The national currency fell to an eight-year low earlier this week as the National Bank of Ukraine widened the trading corridor for the hyrvnia.
While the official exchange rate is set as Hr 4.95 – plus or minus eight percent – to the U.S. dollar, some exchange booths were offering Hr. 5.5 to Hr 6 for $1.
It appears that Ukraine’s banking officials are willing to sacrifice some of the hryvnia’s value in order to maintain trust in the banking sector. Ukraine’s nearly 180 banks have combined assets of over $722 billion.
It’s a delicate balancing act for the National Bank, which has $38 billion in foreign exchange reserves, while its officials are promising “strong interventions” to keep the hryvnia at roughly five to the dollar. This comes at a time when international financing sources are drying up and Ukraine continues experiencing Europe’s highest inflation rate, 25 percent year-on-year, and a growing current account deficit, nearly $8 billion in July.
Last week, the NBU announced a $1 billion, one-year bailout loan to PromInvestBank, the nation’s sixth-largest bank. An ongoing shareholders dispute at PromInvestBank resulted in a media war and, against the background of the “global credit crunch” hype, a run on bank branches and ATMs in Donetsk oblast. The NBU had injected Hr 2 billion ($400 million) before it announced that the bank would be placed in receivership, Reuters reported on Oct. 8. The National Bank is expected to take over the bank’s operations.
While PromInvestBank’s problems are complicated by non-transparent management and shareholder structure, other Ukrainian banks are due to pay out more than $1 billion by the end of the year, including UkrSotsbank, Nadra Bank and Raiffeisen Bank Aval.
“The strategy appears to be not to waste foreign exchange reserves, defending an arguably un-defendable exchange rate, but to conserve reserves to support banks and corporates to meet external debt service payments falling due and, also, to more generally prop up the banking sector,” explained Timothy Ash of the Royal Bank of Scotland. “Our sense is that the NBU can either support the currency, or support the banks and corporates … it does not really have enough foreign exchange reserves to do both.”
Meanwhile, the former finance minister of Ukraine, Ihor Mityukov, argued that the country’s financial system is not as vulnerable as it was before the 1998 “Russian default crisis” because it has high foreign exchange reserves. Ten years ago, the Asian and Russian financial crises spilled over into Ukraine causing hryvnia devaluation by 60 percent, inflation at 20 percent and the NBU to lose 40 percent of its foreign reserves.
Economist Victor Lysytsky, who has served in the National Bank and government, agrees with Mityukov.
“The economic crisis does not yet threaten Ukraine. Bank deposits have grown 137 percent in the last 12 months. It’s very important that in the conditions of the global credit crisis our bankers would be able to increase non-deposit sources of crediting the banking sector,” he said.
“The Soroses of the world trust our bankers and economy, but not our politicians. The primary risk to our economy is not financial. The greatest risk to our economy is a slow-witted, bribe-intensive government drowning in political bedlam.” Lysytsky said.
