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Friday, December 19, 2008

Tymoshenko, Stelmakh Trade Barbs; Yushchenko Offers Reassurances

With the dollar trading close to Hr. 9 on the interbank currency exchange, up from Hr. 4.60 in the spring, Ukraine faces its deepest economic crisis since the early ‘90s.

Millions will lose their subsistence jobs, and thousands already have. Currency speculators are ringing up record profits, and government officials keep finger-pointing.

PM Yulia Tymoshenko on Thursday charged President Yushchenko and National Bank Governor Volodymyr Stelmakh with having a role in the currency speculations. Stelmakh countercharged:

NBU Chairman Volodymyr Stelmakh: Today, Ukraine’s economy is in a very difficult situation. The government’s grossly incompetent policies in managing the economy have led to a point where, already in December of this year, Ukraine may find itself in domestic default. Today, the government has no money for wages, pensions, social security, and liabilities of foreign and domestic kind. The Board of Governors of the National Bank of Ukraine is concerned about today’s situation, when the Prime Minister has crossed the line that no one has ever crossed. Particularly cynical is the fact that the ammo in the government’s political wars may very well be ordinary people who will be the first to suffer from the banking system’s stabilization. [sic]

This reminds me of Yanukovych’s Freudian slip during the presidential debates: “We must secure for our citizens a feeling of insecurity.”

To soothe the soul of the insecure “little Ukrainian,” Yushchenko offers his reassurances:

President Yushchenko: Currently, the National Bank is switching to daily auction mode, which aims to start currency trading from the highest bid. Those who made such a high bid, let them buy. But they will know that tomorrow they will lose because the announced exchange rate for tomorrow will be different.

The good news: In today’s interbank exchange trading, the hryvnia rebounded to Hr. 8.5 per dollar.

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Gabriela said...

This Yanukovych's slip made me remind of one very 'popular' here in Peru: a memeber of the Parliament, when taking oath assuming office said: "I swear to God, to the money...". That's because in Spanish, the correct words are: "Por Dios y la patria" (to God and the country), and what this man said: "Por Dios y la plata".
No one remembers this guy's name, but his oath became unforgettable.

Taras said...


Para los politicos todo es posible:)))

Anonymous said...

The ultra-competitive hysteria of Ukrainian politics does not help one bit. My impression is that there is a sovok carry-over here: if things go south, even if it's not your fault, the reflex sovok reaction is to look for a scapegoat and to declare the official a criminal.

The fact is that if there is incompetence in office, that's not a crime.

Here's a fairly exhaustive article about Ukraine's situation. My impression is that Ukraine's "political elite" have absolutely no idea about what to do in the current economic crisis, and they are burdened with reflect sovok reactions, the tendency to point the finger of blame at everyone else, in order to avoid any blame.

Note that Ukraine will have to BORROW money in order to cover its budget deficits.

Superimposed on all of this are the accusations that Firtash and Nadra Bank are somehow tied in with Stelmakh and the National Bank of Ukraine, and are taking advantage of the currency crisis so that Firtash can enrich himself.

Should the hryvnia free-float, or should it be supported with a trading range?

The hysteria of Ukrainian politics does not help one bit.

Anonymous said...

The battle in Ukraine to stop the currency plummeting

Ukraine’s currency is plummeting in response to the country’s declining economic prospects and financing difficulties. With the IMF now having a major say in policy decisions, non-market solutions are improbable; instead, the aim is to achieve an orderly depreciation rather than a rout. Ultimately, a weaker exchange rate will be beneficial to the economy. Yet the adjustment will be painful, and this may fuel political impulses that run counter to IMF strictures.

Off a cliff

The hryvnya hit an all-time low of HRN7.38:US$1 on November 27th, a fall of around 38% from the HRN4.60:US$1 rate seen in the first week of July. The National Bank of Ukraine (NBU, the central bank) had been attempting to defend the currency through interventions in the foreign exchange market, but having seen reserves fall by 15% in October alone, to US$31.9bn, it can ill afford to further defend the currency.

The lack of confidence in Ukraine’s currency is unsurprising. Inflation has been sky-high this year, averaging just over 30% year on year in the second quarter and 26% in the third quarter. Industry is going into freefall. Monthly output growth fell by 0.5% in August and 4.5% in September; nevertheless, the 19.8% year-on-year contraction recorded for October came as an enormous shock. The economic slowdown and the weaker prospects for export volumes and prices, as well as the global credit squeeze, have focused attention on Ukraine’s large external financing requirement. Financial inflows have all but dried up.

As good as steel

Russia too is experiencing strong downward pressure on its currency versus the dollar. In Russia’s case, this reflects the the fall in the oil price since July and uncertainty over short-term prospects. The oil and gas industry is the main driver of the economy; it is also a major determinant of sentiment; hence the Russian equity market has followed the oil price downwards since mid-year.

