.85 – – – – 5.85 Liabilities to the IMF in respect of purchases of funds under credit facilities – – – 4.77 – – 4.77

Interest rate repricing analysis of assets and liabilities The table below summarises concentration of the interest rate repricing risk categorised by the earlier of contractual repricing or maturity dates. For the assets and liabilities with fixed interest rates, classification is determined based on the contractual maturity date. For the assets and liabilities with variable interest rates, classifi- cation was determined with taking into account the earlier repricing term or maturity date. Foreign securities at fair value through profit or loss have been classified within demand and up to 1 month category as the Management believe this is a fairer portrayal of its repricing position.

169 Annual Report 2008

As at 31 December 2008 interest rate repricing analysis of the NBU's financial assets and liabilities is presented below: (in UAH millions) Demand 1 to 3 3 to 12 1 to 5 Over Non- Total and up months months years 5 years interest to 1 month bearing

Financial assets Foreign currency funds and deposits 44,666 33,546 33,417 4 – 198 111,831 Foreign securities 126,862 – – – – 121 126,983 SDR Holdings 66 – – – – – 66 State securities of Ukraine – 156 32 6,451 1,993 395 9,027 Loans to banks and other borrowers 326 2,397 58,135 68 – – 60,926 Internal State debt – – – – – 10,349 10,349 IMF Quota contributions – – – – – 16,272 16,272 Other financial assets – – – 80 81 58 219 Total financial assets 171,920 36,099 91,584 6,603 2,074 27,393 335,673 Financial liabilities Banknotes and coins in circulation – – – – – 167,538 167,538 Accounts of banks 88 – – – – 18,816 18,904 Accounts of State and other institutions 26 – – – – 12,990 13,016 Deposit certificates issued by the NBU 2,809 – – – – – 2,809 Loans received – – 124 – – – 124 Liabilities to the IMF 36,377 – – – – 16,272 52,649 Other financial liabilities 465 – – – – 55 520 Total financial liabilities 39,765 – 124 – – 215,671 255,560 Net gap 132,155 36,099 91,460 6,603 2,074 (188,278) 80,113 Cumulative gap 132,155 168,254 259,714 266,317 268,391 80,113 –

Included in the loans to banks and other borrowers in category "1 to 5 years" are the loans of UAH 68 million granted for 3 years against the deposit placed by the counterparty for one month. The terms of loan agreement require monthly renewal of the deposit and the counter- party's failure to comply with this condition results in immediate repayment of the loan. As at 31 December 2007 the interest rate repricing analysis of the NBU's financial assets and liabilities is presented below: (in UAH millions) Demand 1 to 3 3 to 12 1 to 5 Over Non- Total and up months months years 5 years interest to 1 month bearing

Financial assets Foreign currency funds and deposits 11,932 20,956 51,829 1 – 89 84,807 Foreign securities 77,315 – – – – 121 77,436 SDR Holdings 14 – – – – – 14 State securities of Ukraine – – – – – 395 395 Loans to banks and other borrowers 125 237 1,192 138 – – 1,692 Internal State debt – – – – – 8,099 8,099 IMF Quota contributions – – – – – 10,949 10,949 Other financial assets – – 1 59 52 2 114 Total financial assets 89,386 21,193 53,022 198 52 19,655 183,506 Financial liabilities Banknotes and coins in circulation – – – – – 122,471 122,471 Accounts of banks 141 – – – – 19,276 19,417 Accounts of State and other institutions 18 – – – – 15,420 15,438 Deposit certificates issued by the NBU 2,266 726 125 – – – 3,117 Loans received – – 156 – – – 156 Liabilities to the IMF 2,197 – – – – 10,949 13,146 Other financial liabilities 308 – – – – 27 335 Total financial liabilities 4,930 726 281 – – 168,143 174,080 Net gap 84,456 20,467 52,741 198 52 (148,488) 9,426 Cumulative gap 84,456 104,923 157,664 157,862 157,914 9,426 –

170 Consolidated Financial Statements

Included in the loans to banks and other borrowers in category "1 to 5 years" are the loans of UAH 138 million granted for 3 years against the deposit placed by the counterparty for one month. The terms of loan agreement require monthly renewal of the deposit and the counter- party's failure to comply with this condition results in immediate repayment of the loan.

32. Liquidity risk For the purposes of liquidity risk calculation the liabilities are analysed by the remaining contractual maturity at the balance sheet date. The amounts disclosed in the maturity table are the contractual undiscounted cash flows. Such undiscounted cash flows differ from the amount included in the balance sheet because the balance sheet amount is based on the discounted cash flows. Net settled derivatives are includ- ed at the net amounts expected to be paid. When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the reporting date. Foreign cur- rency payments are translated using the spot exchange rate at the balance sheet date. The liquidity risk position of the NBU as at 31 December 2008 is set out below: (in UAH millions) Demand 1 to 3 3 to 12 1 to 5 Over Non- Total and up months months years 5 years interest to 1 month bearing Financial liabilities Banknotes and coins in circulation 167,538 – – – – – 167,538 Accounts of banks 18,905 – – – – – 18,905 Accounts of State and other institutions 13,016 – – – – – 13,016 Deposit certificates issued by the NBU 2,821 – – – – – 2,821 Loans received – – 70 59 – – 129 Liabilities to the IMF 126 419 801 36,825 – 16,231 54,402 Other financial liabilities 510 4 – 5 – 1 520 Gross loan commitments 2,649 – – – – – 2,649 Total potential future payments for financial obligations 205,565 423 871 36,889 – 16,232 259,980

Part of liabilities to the IMF representing the liabilities in settlement of Quota is included in "no maturity" category due to the nature of this balance. The liquidity risk position of the NBU as at 31 December 2007 is set out below: (in UAH millions) Demand 1 to 3 3 to 12 1 to 5 Over Non- Total and up months months years 5 years interest to 1 month bearing Financial liabilities Banknotes and coins in circulation 122,471 – – – – – 122,471 Accounts of banks 19,418 – – – – – 19,418 Accounts of State and other institutions 15,438 – – – – – 15,438 Deposit certificates issued by the NBU 2,267 732 133 – – – 3,132 Loans received – – 82 86 – – 168 Liabilities to the IMF 85 705 1,036 469 – 10,921 13,216 Other financial liabilities 320 13 – 1 – 1 335 Gross loan commitments 1 – – – – – 1 Total potential future payments for financial obligations 160,000 1,450 1,251 556 – 10,922 174,179

33. Commitments, contingencies and derivative financial instruments Guarantees issued Guarantees were issued by the NBU in 1992 in accordance with a decree of the Parliament of Ukraine after issue of respective guarantees by the Cabinet of Ministers of Ukraine to cover

171 Annual Report 2008

repayment of loans received by Ukrainian borrowers from foreign creditors. Loans outstanding covered by these guarantees were partially repaid and partially restructured. Restructured loans are repaid by the Ministry of Finance of Ukraine from funds of the State budget of Ukraine in accordance with the Agreement between the Government of Ukraine and Government of the Federal Republic of Germany entered into in December 2001. As the debts covered by these guarantees are serviced by the Cabinet of Ministers of Ukraine, the NBU does not expect any expenses arising in respect of these guarantees. Commitments to extend credit Commitments to extend credit include the following: (in UAH millions) 2008 2007 Commitments to extend credit under international credit lines – 1 Commitments to extend credit under loans to support the banks' liquidity 2,649 – Total commitments to extend credit 2,649 1

Capital commitments As at 31 December 2008 the NBU had capital commitments in respect of fixed asset pur- chases, construction and improvements and intangible assets purchases totalling UAH 535 mil- lion (2007: UAH 160 million). Derivative financial instruments Starting from December 2007 the NBU has been performing operations with futures for the purposes of regulating the interest rate risk. These operations are performed as a part of Investment Management and Consulting Services Agreement between the NBU and International Bank for Reconstruction and Development. As at 31 December 2008 the NBU had 1,109 long stock-exchange interest futures contracts maturing from March 2009 to December 2012 and the nominal value of UAH 2,107 million (USD 274 million) (31 December 2007: 342 long stock-exchange Euro-dollar interest futures contracts maturing from March 2008 to March 2010, with the nominal value of UAH 416 million, or USD 82 million) and 172 short contracts with the nominal value of UAH 320 million or USD 42 million. Legal proceedings From time to time and in the normal course of business, claims against the NBU are received. On the basis of own estimates and internal professional advice the Management is of the opinion that no material losses will be incurred by the NBU and accordingly no provision has been made in these financial statements.

34. Fair value of financial instruments The estimated fair values of financial assets and liabilities have been determined by the NBU using available market information, where it exists, and appropriate valuation methodolo- gies. However, judgement is necessarily required to interpret the market data to determine the estimated fair value. As disclosed in Note 4, the economy of Ukraine displays characteristics of an emerging market, and the level of activity in financial markets of Ukraine at the moment is low. As such, the estimates may not be fully reflective of the value that could be realised by the NBU in the current circumstances. Financial assets and liabilities carried at fair value. Debt securities at fair value through profit or loss are recorded in the balance sheet at their fair value. Fair value of these securities is based on quoted prices in an active market. The NBU has estimated that the fair value of cer- tain financial assets and liabilities is not materially different from their carrying values. These financial instruments include funds and deposits in foreign currency, SDR holdings, banknotes and coins in circulation, accounts of banks, accounts of State and other institutions, deposit cer- tificates issued by the NBU, loans received and liabilities to the IMF. 172 Consolidated Financial Statements

Fair values of those financial instruments for which no active market exists have been estimated by the NBU using discounted cash flow techniques. This model takes into account future interest payments and principal repayments, the repayment period and the dis- count factor. As the determination of the discount factor is subjective, the NBU has used a range of discount factors which resulted in a range of fair values calculated for the same category of assets. The discounted cash flows method was used by the NBU to estimate fair values of State securities of Ukraine denominated in the national currency, internal State debt and loans to banks and other borrowers. The following methods and assumptions were used for the pur- poses of discounted cash flow calculations: Fair value of State securities of Ukraine denominated in the national currency. This cat- egory includes promissory notes of the State Treasury of Ukraine and domestic State debt bonds. To estimate the upper value of the promissory notes of the State Treasury of Ukraine and domestic State bonds, the NBU used the discount factor of 12% per annum, being the NBU dis- count rate effective on 31 December 2008 (2007: the NBU used the discount factor of 6.6% per annum, being the average yield on domestic State bonds with maturity date on 23 June 2010 sold on the primary market on 26 November 2007). To estimate the lower value of the promissory notes of State Treasury of Ukraine and domestic State bonds, the NBU used the discount rate of 17.0% per annum being the average yield on domestic State bonds sold on the primary market on 30 December 2008 (2007: the NBU used the discount factor of 8% being the NBU discount rate effective as at 31 December 2007). For the purposes of calculating the fair value of promissory notes of the State Treasury of Ukraine, the NBU did not take into account any interest income, as no interest accrual is envis- aged by effective legislation. The fair value of internal State debt in respect of the loans to Government in foreign currency. To estimate the fair value, the NBU used the discount factor of 25.607% per annum being the yield on USD-denominated external Government bonds on the Ukrainian external debt securities market as at 1 January 2009 with the maturity date in 2017 and coupon rate of 6.75% per annum (2007: discount rate of 6.935% per annum being the yield on USD-denomi- nated external Government bonds on the Ukrainian State debt securities market with similar maturity dates). As disclosed in Note 9, the Law of Ukraine on State budget of Ukraine for 2009 provides for restructuring in 2009 of the balance of debt of the Government to the NBU defined in the Law on Restructuring, through issue of internal State bonds to be transferred to the NBU, however terms and conditions of these bonds are not specified. Therefore the discounted cash flows have been estimated from 2009, given that servicing of the debt will not be in accordance with the repay- ment schedule envisaged by the Law of Ukraine On Restructuring and that the debt would not be repaid by 2009, as it was envisaged, but that the repayment will be in line with recent actual servicing of USD 33 million (amount repaid during 2008) per annum up to its final repayment. The fair value of internal State debt in respect of the national currency denominated loans to Government granted in 1994–1996. To estimate the upper value, the NBU used the discount factor of 12% per annum being the NBU discount rate effective on 31 December 2008 (2007: the NBU used the discount factor of 6.6% per annum being the average yield on domestic Government bonds placed on the primary market on 26 November 2007). To estimate the lower value of loans, the NBU used the discount rate of 17.0% per annum being the average yield on domestic State bonds sold on the primary market on 30 December 2008 (2007: the NBU used the discount factor of 8% being the NBU discount rate effective as at 31 December 2007). As at the end of 2008 the cash flows for the purposes of calculating the fair value of loans to Government in national currency included the amount of interest at 5% per annum for serv- icing the loans starting from 2010.

173 Annual Report 2008

Fair value of the loans to banks and other borrowers As disclosed in Note 4, during October-December 2008 due to the sharp deterioration of economic conditions and lack of liquidity in the banking market, the NBU significantly increased the volume of refinancing operations with Ukrainian banks. Due to significant uncertainty perti- nent to the current economic conditions, the NBU is not able to reliably estimate the future cash- flows in respect of the loans issued to Ukrainian banks during the fourth quarter of 2008 for the purposes of estimating the fair value of these loans (2007: the fair value of loans to banks and other borrowers was approximating the carrying value of the loans). The following table summarises the carrying amounts and estimated fair values of those financial assets not presented on the NBU's balance sheet at their fair value: (in UAH millions) 2008 2007 Carrying Estimated Carrying Estimated value fair value value fair value Upper Lower Upper Lower Value value Value value

State securities of Ukraine in national currency: Promissory notes of the State Treasury of Ukraine 395 339 320 395 340 330 Domestic State bonds 8,632 9,118 7,993 ––– Total State securities of Ukraine 9,027 9,457 8,313 395 340 330 Internal State debt on loans in foreign currency 6,979 994 994 4,729 2,730 2,730 Internal State debt in national currency arising in 1994–1996 3,370 1,885 1,395 3,370 2,676 2,346 Total internal State debt 10,349 2,879 2,389 8,099 5,406 5,076 Loans to banks and other borrowers 60,926 N/A N/A 1,692 1,692 1,692

Taking into account the fact that the calculations of the estimated fair value are based on certain assumptions, it should be noted that the information provided above may not be fully reflective of the value that could be realised.

35. Presentation of financial instruments by measurement categories In accordance with IAS 39, Financial Instruments: Recognition and Measurement, the NBU classifies its financial assets into the following categories: loans and receivables; financial assets at fair value through profit or loss; available-for-sale financial assets and financial assets held to maturity. All financial liabilities of the NBU are carried at amortised cost.

174 Consolidated Financial Statements

The following table analyses financial instruments by these measurement categories as of 31 December 2008:

(in UAH millions) Loans Assets at fair Available- Assets held Financial Total and value through for-sale to maturity liabilities receivables profit or loss assets at amortised cost Financial assets Foreign currency funds and deposits 111,823 8 – – – 111,831 Foreign securities – 126,862 121 – – 126,983 SDR Holdings 66 – – – – 66 State securities of Ukraine 8,632 – – 395 – 9,027 Loans to banks and other borrowers 60,926 – – – – 60,926 Internal State debt 10,349 – – – – 10,349 IMF Quota contributions – – 16,272 – – 16,272 Other financial assets 219 – – – – 219 Total financial assets 192,015 126,870 16,393 395 – 335,673 Financial liabilities Banknotes and coins in circulation – – – – 167,538 167,538 Accounts of banks – – – – 18,904 18,904 Accounts of State and other institutions – – – – 13,016 13,016 Deposit certificates issued by the NBU – – – – 2,809 2,809 Loans received – – – – 124 124 Liabilities to the IMF – – – – 52,649 52,649 Other financial liabilities – – – – 520 520 Total financial liabilities – – – – 255,560 255,560

The following table analyses financial instruments by the measurement categories as of 31 December 2007:

(in UAH millions) Loans Assets at fair Available- Assets held Financial Total and value through for-sale to maturity liabilities receivables profit or loss assets at amortised cost

Financial assets Foreign currency funds and deposits 84,806 1 – – – 84,807 Foreign securities – 77,315 121 – – 77,436 SDR Holdings 14 – – – – 14 State securities of Ukraine – – – 395 – 395 Loans to banks and other borrowers 1,692 – – – – 1,692 Internal State debt 8,099 – – – – 8,099 IMF Quota contributions – – 10,949 – – 10,949 Other financial assets 114 – – – – 114 Total financial assets 94,725 77,316 11,070 395 – 183,506 Financial liabilities Banknotes and coins in circulation – – – – 122,471 122,471 Accounts of banks – – – – 19,417 19,417 Accounts of State and other institutions – – – – 15,438 15,438 Deposit certificates issued by the NBU – – – – 3,117 3,117 Loans received – – – – 156 156 Liabilities to the IMF – – – – 13,146 13,146 Other financial liabilities – – – – 335 335 Total financial liabilities – – – – 174,080 174,080

175 Annual Report 2008

36. Related party transactions For the purposes of these financial statements, parties are considered to be related if the parties are under common control or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions as defined by IAS 24 "Related Party Disclosures". In considering each possible related party relationship, attention is paid to the substance of the relationship, not merely the legal form. Related parties of the NBU include the Government, state-controlled entities, key management personnel and other related parties. In the normal course of business the NBU enters into transactions with the related parties. The outstanding balances at the year end are as follows: (in UAH millions) 2008 2007 Notes Govern- Associa- Other Govern- Associa- Other ment and tes related ment and tes related State- parties State- parties controlled controlled entities entities

State securities of Ukraine 7 9,027 – – 395 – – Loans to banks and other borrowers 8 23,386 –– ––– Internal State debt, gross 9 11,145 – – 8,660 – – Provision against internal State debt 9 (796) – – (561) – – Other assets 12 5907 2461 Accounts of banks 13 3,612 – – 1,180 – – Accounts of State and other institutions 14 12,917 54 36 15,328 35 72 Profits payable to the State Budget 18 4,455 – – 4,834 – – Deposit certificates issued by the NBU 15 1,000 –– 300 – – Other liabilities 17 4 –– 2––

All balances presented in the table above are non-interest bearing except for: loans to State-owned banks with the contractual interest rates from 12% to 18% as at 31 December 2008 (31 December 2007: none) maturing within 12 months; demand accounts of State and other institutions totalling UAH 26 million with the contrac- tual interest rate of 4.43% as at 31 December 2008 (31 December 2007: UAH 18 million with the contractual interest rate of 3.1%); deposit certificates issued by the NBU with the contractual interest rate of 12% as at 31 December 2008 (31 December 2007: from 2.5% to 7.0%) maturing within one month. Income and expense items from operations with the related parties are as follows: (in UAH millions) 2008 2007 Govern- Associa- Other Govern- Associa- Other ment and tes related ment and tes related State- parties State- parties controlled controlled entities entities

Interest income 239 –– 2–– Interest expense 7– 1 6– 5 Fee and commission income 95 – 2 14 – – Other income 81 2 –2 – Other expenses 7– 2 14 – 2 Net increase in provisions 235 – – 172 – –

In 2008 the short-term benefits (salaries) of key management personnel amounted to UAH 8 million (2007: UAH 6 million). As at 31 December 2008 outstanding balance of loans to the key management personnel totalled UAH 2 million (2007: UAH 3 million).

176 Consolidated Financial Statements

37. Concentration of assets and liabilities As at 31 December 2008 6% (2007: 5%) of the total NBU assets, excluding IMF Quota, are represented by amounts due from the Government of Ukraine in respect of internal State debt and State securities of Ukraine, 4% (2007: 0%) are represented by funds placed with the Federal Reserve Bank of New York, 3% (2007: 2%) are represented by funds placed with BNP Paribas, 9% (2007: 14%) are represented by US Treasury bills, 20% (2007: 16%) are repre- sented by the coupon bonds of UK Government and other EU countries and 18% (2007: 1%) are represented by loans to Ukrainian banks and other borrowers. As at 31 December 2008 69% (2007: 75%) of the total NBU's liabilities (excluding the prom- issory notes issued to the IMF in settlement of Quota) are represented by banknotes and coins in circulation, 5% (2007: 9%) are represented by funds of the State Treasury of Ukraine, 8% (2007: 12%) are represented by accounts of banks and 15% (2007: 1%) are represented by lia- bilities to the IMF.

