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,

Well…this move was easy to predict. As reported on www.bloomberg.com, the Ukrainian Government is now restricting bank withdrawals.  In some ways, this is like closing the barn door after the horse has already made it out.  Many companies had anticpated this change, and have acted already.

Interesting to see if further restrictions are placed in the near term. In the meantime, I am going over to the ATM near my office to make a cash withdrawal.  

Ukraine Restricts Bank Withdrawals to Avert Liquidity Crisis 

By Kateryna Choursina

Dec. 8 (Bloomberg) — Ukraine’s central bank restricted withdrawals from banks before the maturity date of individual contracts to avert a liquidity crisis.

The Kiev-based Natsionalnyi Bank Ukrainy said in a letter to commercial lenders on Dec. 6 that early withdrawals of deposits “leaves liquidity of some banks under threat,” according to a statement on the bank’s Web site.

The central bank introduced a six-month moratorium for domestic lenders to return deposits to clients before contracts with banks that ended on Oct. 13 after depositors started withdrawing their money. Ukrainians were withdrawing as much as 2 billion hryvnia ($100 million) a day in the first days of October, First Deputy central bank Governor Anatoliy Shapovalov said on Oct. 24.

The regulator also recommended that banks reduce foreign- currency interest rates, according to a statement on its Web site also dated Dec. 6.

Technorati Tags: Banker, www.bloomberg.com, foreign currency interest rates, deposits, domestic lenders, hyrvnia, First Deputy Central Bank Governor, Anatolii Shapovalov, Kiev, Kyiv, Natsionalnyi Bank Ukrainy, liquidity, central bank, Ukrainian Government, Anton Olff,

Two articles of interest. The first is a currency update from www.businessneweurope.eu  The consensus on “the street,” in Odessa and Kyiv, is that the hryvnia will continue its slide as the Ukrainian government will not have the resources to intervene in the currency markets.

The second is from www.ukrnews.com This article deals with the anticipated temporary rise in the hryvnia that occurs around holidays. Anyone visiting Ukraine during this summer will recall that the hryvnia was pegged at a seemingly unrealistic 4.60 to the U.S. dollar, only to depreciate significantly once the season had ended.

After the holidays, may come the hangover!!

Ukraine moves to flexible exchange rate as hryvnia slides 50%

James Marson in Kyiv
December 3, 2008

With Ukraine’s central bank curtailing moves to support the free-falling hryvnia, the local currency has slid further from 5.79 to the dollar on November 18 to 7.24 on December 3, marking an almost 50% drop in value since the start of the year. The central bank now believes the market has almost found the “satisfactory” rate.

After massive currency interventions in October caused the country’s foreign exchange reserves to drop by $6bn, the National Bank of Ukraine (NBU) has started to move towards a flexible exchange rate, a condition of the $16.4bn loan the country got from the International Monetary Fund. “Without a flexible exchange rate, we can’t overcome the crisis. No amount of currency reserves would be sufficient,” Oleksandr Savchenko, deputy chairman of the NBU, told a conference organized by Fitch Ratings on November 27.

Currency auctions have been introduced to smooth the hryvnia’s slide to its equilibrium rate. “The market is looking for the satisfactory rate,” Savchenko said. “We believe it has almost been found.”

The hryvnia has come under pressure from all sides as the country’s exports plummeted, demand for dollars shot up to repay dollar loans and people converted their savings out of the national currency. “People have been rapidly converting into dollars - there’s low trust in the hryvnia,” says Olena Bilan, an analyst at Dragon Capital. “When the hryvnia started to fall in October, people rushed to get rid of their hryvnia holdings.” NBU figures show that Ukrainians bought $2bn more in foreign currency in November than they sold.

On the positive side, the hryvnia’s fall is a boost to struggling exporters and should help Ukraine close its current account deficit, which reached 7% of GDP in the second quarter of 2008. “The implications of a weak hryvnia are huge,” says Oleksandr Klymchuk, an analyst at Concorde Capital. “It raises the competitiveness of exporters and gives locally produced goods a price advantage over imports.”

But it’s also a threat to banks, as Ukrainians struggle to pay back their loans, 50% of which are denominated in dollars. Fitch on Friday downgraded the outlook for 11 of the country’s banks, citing concerns about the deterioration in asset quality and the threat to confidence in the currency. “The devaluation pressure will persist into next year. It’s difficult to predict where the exchange rate will move, as it’s a question of confidence,” Bilan said.

A recovery of the hryvnia next year is likely, analysts say, as people convert their money back into hryvnia to spend, and a tight monetary policy from the NBU restricts hryvnia supply. If currency inflows from foreign direct investment and privatization pick up, the hryvnia should stabilise around 7.5, Klymchuk believes. If not, he predicts the rate could slide as far down as 9 or 10 hryvnia against the dollar.

Bankers Expecting Traditional Strengthening Of Hryvnia On Eve Of New Year (16:09, Wednesday, December 3, 2008)

Bankers are expecting the traditional strengthening of the hryvnia on the cash market on the eve of New Year to take place this year.

“I think that there will be a situational strengthening,” said Viacheslav Utkin, a member of the supervisory board of Enerhobank.

According to Utkin, the hryvnia will strengthen because of winter holidays and vacations.

“There will be large expenditures ahead of the holidays, the vacations,” Utkin said.

According to him, the hryvnia’s cash rate could reach 7 UAH/USD.

Erik Naiman, the head of the department of financial instruments at Ukrsotsbank, is also not ruling out the possibility of the cash rate of the hryvnia rising before New Year.

“That happens [traditionally] because people sell dollars in order to have a good holiday,” he said.

Naiman declined to forecast the margin by which the hryvnia with strengthen, but he said that it would be insignificant.

AvtoZAZbank’s Board Chairman Vladyslav Bairak was unable to forecast a possible strengthening of the hryvnia on the eve of New Year.

“At present, I do not have such confidence,” Bairak said.

According to him, citizens have shown a lack of confidence in the hryvnia in the past month.

As Ukrainian News earlier reported, the hryvnia fell by 5 kopecks to 7.45 UAH/USD on the inter-bank currency market on December 2.

Technorati Tags: currency, bankers, AvtoZAZbank, Vladyslav Bairak, cash, Erik Naiman, Ukrotsbank, Viacheslav Utkin, Enerhobank, monetary policy, devaluation, current account deficit, GDP, Oleksander Klymchuk, Concorde Capital, Dragon Capital, Olena Bilan, National Bank of Ukraine, NBU, International Monetary Fund, IMF, Oleksandr Savchenko, flexible exchange rate, www.businessneweurope.eu, Odessa, Kyiv, Ukraine, www.ukrnews.com, Anton Olff, hyrvnia,