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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

The hryvnia is commanded to stand

13 November, 2012 - 00:00

The government and the National Bank are preparing “voluntary” conversion of state bonds.

Last Tuesday, the National Bank of Ukraine Head Viktor Yushchenko and Finance Minister Ihor Mitiukov joined their efforts to convince the journalists that the situation on Ukraine’s currency and financial markets is totally different from that in Russia, and that there are no reasons for Ukraine to resort to some special measures similar to Russia’s.

As we know, on August 17 Russia announced a moratorium on paying off loans received from non-residents and introduced temporary restrictions on conducting major currency transactions by Russia’s residents. At the same time, Russia broadened substantially the currency corridor limits. In a word, the ruble is allowed to fall.

Pointing out Ukraine’s ability to keep all of its external obligations, illustrated by recent timely repayment of a loan to the Japanese Nomura company, the Ukrainian financiers stated that the monetary factor does not exert substantial pressure on Ukraine, nor does the activity of non-residents, whose number and actives are insignificant in Ukraine. Nor are we facing an imminent threat of losing corporate actives on the Russian market since they are negligible and, according to Mr. Yushchenko, are not under Russian moratorium.

The only real threat that the National Bank and the Finance Ministry see in the Russian government’s anti-crisis efforts is in the area of trade and economic relations, which put tangible pressure on Ukraine: Russia accounts for 32% of Ukraine’s export and 38% of its import, and trade misbalance amounts to $4 billion to Russia.

Under such circumstances, the government and the National Bank limited themselves to an “inadequate reaction from the exchange rate standpoint,” according to Mr. Yushchenko. At the auction sale last Monday evening, the hryvnia was devalued from 2.1435 to 2.1805 to $1.00. The pawn rate was raised by 10%, while the discount rate remained unchanged. At the same time, Mr. Yushchenko admitted that in the event the situation in Russia deteriorates further, Ukraine can also broaden the limits of the currency corridor. Mr. Mitiukov announced that a statement by the government of Ukraine is expected early next week, outlining conditions for “voluntary and fair” conversion of state bonds into other securities by residents and non-residents. According to Mr. Mitiukov, the government is in the process of developing a number of measures in the area of trade with Russia, which are likely to further escalate the trade war.

Given all these developments, attempts to assure the public and the financial institutions that Ukraine’s financial market will stabilize in 1998 look somewhat naive.

Commenting on the current financial market situation, Pulsar-Holding JSC president Oleksandr Narbut noted that the “voluntary” operation of the Finance Ministry is possible only if it offers attractive enough conditions, which is hard to believe given the Ministry’s prior actions.

EXPERT OPINION (Oleksiy Plotnykov, Doctor of Economics)

In all likelihood, the Russian crisis will trigger the beginning of a financial crisis in Ukraine. It is obvious that the country is on the verge of a financial crisis, and the country’s financial pyramid can neither provide a plausible explanation of the situation, nor find another solution to it. In my view, what happened in Russia will only urge a tough financial crisis within the next two weeks, right after the Independence Day celebrations, when the IMF will make a decision on issuing loans to Ukraine. Currently Ukraine has a state debt of UAH 37 billion, of which UAH 15 billion is internal and UAH 22 billion is foreign debt. These are appalling figures, as is the fact that in first half of 1998 about 90% of budget revenues were used to service the debt.

Q.: Do you think Ukraine will be able to avert a banking crisis?

A.: If a financial crisis breaks out, it will be followed by a banking one. On the one hand, industrial enterprises will make every possible effort to convert hryvnias into hard currency; on the other, the population will urgently withdraw their hryvnia deposits and convert them into foreign currency. This will naturally cause the banks to stop their operations because they will not be able to fully meet the clients’ expectations. In fact, this will result not only in a banking crisis but also in social tension in the country.

Q.: What could the government do to relieve the situation?

A.: It is difficult to propose anything at the moment. The government simply should not have gotten entangled in the debt pyramid. In the current situation, it is very difficult to suggest anything to the government.

 

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