38. Subsequent events In January 2009 the NBU transferred to the State Budget UAH 1,000 million as partial set- tlement of the liability to transfer the excess of income over expenditure for 2008. An addition- al transfer of UAH 1,000 million was made in April 2009. On 12 February 2009 Fitch Ratings downgraded Ukraine's long-term foreign and local cur- rency Issuer Default Ratings to 'B' from 'B+'. This reflects the increased risk of a banking and currency crisis in Ukraine, due to intensified stress on the financial system. The Outlooks on both Issuer Default Ratings are 'negative'. The agency has also downgraded the Country Ceiling to 'B' from 'B+'. On 25 February 2009 Ukraine's credit rating was cut two levels by Standard & Poor's due to the political turmoil. The long-term foreign currency rating was lowered to CCC+. The agency left Ukraine's outlook 'negative', indicating it might reduce the ratings further. After the balance sheet date the international reserves of the NBU decreased from USD 31.5 billion as at 31 December 2008 to USD 25.4 billion as at 31 March 2009. In 2009 the NBU continued to provide loans to banks to support their liquidity and the total amount of these loans increased to UAH 79,347 million as at 9 April 2009.

10 April 2009 Kyiv, Ukraine

177

Part 6

TABLES 182 Annual Report2008

Basic indicators of the economic development of Ukraine Gross domestic product, industrial and agricultural output, investments, retail turnover (in actual prices, UAH million)

Gross domestic product Industrial output Output of real, as index, as compared Intermediate compared with Industrial Agricultural Capital Total retail Period goods and Deflator with the respective consumption nominal the respective products sold output investments turnover services index,% period of the previous period of the year, % previous year, % 1 2 3 4 5 6 7 8 9 10 11 2005 1 048 481 607 029 441 452 102.7 124.5 468 563 103.1 92 536 93 096 94 332 2006 1 252 209 708 056 544 153 107.3 114.8 551 729 106.2 94 300 125 254 129 952 2007 1 650 992 930 261 720 731 107.9 122.7 717 077 110.2 109 850 188 486 178 233 2008 January … … 57 720 104.9 123.6 54 592 106.1 3 370 … 15 024 January-February … … 118 557 105.8 125.0 113 110 108.9 7 100 … 31 026 January-March 437 737 250 020 187 717 106.3 126.6 178 686 107.9 10 800 34 115 49 839 January-April … … 266 575 106.2 131.2 247 113 108.0 16 970 … 69 453 January-May … … 348 083 106.4 133.1 318 881 108.1 24 500 … 90 421 January-June 977 674 556 257 421 417 106.3 129.5 393 050 107.7 34 130 81 561 110 559 January-July … … 530 276 106.5 134.3 470 611 107.3 78 100 … 133 014 January-August … … 628 108 107.1 134.3 542 873 106.3 108 340 … 155 531 January-September 1 617 688 920 494 697 194 106.3 129.6 612 623 105.1 115 740 136 971 177 535 January-October … … 799 996 105.8 132.9 671 161 102.3 126 502 … 201 422 January-November … … 875 376 103.6 132.0 719 983 99.2 139 385 … 220 756 January-December 2 205 334 1 255 470 949 864 102.1 129.1 779 127 96.9 150 845 233 081 243 898

Note: information of the State Committee of Statistics of Ukraine. Basic indicators of the economic development of Ukraine Consumer price index, industrial producer price index, unemployment rate, income and expenditure of the population, wage, government finance

Industrial producer price Consumer price index, % Total income of the population Consolidated budget 2, % of GDP index, % Unemploym Real Average ent rate Expenditure of average with respect with respect real monthly Period with respect with respect (at the end the population monthly to December to December disposable, % nominal wage, deficit (–), to the to the of period), (net of savings) wage index, Reve- Expen of the of the Nominal (with inflation UAH surplus previous previous % %1 nues diture3 previous previous taken into (+) month month year1 year1 account)

1 2 3 4 5 6 7 8 9 10 11 12 13 14

2005 … 110.3 … 109.5 3.1 381 404 123.9 335 753 806 131.5 30.4 32.1 –1.8 2006 … 111.6 … 114.1 2.7 472 061 111.8 427 858 1 041 111.7 31.6 32.2 –0.7 2007 … 116.6 … 123.3 2.3 623 289 114.8 575 510 1 351 110.3 30.5 31.4 –1.1 2008 January 102.9 102.9 102.3 102.3 2.4 52 480 123.4 49 217 1 521 88.6 31.7 24.9 6.9 February 102.7 105.7 103.0 105.4 2.4 110 275 122.1 103 019 1 575 92.6 34.3 29.4 4.9 March 103.8 109.7 106.6 112.4 2.3 176 020 120.1 169 108 1 618 92.9 32.9 29.8 3.0 April 103.1 113.1 106.6 119.8 2.2 237 115 117.7 225 170 1 647 91.2 32.6 30.5 2.0 May 101.3 114.6 103.7 124.2 2.0 303 201 116.0 288 105 1 673 92.0 33.1 29.7 3.4 June 100.8 115.5 104.2 129.4 1.9 381 770 114.5 361 110 1 707 96.8 32.4 30.8 1.6 July 99.5 114.9 103.6 134.1 1.8 451 874 113.7 425 523 1 739 99.7 30.4 29.1 1.3 August 99.9 114.8 101.8 136.5 1.8 528 524 113.4 493 839 1 755 96.9 30.6 28.3 2.3 September 101.1 116.1 98.2 134.0 1.8 609 713 111.8 564 431 1 773 98.0 31.3 29.4 1.7 October 101.7 118.0 98.6 132.1 1.9 684 584 112.4 636 813 1 787 96.3 30.3 29.2 0.9 November 101.5 119.8 93.5 123.5 2.3 760 353 111.4 701 753 1 790 90.3 30.6 29.7 0.6 December 102.1 122.3 99.6 123.0 3.0 856 633 109.6 786 861 1 806 97.0 31.4 32.6 –1.5

1 Annual data - December with respect to December of the previous year. Tables 2 Expenditure does not comprise loans minus repayments. 3 Excluding crediting without repayment.

Note: information of the State Committee of Statistics of Ukraine and the Ministry of Finance of Ukraine. 183 Annual Report 2008

10 19 391 22 358 32 479 33 231 35 452 35 452 37 530 37 530 31 543 31 543 USD million fficial reserve assets, fficial at the end of period O

0 6 0 0 4 4 9 9 ......

6 7 7 7 5 5 5 5

9 45.9 50.6 5 5 5 5 5 5 5 5 % of GDP

period

8 8 6 6 39 39 54 54

956 802 8 8 4 4

8 6 6 4 4 2 2 1 1 39 619 54 512 79 87 9 9 10 10 10 10 USD million Gross external debt, at the end of

7 50.6 49.5 50.6 59.5 58.5 59.0 51.9 56.1 51.3 55.0 % of GDP

6 43 707 53 307 72 153 21 979 27 425 49 404 29 830 79 234 20 898 100 132 Import of goods and services USD million

5 51.3 46.6 44.8 47.4 50.2 49.0 47.5 48.4 42.5 47.0 % of GDP

4 44 378 50 239 64 001 17 528 23 516 41 044 27 253 68 297 17 315 85 612 Export of goods and services USD million

3 2.9 1.5 3.7 7.2 8.4 3.7 6.5 9.2 7.1 – – 10.0 – – – – – – – % of GDP

2 2 531 1 617 5 272 3 700 3 359 7 059 2 128 9 187 3 746 Current account balance – – – – – – – – 12 933 – USD million

year -

1

Period 1st quarter 2nd quarter 1st half 3rd quarter 9 months 4th quarter year 2005 2006 2007 2008

184 Basic indicators of the economic development Ukraine reserve assets Balance of payments, external debt, official Tables

Survey of depository corporations (including the National Bank of Ukraine)1 (outstanding amounts at end of period, UAH, million)

Indicators 2004 2005 2006 2007 2008 Net foreign assets 45 086 81 825 67 041 51 443 –16 121 Claims on non-residents 77 357 124 602 146 737 209 251 320 504 Monetary gold and SDR holdings 1 186 1 398 1 814 2 489 4 144 Foreign currency 3 005 2 433 4 139 6 707 7 495 Transferable deposits 9 997 10 810 12 768 15 416 48 968 Other deposits 46 549 77 602 70 704 88 715 102 182 Securities other than shares 3 912 20 143 43 070 77 365 127 274 Loans 1 167 2 053 3 450 6 740 13 085 Shares and other equity 150 249 279 670 750 Insurance technical reserves – – – – – Financial derivatives – – – – 35 Other accounts receivable 11 392 9 914 10 514 11 150 16 570 less: Liabilities to non-residents 32 271 42 776 79 696 157 808 336 625 Transferable deposits 21 017 17 787 18 020 19 323 58 131 Other deposits 1 709 4 522 4 989 10 172 39 642 Securities other than shares 29 125 1 146 4 722 2 540 Loans 9 477 20 044 54 792 120 790 235 776 Insurance technical reserves – – – – – Financial derivatives – – – – 33 Other accounts payable 38 298 749 2 800 503 Domestic credit 109 255 146 752 248 631 440 027 778 432 Net claims on central government 14 516 –5 769 –6 757 –3 530 23 786 Claims on central government 20 711 13 845 14 133 15 362 41 885 Securities other than shares 9 447 3 783 4 609 6 195 25 953 Loans 9 849 9 294 9 042 8 660 11 145 Shares and other equity – – – – – Financial derivatives – – – – 5 Other accounts receivable 1 415 768 483 507 4 782 less: Liabilities to central government 6 195 19 614 20 890 18 892 18 099 Transferable deposits 5 702 18 745 18 889 15 889 13 482 Other deposits 6 0 0 40 51 Securities other than shares – – – – 15 Loans – – – – – Insurance technical reserves – – – – – Financial derivatives – – – – – Other accounts payable 487 869 2 001 2 963 4 552 Claims on other residents 94 739 152 522 255 388 443 557 754 646 Claims on other financial corporations 1 253 2 839 4 396 10 137 15 907 Transferable deposits – – – – – Other deposits – – – – – Securities other than shares 140 470 524 1 513 2 699 Loans 842 1 663 2 689 5 932 9 789 Shares and other equity 218 529 1 046 2 463 2 972 Insurance technical reserves – – – – – Financial derivatives – – – – 196 Other accounts receivable 53 177 137 228 252 Claims on regional and local gove rnment 187 317 363 467 490 Securities other than shares 148 311 358 452 476 Loans 39 5 4 4 12 Shares and other equity – – – – – Financial derivatives – – – – – Other accounts receivable 0 0 1 11 2 Claims on public non-financial corporations 6 443 7 232 9 229 13 705 37 855 Securities other than shares 814 632 278 248 278 Loans 5 592 6 492 8 899 13 426 37 538 Shares and other equity 8 32 7 10 4 Financial derivatives – – – – – Other accounts receivable 29 76 45 21 34

