MBS Blog

Feeling the effects of the current Global Economic Crisis, there is little doubt that Russian and Ukrainian Governments are preparing to let their currencies slide even further. The question remains as to how low they will go and what effect they will have on these emerging market economies.

In Ukraine, the hryvna is now hovering around 6 to $1USD, having lost more than 20% over the last 60 days.  The Russian ruble is also getting battered and could see levels against the U.S. dollar that it has not experienced since the financial crisis of the late 1990s.

Devaluations in either economy could exascerbate already high levels of inflation. Russia is particularly vulnerable as it relies on imports of basic food products, plus it derives a significant portion of its revenues for oil and natural gas exports. As oil revenue has declined, and subsequent market interventions have depleted Russia’s foreign currency reserves, Russia could be hit with a higher degree of stagnation than Ukraine. In fact, Ukraine may be able to weather a devaluation better than Russia.

The industrial sector located in Eastern Ukraine could benefit from the lower prices of their steel and chemical products, making their products competitive with China and South Korea. The Ukrainian agricultural sector could also benefit from devaluation.  The fomer “bread basket” of Imperial Russia and the Soviet Union, could regain this title, but with exports to Europe and Asia. This vastly under utilized sector could see a surge in foreign investment next year, or whenever the global credit markets become unfrozen.

In the meantime, businesses and individuals are going to have to adjust to the new reality.

Anton Olff

Technorati Tags: Global Economic Crisis, Ukraine, devaluation, currency reserves, hryvna, Russia, ruble, dollar, Eastern Ukraine, China, South Korea, Soviet Union, exports, Europe, Asia,