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The Corner

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Hryvnia Woes



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The chronic weakness of the Ukrainian economy (in some respects, it is resembles Russia’s, but without the oil money) goes quite some way to explaining how Putin has been given the opportunity that he has. Basically, he’s in a position to offer Ukraine badly needed cash on superficially easy terms (the long-term consequences, politically and economically, are a different matter) and to do something about the country’s gas bills. Any rescue package from the IMF, by contrast, will be likely be smaller and on, again superficially, much tougher terms. As for the EU, it would doubtless be prepared to chip in a little alongside any IMF package, but I doubt if the amount would be significant enough to make a real difference.

Meanwhile Ukraine’s foreign-exchange reserves, depleted in part by the efforts of the central bank to prop up the hryvnia (the national currency) have been shrinking. Reuters is reporting that the reserves would now buy less than two months’ imports (the IMF generally considers three months to be the minimum safe number):

“We estimate the critical level of reserves is around $15 billion, so authorities have less than $4 billion now to continue to defend the status quo,” said Vladimir Osakovsky, an economist at Bank of America/Merrill Lynch.

Ukraine owes just under $4 billion in gas bills and debt repayments in the first three months of 2014. However, Osakovsky said foreign debt repayments were low in December and early next year, and this could slow the reserves’ decline. Overnight interest rates – at which banks lend to each other – jumped to the highest levels in a year at around 20 percent on Monday. This forced some banks to sell dollars to meet daily their funding needs, dealers said. The action pushed the hryvnia to the highest in six weeks against the dollar but it remains under severe stress in forward markets which are pricing a sharp devaluation over the next six to 12 months….



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