MBS Blog

As we have been reporting on this space, the Russian and Ukrainian currencies have been declining along with their economies. While Russia has been able to stave off a complete collapse due to the foreign currency reserves it holds, it is only a matter of time before the ruble descends to much lower levels.

For now though, the Russian Government has managed a slower depreciation. When the foreign reserves decline further, and oil & gas prices continue their current trend, capital flight will accelerate in 2009. This will force the ruble lower. 

For Ukraine there are fewer options. No cash reserves or oil resources means that Ukraine is subject to the whims of a volatile market in crisis. The recent emergency loan from the International Monetary Fund (IMF) to Ukraine stabilized the markets here to a great extent, but the real stabilization will come when the market hits bottom and government reforms. The loan from the IMF in fact, was contigent on reforms. 

As for 0900 this morning of Friday the 19th of December, the Ukrainain currency-the hyrvnia (UAH) is selling at 7 to 1 U.S. dollar at local kiosks here in Odessa. Yesterday it was at 10 to 1 U.S. dollar.

As we have mentioned in an earlier post on this blog, it is a seasonal ritual.  During the holiday season or summer tourist season, the Ukrainian Government shores up the hryvnia against foreign currencies. This past summer for example, the hryvnia was at 4.6 to 1 U.S. dollar. As soon as the tourists departed, it went back up to the 5 to 1 U.S. dollar rate where it had been averaging for the past several years in a tight trading range or “peg.”

In the end, neither the Russian or Ukrainian Governments will not be able to over-rule the markets.

Technorati Tags: Russia, Ukraine, U.S. dollar, Anton Olff, currencies, Odessa, ruble, hyrvnia, UAH, International Monetary Fund, IMF, economy, foreign reserves, foreign currency, Russian Government, depreciation, oil, gas, capital flight,

The short term outlook for foreign investment in Ukraine is not positive. As this assessment by Oxford Analytica on www.forbes.com indicates, this is partially due to the continued slide of the hryvnia as well as the inability of the Ukrainian Government and Central Bank to intervene successfully on a consistent basis.

As this article hints, foreign currency controls may be imposed. This will almost crimp foreign investment and trade to an even greater extent.

Global Financial Crisis

Ukraine: Currency Slide Stalls Foreign Investment

Oxford Analytica, 12.11.08, 06:00 AM EST

Sporadic, counter-productive market interventions could reignite liquidity problems.

Newly elected parliamentary Speaker Volodymyr Lytvyn announced yesterday that Prime Minister Yulia Tymoshenko and President Viktor Yushchenko would reform their fractious governing coalition. Lytvyn’s selection as speaker will help break Ukraine’s legislative deadlock, but it remains uncertain whether Yushchenko and Tymoshenko can cobble together a functioning government.

One of the most critical challenges the authorities face is the severe devaluation of the hryvnia, which has fallen to all-time lows against major foreign currencies in the last two months. Furthermore, Ukraine’s domestic currency markets are now experiencing the worst deficit of foreign currency since the regional financial crisis of the late 1990s.

Questionable Policies?
Given the extent of the ongoing currency devaluation, it is hardly surprising that the wisdom of the central bank’s policies has been widely questioned.

–Sporadic market interventions.Rising devaluation pressures have prompted the National Bank of Ukraine to resume its active presence on the wholesale currency market. Earlier in the year–and especially in the aftermath of the most recent one-off currency revaluation in May–the bank clearly preferred to keep its presence at the minimum needed to ensure nominal currency stability. However, in the ensuing crisis, the NBU took its time in responding to the changing currency situation; it was not until early October that the first large-scale interventions were actually conducted.

Even then, such interventions proved surprisingly sporadic, and were only able to temporarily slow, not prevent, the devaluation. Moreover, after having spent as much as $6.6 billion in foreign reserves in October to support the hryvnia, the NBU sharply scaled back its spending in November to around 2.2 billion dollars.

Apart from obvious concern over the rapid depletion of foreign reserves, the drawdown apparently reflected the bank’s belief that it could still retreat to the very last “line of defense” for the currency. NBU chief adviser Valery Litvitski has suggested that it will now defend the current trading rate with all the resources at its disposal.