For Ukraine, the commodity to watch is steel. Ferrous metals account for 40% of export revenue and 25% of industrial production. As with oil in Russia, the revenues generated are vital to stimulating the broader economy. From late 2007 until the middle of this year, the hryvnya was generally on an appreciating trend. This was consistent with the surge in the prices of Ukraine’s main steel products. Prices for steel billet rose from around US$540/tonne in late 2007 to US$800/t in early March and US$1,200/t in early July, according to data from Metal Bulletin. Prices for steel slab and hot-rolled coil followed a similar trajectory: from US$550/t in late-2007 to US$1,100/t in late July for the former, and from US$620/t to US$1,130/t for the latter.

From August, however, prices started to collapse. The price of billet fell by 25% in a month and as of November 24th its price is down two-thirds from its mid-year high. Slab and hot-rolled coil prices have suffered a similar decline. Even more damagingly, global demand for steel has shrunk dramatically since July, hence the sharp downturn in industrial output and the guaranteed contraction in export revenue (90% of steel output is exported). One prominent Ukrainian mill expects output in the first quarter of 2009 to be down 75% from a year earlier.

The hryvnya has tracked steel’s declining fortunes. On Bloomberg data, the currency traded at HRN4.60:US$1 in the first week of July. By late September it had broken through HRN5:US$1. Over the course of October it moved unrelentingly towards HRN6:US$1, but the major slide has come in late November. From HRN6.12:US$1 on November 21st, the Ukrainian currency slumped to HRN7.38:US$1 on November 27th.

The current-account deficit was until recently estimated to be around 6.7% of GDP this year. With steel export revenue set for a sharp decline, this will put widening pressure on the current-account deficit from one side. From the other, the near-certainty of a sizeable increase in the price of imported gas in 2009 threatens a further widening. Given the sharp shrinkage in the availability of credit, it is not clear how Ukraine could finance its current-account deficit in the months ahead. The IMF, starkly, has forecast a current-account deficit of just 2% of GDP next year--on the assumption that this is all the credit that Ukraine will be able to attract.

Managed retreat?

In early November Ukraine agreed a US$16.4bn package with the IMF, focused initially on reviving the banking sector and ensuring it could service its large external debts. The programme also seeks to put Ukraine’s public finances and exchange-rate policy onto a more sustainable footing. With large budget surpluses not a practical option, nominal depreciation is inevitable. The IMF and the NBU hope to engineer an orderly retreat and so avoid a rout that could overshoot, causing additional and unnecessary damage. Yet the IMF also wants Ukraine to relinquish controls on foreign-exchange markets.

Now that the NBU has scaled back its efforts to arrest the currency’s slide, the most pressing question is how much further the currency will fall. On November 27th that NBU’s deputy governor, Oleksander Savchenko, said that an exchange rate of around HRN7:US$1 was appropriate given Ukraine’s financial circumstances. Yet just ten days earlier, the NBU had said that HRN5.6-6.0:US$1 was sustainable through to mid-2009, after which the currency would strengthen once again. Among banks and other market-watchers, there is a growing sense that HRN7.5-8.0:US$1 could be a more sustainable exchange rate.

In the firing line

The devaluation will cause considerable disruption. Importers find it all but impossible to hedge against currency risk in the country. As a result, in October some pharmaceutical importers put up prices to cover their increased costs, only for the government to mandate that prices be returned to their October 1st levels. As the impact of the November weakening of the currency feeds through, many more enterprises that import finished products or inputs will be inclined to raise prices. This will either stoke inflation and suppress consumption or, if the government opts for widespread price controls, threaten higher rates of insolvency and a cutback on future investment.

Alongside business, Ukrainians with foreign-currency loans will feel an immediate impact from the devaluation. According to the NBU, an astonishing 50% of loans in Ukraine are US dollar-denominated. A slide in the currency will put additional strain on borrowers, at a time when growth is falling, unemployment is rising and real wage growth is about to fall sharply (and may become real wage contraction). Monthly repayments on a US$12,000 car loan taken out over 7 years in 2006 at 11.5%, for instance, will rise from HRN966 at the August exchange rate to HRN1,460 if the hryvnya stabilises at HRN7:US$1.

The most realistic method of protecting those with dollar loans, aside from seeking to lengthen the maturity of the foreign-denominated loans, would be to hike interest rates in an effort to defend the currency. Yet this would arguably make the overall situation worse. Already businesses are facing lending rates of 30-50% when they approach domestic banks for credit. The government would fiercely resist moves to increase interest rates. According to Anatoliy Shapovalov, the NBU’s first deputy governor, the government wants to cut the benchmark interest rate from 12% to 8%. However, higher interest rates are likely at some point to be on the IMF’s agenda for Ukraine, if only to bring down inflation, most likely once liquidity improves.

