Counter to officials’ bold declarations about the economic situation being completely under control, almost every man in the street knows to watch for the first signs of the crisis during the IMF-Cabinet talks.
How can one trust consoling assurances, even from the NBU Governor, considering that the President made it clear that the crisis cannot be avoided without foreign loans? The more so that Mr. Yushchenko, on the strength of his office, will never admit to the hryvnia’s downfall, however hypothetical. It is also possible, that due to certain circumstances he may learn about the fact from Russian news agencies, together with the rest of us.
To help the reader understand what is actually going on, it should be remembered that the IMF mission’s findings in Kyiv pointed to the necessity for the Cabinet and NBU to finish work on the issues arising from the inspection tour and forward a joint official memorandum to the IMF in mid-July.
(From The Day’s files: according to standing procedures, a borrowing country’s memorandum is first examined by IMF experts and then submitted to the Board, along with appropriate findings/ recommendations. The Ukrainian memorandum is expected to be heard by the IMF Board on July 25. The IMF mission’s findings in Kyiv were positive.)
Also, since last summer when Ukraine was denied an EFF loan, the Cabinet has abided by most of the “starting” conditions set forth by the Fund. Some of the remaining ones will be complied with after enacting the President’s June series of edicts. According to an NBU official who took part in the talks with IMF, these documents provide the legal framework for carrying out the EFF starting conditions, allowing the Ukrainian side to announce that it has formally done so.
Of the problems requiring settlement in the next few weeks the most important is the President’s edict amending the 1998 budget law with a reduced deficit and government spending, which remains to be signed. Also, VAT exemptions are to be annulled, edicts to be signed, curbing barter deals and simplifying bankruptcy proceedings, accounts of enterprises indebted to the budget to be unblocked, and a resolution speeding up privatization is to be enacted. True, the latter could be made up for by the Cabinet’s extraordinary decision to issue converted Eurobonds to secure budget revenue, while putting off real privatization until a later date. Among the measures which the government is unable to take, IMF pressure notwithstanding, are curbing housing subsidies, canceling a large number of social benefits, and implementing administrative reform – specifically, reorganizing the Finance Ministry.
Getting back to the monitoring of events boding crisis, without belittling the importance of a dialogue with IMF, it should be noted that Ukraine is dependent not only on the Fund, but also on Russia. Gasprom President Viakhirev’s recent visit to Ukraine was another reminder to the government that its northern neighbor is its number one creditor. In this case, however, the usual gas problems may have been of minor importance compared to the situation on the Russian money market.
Russia represents a small category of emerging markets where the national currency has not been devaluated as yet. The Asian tigers have fallen, and even the Japanese yen has shown some decline, as did the Czech koruna. But not the Russian ruble. Of course, it is maintained not because it is strong itself, but because the fiscal authorities keep it that way. The government and the Central Bank constantly declare their being resolved to do everything within their power to prevent devaluation. However, the longer the financial crisis, the larger the amounts drawn from Central Bank accounts to maintain the ruble’s stability. Likewise, the matter of the expedience and even desirability of lowering the ruble’s rate by 10-20 percent is put forth more and more often.
In the past two weeks the devaluation topic has been present in information from discussions held in public places and Russian corridors of power. Remarkably, the matter is mostly raised by key taxpayers like Gasprom which provides 25% of the Russian Federation’s budget revenue. Where is the connection with the “stable Ukrainian currency”? Paradoxically, the Russian ruble, along with NBU hard currency reserves, is the guarantor of the hryvnia’s stability. Russia accounts for 25% of all Ukrainian exports and 51% of its imports. In other words, once Russia decides on devaluation (and this decision is directly dependent on $15 billion worth of emergency international loan), the hryvnia will have to follow suit. Otherwise, a tidal wave of hard currency demand will instantly jump from the Russian to the Ukrainian market with its “stable” hryvnia. In addition, such devaluation will result in a sharp drop in the cost of Russian goods, with Ukrainian prices rocketing, threatening an increase in the bilateral trade balance credit and closure of Russian consumer markets.
Regrettably, Ukraine is still in a condition in which its economic policy is set in Kyiv only partially, although it would be erroneous to assume that Kyiv has had nothing to do with this situation. In fact, the Ukrainian authorities have denied domestic enterprises a single opportunity to compete on domestic and foreign markets. Ukrainian laws have bestowed on the government all kinds of privileges (commercial ones included). Is it thus surprising that the government, going bankrupt nationwide, has no support from within? And raising the NBU discount rate to 82% annually is explained, last but not least, by the Russian Central Bank’s high rates provoking hard currency outflow from Ukraine.
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Oleksiy Plotnykov, Ph.D. (Economics):
The Russian ruble’s devaluation will not have a direct effect on Ukraine. The Ukrainian and Russian monetary systems influence one another, but only indirectly. Theoretically, apart from the fact that we are faced with an impending domestic financial crisis, the Russian devaluation should not affect the hryvnia’s rate, especially if the National Bank proves capable of keeping it within the currency corridor. However, considering that we are constantly wary of this financial crisis and a plummeting hryvnia, the ruble’s devaluation would trigger off a largely psychological crisis in Ukraine, and then our hryvnia would go down with the ruble.







