NATIONAL BANK OF UKRAINE ANNUAL REPORT 2005 Dear Sirs, We would like to offer for your attention the Annual Report of the National Bank of Ukraine for 2005 prepared in accordance with the Law of Ukraine "On the National Bank of Ukraine". The major achievements of Ukraine's macroeconomic development in 2005 primarily were the households' real income growth, unemployment decrease, inflation rate lowering and acceleration in the rates of foreign capi- tal attraction to Ukraine. Ukrainian banks essentially increased crediting of the economy, and the individuals' deposits unprecedentedly grew. International reserves of the National Bank of Ukraine almost doubled. The National Bank of Ukraine's monetary policy in 2005 was aimed at sup- porting the hryvnia stability as a monetary prerequisite for the economic growth, at reaching the long-term social, structural and institutional goals. We consider that the publication of the information of the results of the National Bank of Ukraine activity for the reporting year will promote trans- parency of its work and retaining of confidence in the national monetary unit. I would like to assure you that the National Bank of Ukraine will continue the weighed monetary policy directed towards restraining the inflation rate, ensuring the economic recovery and raising the people's welfare. Sincerely, Governor of the National Bank of Ukraine Volodymyr Stelmakh Council of the National Bank of Ukraine (as at 1 January 2006) Valerii Heiets Valerii Alioshyn Serhii Buriak Anatolii Danylenko Olexander Dubrov Chairman of the Council Deputy Chairman Head of the Finance Deputy Director President Director of the Economy of the Council and Banking Committee of the Economy of the "Keros-Kyiv" Ltd., and Forecasting Institute First Deputy Head of the of the Verkhovna Rada and Forecasting Institute Ukrainian - American Joint of the National Academy Pensioners, Veterans and Invalids of Ukraine of the National Academy Venture, Governor of Sciences of Ukraine Committee of the Verkhovna of Sciences of Ukraine of the "Keros" Group Board Rada of Ukraine Mykola Onischuk Petro Poroshenko Petro Sabluk Volodymyr Stelmakh Yulia Tymoshenko First Deputy Head Chairman Director of the National Governor Head of the Law Policy Committee of the "Petro Poroshenko's Scientific Centre "Institute of the National Bank of the political party of the Verkhovna Rada Charity Fund" for Agrarian Economy" of Ukraine "All-Ukrainian Union of Ukraine of the Ukrainian Academy "Batkivschyna" of Agrarian Sciences Anatolii Fedorenko Hennadii Shemshuchenko Fedir Shpyh Ihor Yushko Vice-President Deputy Director of the Banking Member of the Finance Vice-President of the Open Joint Stock Law Centre attached to the and Banking Committee of the "Interpipe" Corp. Company "KINTO" Koretskyi State and Law Institute of the Verkhovna Rada of the National Academy of Ukraine of Sciences of Ukraine Board of the National Bank of Ukraine (as at 1 January 2006) Volodymyr Stelmakh Anatolii Shapovalov Volodymyr Krotiuk Olexander Savchenko Pavlo Senysch Governor First Deputy Governor Deputy Governor Deputy Governor Deputy Governor of the National Bank of the National Bank of the National Bank of the National Bank of the National Bank of Ukraine of Ukraine of Ukraine of Ukraine of Ukraine Viktor Kravets Mykola Lavruk Olexander Tolstoi Ihor Shumylo Natalia Hrebenyk Executive Director Executive Director Executive Director Executive Director Director on Payment Systems on Administration on Cash Circulation on the Economy of the Monetary Policy and Settlements Department Ihor Ivaniuk Olha Kandybka Vasyl Pasichnyk Vira Rychakivska Anatolii Savchenko Anatolii Stepanenko Director Director Director Chief Accountant — Director Head of the Personnel of the Financial of the Legal Director of the Accounting of the Information Technology of the Main Branch Department Department Department Department Department for the City of Kyiv and Kyiv Region Organization Chart of the National Bank of Ukraine (as at 1 January 2006) NBU Governor Volodymyr Stelmakh Department Personnel NBU Council Legal Audit Bank of External Department Office Department Department Security Economic Department Relations Group of NBU NBU NBU Board's Advisers to NBU Central Library Training Centre Secretariat Governor Guard of NBU Institutions in the City of Kyiv Office of Public NBU Educational and Mass Media Institutions Relations First Deputy Deputy Deputy Deputy Executive Executive Executive Executive Governor Governor Governor Governor Director Director on Cash Director Director Anatolii Olexander Pavlo Volodymyr on Economics Circulation on Payment on Administration Shapovalov Savchenko Senysch Krotiuk Ihor Olexander Systems Mykola Shumylo Tolstoi and Settlements Lavruk Viktor Kravets Department Monetary