185 Annual Report 2008

Concluded

Indicators 2004 2005 2006 2007 2008

Claims on other non-financial corporations 70 606 106 261 159 049 258 254 418 913 Securities other than shares 2 041 3 253 4 180 7 178 7 755 Loans 66 166 99 744 151 758 247 199 406 321 Shares and other equity 2 022 2 880 2 681 3 205 2 601 Financial derivatives – – – – 176 Other accounts receivable 377 385 430 672 2 060 Claims on other resident sectors 16 250 35 873 82 352 160 994 281 482 Securities other than shares – 25 10 8 – Loans 16 192 35 744 82 124 160 566 280 717 Financial derivatives – – – – – Other accounts receivable 58 104 217 419 765

Monetary aggregate M3 125 705 194 071 261 063 396 156 515 727 Currency in circulation outside depository corporations 42 345 60 231 74 984 111 119 154 759 Transferable deposits 31 772 48 285 61 332 90 780 105 372 Other financial corporations 2 494 1 737 2 750 4 294 4 147 State and local government – – – – – Public non-financial corporations 3 869 4 116 3 505 4 325 7 241 Other non-financial corporations 16 174 23 165 28 340 40 896 52 168 Other sectors of the economy 9 235 19 266 26 737 41 265 41 816 Other deposits 51 366 84 629 123 098 189 374 252 397 Other financial corporations 2 790 4 392 5 991 11 048 15 158 Regional and local government – – – – – Public non-financial corporations 2 869 4 827 3 496 5 060 5 139 Other non-financial corporations 11 591 18 948 30 298 45 412 53 739 Other sectors of the economy 34 116 56 462 83 312 127 854 178 361 Securities other than shares 222 925 1 650 4 884 3 200 Other financial corporations 26 75 341 867 366 Regional and local government 0 – – – – Public non-financial corporations 0 6 3 1 4 Other non-financial corporations 119 482 915 3 272 1 888 Other sectors of the economy 76 362 391 744 943 Deposits exclude d from monetary aggregate M3 1 193 1 726 1 417 3 536 1 922 Transferable deposits 1 193 1 726 1 417 3 536 1 921 Other financial corporations – – – – – Regional and local government 1 193 1 726 1 417 3 536 1 921 Public non-financial corporations 0 – – – – Other non-financial corporations – – – – – Other sectors of the economy – – – – – Other deposits 0 0 0 0 1 Other financial corporations – – – – – Regional and local government 0 – – 0 0 Public non-financial corporations – – – – – Other non-financial corporations – – – – – Other sectors of the economy 0 0 0 0 1 Securities other than shares excluded from monetary aggregate M3 – – – – – Other financial corporations – – – – – Regional and local government – – – – – Public non-financial corporations – – – – – Other non-financial corporations – – – – – Other sectors of the economy – – – – – Loans 208 160 259 1 038 1 468 Financial derivatives – – – – 290 Insurance technical reserves – – – – – Shares and other equity 27 486 31 404 55 634 99 527 233 751 Other items (net) –251 1 216 –2 701 –8 787 9 153

1 Depository Corporations Survey (including National Bank of Ukraine) is an analytical form of presenting the statistical data of depository cor- porations (NBU and other depository corporations) that are consolidated into the generalized categories of assets and liabilities. The survey comprises data on liabilities of depository corporations that are included to the monetary aggregates. The balance sheet identity in Depository Corporations Survey (including the National Bank of Ukraine) reflects the link of monetary aggregate M3 and other items with claims of depos- itory corporations on residents and non-residents. Beginning from December 2002, data are based on the standardized report forms for central banks and other depository corporations (banks) according to the IMF methodology.

186 Tables

Surveys of depository corporations (excluding National Bank of Ukraine)1 (outstanding amounts at end of period, UAH, million)

Indicators 2004 2005 2006 2007 2008

Net foreign assets 303 –12 175 –44 199 –113 882 –226 116 Claims on non-residents 12 225 14 305 20 571 30 610 57 706 Foreign currency 2 222 2 359 4 064 6 630 7 406 Transferable deposits 7 008 8 985 11 963 14 862 31 253 Other deposits 1 733 765 868 1 591 4 661 Securities other than shares 5 4 4 50 412 Loans 1 167 2 053 3 450 6 740 13 085 Shares and other equity 11 128 157 548 629 Insurance technical reserves – – – – – Financial derivatives – – – – 35 Other accounts receivable 79 11 65 188 226 less: Liabilities to non-residents 11 922 26 480 64 770 144 491 283 822 Transferable deposits 1 119 1 827 3 363 6 176 5 482 Other deposits 1 709 4 522 4 989 10 172 39 642 Securities other than shares 1 125 1 146 4 722 2 540 Loans 9 056 19 709 54 537 120 634 235 652 Insurance technical reserves – – – – – Financial derivatives – – – – 33 Other accounts payable 36 296 735 2 786 473 Claims on Nationa l Bank of Ukraine 11 808 24 988 22 614 33 576 34 326 Holdings of national currency 3 324 5 178 7 150 11 352 12 779 Transferable deposits 8 053 17 265 14 886 18 981 18 627 Other deposits 252 117 394 139 141 Securities other than shares 142 2 427 180 3 097 2 754 Loans – – – – – Shares and other equity – – – – – Financial derivatives – – – – – Other accounts receivable 37 2 5 8 25 Net claims on central government 1 779 2 380 2 192 2 744 13 032 Claims on central government 2 710 3 530 4 457 6 304 18 211 Securities other than shares 2 576 3 344 4 198 5 800 16 926 Loans – – – – – Shares and other equity – – – – – Financial derivatives – – – – 5 Other accounts receivable 134 186 259 504 1 280 less: Liabilities to central government 931 1 151 2 265 3 560 5 179 Transferable deposits 439 283 265 561 565 Other deposits 6 0 0 40 51 Securities other than shares – – – – 15 Loans – – – – – Insurance technical reserves – – – – – Financial derivatives – – – – – Other accounts payable 485 867 2 000 2 959 4 549 Claims on other residents 94 458 152 242 255 038 443 210 753 945 Claims on other financial corporations 1 230 2 815 4 352 10 091 15 800 Transferable deposits – – – – – Other deposits – – – – – Securities other than shares 140 470 524 1 513 2 699 Loans 842 1 663 2 689 5 932 9 789 Shares and other equity 195 505 1 022 2 434 2 906 Insurance technical reserves – – – – – Financial derivatives – – – – 196 Other accounts receivable 53 177 116 212 210 Claims on regional and local government 187 317 363 467 490 Securities other than shares 148 311 358 452 476 Loans 39 5 4 4 12 Shares and other equity – – – – – Financial derivatives – – – – – Other accounts receivable 0 0 0 11 2

187 Annual Report 2008

Concluded Indicators 2004 2005 2006 2007 2008

Claims on public non-financial corporations 6 329 7 124 9 106 13 604 37 694 Securities other than shares 814 632 278 248 278 Loans 5 486 6 391 8 798 13 326 37 382 Shares and other equity 8 32 7 10 4 Financial derivatives – – – – – Other accounts receivable 21 69 24 19 30 Claims on other non-financial corporations 70 510 106 181 158 956 258 166 418 642 Securities other than shares 2 041 3 253 4 180 7 178 7 755 Loans 66 103 99 687 151 705 247 150 406 283 Shares and other equity 2 022 2 880 2 681 3 205 2 601 Financial derivatives – – – – 176 Other accounts receivable 344 361 390 633 1 827 Claims on other sectors of the economy 16 201 35 806 82 262 160 882 281 319 Securities other than shares – 25 10 8 – Loans 16 144 35 677 82 034 160 455 280 556 Financial derivatives – – – – – Other accounts receivable 57 104 217 419 763

Liabilities to National Bank of Ukraine 4 067 764 1 441 1 738 60 986 Transferable deposits 0 0 – – – Other deposits – – – – – Securities – – – – – Loans 4 067 762 1 439 1 737 60 985 Financial derivatives – – – – – Other accounts payable – 2 2 1 1 Transferable deposits included in monetary aggregate M3 31 593 48 115 61 136 90 364 104 807 Other financial corporations 2 494 1 737 2 750 4 294 4 147 Regional and local government – – – – – Public non-financial corporations 3 730 4 036 3 480 4 215 7 142 Other non-financial corporations 16 174 23 165 28 340 40 896 52 168 Other sectors of the economy 9 195 19 178 26 567 40 959 41 350 Other deposits included in monetary aggregate M3 51 366 84 629 123 098 189 374 252 397 Other financial corporations 2 790 4 392 5 991 11 048 15 158 Regional and local government – – – – – Public non-financial corporations 2 869 4 827 3 496 5 060 5 139 Other non-financial corporations 11 591 18 948 30 298 45 412 53 739 Other sectors of the economy 34 116 56 462 83 312 127 854 178 361 Securities other than shares included in monetary aggregate M3 222 925 1 650 4 884 3 200 Other financial corporations 26 75 341 867 366 Regional and local government 0 – – – – Public non-financial corporations 0 6 3 1 4 Other non-financial corporations 119 482 915 3 272 1 888 Other sectors of the economy 76 362 391 744 943 Deposits excluded from monetary aggregates M3 1 193 1 726 1 417 3 536 1 921 Transferable deposits 1 193 1 726 1 417 3 536 1 921 Other deposits 0 – – 0 0 Securities other than shares excluded from monetary aggregate M3 – – – – – Loans 208 160 259 1 038 1 468 Financial derivatives – – – – 290 Insurance technical reserves – – – – – Shares and other equity 19 833 28 040 47 325 77 431 135 846 Other items (net) –133 3 074 –680 –2 716 14 272

1 Depositotory Corporations Survey (excluding National Bank of Ukraine) is an analytical form of presenting statistical data of depository corporations (except NBU) that are consolidated into the generalized categories of assets and liabilities. The survey comprises data on lia- bilities of depository corporations that are included to the monetary aggregates. Beginning from December 2002, data are based on the standardized report form for other depository corporations according to the IMF methodology.

188 Tables

Monetary aggregates and components

including M3 1 M1 M2–M1 M3–M2 cash in other deposits securities except shares circulation transferable transferable including including Period outside deposits in deposits in depository national foreign total in national in foreign total in national in foreign

corporations currency currency currency currency currency currency (Ì0) 1 2 3 4 5 6 7 8 9 10 11 outstanding amounts at end of period, UAH, million 2005 194 071 60 231 38 341 9 944 84 629 48 955 35 674 925 766 160 2006 261 063 74 984 48 292 13 040 123 098 65 983 57 115 1 650 1 402 248 2007 396 156 111 119 70 546 20 233 189 374 119 740 69 634 4 884 4 595 289 2008 January 391 332 105 445 68 004 21 084 191 818 119 704 72 114 4 980 4 692 288 February 398 066 106 912 67 600 21 102 197 862 123 350 74 512 4 591 4 297 294 March 416 013 109 841 73 836 23 552 204 217 127 977 76 240 4 567 4 251 316 April 429 649 116 066 72 561 24 412 212 132 132 368 79 764 4 478 4 089 390 May 429 672 118 843 70 116 24 662 211 730 133 717 78 014 4 321 4 002 318 June 450 589 124 742 76 378 25 267 219 933 140 825 79 109 4 269 3 946 323 July 467 234 130 924 76 871 24 769 230 499 145 718 84 781 4 171 3 851 321 August 474 883 133 966 78 627 25 214 232 818 147 489 85 328 4 260 3 925 334 September 477 659 133 564 81 256 22 969 235 932 150 791 85 142 3 938 3 605 332 October 481 117 146 251 70 894 28 607 231 452 139 702 91 750 3 912 3 565 347 November 483 849 141 318 68 031 30 106 240 766 131 655 109 112 3 628 3 238 390 December 515 727 154 759 70 369 35 003 252 397 129 888 122 509 3 200 2 763 437 annual change, % 2005 54.4 42.2 54.9 41.5 64.8 74.3 53.3 317.6 470.3 82.7 2006 34.5 24.5 26.0 31.1 45.5 34.8 60.1 78.3 83.1 55.7 2007 51.7 48.2 46.1 55.2 53.8 81.5 21.9 196.0 227.8 16.2 2008 January 52.7 49.3 42.4 56.4 56.5 85.1 24.5 184.4 214.7 10.7 February 52.3 49.0 44.7 47.3 56.2 83.1 25.6 149.1 164.8 33.2 March 52.7 48.4 51.0 62.7 54.6 80.6 24.5 55.4 56.1 46.0 April 52.2 48.6 47.3 36.2 58.5 82.9 29.8 38.3 35.5 77.7 May 49.1 51.4 30.0 43.9 56.0 80.9 26.2 50.6 51.3 41.6 June 48.7 48.6 34.6 58.0 53.6 75.1 26.0 37.4 39.5 16.4 July 47.4 49.3 26.2 35.5 57.1 76.4 32.3 24.0 25.3 10.2 August 44.4 45.7 28.6 34.6 51.6 68.4 29.3 17.8 18.0 15.1 September 37.2 37.9 20.0 27.2 45.4 59.7 25.4 18.2 17.4 27.6 October 35.8 47.8 7.8 43.9 39.6 42.1 36.0 4.2 4.3 3.1 November 32.3 39.2 1.5 53.5 38.8 24.4 61.3 –9.0 –13.2 52.6 December 30.2 39.3 –0.3 73.0 33.3 8.5 75.9 –34.5 –39.9 51.6

1 Monetary aggregates consist of liabilities of depository corporations to other sectors of the economy except general government and other depository corporations. Monetary aggregate Ì0 includes currency in circulation outside the depository corporations. Monetary aggregate Ì1 comprises monetary aggregate M0 and transferable deposits in national currency (M1–M0). Monetary aggregate Ì2 comprises monetary aggregate M1 and transferable deposits in foreign currency and other deposits (M2–M1). Monetary aggregate Ì3 comprises monetary aggregate M2 and securities other than shares (M3–M2). Beginning from December 2002 monetary aggregates are based on the IMF methodology.

189 Annual Report 2008

4 18 24 69 81 81 6 64 72 81 74 93 82 94 86 66

profit - 14

serving non

institutions households

including

13 35 659 82 010 160 386 164 775 174 234 183 580 191 899 193 546 198 650 204 466 208 729 213 552 238 616 260 081 280 490 households

other sectors of the economy

168 12 total 35 677 82 034

160 455 164 856 174 315 183 644 191 963 193 618 198 730 204 541 208 822 213 633 238 711 260 280 556

-

ncial 11 99 687

151 705 247 150 252 469 262 293 278 259 283 080 285 797 297 919 305 954 317 062 329 098 354 277 384 991 406 283 fina other non

corporations

-

including

10 6 391 8 798 13 326 13 172 13 059 12 305 12 758 13 146 13 988 13 764 14 622 15 069 17 041 17 969 37 382 financial financial

financial corporations non public corporations -

non

9 total

106 078 160 503 260 476 265 642 275 352 290 565 295 838 298 943 311 907 319 718 331 684 344 167 371 318 402 959 443 665

including

5 4 4 4 3 3 3 3 3 3 3 7 8 2 2

local 12

government regional and regional

including

– 7 – – – – – – – – – – – – – – central

government general governmentgeneral

5 4 4 3 3 2 2 7 4 3 3 3 3 6 3

total

12

-

…

5

other inter 2 370 5 382 5 084 5 325 6 263 6 406 6 386 6 906 6 556 6 805 7 540 7 729 7 845 9 060 financial financial mediaries auxiliaries and financial and financial ding

inclu

… 4 319 550 466 483 563 540 567 544 514 526 584 558 598 729 funds insurance and pension corporations

other financial corporations 3 total 1 663 2 689 5 932 5 550 5 807 6 826 6 946 6 953 7 450 7 070 7 332 8 123 8 287 8 443 9 789

2 Total 143 423 245 230 426 867 436 051 455 477 481 037 494 750 499 521 518 091 531 332 547 841 565 927 618 320 671 573 734 022 outstanding amounts at end of period, UAH, million

1

Period January February March April May June July August September October November December Loans granted by depository corporations (excluding National Bank of Ukraine) sectors the economy

2005 2006 2007 2008 190 Tables

6.8 4.4

20.0 34.0 64.6 65.7 76.1 59.7 16.4 41.9 10.2 – 16.5

profit 185.1 140.5 137.1 – - 14

serving Concluded

non institutions households

including .4

95.6 97 99.9 96.8 93.2 84.2 77.7 70.0 64.0 59.4 68.4 73.3 74.9 13 121.1 130.0

households

other sectors of the economy 95.6 97.4 99.9 96.8 93.2 84.2 77.6 70.0 64.0 59.3 68.3 73.2 74.8 12

total 121.0 129.9

-

on

7

11 50.8 52.2 62.9 67.5 67.0 66.1 65. 62.0 56.6 56.8 56.1 52.4 59.8 64.0 64.4

financial financial other n corporations

-

including

16.5 37.7 51.5 57.8 40.7 33.5 29.2 30.5 33.1 23.7 34.7 18.8 29.6 32.6 10 180.5

financial financial

financial corporations non public corporations -

non

9 48.2 51.3 62.3 67.0 65.6 64.4 63.8 60.3 55.4 55.0 55.0 50.5 58.1 62.3 70.3 total

including

4.6 8 87.2 11.5 10.8 20.2 31.0 39.2 26.0 local – – – – – – 275.7 126.8 129.4 136.4 130.5 134.2 – 203.5

government regional and regional

including

– – – – – – – – – – – – – – – 7

central

government

general governmentgeneral

4.6 6 87.2 11.5 10.8 20.2 31.0 39.2 34.2 26.0 total – – – – – – 275.7 126.8 129.4 136.4 130.5 1 – 203.5

- … …

5 88.6 81.2 68.2 68.3

127.1 143.4 126.9 132.0 132.2 128.4 141.9 122.5 106.1

other inter financial financial mediaries auxiliaries and financial and financial

including

… … 4 72.4 60.3 60.3 85.0 69.3 76.0 82.0 36.7 45.5 13.3 15.4 32.6 funds 106.8 insurance and pension corporations

al other financial corporations 3 97.5 61.7 98.8 84.7 74.2 63.0 65.0 tot 120.6 133.2 119.3 127.2 125.7 122.9 138.9 119.0

61.9 71.0 74.1 78.0 77.8 76.2 74.8 69.5 64.1 61.1 58.8 54.1 62.1 66.4 72.0 2 Total annual change, %

1

Period January February March April May June July August September October November December

2005 2006 2007 2008 191 Annual Report 2008

profit - 14

862

serving

1 020 1 575 1 671 1 697 1 726 1 816 1 864 1 915 1 937 1 951 1 931 1 942 1 942 1 851 non institutions households

including

13

74 778 108 860 167 239 171 326 177 223 182 856 189 707 190 599 196 893 201 149 204 992 207 310 198 392 209 024 217 860 households

other sectors of the economy 582 12

total 75 640 109 879 168 813 172 997 178 920 184 191 523 192 463 198 808 203 087 206 944 209 241 200 334 210 966 219 711

-

11

financial financial 42 114 58 638 86 308 84 524 84 851 88 303 91 697 89 226 95 251 other non 102 351 102 682 102 553 102 650 100 469 105 907 corporations orations

-

including

10 8 703 8 216 9 350 8 613 7 896 9 181 9 061 8 947 8 822 9 605 9 694 8 862 6 976 9 275

12 281 financial financial financial corp non public corporations -

non

76

9 0 163 total

50 9 65 614 95 583 93 227 93 067 97 652 97 122 100 310 104 432 111 412 111 628 111 376 112 256 11 118 188

t including

8

local

1 726 1 417 3 536 3 693 3 985 4 676 5 153 5 315 4 863 5 002 4 653 4 716 4 117 3 507 1 921 governmen regional and regional

including

3 7

615 central 284 266 601

3 140 1 700 1 382 1 254 1 707 2 03 1 756 2 061 2 689 1 909 2 165 government general governmentgeneral

6

total 2 010 1 682 4 136 6 833 5 685 6 058 6 407 7 022 6 896 6 759 6 713 7 406 6 026 5 672 2 536

-

5

other inter …

financial financial 4 679 8 300 8 865 8 762 9 813

mediaries 11 886 10 815 10 447 10 494 10 634 11 047 10 925 10 444 10 768 auxiliaries and financial and financial

including

4

… funds 4 063 7 043 5 445 5 439 7 001 5 964 5 934 7 390 6 530 6 554 8 115 7 385 7 437 8 537 insurance and pension corporations

other financial corporations 3

total 311 6 129 8 741 15 343 14 14 201 18 887 16 780 16 382 17 884 17 164 17 601 19 040 17 830 17 250 19 305

2

Total 134 754 185 917 283 875 287 368 291 873 307 179 315 020 312 988 328 021 338 423 342 888 347 063 336 445 344 051 359 740

outstanding amounts at end of period, UAH, million

1

ember

Period

January February March April May June July August Sept October November December

Deposits held with depository corporations (excluding National Bank of Ukraine) by sectors the economy 2005 2006 2007 2008 192 Tables

6.7

profit - 18.3 54.4 53.7 47.5 44.0 43.4 39.4 38.5 32.6 24.9 30.0 14.9 11.0 17.6 14

serving Concluded non institutions households

including

13 75.9 45.6 53.6 54.0 53.4 53.4 56.7 54.6 52.4 50.2 47.2 44.2 33.5 33.1 30.3 households

other sectors of the economy 12 total 74.6 45.3 53.6 54.0 53.4 53.3 56.6 54.4 52.2 50.0 47.0 44.0 33.3 32.8 30.2

-

11 51.7 39.2 47.2 50.2 55.8 52.0 53.4 37.8 42.7 40.5 38.8 27.2 28.1 25.7 22.7

financial financial other non corporations

-

including

7.5 1.2 2.7 34.3 33.0 30.1 33.0 – 21.3 29.2 16.2 14.1 14.9 32.4 21.3 12.2 10 – – financial financial

financial corporations non public corporations - non

9

total 48.3 28.7 45.7 48.1 49.8 50.0 44.2 33.5 40.5 39.5 36.7 24.8 26.7 24.7 23.6

ng

includi

8 44.7 17.9 66.2 56.2 37.5 22.6 45.7 local – 149.6 160.5 157.5 201.4 174.9 156.6 110.4 116.2 – –

government regional and regional

including

1

7 6.4 2.4 – 93.4 65.9 39. 59.4 49.3 44.6 95.9 62.7 36.2 – 126.1 291.3 135.9 109.2 central

government general governmentgeneral

3.2 6 22.7 16.3 87.7 91.5 74.3 78.0 54.3 – 38.7 total – 145.9 207.7 134.2 154.1 130.8 123.5 –

… … -

77.4 81.5 73.8 94.5 84.0 78.4 49.6 41.0 32.7 29.7 5 139.4 125.9 114.6

other inter d financial d financial financial financial mediaries auxiliaries an

including .7 … …

73.4 68 54.4 51.0 56.0 55.2 50.2 43.1 48.1 36.9 52.7 44.1 21.2 4 funds insurance and pension corporations

16.0 42.6 75.5 76.4 65.8 96.7 94.9 88.5 73.3 66.0 65.7 43.9 45.6 37.4 25.8

other financial corporations 3 total

2 59.3 38.0 52.7 54.8 53.8 55.5 55.0 49.6 49.9 47.7 44.7 37.8 31.9 29.5 26.7 Total annual change, %

1 January February March April May June July August September October November December 2005 2006 2007 2008 Period

193 Annual Report 2008

Interest rates on refinancing (average weighted annual rates, %) including

1 Period rights credits liquidity stabilization through tender credits granted NBU discount rate overnight credits repo transactions swap transactions rate on all instrumentsrate on all credits granted for collateral of propertycollateral refinancing credits on refinancing Average interest weighted support of long-term bank 1 2 3 4 5 6 7 8 9 10

2005 9.5 14.7 12.9 14.9 12.0 – 15.0 – 2006 8.5 11.5 10.4 12.1 10.7 – – 9.5 8 2007 8.0 10.1 10.0 11.1 – – – – 8 2008 12.0 15.3 16.6 16.0 13.8 – – 15.1 from 01.01 10.0 – – – – – – – January 10.0 14.6 15.5 14.6 – – – – February 10.0 14.7 15.3 14.8 14.6 – – 14.5 March 10.0 14.8 15.2 14.8 14.5 – – 14.5 from 30.04 12.0 – – – – – – – April 12.0 15.3 15.5 15.3 14.9 – – 14.8 May 12.0 15.8 15.7 15.8 15.2 – – 15.0 June 12.0 15.6 15.4 15.9 14.7 – – – July 12.0 15.9 16.1 15.2 16.1 – – – August 12.0 15.9 15.8 15.9 16.0 – – – September 12.0 14.6 16.0 16.0 15.7 – – – October 12.0 15.2 16.8 16.0 15.5 – – 16.0 November 12.0 15.6 16.4 16.0 15.1 – – 16.4 December 12.0 14.8 18.3 19.7 12.6 – – –

1 At end of period.

194 Tables

2 13 7.7 6.9 7.4 8.7 7.9 7.6 7.4 7.6 8.5 8.7 9.1 8.9 9.6 9.3 9.9 10.0 rate, % interest

households 6 572 12 mln. 31 216 35 292 39 931 41 532 37 422 36 091 43 671 39 478 44 892 38 687 33 060 45 644 UAH, 170 951 24 336 094 466 916 Amount, -

%

1 11 8.2 6.5 6.6 7.5 7.7 7.8 7.9 7.3 6.1 5.9 6.4 6.6 7.8 9.2 11.6 12.2 rate, interest financial financial -

non households 10 mln. 86 901 26 916 28 854 36 939 54 359 71 940 83 331 82 338 69 131 60 560 32 598 25 881 44 683 UAH, corporations and non 199 025 316 350 617 529 Amount, profit institutionsprofit serving

including 9 2.6 11.0 12.0 15.0 12.7 13.1 13.6 13.7 14.8 15.7 15.2 15.4 15.5 15.8 16.5 20.0 rate, % interest

al governmental 3

678 833 655 404

8 1 625 2 572 7 001 1 239 1 201 1 353 1 230 1 425 1 450 1 62 1 223 mln. 13 312 gener UAH, Amount,

7 9.8 9.4 9.7 % 10.2 12.1 11.3 11.5 11.5 11.5 11.4 13.2 12.1 11.7 13.1 12.6 14.7 interest rate,

6 2 342 2 309 4 002 4 016 2 787 3 955 4 245 3 017 4 730 2 889 2 573 4 702 9 845 15 774 26 426 41 568 Amount, other financial corporations UAH, mln.

9 5 6.8 5.8 5.8 5.4 6.2 5. 5.6 4.8 3.8 3.7 5.0 4.9 6.3 7.2 8.3 8.2 currency in foreignin

including

4 8.5 7.6 8.2 9.9 8.8 8.9 9.0 9.5 9.7 9.1 9.0 9.8 10.1 10.4 12.0 13.0 currency in national in

total

3 % 8.0 6.8 7.2 8.3 8.0 7.9 7.8 7.7 7.1 7.0 7.6 7.6 8.8 9.5 10.8 11.3 interest rate,

61 151 67 289 82 112 75 396 62 168 95 433 2 269 321 463 943 685 871 101 107 113 503 124 607 131 679 113 076 111 804 1 139 325 Amount, UAH, mln.