Unavoidable pain

A weaker exchange rate is inevitable given the balance of payments shock that Ukraine is starting to experience. Eventually it should provide a competitive boost to the economy, increasing opportunities for exporters (when external demand recovers) and import-substituting producers. First, however, Ukraine must undergo the pain of adjustment. How painful this process will be depends on how much further the currency will fall; the main risk now is that ordinary Ukrainians will lose confidence in the currency, causing it to fall even further. The reported withdrawal by residents of HRN9bn from banks in October suggests that this risk is appreciable. It would not be surprising if Prime Minister Yuliya Tymoshenko’s dirigiste government soon resorted to heavy restrictions on withdrawals.

Anonymous said...

Let's see - what is it about this chart that stands out about the Nadra Bank, that is owned by Firtash?

I guess this relates to which banks got how much from the IMF loan ------

Taras said...

Nice article from the The Economist!

They should have mentioned the Big Mac Index, though.

They should have explored the damage done to Ukrainian consumers by keeping the hryvnia undervalued throughout much of its history and the economy dollarized, a microcosm of the China-U.S. model .

They should have noted how the well-engineered devaluation of the hryvnia serves special interests.

They should have described how the weak hryvnia should help the oligarchs continue exploiting Ukraine’s obsolete economy as a cash cow, without much investment.

Elmer, I guess that’s what the IMF stands for: Investing Money in Friends.

Anonymous said...

Well, Taras, I don't think it's the IMF's intention to support an oligarchy - the oligarchy was there to begin with.

A low value to the hryvnia helps exports - which indeed helps the oligarchs, who then help themselves to whatever they want.

It hurts imports. But the article correctly notes that such a situation helps "import-substitution" activity.

Meaning, of course, that it becomes advantageous to sell a Ukrainian car, instead of a Mercedes.

Ah, but there's the catch, isn't it. That assumes that people are in a position to 1) manufacture a Ukrainian car, or other "import-substitution" product and 2) sell it.

So try to set up a business to sell Ukrainian wine, instead of French wine, or Ukrainian bicycles instead of American or European bicycles.

Any bets on the chances of that - and why it would or wouldn't work?

One thing caught my eye --

"According to the NBU, an astonishing 50% of loans in Ukraine are US dollar-denominated."

What that tells me is that the astonishing number of borrowers is not composed of individuals, and that these borrowers, through offshore accounts (oligarchs) and other devices, such as hedge funds, have the means to protect themselves.

Do you have any thoughts on the astonishing 50% number?

Taras said...

In 1995, after Ukraine gave up the world’s third-largest nuclear arsenal and signed its first standby agreement with the IMF, no oligarchy existed here.

Cronyism, yes, but oligarchy, no.

It was with the IMF loans that the oligarchy and grabitization set in, as opposed to reform and the rule of law.

The IMF loans helped Kuchma write the book of stabilnist, a social contract that prevents Ukrainians from enjoying decent living standards and reproducing themselves.

How do you reproduce if, no matter what knowledge you have, no matter how hard you work, you still can’t afford a home? (Unless, of course, you have the right connections.)

Ukrainians must study and work much harder than average Westerners for only a fraction of the Westerners’ earnings.

You’d think that costs of living would be much lower here? Not necessarily. Alas, Kyiv tops Berlin and Brussels on the world’s most expensive cities list.

That’s the cost of the IMF loans to Ukraine.

Ukraine’s consumption cannot be attributed to imports alone. While most cars, bicycles, and virtually all cell phones sold here come from abroad, most of the food, including wine, comes from local producers.

Now, as for the dollar-denominated loans, their popularity can be explained by their lower interest rates. From spring 2005 to spring 2008, the dollar peg had kept the exchange rate at Hr. 5.05 per dollar despite the dollar’s continuous decline in the world’s currency markets.

The tide began to change once the government and speculators crashed the hryvnia this fall, providing a hefty subsidy to the oligarchs’ metal exports. Still, the crisis has shown no signs of subsiding.

So, come spring, the tide may change again — this time against stabilnist.

Anonymous said...

Taras, thanks for the explanation.

One question - you keep picking on the IMF as if the IMF forced Kuchma and his cronies to misuse funds.

What mechanisms do you think the IMF has for preventing a bunch of thieves and crooks in Ukraine from misusing loans from the IMF?

For example - the IMF just agreed to give Ukraine a bailout loan of $16 billion dollars, on certain conditions.

The Ukrainian Parliament has already passed a budget, signed by the President, with a budget deficit above the amount or percentage recommended by the IMF.

It's true that not all of the IMF loan has been funded yet.

Does the IMF have the power to vote in the Rada?