Risk Financial Department of Banking Policy Management Department of Banking Record Regulation Department Unit Regulation Statistics Cash Management and Supervision and Reporting Circulation and Supervision Payment Office Department Department Methodology Systems Department Accounting Foreign Department Department Exchange of Foreign Department Construction Department Department Banknote Regulation Exchange of Registration Office of Banks' of Economic Printing and Department Regulation and Licensing and Licensing Activity Analysis Minting Works Central Information Termination and Forecasting Clearing Technology House Department Department NBU Project Banknote of Foreign Maintenance Monitoring Unit Paper Exchange Department Balance Administration for International Mill Reserve State for Prevention of Payments Office Credit Lines Management Treasury of Legalization Department and Open of the Proceeds Market from Crime Operations through the Banking NBU Money Museum NBU Operations System Editorial Board Department and Terrorism of NBU Financing Periodicals Tenders and Marketing NBU Central Vault Research Regional NBU Scientific Office Branches Research Centre INTRODUCTION Expectation of positive changes in consequence of new political and economic conditions in Ukraine determined the responsibility of the central authorities before both the population and the economic entities. In 2005, the "new wave" demographic processes started, which had a positive influence on the transparency of the Ukrainian economy acknowledged as the mar- ket economy by the EC and the USA. Under these conditions, homage should be done to the banking sector of Ukraine, which in 2005 showed higher quantitative and qualitative indicators of the development in Ukraine as compared with other economic sectors. The reduction in the real GDP growth almost to one-fourth in 2005 was determined prima- rily by considerable structural transformations in the economy, as well as by dampening of the investment activity and worsening of the external conditions. The domestic demand increased mainly due to the increase in the household incomes supported in addition by the budget pol- icy directed towards the current consumption. The inflationary developments in 2005 in a great measure were determined by non-monetary factors. Among them remain a contemporary shortage of important commodities in the market of Ukraine (which caused price shocks in certain commodity markets), the growth of social expen- ditures (budgetary and pension ones), which outrun the GNP growth, and the energy carrier price increase under conditions of considerable power and material consumption of production. The National Bank of Ukraine pursued the monetary policy in compliance with the Monetary Policy Guidelines for 2005, coordinated with the government economic policy. It was primarily directed towards restraining the inflation processes. To this end, the National bank of Ukraine followed the weighed policy in the foreign exchange market, permanently conducted the steril- ization transactions through issuing the deposit certificates, strengthened requirements to the formation of required reserves and raised the discount rate to 9.5 per cent per annum. One-time correction of the exchange rate of hryvnia against US dollar was an extra anti- inflation step of the monetary policy undertaken in April 2005 after the 5-year stability of the nominal exchange rate. This step was caused by a sharp increase in the foreign currency sup- ply in the inter-bank foreign exchange market as a consequence of additional inflow of the spec- ulative short-term capital due to the issue of government securities against the background of the undervalued national currency versus foreign currencies. Therefore, keeping to the inflation benchmark was succeeded - the increase in consumer prices by the year results was less than in 2004 (10.3% against 12.3%). The rise of money in circulation remained a standing pre-requisite of the economic growth. In 2005, the monetary base increased by 53.9% (in 2004 - by 34.1%). The total money supply in circulation increased by 54.3%, including in the national currency - by 55.4% (in 2004, by 32.4 and 26.8%, respectively). The money supply growth took place primarily due to transac- tions in the foreign exchange market as a result of considerable foreign exchange inflow with a necessary to maintain the hryvnia exchange rate stability. In 2005, the exchange rate of hryv- nia against US dollar grew by 4.8%, the real effective exchange rate of hryvnia - by 15.3%, being the biggest increase after 2000. The main factor of the real strengthening of hryvnia in 2005 was its nominal strengthening against the US dollar, euro and Russian ruble. During 2005, the National Bank of Ukraine