–Counter-productive refinancing. The NBU has also had to increase its financial aid to domestic commercial banks, many–if not all–of which have been suffering from the financial crisis. In November, the NBU provided just over 35 billion hryvnia in loans to commercial banks, up from approximately 30 billion in the previous month. By comparison, the cumulative volume of refinancing in the first nine months of 2008 amounted to 63 billion.

However, the NBU has either failed or neglected to properly control recipient banks’ use of such resources. As a result, rather than being subsequently lent to the real economy, most of the hryvnia-denominated resources obtained in the last three months have found their way to the currency market, only exacerbating devaluation pressures. It is mainly for this reason that Yushchenko has recently chosen to publicly criticize the NBU’s overall handling of the raging currency crisis.

Outlook 
Although the latest trading week saw the market rate essentially stalling at a ceiling of 7.5 hryvnia per dollar, this may well be a temporary point in the hryvnia’s downward slide. Decreasing foreign investment inflows, compressed external borrowing and falling export revenue mean any firm stabilization of the currency will come slowly.

Furthermore, additional short-term factors threaten to delay the stabilization–of particular concern is state holding company Naftohaz’s planned foreign currency purchases to repay debt owed for

In any case, the NBU is likely to face difficulties in fulfilling its freshly declared task of preserving the hryvnia. In terms of possible market interventions, the regulator is constrained by the International Monetary Fund’s requirement that it hold no less than $26.7 billion in net foreign reserves by the end of 2008–a condition attached to the $16.4 billion loan Ukraine recently received.

As of December, gross reserves stood at $32.7 billion. Should the NBU be forced to focus on reducing foreign currency demand by purely monetary methods, restrictions will almost certainly reignite liquidity problems. This could exacerbate the real economy’s deterioration.

Technorati Tags: Ukraine, foreign investment, Naftohaz, commercial banks, NBU, NBU, currency market, liquidity, Volodymyr Lytwyn, Yulia Tymoshenko, Viktor Yushenko, Oxford Analytica, www.forbes.com, Ukrainian Government, National Bank of Ukraine, Anton Olff, foreign currency, hyrvnia, currency controls, Global Financial Crisis,

KIEV, Ukraine — The National Bank of Ukraine has unveiled its intentions to intervene Dec. 8 through Dec. 12 so as to revaluate the hryvnia.Anatolii Shapovalov, the NBU first deputy governor, also expressed hope the national currency has bottomed out in value.

“We will hold interventions next week in addition. As soon as people understand that the exchange rate [of foreign currencies] goes down and start to sell the dollars, everything will become calm,” Shapovalov said.

Shapovalov did not disclose how many interventions there will be next week and on which days the National Bank will intervene.

He noted that the devaluation of the hryvnia stopped in early December and a trend for the revaluation of the national currency emerged then.

“The exchange rate trend has swung round. Possibly, this is the bottom we wanted to reach. As soon as people stop [purchasing foreign currency], there will be a result. There are no economic preconditions for the current exchange rate,” the NBU first deputy governor said.

According to Shapovalov, the difference between the value of foreign currency bought by the Ukrainian population and the value of foreign currency sold by the population was USD 2.7 billion in January through September. This index grew to USD 6 billion in October and November.

As Ukrainian News earlier reported, the National Bank of Ukraine has said Ukrainian population sold more foreign currency than bought as registered on December 3 for the first time over the past few weeks.

The balance of the value of foreign currency sold by the population over the value of foreign currency bought by the population on December 3 was equivalent of USD 15.6 million.

The balance of the value of the cash dollars sold by the population over purchased cash dollars was USD 13.5 million on December 3. The trend has been registered for the first time over the past two months.

The cash sell rate for US dollars in Kyiv forex outlets fell by 1.2 kopeck to 7.5600 UAH/USD on December 5, as of 10:30, compared with data as of 9:30.

The National Bank of Ukraine has set its official exchange rate of UAH7.3614/USD1 for December 5 through December 7 and of UAH7.3598/USD1 for December 8.

Technorati Tags: Anatolii Shapovalov, Anton Olff, ATMs, currency, exchange kiosks, exchange rate, foreign currency, forex outlets, hryvnia, Kyiv Post, National Bank of Ukraine, NBU, U.S. dollar, Ukraine, Ukrainian Government