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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

HRYVNIA AWAITS GOOD NEWS FROM RUSSIA Why give money to governments unable to keep it at home?

13 November, 2012 - 00:00

Outwardly the situation on the Ukrainian money market is serene. Almost no inflation and the dollar's climb is very slow; banks take in and pay out deposits. In short, nothing makes citizens rush to exchange their hryvnias for dollars, buy heaps of goods, or close their bank accounts.

Against this idyllic background the National Bank's decision to raise the prime rate to 82% per annum on July 7 was both unexpected and incomprehensible, especially considering that the decision will have practically no effect on market operators. However, its very untimely and unneeded nature are quite alarming. On July 6, something as vague and poorly explained happened on the money market. As in February, the NBU suddenly boosted the hryvnia's devaluation (about 6% in February — Ed.). On Monday, the decline was 0.5% and on Tuesday it stopped, as the banks had not been able to sell their dollars on the interbank market at the new price and turned to the NBU. For the first time there was no demand for the dollar. This situation lasted only one day. On July 8 the banks' supply was resumed, the rate dropped by 5 points, and the $1.7 million traded was to the NBU's satisfaction.

The situation on the Ukrainian financial market is strikingly similar to that in Russia. From early this year, the Cabinet's and NBU's decisions have been synchronous to those in Russia, resulting from Moscow market fluctuations. On May 27, in response to the yield rate rise (up to 90% on short term state obligations), the Russian Central Bank raised its discount rate to 150%. One May 29 the NBU followed suit, raising its to 51%.

Another earthquake on the Russian market happened on July 6–7, the scope having grown much bigger; yields rose on government promissory notes and with certain short term state bond issues reached 120%, while the ruble's decline for two days went below the Russian Central Bank's daily currency corridor. Russian experts do not rule out the possibility of the discount rate reaching 110% per annum.

In fact, NBU officials make no secret of the fact that their decisions are explained by the desire to prevent capital outflow to the Russian market and suppress hard currency demand. But even if the situation in Russia were normal the National Bank would have enough reasons to cool Ukraine's overheated money market. The thing is that on June 30 state budget deficit was Hr 220 million more than planned. "The deficit schedule was upset even around the 20th when we, as agreed with the creditors, put off several foreign debt payments to the beginning of July and refinanced the coal sector instead," a State Treasury spokesman told The Ukrainian News. "And we paid more than Hr 145 million to finance the Ministry of Coal Industry. We also spent over Hr 100 million, but this money was 'hidden' in other budget items." In other words, a total of Hr 220 million "extra" money, along with that put into circulation over the previous months, was suspended in midair. And this money could have been tied up on the liabilities market, but its main buyer now is the NBU, causing an additional increase in the money stock (thus making the hryvnia cheaper). Moreover, the attractiveness of investing in government bonds is dampened by the NBU's decision (at IMF urging) to stop counting Domestic Government Bonds as compulsory bank reserves. This decision is supposed to stop the growing financial pyramid, but it will in no way lessen the state's need for live money.

Normalizing Ukraine's monetary market is correctly associated with international assistance. However, giving foreign loans to Russia is even more important for Ukraine. Not coincidentally, The Wall Street Journal recently warned the countries "living next door" to Russia that their markets would collapse if international creditors refused to help Russia. Soon it will become known whether or not Russia receives the loan worth 15 billion dollars it needs so badly in place of the $14 billion exported early this year. Incidentally, over $1.5 million was withdrawn from Ukraine during the first half of the year. It is thus only logical to ask why one should loan money to governments unable to keep it inside their countries.

 

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