‘Welcome to Hell’

by Andrew Stuttaford


Ukraine’s hryvnia currency tumbled on Wednesday to a record low, as investors were unsettled by the country’s murky political and economic outlook, while Brazil’s real retreated after a five-day rally… Ukraine’s foreign currency reserves have dropped to $15 billion from $17.8 billion on Feb. 1, central bank chief Stepan Kubiv said on Wednesday. The country has asked the International Monetary Fund to help prepare a new financial aid program, Kubiv said, adding that the new government would soon have its own anti-crisis program ready..Investors remained shaken, driving the hryvnia down around 4 percent to 10 per dollar, while five-year credit default swaps jumped 76 basis points, Markit data showed.

Meanwhile, Arseniy Yatsenyuk, the man most likely to become the new prime minister has this to say (via the BBC):

“We are to undertake extremely unpopular steps as the previous government and previous president were so corrupted that the country is in a desperate financial plight…We are on the brink of a disaster and this is the government of political suiciders! So welcome to hell.”

That’s not that much of an understatement.  This is not going to be easy.

It’s worth remembering that the usual rule of thumb is that a country should have enough in the way of currency reserves to cover three months imports. In Ukraine’s case, that would probably be about $20 billion, a number rather higher, therefore, than the total disclosed today.

The same BBC report notes that the U.S. has offered Ukraine loan guarantees of up to $1 billion – a lot of money, to be sure, but a number that would cover less than two weeks of the capital outflow seen in February, an outflow that has been gathering pace, not least thanks to the effort to prop up the currency.

Another BBC report runs through some basics:

[W]hy not just the the currency slide? After all, the IMF has in the past called for Ukraine to adopt a more flexible exchange rate policy, which in practice would mean a depreciation of the hryvnia.  In some circumstances a falling currency can be very helpful, in enhancing local industry’s competitiveness, and it means you do not have to burn up your currency reserves. But if it happens too quickly it can be a very serious problem for anybody – individuals, companies, banks of governments – that have borrowed in foreign currency. The interest and repayments become more expensive in local currency terms. It can render borrowers insolvent.

…Ukraine does have plenty of external debt. Capital Economics estimates there is a total of $66bn that matures this year – in other words it will either have to be repaid or “rolled over”, financed with new borrowing.  Most of that is private sector, but even so, the government will need more than $9bn this year, according to the consultancy.  There have also been comments about the financial situation from Russian officials that might be seen as ominous.  The Ambassador to the European Union, Vladimir Chizhov, said that Ukraine owes about $3bn to the Russian gas company Gazprom.

“The gas is still flowing” he said “but the money is not coming back”.

Kiev’s Maidan will not be the only front in Ukraine’s struggle for an independence worthy of the name.

The Corner

The one and only.