Ukrainians scramble to exchange Ukrainian currency into foreign cash, triggering a shortage of dollars and euros on the nation's money market
cash, triggering a shortage of dollars and euros on the nation’s money market.
Currency exchange bureaus were buying U.S. dollars at a rate of about Hr 5.37/1 dollar in early October, but on Oct. 27 the price was Hr 5.40/1 dollar.
In recent days, it’s become increasingly difficult to buy U.S. dollars and other foreign currencies at exchange bureaus nationwide. A number of street vendors visited by the Post in Kyiv on Oct. 27 did not have any U.S. dollars or euros available.
Ukrainians bought $480 million dollars’ worth of foreign currency from Oct. 18 to Oct. 22 alone, which, according to national bank figures, is more than twice the amount Ukrainians bought during similar periods in September and August.
A deficit of dollars on the market triggered the NBU to sell $420 million of its reserves Oct. 18 through Oct. 22 to Ukrainian banks, which is nearly half the amount the central bank said it would spend from its reserves to stabilize the market during the election period.
“The situation is quite serious – we have a snowball effect in Ukraine,” said Jacques Mounier, head of Calyon Credit Lyonnais Bank Ukraine. “However, it is not yet dramatic.”
“This situation is being fueled by growing uncertainty ahead of elections,” said Volodymyr Sidenko, chief economist at the Razumkov Ukrainian Center for Economic and Political Studies.
“It has been worsened by the pension raises, implemented by the government in September, which began to increase inflation.”
Sidenko said it’s unlikely the situation will improve during the election period. “Increasing political instability will be mirrored on the currency market,” he said. “If it persists, the current political conditions could slow the strong economic growth Ukraine has seen in recent years,” Sidenko added.
An official at a Western bank told the Post Oct. 27 on condition of anonymity that “the situation is difficult and is, without a doubt, connected with the elections.” People are not sure how these elections will pan out, if at all, the bank official continued. “As a result, many Ukrainians – not just pensioners – are rushing to change their Ukrainian currency into foreign currency, namely dollars.”
The source added that the demand for dollars on the market had not been met by the $420 million sold on the market in recent weeks.
The banking official said the situation is not yet a crisis, but could develop into one if the political situation worsens. Such a situation would cause more Ukrainians to change their local currencies into foreign cash in a hurry.
“It is hard to say how the situation will develop between the first and second rounds [Nov. 21] of voting in the presidential elections. A lot will be clear after the first round, but this situation could worsen or remain difficult,” the official said.
Mounier predicts the current rush for hard currency will ease a bit in a few days as Ukrainians are forced to convert foreign currency from their savings into local cash in order to buy food and other goods.
Mounier worries, however, that the panic is being used as a political tool.
“With the authorities having opened the state’s wallet in a big way by increasing pensions substantially, the population in Ukraine could wonder about the sustainability of the hryvnya exchange rate,” Mounier said. “One should nevertheless wonder if today’s panic – which is fueled by hard currency note purchases by the population – is not to some extent nurtured by the authorities and power structures in Ukraine. [They might be] spreading fears and trying to frighten the population.”
Dmitri Shemitilo, a country debt analyst at the London office of Commerzbank Securities, questioned the NBU’s policy of selling off its reserves to stabilize the situation ahead of the elections. He added that it’s too early to panic.
“I do not think Ukraine will move towards the Georgian scenario, meaning I would expect the elections will not result in civil war,” Shemitilo said, adding that there’s a risk of the opposition movement drawing larger crowds into the streets if their candidate loses.
“I would see some currency weakening after the elections as a good buy opportunity,” Shemitilo said.“Some panic might lead to a short-term weakening, but the market should come back after the elections, supported by privatization expectations,” Shemitilo added.
