* Big rise in key refinancing rate takes effect on Friday
* IMF mission has extended visit as Kiev seeks loans (Adds trader quote)
By Natalia Zinets
KIEV, Feb 5 (Reuters) - Ukraine's hryvnia currency plunged about 30 percent against the dollar on Thursday, traders said, after the central bank abandoned the foreign currency auctions that had effectively pegged the exchange rate.
The central bank scrapped the daily auctions, which had set an unofficial peg for banks to follow, and also raised its main interest rate to 19.5 percent on Thursday as it sought to avert a Ukrainian financial collapse, brought ever closer by fighting in the country's east and a lack of foreign funding.
With the hryvnia declining even before Thursday's drop, and Ukraine's foreign exchange reserves falling to $6.4 billion - barely enough to cover five weeks of imports - the bank has few ways to revive an economy on the brink of bankruptcy.
The scrapping of the auctions was aimed at closing the gap between the black market exchange rate and the official rate, which the central bank said would eliminate market uncertainty.
But following the announcement, the hryvnia was trading at 24-25 against the dollar, down about 30 percent from Wednesday's close, traders said.
According to Reuters data, the hryvnia was trading at 23.90 at about 1300 GMT.
"The market is increasingly active, but from the side of buyers (of foreign currency). There are not many sellers. The true level now is 24 or 25. I cannot say if there are real deals, but they were the live quotes," said one trader.
"The official rate does not yet reflect the real picture, it's far from it."
The central bank raised its key refinancing rate to 19.5 percent from 14 percent, to take effect on Friday, as it seeks to curb annual inflation which hit almost 25 percent in December.
Announcing the measures, central bank governor Valeriia Gontareva told a news conference: "There is still panic on the market, connected with ongoing fighting."
The former Soviet republic desperately needs funds from donors to fill an estimated $15-billion funding gap to withstand the financial crisis, deepened by a surge in fighting in eastern regions where pro-Russian rebels have seized new ground.
But analysts say the renewed fighting, which has all but buried a September ceasefire, makes it more difficult for lenders such as the International Monetary Fund (IMF) to offer funds.
"If there is any worsening of the situation, the National Bank is ready with the tools needed to calm the foreign exchange market," Gontareva said.
She said the bank was forecasting consumer price inflation this year of 17.2 percent and warned that inflationary and currency devaluation risks would continue in the near term.
IMF TALKS TOUGH
Gontareva, a former top executive at Western banks who was appointed soon after President Petro Poroshenko was elected last May, said the bank had agreed terms with the IMF to boost financial aid but gave no figures.
However the terms are unclear, and an IMF team is still in the capital Kiev after extending its mission beyond Jan. 29, a move seen by some analysts as a sign that talks on boosting its financial support are tough.
Ukraine has already received $4.6 billion from the IMF as part of a $17 billion aid programme, but is seeking to extend that programme in terms of time and money.
Some analysts said that without a ceasefire, any foreign financing from the IMF and others would be difficult to secure.
Kiev has said it wants to restore the ceasefire agreed with the Moscow-backed rebels last September in the Belarussian capital Minsk and accuses Russia of sending new troops and arms to help the separatists take ground in eastern Ukraine.
Moscow denies arming the rebels and says it too wants the ceasefire to hold.
Tim Ash, head of emerging markets research at Standard Bank, said Russian President Vladimir Putin was betting that no amount of Western financing would work unless the conflict was halted.
"This is just finger-in-the-dyke stuff. The conflict has to be halted, period," he said in a note.
U.S. Secretary of State John Kerry arrived in Kiev on Thursday for talks with Poroshenko and government leaders. A senior State Department official said Kerry would offer U.S. support for efforts by Ukraine to negotiate a new ceasefire.
Kerry also intends to provide an additional $16.4 million in humanitarian aid to help civilians in eastern Ukraine, U.S. officials said.
Analysts said continued fighting ensured any move by the central bank to secure the economy would fail.