1

Period

une January February March April May J July August September October November December Information on deposits of non-financial corporations, non-commercial organizations serving households and subsectors employers and self-engaged workers of the households sector. Information on deposits of subsectors hired employees and receivers income from property transfers the households sector. 2005 2006 2007 2008 Interest rates on deposits held with depository corporations (excluding National Bank of Ukraine) in reporting period by sectors of the economy (average weighted annual rates, %) 1 2 195 Annual Report 2008

7

3 17 16.3 15.2 15.6 18.7 18.0 17.1 17.5 17. 19.2 18.9 19.4 19.4 19.5 20.6 21.6 19.3 rate, % interest

households 16 6 547 4 753 7 321 mln. UAH, 41 207 91 159 11 394 18 025 18 471 18 386 14 309 14 580 1 15 299 15 718 10 567 Amount, 156 125 165 369

-

2

15 14.4 13.9 13.1 15.5 13.0 13.3 13.8 14.3 14.9 15.2 14.6 15.3 15.5 17.3 18.7 19.7 rate, % interest

financial

-

non

profit institutions 14 mln. UAH, 68 236 78 259 87 291 76 646 65 683 80 710 86 265 79 566 88 708 71 245 62 892 serving households corporations and non Amount, 396 276 534 677 809 995 945 532 100 033

including

– – – – – – – – – 8.3 13 18.6 15.8 13.5 21.6 17.0 27.8 rate, % interest

8 2 – – – – – – – – – 12 79 10 25 11 12 mln. UAH, general government Amount,

1 14.0 14.3 15.1 17.0 15.8 16.5 16.7 16.0 16.7 16.2 18.2 17.0 17.7 16.8 17.1 18.0 11 rate, % interest

inancial

829 305 421 663 413 485 473 439 445 752 376 276 487 corporations other f 10 mln. 2 124 3 438 5 536 UAH, Amount,

9 in

11.6 11.3 11.3 11.6 11.0 10.8 10.9 11.0 11.5 11.9 11.5 12.0 12.6 12.5 11.5 11.9 foreign currency

including

8 in

16.0 15.1 13.9 17.6 14.0 14.7 15.3 17.0 17.6 17.3 17.1 17.3 16.8 19.1 22.6 21.6 national currency

including,

7 without overdraft 14.1 13.6 13.0 15.5 13.0 13.4 13.9 14.6 14.9 15.2 14.5 15.1 15.2 17.2 18.7 19.4 rate, % interest

6 mln. UAH, 61 188 75 587 83 014 72 246 59 035 74 360 79 298 72 063 80 764 62 371 54 288 94 329 Amount, 355 815 494 758 768 965 868 542

5 in

11.5 11.3 11.3 11.6 11.0 10.9 10.9 11.0 11.4 11.9 11.5 12.1 12.4 12.4 11.4 11.9 foreign currency

including

4 in 16.4 15.4 14.4 17.8 14.7 15.1 15.7 16.8 17.8 17.6 17.6 18.0 17.7 19.4 21.9 21.6 national currency

Total

3 14.6 14.1 13.5 16.0 13.7 14.0 14.4 15.0 15.7 15.8 15.4 16.0 16.1 17.8 18.9 19.7 rate, % interest

2 79 935 96 706 95 445 80 483 95 763 95 310 82 187 67 920 438 391 627 967 969 567 106 425 103 251 105 178 107 853 Amount, UAH, mln. 1 116 456

1

Period Information on credits granted to non-financial corporations, non-commercial organizations serving households and subsectors of employers and self-engaged workers of the house- Information on overdraft credits. ²nformation on credits granted to subsectors of hired employees and receivers income from property transfers the households sector. January February March April May June July August September October November December 1 2 3 holds sector.

2005 2006 2007 2008 196 Interest rates on credits granted by depository corporations (excluding National Bank of Ukraine) in reporting period by sectors of the economy (average weighted annual rates, %) Tables

Official exchange rate of Hryvnia against foreign currencies set by the National Bank of

Ukraine, period average (UAH) Currencies 2005 2006 2007 2008

100 Australian Dollar 390.88 380.32 423.29 443.77 100 Pound Sterling 933.76 929.45 1010.69 966.88 10000/100 1 Azerbaijan Manat 10.83 557.91 588.48 641.78 10 Belarussian Ruble 0.02 0.02 0.02 0.02 100 Danish Krone 85.76 84.96 92.85 103.38 100 US Dollar 512.47 505.00 505.00 526.72 100 Estonian Kroon 40.84 40.50 44.21 49.26 100 Icelandic Krona 8.16 7.26 7.90 5.76

100 Canadian Dollar 422.89 445.16 471.98 493.94 100 Kazakh Tenge 3.86 4.01 4.12 4.38 100 Latvian Lats 909.94 907.95 988.22 1097.12 100 Lithuanian Litas 185.20 183.56 200.36 223.24 100 Moldovan Leu 40.68 38.47 41.67 50.75 100 Norwegian Krone 79.67 78.80 86.34 93.63 100 Polish Zloty 158.76 162.77 183.06 219.19 10 Russian Ruble 1.81 1.86 1.98 2.11

100 Singapore Dollar 308.03 317.81 335.22 371.65 100 Slovak Koruna 16.55 17.04 20.49 24.67 10000/100 2 Turkish Lira 380.29 352.97 387.74 404.35 10000 Turkmen Manat 9.86 9.71 9.71 5.30 1000 Hungarian Forint 25.78 24.02 27.53 30.64 100 Uzbek Sum 0.46 0.41 0.40 0.40 100 Czech Koruna 21.44 22.37 24.95 30.84 100 Swedish Krona 68.96 68.50 74.79 80.03 100 Swiss Franc 412.75 402.78 421.16 486.09 100 RNB (China) 62.53 63.34 66.40 75.85 1000 Japanese Yen 46.69 43.40 42.92 51.40 100 Euro 638.99 633.69 691.79 770.80 100 SDR 758.02 742.83 772.94 830.84

1 From January 2006, 100 Azerbaijan Manat. 2 From January 2005, 100 Turkish Lira.

197 Annual Report 2008

Official Exchange Rate of Hryvnia against Foreign Currencies Set by the National Bank 1 of Ukraine, end of period (UAH) Currencies 2005 2006 2007 2008

100 Australian Dollar 368.69 398.47 443.46 531.22 100 Pound Sterling 867.59 990.45 1009.73 1114.30 10000/100 2 Azerbaijan Manat 11.00 579.46 597.35 961.30 10 Belarussian Ruble 0.02 0.02 0.02 0.04 100 Danish Krone 80.06 89.20 99.50 145.70 100 US Dollar 505.00 505.00 505.00 770.00 100 Estonian Kroon 38.17 42.51 47.42 69.38 100 Icelandic Krona 7.93 7.14 8.13 3.74

100 Canadian Dollar 432.85 435.24 515.63 626.36 100 Kazakh Tenge 3.77 3.98 4.19 6.38 100 Latvian Lats 851.60 953.94 1064.49 1533.47 100 Lithuanian Litas 173.53 192.62 214.88 314.40 100 Moldovan Leu 39.36 39.13 44.62 74.02 100 Norwegian Krone 74.49 80.73 93.05 110.32 100 Polish Zloty 154.70 173.61 206.01 261.80 10 Russian Ruble 1.75 1.92 2.06 2.62

100 Singapore Dollar 303.36 329.22 349.22 534.09 100 Slovak Koruna 15.77 19.31 22.08 36.03 10000/100 3 Turkish Lira 374.09 356.81 431.92 502.43 10000 Turkmen Manat 9.71 9.71 9.71 5.40 1000 Hungarian Forint 23.65 26.42 29.23 40.76 100 Uzbek Sum 0.43 0.41 0.39 0.55 100 Czech Koruna 20.59 24.20 27.91 40.76 100 Swedish Krona 63.46 73.57 78.53 99.14 100 Swiss Franc 383.17 413.89 446.85 725.49 100 RNB (China) 62.57 64.70 69.14 112.65 1000 Japanese Yen 42.83 42.38 44.66 85.21 100 Euro 597.16 665.09 741.95 1085.55 100 SDR 721.78 759.72 798.03 1186.01

1 Established at last calendar day. 2 From January 2006, 100 Azerbaijan Manat. 3 From January 2005, 100 Turkish Lira.

198 CONTENTS

OPENING ADDRESS OF THE GOVERNOR OF THE NATIONAL BANK OF UKRAINE ...... 2 MEMBERS OF THE COUNCIL OF THE NATIONAL BANK OF UKRAINE ...... 4 MEMBERS OF THE BOARD OF THE NATIONAL BANK OF UKRAINE ...... 6 ORGANIZATIONAL CHART OF THE NATIONAL BANK OF UKRAINE ...... 8 ABOUT THE NATIONAL BANK OF UKRAINE ...... 11

PART 1. GENERAL ECONOMIC SITUATION ...... 13 1.1. SOCIAL AND ECONOMIC SITUATION IN UKRAINE ...... 14 1.1.1. GROSS DOMESTIC PRODUCT ...... 14 1.1.2. DYNAMICS OF CONSUMER PRICES AND PRODUCER PRICES . .21 1.1.3. FINANCE ...... 24 1.1.4. INCOME AND EXPENDITURES OF THE POPULATION ...... 29 1.1.5. THE LABOR MARKET ...... 31 1.2. EXTERNAL ECONOMIC SECTOR ...... 32 1.2.1. BALANCE OF PAYMENTS ...... 32 1.2.2. EXTERNAL DEBT OF UKRAINE ...... 37 1.3. SURVEY OF THE WORLD ECONOMY AND INTERNATIONAL MARKETS ...... 38

PART 2. ACTIVITIES OF THE NATIONAL BANK OF UKRAINE ...... 43 2.1. MONETARY POLICY ...... 44 2.1.1. IMPLEMENTATION OF THE MONETARY POLICY GUIDELINES IN 2008 ...... 44 2.1.2. NON-CASH EMISSION BY THE NATIONAL BANK OF UKRAINE . . .47 2.1.3. MONEY CIRCULATION ...... 48 2.1.4. CASH CIRCULATION ...... 50 2.2. EXCHANGE RATE POLICY ...... 52 2.2.1. DYNAMICS OF THE EXCHANGE RATE OF HRYVNIA. REAL EFFECTIVE EXCHANGE RATE ...... 52 2.2.2. DEVELOPMENT OF THE FOREIGN EXCHANGE MARKET OF UKRAINE ...... 53 2.2.3. IMPROVEMENT OF THE FOREIGN EXCHANGE SYSTEM REGULATION. PREVENTIVE MEASURES WITH REGARD TO OUTFLOW OF FOREIGN CURRENCY ABROAD ...... 55 2.2.4. INTERNATIONAL RESERVES ...... 57 2.3. DEVELOPMENT OF THE BANKING SECTOR OF UKRAINE ...... 58 2.3.1. INDICATORS OF ACTIVITIES OF THE BANKS OF UKRAINE . . . . .58 2.3.2. SURVEY OF THE SECTOR OF OTHER DEPOSITORY CORPORATIONS (BANKS) ...... 60 2.3.3. DEPOSIT MARKET ...... 62 2.3.4. CREDIT MARKET ...... 65 2.3.5. CREDITS AND DEPOSITS IN THE INTERBANK MARKET ...... 69 2.3.6. OPERATIONS OF BANKS IN THE SECURITIES MARKET ...... 70 2.4. REGULATION OF ACTIVITIES OF BANKS OF UKRAINE AND SUPERVISION OF THEIR ACTIVITIES ...... 73 2.4.1. REGULATION OF ACTIVITY OF BANKS OF UKRAINE ...... 73 2.4.2. SUPERVISION OF THE BANKS' ACTIVITIES ...... 76 2.4.3. INSPECTION OF BANKS ...... 79 2.4.4. REGISTRATION AND LICENSING OF BANKS ...... 81 2.4.5. TERMINATION OF THE BANKS' ACTIVITIES ...... 85 2.5. FOREIGN EXCHANGE CONTROL AND LICENSING ...... 87 2.6. PAYMENT SYSTEM OF UKRAINE ...... 88 2.6.1. INTERBANK SETTLEMENTS ...... 88 2.6.2. DEVELOPMENT OF THE PAYMENT CARD SYSTEMS ...... 90 2.6.3. BASIC RESULTS OF THE INTERNATIONAL SYSTEMS' OPERATION FOR TRANSFER OF FUNDS BETWEEN INDIVIDUALS WITHOUT OPENING THE ACCOUNTS IN 2008 . . . . .92 2.6.4. CASH PERFORMANCE OF THE BUDGETS OF UKRAINE ...... 92 CONTENTS

