Devaluation pressure on hryvnia intensifies in late August

Ukraine’s currency, the hryvnia, fell 1.6% against the U.S. dollar on the last day of August to a UAH 26.08/USD rate on the interbank exchange, with the central bank (the NBU) having to intervene with a USD 30 mln sale, the first such intervention since April 2016. The hryvnia has lost 5.0% against the U.S. dollar since the beginning of August. The NBU attributed the weakening to a correction of soft commodity prices, some panic related to problems in Crimea, as well as a seasonal increase in demand for foreign currency.

In other news, Ukrainian First Deputy Prime Minister Stepan Kubiv announced on Aug. 31 that the Cabinet ruled to increase stockpiles of natural gas in underground storage to 17 bcm by the start of heating season (mid-October, as we understand). Current gas stockpiles are 12.3 bcm in Ukraine.

Alexander Paraschiy: While we do not rule out some seasonal demand for foreign currency, we believe that the key reasons for hryvnia weakening was boosted demand for hard currency from energy importers. The need to raise gas stockpiles by about 4.7 bcm in the coming 1-2 months means Ukraine will have to significantly intensify gas imports, to at least 4 bcm during the period. This is more than Ukraine imported in the last seven months of the year (3.4 bcm). On top of that, Ukraine has recently resumed imports of anthracite coal, and it will also need to boost imports of nuclear fuel. All this will place pressure on Ukraine’s current account in the coming weeks, and should raise demand for hard currency on the interbank market. We continue to expect the exchange rate will be close to UAH 27/USD as of end-2016, though now we think this level could be reached much earlier.

A factor that could calm speculative pressure on the hryvnia could be a positive IMF decision on the next loan tranche. This would open the door to Ukraine getting about USD 2.4 bln in loans from IMF, the U.S. and the EU in a very short period of time. Today’s launch of the electronic asset declaration system is a positive step in that direction, but not likely to be enough to satisfy IMF demands. Thus far, Ukraine is not in the agenda of IMF board meetings scheduled till Sept. 9.