When the IMF made the original loans in 1995, what clues did the IMF have, what clues should it have noticed, so as NOT to make any loans to Ukraine?

Do you really think that Kuchmism, the formation of an oligarchy, would have simply stopped in the absence of an IMF loan?

Ukraine followed the pattern of every former sovok state - sovok insiders grabbing everything through insider deals, insider contacts.

Somehow, I don't think the IMF was responsible for the base, ungodly corruption on the part of the former sovoks.

Taras said...

Ukraine can hardly be considered the only country where the IMF loans went wrong.

It’s a question of country-specific knowledge and oversight, or, rather, lack thereof.

Whether by commission or omission, the IMF gave the money to the wrong guys, fulfilling Doug Casey’s famous quote: “Foreign aid might be defined as a transfer from poor people in rich countries to rich people in poor countries.”

Not all former Soviet countries followed the same pattern.

Take the Baltics. Agreed, Lithuania, Latvia and Estonia had spent less time on the Soviet “animal farm,” but they also received the best of aid and advice.

After the breakup of the USSR, Washington kindly asked Russia to withdraw its troops from the Baltics. Today, the Baltics enjoy much higher living standards, undreamed of in Ukraine, as part of NATO and the EU.

That’s because Ukraine had a totally different love story. We had to give up the world's third-largest nuclear arsenal for just a few billion dollars worth of IMF loans.

Ball-and-chained to Russia, we ended up as a “chicken Kiev” in the foreign policy pursued by Moscowcentric do-gooders like Strobe Talbott, a friend of Bill Clinton.

Here’s how Bill Clinton addressed Ukrainians during his visit to Kyiv in May 1995:

But your efforts will not be in vain, because the course is right, even if the path is difficult. The toil is bitter, but the harvest is sweet, as the old Proverb says. In time, your transformation will deliver better, more prosperous lives and the chance for you and your children to realize your God-given potential. You and your children will reap the harvest of today's sacrifices.

In the pursuit of peace and prosperity, you have been well-served by President Kuchma and his government's bold and farsighted leadership. You should know this: As you build your future, the United States will stand with you.

As of today, I don’t think Clinton would trade even 10% of his daughter's future for 100% of mine.

That’s despite the fact that she and I were born in the same month, in the same year.

Anonymous said...

I'm not sure how this ties in with nuclear weapons.

You made the point yourself: the Baltics enjoy a much higher living standard, undreamed of in Ukraine.

As far as giving money to the "wrong people" - well, I've asked it before, and I'll ask it again - where were the Ukrainian people in all this mess, other than sitting with their heads down, and allowing Kuchma to take over?

To put it differently - the IMF came in, and Ukraine, for the first time, established a national budget, as documented by Andrew Wilson, in his book, "Ukraine: An Unexpected Nation."

But there is a distinction to be made here between lending and actually controlling a country. There is the matter of national sovereignty.

The IMF, and other organizations in the West, have been accused by roosha of turning Ukraine, and other countries, into "CIA" puppets and worse.

I wouldn't exactly define IMF loans as "foreign aid."

In my understanding, "foreign aid" comes directly from a country, and doesn't necessarily take the form of loans - and, as people in the US have themselves pointed out, sometimes humorously, it doesn't always have the intended consequences.

My point is this - the people in Ukraine bear the responsibility for what happens, or happened, in Ukraine.

As is the case with any country.

Taras said...

The U.S. government made the IMF loans conditional on Ukraine’s accession to the NPT as a non-nuclear state.

The Ukrainian people sat with their heads down because of the chaos and depression that came with the breakdown of the Soviet system. (The Great Depression would pale by comparison.)

Then came the IMF loans/meds, further exacerbating the problem.

In the absence of those meds, it would have been much harder for Dr. Kuchma to retain his grip on power.

I was 15 years old at the time. I’m almost 29 now.

Whatever happened to my God-given potential? Where’s my prosperity? Where’s my sweet harvest? Did the United States really stand with me?

Today, the U.S. government brushes off visa applicants from Ukraine as potential illegal immigrants, even if they have no intention of outstaying their welcome.

Alex said...

Kharkov is going to host Euro-2012 games. The city will accept ten thousand fans from Europe. And none of them knows, that during 2007 year 10423 tuberculosis infected persons have died in Ukraine. Many of them have forgotten, that illness. Germany, Finland, Austria, Italy do not inoculate their citizenzs against this lethal disease.

Unfortunately, funds became insufficient and the Kharkov authorities made an original decision. Keeping within the limits of Euro-2012 preparation Kharkov reduces the number of tubercular departments. So, by March, 15th 345 places of 545 available will be reduced in the first Kharkov’s antitubercular clinic №1. But do not worry, it is a temporary situation: liquidation of last two hundred places and complete liquidation of the whole clinic will occur till the end of this year.