"It's more about economic failings and the war situation at this stage. Interest rates won't make any difference, just as they are not (making a difference) in Russia," said Simon Quijano-Evans head of emerging market research at Commerzbank in London. (Additional reporting by Pavel Polityuk in Kiev, Katya Golubkova and Lidia Kelly in Moscow, and Sujata Rao in London; Writing by Elizabeth Piper; Editing by Timothy Heritage and Pravin Char)
(Bloomberg) -- Ukraine effectively froze trading in its currency market as the central bank deployed new measures to help stabilize the plunging hryvnia until it can access a $17.5 billion loan from the International Monetary Fund.
Policy makers in Kiev banned banks from buying foreign exchange for their clients, tightening capital controls for the second time this week after previous measures failed to keep the hryvnia from falling 53 percent against the dollar this year.
A pro-Russian insurgency in the nation’s easternmost regions is devastating Ukraine’s economy and the country is hemorrhaging capital as it awaits the IMF’s approval of a $17.5 billion loan. The hryvnia is the world’s worst-performing currency of 2015, as the nation’s recession deepens and the central bank reserves fall to the lowest in at least a decade.
“The central bank is left with only severe administrative restrictions amid the hryvnia decline,” Olena Bilan, the chief economist at Kiev-based investment bank Dragon Capital, said by phone. “Today’s decision will buy the regulator some breathing space. However, it won’t be enough to boost confidence.”
Ukraine’s $2.6 billion of 9.25 percent notes due in July 2017 were little changed at 42.42 cents on the dollar to yield 55.18 percent at 5:15 p.m. in Kiev. The bonds fell to a record 41.35 cents on Monday.
Economic Fallout
The country’s central bank bought $80 million on the currency market on Wednesday, Governor Valeriya Gontareva said in Kiev. The purchases were done an average rate of 21.82 hryvnia per dollar, Fyodor Bagnenko, a fixed-income trader at Dragon Capital in Kiev, said by e-mail, citing central bank data. The hryvnia closed at 33.5 per dollar on Tuesday.
The latest capital controls drew the ire of Prime Minister Arseniy Yatsenyuk, who said they were harmful for the economy and scolded the central bank for making the decision without consultation.
The move “has a very complicated and negative impact on the country’s economy,” Yatsenyuk said Wednesday before meeting President Petro Poroshenko. “We have repeatedly advised our colleagues at the central bank to take the situation under tough control so that the foreign currency was not channeled abroad.”
IMF Approval
Gross domestic product shrank as much as 7.5 percent last year, the IMF estimates. The economy will probably contract 5.5 percent in 2015, Finance Minister Natalie Jaresko said Feb. 16. GDP fell 15.2 percent in the fourth quarter from the same period of 2013, the biggest drop in five years. Reserves shrank to $6.4 billion in January from $17.8 billion a year earlier.
As part of the latest measures, the central bank extended a freeze period for local currency intended for foreign-exchange purchases from two to three days. Banks will still be able to purchase currency for their own operations in amounts of no more than 0.5 percent of their regulatory capital each business day.
Yatsenyuk urged an immediate meeting of parliament to expedite laws required for the IMF’s approval.
Lawmakers on Monday delayed the vote, including on an amendment to this year’s budget, to March 3. The Washington-based lender’s decision would unlock as much as $40 billion, including bilateral loans and about $15 billion in potential savings from negotiations the country is pursuing with bond investors. The IMF said in an e-mail on Monday that while a flexible currency policy will help Ukraine’s economy adjust, “administrative measures on a temporary basis may be necessary to support the foreign exchange market.”
“The strategy is to try and hold the line until good news appears in the form of an IMF board sign-off,” Timothy Ash, the chief emerging-market economist at Standard Bank Plc in London, said by e-mail. While administrative controls may halt foreign-currency demand in the short term, “they are very damaging for the broader economy, disrupting economic activity and likely deepening the extent of the recession.”
In other news, the minimum wage in Ukraine (1218 UAH) has now fallen to around $42 per month, thanks to the exchange rate. This is about the same as the minimum wage in Liberia, and lower than many African countries like Ghana, Chad, Kenya, etc. And rationing had been introduced in stores in Kiev….
Well this is hardly surprising. The economy was circling the drain even before all this started and now after the loss of Crimea and the fighting in the east it's no wonder the things are dire.
But if the forces of evil should rise again, to cast a shadow on the heart of the city.
