The situation on the Russian money market soured players’ moods in practically every European country.
Last week, the Polish economy, which had remained stable, experienced something it hoped it had long forgotten: fear of instability. The Warsaw Stock Exchange turned out susceptible to the Russian syndrome. Germany also experienced something of the kind. Its close business contacts with the Russian Federation doomed the Deutschmark to turbulent fluctuations whenever the news from Moscow went from bad to worse. They say that George Soros, the world’s biggest currency speculator, took advantage of the situation and pocketed two billion dollars’ worth of the Deutschmarks which had then lost much of its market value. Mr. Soros declared this untrue.
Russia’s CIS allies responded to the crisis very sharply, although every former fraternal Union republic showed an outwardly specific, ethnically colored reaction. The government in Belarus has long since rung down the iron curtain in the way of currency movement across its frontiers, thus putting a resolute end to the zaichik’s exchange rate evolution, so the heaviest blow was dealt the interbank and black markets. Over the first two days of the week the interbank dollar went up 40% and the one on hand by 30%. The situation with Moldova and Kazakhstan was different. Their credit balance manly resulted from trade contacts with the Russian Federation. Apart from keeping the ruble rate low, threatening overall devaluation, Russia’s import restrictions and poor CIS export characteristics will soon block all commodity influx from the Commonwealth.
The Baltic states, although long separated from Moscow, also felt the shock wave. Latvian banks have long been close partners of Russia’s fiscal structures (closer by far than their Ukrainian counterparts). Thus, when these structures turned out insolvent, Latvia was bound to sustain financial losses. Experts predict that at least four banks will suffer because of Russia’s bankruptcy, with the heaviest burden on the Latvian dairy industry. In fact, this industry is practically at a standstill. All told, Latvian exports may be curtailed by 20-70%. And the same is true of Lithuania. Estonia is the only exception, because it resolved to sever all economic ties with Russia practically as soon as it became independent. Yet it, too, could suffer losses from the world rather than regional economic crisis.
Getting back to Ukraine, last week kept this country in suspense. The Cabinet and National Bank held their breath waiting for news from Russia, bracing themselves to respond to new twists in the crisis. The only logical conclusion: everything said and done by the authorities is actually important only at the time this becomes public knowledge, because the situation may change drastically a couple of hours or days later, meaning that official Kyiv’s actions are in practice unpredictable. NBU Governor Viktor Yushchenko explains the situation in his own way: “The statements we have heard from the Russian government and Central Bank have not made clear the depth or tactics of the new currency policy. And making this clear is very important for the NBU to join efforts with the Ukrainian government to determine further steeps in the sphere of monetary policy and in maintaining the currency corridor.” In other words, the National Bank of Ukraine has reserved the right to make decisions “adequate to the situation as it develops.”
One such decision was made almost instantly: determining the ruble-hryvnia exchange rate by applying the USD-Russian ruble cross rate resulting from Moscow Interbank tenders and valid on a given business day. Naturally, this approach will secure a synchronous Moscow ruble downward trajectory, provided Moscow agrees. Should any of the players in this game refuse this tactic and tie the hryvnia not to this cross rate but to the ruble’s actual rate, The NBU would be the first to discard its own “innovation.” In fact, the first signs of disproportion emerged by the end of last week. All the tricks being played off by Russia’s and Ukraine’s leading banks notwithstanding, bankers remembered the good old times of cross-rate arbitration speculations, sometimes yielding 2,000-3,000% per annum. Considering today’s speculative moods, NBU will make the crucial decision shortly.
In fact, for Ukrainian bankers the past week was far from the best, especially for those remaining bound by contract to their Russian counterparts. Accordingly, their response to the Russian monetary crisis was more revealing than that of official Kyiv. All admitted to the interbank market’s stagnation, attributing it not so much to the National Bank lowering the official exchange rate as to the banks themselves becoming dubious about each other’s solvency. The liquidity of many Ukrainian banks wavered because their Russian counterparts failed to respect their commitments, now forcing banks to revise their credit limits with regard to their colleagues. Few transactions are being made and most involve overnight funds with the annual interest rate jumping to 80—100%.
Still, the banks, like the Cabinet, took their time last week. Foreign exchange offices and counters offered a rate determined not so much by real factors as by their owners’ choice. Experts maintain that the exchange rate will drop dramatically, being close to the populace’s buying capacity margin as it is. However, this is true only of those who can afford to wait. Once they smell devaluation in the air they will besiege all the foreign exchange kiosks, desperate to change their hryvnias for greenbacks (no one has been trying to rescue the national currency for a long time).
Another aspect is the non-cash money market. Here the corporate securities market, that of forward contracts, credit, and hard currency, acts as a destabilizing factor. In past years they have actually ceased to exist as normal market entities. Most likely, state spokesmen are right in saying that they are keeping the situation under control. The NBU’s regulatory documents being issued on a conveyor belt basis have gradually reduced free interbank financial movement to zero. Government bonds on the secondary market are not in demand, while those primarily issued are redeemed by predetermined buyers. And the stock market has simply had no time to get liquid, meaning no one will be surprised when it is pronounced dead.
In a word, by the time Russia was gripped by its crisis, Ukraine’s non-cash market had already been monopolized by the state. Under the circumstances it would be ridiculous to expect the Cabinet and the National Bank to have lost control as actually the only functional fiscal entity. However, this scenario does not rule out the main threat: collapse of the financial system. The government as a natural economic monopolist has to coexist with the shadow economy, and the latter is up and coming, for here hard cash is the watchword. Of course, customer-oriented Ukrainian entrepreneurs are objectively opposed to devaluing the hryvnia. Thus, in the final analysis, it is they who will decide whether to surrender or support the hryvnia’s position, and consequently, it is precisely to them that the Cabinet and NBU will have to orient their decisions. Whether all those top-level fiscal bureaucrats will be willing to meet the unofficial economy halfway by gradually surrendering some what they have is a far from rhetorical question.