2.7. SERVICING OF THE INTERNAL (DOMESTIC) DEBTS OF UKRAINE . . . . .93 2.8. LEGAL ENVIRONMENT OF THE BANKING SYSTEM ...... 94 2.9. RISK MANAGEMENT IN THE NATIONAL BANK OF UKRAINE ...... 96 2.10. FINANCIAL MONITORING ON PREVENTION OF USING THE BANKING SYSTEM FOR LEGALIZATION (LAUNDERING) OF PROCEEDS OBTAINED FROM CRIME ...... 96 2.11. INTERNATIONAL COOPERATION ...... 97 2.11.1. RELATIONSHIPS OF THE NATIONAL BANK OF UKRAINE WITH CENTRAL BANKS ...... 97 AND BANKING INSTITUTIONS OF OTHER COUNTRIES 2.11.2. COOPERATION OF THE NATIONAL BANK OF UKRAINE WITH THE INTERNATIONAL FINANCIAL AND OTHER ORGANIZATIONS ...... 98 2.12. BASIC TRENDS OF ECONOMIC WORK OF THE NATIONAL BANK OF UKRAINE ...... 102 2.12.1. STATISTICAL AND INFORMATION SUPPORT OF THE NATIONAL BANK OF UKRAINE ACTIVITY ...... 102 2.12.2. ECONOMIC RESEARCH AND FORECASTING ...... 104 2.13. SCIENTIFIC RESEARCH OF THE NATIONAL BANK OF UKRAINE . . . .104 2.14. IMPROVEMENT OF ACCOUNTING AND FINANCIAL REPORTING . . . .105 2.15. AUDIT OF THE NATIONAL BANK OF UKRAINE ...... 105 2.16. BANKNOTE AND COIN PRODUCTION ...... 106 2.16.1. ACTIVITIES OF THE BANKNOTE PRINTING AND MINTING WORKS OF THE NATIONAL BANK OF UKRAINE ...... 106 2.16.2. THE BANKNOTE PAPER MILL ACTIVITY ...... 107 2.17. STAFFING AND PERSONNEL TRAINING AND RETRAINING ...... 107 2.18. DEVELOPMENT OF THE MATERIAL AND TECHNICAL BASE ACCORDING TO MAIN DIRECTIONS ...... 109 2.19. RESULTS OF THE FINANCIAL ACTIVITIES OF THE NATIONAL BANK OF UKRAINE ...... 110

PART 3. CALENDAR OF BASIC EVENTS HELD IN 2008 ...... 113

PART 4. METHODOLOGICAL COMMENTS TO THE ANNUAL REPORT ...... 119

PART 5. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 ...... 125 CONSOLIDATED BALANCE SHEET ...... 126 CONSOLIDATED INCOME STATEMENT ...... 127 CONSOLIDATED STATEMENT OF CASH FLOWS ...... 128 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ...... 130 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ...... 131 1. PRINCIPAL ACTIVITIES ...... 131 2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES ...... 131 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS IN APPLYING ACCOUNTING POLICIES ...... 142 4. EFFECT OF ECONOMIC CONDITIONS ON THE FINANCIAL POSITION AND RESULTS OF OPERATIONS OF THE NBU ...... 142 5. FOREIGN CURRENCY FUNDS AND DEPOSITS ...... 144 6. FOREIGN SECURITIES ...... 145 7. STATE SECURITIES OF UKRAINE ...... 148 8. LOANS TO BANKS AND OTHER BORROWERS ...... 149 9. INTERNAL STATE DEBT ...... 152 10. IMF QUOTA CONTRIBUTIONS ...... 153 11. FIXED ASSETS AND INTANGIBLE ASSETS ...... 154 12. OTHER ASSETS ...... 155 13. ACCOUNTS OF BANKS ...... 156 14. ACCOUNTS OF STATE AND OTHER INSTITUTIONS ...... 157 15. DEPOSIT CERTIFICATES ISSUED BY THE NBU ...... 157 16. LIABILITIES TO THE IMF ...... 157 CONTENTS

Annual Report 17. OTHER LIABILITIES ...... 158 of the National Bank 18. PROFITS PAYABLE TO STATE BUDGET ...... 158 of Ukraine 19. MANAGEMENT OF CAPITAL ...... 159 for 2008 20. CASH AND CASH EQUIVALENTS ...... 160 21. INTEREST INCOME AND EXPENSE ...... 160 Editorial staff: 22. FEE AND COMMISSION INCOME AND EXPENSE ...... 160 Anatolii Shapovalov (Head) 23. OTHER INCOME ...... 161 Vira Gal (Deputy Head) 24. STAFF COSTS ...... 161 Natalia Hrebenyk 25. ADMINISTRATIVE AND OTHER EXPENSES ...... 161 Vira Rychakivska 26. NET INCREASE IN PROVISIONS ...... 162 Mykola Melnychuk 27. FINANCIAL RISK MANAGEMENT ...... 162 Olena Scherbakova 28. GEOGRAPHICAL ANALYSIS OF FINANCIAL ASSETS AND LIABILITIES ...... 165 Tetiana Halchynska 29. CREDIT RISK ...... 166 Compiled by the NBU 30. CURRENCY RISK ...... 167 Statistics and Reporting Department 31. INTEREST RATE RISK ...... 168 32. LIQUIDITY RISK ...... 171 Translated by 33. COMMITMENTS, CONTINGENCIES AND DERIVATIVE Halyna Holubieva FINANCIAL INSTRUMENTS ...... 171 Liudmyla Patenko 34. FAIR VALUE OF FINANCIAL INSTRUMENTS ...... 172 Valentyna Kravchenko 35. PRESENTATION OF FINANCIAL INSTRUMENTS Olha Zahorodniaia BY MEASUREMENT CATEGORIES ...... 174 Proof-readers: 36. RELATED PARTY TRANSACTIONS ...... 176 Kristina Zasypkina 37. CONCENTRATION OF ASSETS AND LIABILITIES ...... 177 Olena Marchenko 38. SUBSEQUENT EVENTS ...... 177 AUDITOR'S REPORT (PriceWaterhouseCoopers) ...... 179 Responsible for the publication, Head of the Division for Issue of NBU Statistic Publications PART 6. TABLE MATERIALS ...... 181 of the Editorial Board of NBU Periodicals: BASIC INDICATORS OF THE ECONOMIC DEVELOPMENT Mylana Boichuk OF UKRAINE ...... 182 SURVEY OF DEPOSITORY CORPORATIONS (INCLUDING Photograps by THE NATIONAL BANK OF UKRAINE) ...... 185 Vladyslav Nehrebetskyi SURVEY OF DEPOSITORY CORPORATIONS (EXCLUDING Address of the Editorial Board NATIONAL BANK OF UKRAINE) ...... 187 of NBU Periodicals: MONETARY AGGREGATES AND COMPONENTS ...... 189 7 Nauky Avenue, LOANS GRANTED BY DEPOSITORY CORPORATIONS (EXCLUDING Kyiv, 03028, Ukraine NATIONAL BANK OF UKRAINE) BY SECTORS OF THE ECONOMY . . . .190 Telephone: (38 044) 527 3014 DEPOSITS HELD WITH DEPOSITORY CORPORATIONS (EXCLUDING Telephone and fax: (38 044) 524 9625 NATIONAL BANK OF UKRAINE) BY SECTORS OF THE ECONOMY . . . .192 E-mail: [email protected] INTEREST RATES ON REFINANCING ...... 194 Laid out and printed by the NBU INTEREST RATES ON DEPOSITS HELD WITH DEPOSITORY Maintenance Administration Office CORPORATIONS (EXCLUDING NATIONAL BANK OF UKRAINE) IN Made up by REPORTING PERIOD BY SECTORS OF THE ECONOMY ...... 195 Olexander Yurkin INTEREST RATES ON CREDITS GRANTED BY DEPOSITORY CORPORATIONS (EXCLUDING NATIONAL BANK OF UKRAINE) IN Artistically designed by REPORTING PERIOD BY SECTORS OF THE ECONOMY ...... 196 Olena Horbatovska OFFICIAL EXCHANGE RATE OF HRYVNIA AGAINST FOREIGN Authorized publication: CURRENCIES SET BY THE NATIONAL BANK OF UKRAINE, 20 July 2009 PERIOD AVERAGE ...... 197 Format: 60×84/8 Offset OFFICIAL EXCHANGE RATE OF HRYVNIA AGAINST FOREIGN Circulation: 200 copies CURRENCIES SET BY THE NATIONAL BANK OF UKRAINE, Order # 9-0594 END OF PERIOD ...... 198 NOTES NOTES