Call me. -Batman
Although the oft-violated ceasefire in the Donbass appears to be temporarily holding, this week saw the first day in many weeks in which the Ukrainian army did not suffer any combat causalities, the news remains unremittingly bleak for Ukraine’s pro-Western government. Russia has rapidly and deftly switched its primary pressure from military to economic. Gazprom, the Russian natural gas monopoly that still provides the lion’s share of Ukraine’s energy, is threatening to cut off gas supplies unless it receives prepayment for future deliveries. Given Ukraine’s incredibly precarious state finances and its extreme shortage of foreign currency (Ukraine pays Russia for natural gas in US dollars) this new effort is tantamount to driving Kiev into bankruptcy.
As Bloomberg put it, “Russia is damaging Ukraine’s economy faster than the US and its European allies can provide support.” The hryvnia, already the world’s worst performing currency, has lost almost 50% of its (already greatly reduced!) value over just the past month. The aid package from the International Monetary Fund that was announced recently is still awaiting approval by the IMF’s executive board, which is now making ominous noises that Ukraine risks “losing support” if the military conflict continues to escalate. March 11th is the earliest date that the IMF will officially approve Ukraine’s aid package, and it’s anyone’s guess as to how much worse things will get in the interim.
A graph of the hryvnia over the past year shows a terrifying, almost exponential collapse against the dollar, a collapse that shows no sign of reversing. As of the writing of this article on the morning of February 26th, the carnage was accelerating and the hryvnia was plumbing record lows against the dollar on an hourly basis (it was at 33.6 upon publication). According to the WSJ, the black market exchange rate is even higher at roughly 40 hryvnias a dollar.
This currency rout has reached such a level that the Ukrainian Central Bank has imposed draconian capital controls in order to stem the surge of money out of the country. For a number of reasons, including Ukraine’s still titanic level of corruption and the weak capacity of its government institutions, these policies have been largely ineffective.
The Central Bank is in such a desperate state that it went so far as to essentially ban all foreign currency trading for the rest of the week. The only dollars that the bank made available were offered at an exchange rate roughly 50% lower than the commercial rate. These drastic steps, while clearly necessary to prevent a total financial collapse, are in direct opposition to Ukraine’s commitments to the IMF, and the IMF has announced that it expects all of these policies will eventually be undone. The situation is simply disastrous.
In Russia the economic outlook is far from sunny, but the ruble has nonetheless been slowly recovering some of its earlier losses. The modest rally in oil prices likely explains why the Kremlin feels confident enough to exert even more economic pressure on Kiev. So long as oil is creeping higher, expect the Russians to ratchet up the tension.
The amount of Western assistance promised to Ukraine was always likely to be insufficient in scale to address the country’s ever-worsening economic ills. Even the much-ballyhooed IMF aid package would barely get foreign currency reserves back to where they were a year ago, when they were already still too low. What is clear now, though, is that the delivery of this aid needs to be urgently expedited if total catastrophe is to be averted. Ukraine doesn’t need funding a month or a year from now, it needs cash today and it needs quite a lot of it.
If the West is actually in a hurry to get Ukraine any money, though, it is doing a good job of pretending otherwise. Despite optimistic press releases and serious sounding sermons about “solidarity,” the amount of non-rhetorical assistance received by the authorities in Kiev has been paltry. The non-receipt of assistance is what explains the drastic, unexpected, and increasingly desperate Central Bank interventions.
In the parlance of international relations Russia has always enjoyed “escalation dominance” in the military realm, since it has the capacity to escalate the conflict in the Donbass in a way that Ukraine and the West simply cannot match. As events of the past week are making clear, though, it appears that Russia’s escalation dominance might extent to Ukraine’s economy as well: it has the ability to inflict disproportionate economic harm at times and places of its choosing. The West has more than enough money so that it could meet and exceed Russian economic pressure, but it needs to act.
I always say that at the end of the day, the guys who suffer the most are the Ukrainians. The pro-West Ukrainian elite and the West vs Russia and the pro-Russian Ukrainian elite fight is just going to tear the place apart really.
STGOD: Byzantine Empire Your spirit, diseased as it is, refuses to allow you to give up, no matter what threats you face... and whatever wreckage you leave behind you.
Kreia
