The focus of this year’s emerging-market currency turmoil is shifting to Ukraine today.
Citing traders, the WSJ reports the U.S. dollar was above 9.00 against Ukraine’s hryvnia, a level not seen since February 2009.
Ukraine has been in political chaos in recent months as anti-government protestors have been clashing with the police since November. That was when President Viktor Yanukovich walked away from a controversial trade deal with Europe.
Russia agreed to buy $US15 billion of government bonds and cut gas prices. At the time, prime minister Mykola Azarov said the deal saved the Ukraine from bankruptcy.
Since then, “Russia, which bought $US3 billion of Ukrainian bonds in December, has delayed the next tranche of aid to ensure its neighbour doesn’t reverse President Viktor Yanukovych’s rebuff of an EU cooperation deal,” reported Bloomberg’s Andras Gergely and Krystof Chamonikolas.
Bloomberg reports that the country’s foreign currency reserves fell to around $US18.8 billion in January from around $US20.4 billion in December.
The Ukrainian hryvnia (UAH) rate is then understandably heavily dependent on Russian financing. In a January 31 note, Morgan Stanley’s Alina Slyusarchuk and Jacob Nell identified two ways this could play out.
“Russia deal on: If the new government is formed quickly and manages to maintain cordial relations with Russia (which would require no resumption of talks with the EU on the FTA, and we think the government would likely postpone a decision until after the elections) and Russia continues disbursements, then Ukraine would be able to maintain UAH at current levels until the March 2015 presidential elections. We think that the NBU will then keep hryvnia at the new level of 8.4-8.5 versus USD as it would have a high cost in reserves to move it back to 8.2.
“Russia deal off: In the event that Russia suspends disbursements, we see a high probability of a sharp FX adjustment. Ukraine is likely to have a significant net financing need before March 2015, which we previously estimated at US$17.6 billion. With current elevated FX pressures it can reach US$20 billion, which approximately equals the current size of the reserves, and we are sceptical that Ukraine will be able to raise it on the markets or that a coalition government in a pre-election period will be prepared to agree to the tough measures required to unlock IMF funding.”
Political tensions however continue to remain high and Ukraine continues to remain divided on Russia and Europe. And as the country spirals deeper into financial turmoil, the local currency and bonds continue to come under immense pressure.
Here’s a three-year look at the dollar-hryvnia exchange rate via Bloomberg: