A 180° ex­change course:

The Ukrainian Week - - CONTENTS -

What's go­ing to hap­pen to the hryv­nia

reg­u­larly in­ter­vened in the FOREX mar­ket, buy­ing up hard cur­rency and strength­en­ing the hryv­nia. The im­pres­sion, thus, has been that ev­ery­thing’s just fine in Ukraine. How­ever, the minute se­ri­ous for­eign debt ser­vic­ing be­gins, it will be clear that th­ese in­flows to the bal­ance of trade ac­count were re­ally mar­ginal com­pared to what was ac­tu­ally needed. And the de­cep­tion will be ex­posed like a Septem­ber fog un­der the warm noon sun. If the coun­try doesn’t have any spare sources of fi­nanc­ing at that point, there will be no way to avoid the re­turn of hryv­nia in­sta­bil­ity.

A TASTE FOR RISKS

The strength­en­ing of the hryv­nia has lasted for some time, but it’s a pass­ing phe­nom­e­non. By the end of the year, the risks will re­main at to­day’s lev­els, be­cause no se­ri­ous debt pay­ments are planned. This means that there’s also un­likely to be any sharp move­ment in the hryv­nia. More­over, the cur­rency could grad­u­ally de­pre­ci­ate sim­ply with the sea­sonal in­flux of grow­ing im­ports, and with them, a grow­ing cur­rent ac­count deficit.

Still, this de­val­u­a­tion is un­likely to be more than 10%, be­cause the bal­ance of pay­ments will re­main rel­a­tively bal­anced. The NBU has enough in­stru­ments in its fi­nan­cial arse­nal to smooth out any lo­cal deficit of hard cur­rency on the mar­ket. That this is likely can be seen in NBU in­ter­ven­tions: over Au­gust, the Bank largely bought up hard cur­rency, i.e., there was a sur­plus and the hryv­nia kept inch­ing up, but be­tween Au­gust 31 and Septem­ber 5, the reg­u­la­tor was forced to sell hard cur­rency, which led to a no­tice­able im­prove­ment in the dol­lar, over 50 kopiykas within a few days. Soon, in­ter­ven­tions in­volv­ing the sale of hard cur­rency are likely to grow in fre­quency, a clear in­di­ca­tor that the hryv­nia ex­change rate has be­gun to de­pre­ci­ate.

At the be­gin­ning of 2018, risks will be­gin to grow sig­nif­i­cantly be­cause the ques­tion of where to find ex­ter­nal fi­nanc­ing to cover the coun­try’s needs will loom ever more strongly. At that point, the equi­lib­rium of the FOREX mar­ket could dis­ap­pear and the am­pli­tude of fluc­tu­a­tions be­gin to in­crease.

There is only one mar­ket fac­tor that could pre­vent this sce­nario, and that is a stir on global fi­nan­cial mar­kets due to sur­plus money, sim­i­lar to what pre­ceded the 2008-2009 fi­nan­cial cri­sis. The thing is that eco­nomic indi­ca­tors have been im­prov­ing around the world in re­cent months and un­cer­tainty has sub­sided. As a con­se­quence, the ap­petite for mar­ket risks has grown and cap­i­tal has been glow­ing to de­vel­op­ing coun­tries. It’s pos­si­ble to say that, in some cases, there has been real in­ter­est in as­sets in un­de­vel­oped coun­tries. There are plenty of indi­ca­tors of this, such as the fact that most cur­ren­cies have grown stronger against the dol­lar lately, es­pe­cially the cur­ren­cies of poorly de­vel­oped coun­tries, while yields on gov­ern­ment bonds in th­ese coun­tries have, in some cases, fallen to record lows.

Since the be­gin­ning of 2017, the euro has gained nearly 15% against the dol­lar, while the cur­ren­cies of Ukraine’s western neigh­bors—Poland, Czechia, Hun­gary and Ro­ma­nia—, whose economies are closely tied to the eu­ro­zone, have grown against the dol­lar al­most to the same ex­tent. The cur­ren­cies of many de­vel­op­ing coun­tries have strength­ened by 7-10%. Even the Chi­nese yuan has gained 5% against the dol­lar. Yields on Bul­garia’s gov­ern­ment eu­robonds are now down to 1.67%, com­pared to 8% less than a decade ago, which is what Ukraine’s bonds are at now. There are plenty more such ex­am­ples.

If this trend were to main­tain for at least a few quar­ters, it would be clear that the cap­i­tal that is cur­rently ac­tively look­ing for places to work in th­ese coun­tries would partly also come to Ukraine. All the more so as a re­cent sur­vey by In­sti­tu­tional In­vestor cov­ered 214 fund man­agers, 32% of whom said that, given a choice of Europe, the Mid­dle East and Africa, their first choice would be to go to Ukraine, in or­der to study mar­ket op­por­tu­ni­ties. This kind of cap­i­tal might even suf­fice to fi­nance Ukraine’s de­mand for for­eign cur­rency. The ques­tion is whether this stir on global fi­nan­cial mar­kets will last long enough, and for that there is nei­ther cer­tainty nor guar­an­tee. And, even if there were, this form of cap­i­tal in­flow is very volatile: to­mor­row, it could equally swiftly be stand­ing in line to exit, hav­ing caused more harm than that from which it might save us to­day.

NON-MAR­KET FAC­TORS

There are two more non-mar­ket fac­tors that could po­ten­tially shift the bal­ance of pay­ments over 2017-2019 and thus have a sig­nif­i­cant im­pact on the hryv­nia ex­change rate. The first has about a zero per­cent like­li­hood, whereas the sec­ond is al­most 100%. But each of them could po­ten­tially be de­ci­sive.

The first is the Yanukovych money. The con­fis­ca­tion of US $1.4bn of the Yanukovych Fam­ily’s money that was on Oschadny Bank ac­counts was a pleas­ant sur­prise for the Bud­get. Now there’s in­for­ma­tion about a half tonne of Yanukovych gold that in­ves­tiga­tive agen­cies have tracked down to Switzer­landю On one hand, it’s hard to count on the money stolen by that regime, be­cause the process of find­ing and re­turn­ing them to the state could drag on for years. On the other, the Pros­e­cu­tor Gen­eral’s Of­fice has re­ported that the to­tal stolen by the Yanukovych clique was nearly US $40bn. This can­not pos­si­bly all be in cash: a large pro­por­tion is in gold and pos­si­bly in tan­gi­ble ma­te­rial as­sets such as prop­erty or own­er­ship shares in busi­nesses.

None of this is a nee­dle in a haystack. It should be fairly straight­for­ward to track th­ese as­sets down and even­tu­ally con­fis­cate them in fa­vor of the state. Even if only a tenth of

The fall will bring a sea­sonal de­pre­ci­a­tion of the hryv­nia, as a re­sult of which the hryv­nia should not go down any fur­ther than about

UAH 28.00/USD

this were re­turned to the bud­get, it would pro­vide se­ri­ous sup­port for pub­lic fi­nances—most im­por­tantly for the bal­ance of pay­ments. If Ukraine’s in­ves­tiga­tive agen­cies con­tinue their ef­forts steadily and per­sis­tently, they could re­turn fairly sub­stan­tial sums. This el­e­ment in the sta­bil­ity of the hryv­nia ex­change rate needn’t be dis­counted, although when and on what scale it can be brought into play is some­thing no­body knows for sure.

The sec­ond fac­tor is the po­lit­i­cal cy­cle. Although Ukraine’s next elec­tions come up only in 2019, bar­ring a snap elec­tion, the cam­paign­ing has al­ready be­gun, even if un­of­fi­cially. This can be seen not only in the ac­tions of the Poroshenko Ad­min­is­tra­tion, which is al­ready ac­tively search­ing for ways to en­sure their boss is elected to a sec­ond term and elim­i­nat­ing po­ten­tial ri­vals and the op­po­si­tion: who are the more highly rated po­ten­tial nom­i­nees and how of­ten they show up on tele­vi­sion. Elec­tion cam­paigns are for the Ukrainian politi­cian what crushes are for the teenager: both sides lose their heads and be­have in ir­ra­tional ways.

In this sit­u­a­tion, a ra­tio­nal ap­proach means rec­og­niz­ing that the only def­i­nite source of ex­ter­nal fi­nanc­ing is sup­port from the IMF and other in­ter­na­tional donors. But in or­der to qual­ify for it, the Verkhovna Rada must vote for the bills that will al­low var­i­ous re­forms to go ahead. But how likely is it that the leg­is­la­ture will sup­port re­forms ini­ti­ated by the Pres­i­dent and a Cab­i­net that is friendly to­wards him, if all the elec­tion rhetoric of the multi-col­ored op­po­si­tion is fo­cused on crit­i­ciz­ing this Ad­min­is­tra­tion? It’s much sim­pler not to vote for the nec­es­sary changes, get the IMF to stop lend­ing, cause a cur­rency cri­sis, and then blame the cur­rent gov­ern­ment for ev­ery­thing in or­der to boost their own rat­ings. Even though this line of ac­tion is ob­vi­ously aimed against the peo­ple and their coun­try, it’s the short­est path to the top po­si­tion in the land. Given that among Ukraine’s top politi­cians, very few act re­spon­si­bly, the most likely sce­nario is that the Rada will be blocked and co­op­er­a­tion with the IMF stopped. The out­come—a hard cur­rency crunch, hryv­nia de­val­u­a­tion and the en­tire bou­quet of prob­lems that goes along with that—is some­thing that most Ukraini­ans re­mem­ber all too well from the not-so-dis­tant past.

To sum up, the gen­eral picture looks like this. The fall will bring a sea­sonal de­pre­ci­a­tion of the hryv­nia, as a re­sult of which the hryv­nia should not go down any fur­ther than about UAH 28.00/USD. The Gov­ern­ment might get one more tranche from the IMF or port­fo­lio cap­i­tal will be­gin to come to Ukraine in greater vol­umes, in­clud­ing for the pur­chase of newly-is­sued gov­ern­ment eu­robonds. Th­ese fac­tors will ex­tend the pe­riod of rel­a­tive equi­lib­rium in the FOREX mar­ket for a few more months, but they will not elim­i­nate the prob­lem of fi­nanc­ing for the next year or two.

What hap­pens next is a good ques­tion. The only thing we can be cer­tain of is that FOREX risks will grow and the hryv­nia rate will fluc­tu­ate more sharply, whether it goes up or down. How­ever, this is only next year. For now, Ukraini­ans can sleep peace­fully..

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