Ukraine gross foreign reserves plunge 23.2% to USD 12.6 bln in October

Ukraine’s gross international reserves plunged USD 3.8 bln in October to USD 12.6 bln, according to a Nov. 7 report issued by the National Bank of Ukraine (NBU). The main factors were Naftogaz redemptions on Eurobonds (USD 1.6 bln), USD 1.2 bln in interventions at the ForEx, as well as USD 641 mln in state debt redemptions (including USD 233 mln to the IMF).

Alexander Paraschiy: The October plunge was somewhat stronger than we expected. Itwas clear that state debt, ForEx intervantions and Naftogaz debt repayments would shave off up to USD 3 bln during the month. Yet extra foreign currency spending deepened the decline.

Ukraine accepting Gazprom’s conditions on the renewal of gas supplies made the situation even tenser. Just the USD 3.1 bln gas debt repayment alone will push gross international reserves below the psychological level of USD 10 bln by the end of 2014. This does not include expected ForEx interventions, state debt redemption (nearly USD 190 mln to the IMF in December), as well as dollars that Naftogaz may need to pay for gas imports.

Ukraine’s western partners and IFIs remain reliable sources of gross reserves replenishment,though the timing of their support is not clear.We anticipate a USD 2.8 bln wire from the IMF. Since it will be waitingfor parliament’s approval of the 2015 spending plan however,the money might not arrive until early next year.

Such an environment won’t calm devaluation sentiments at the market and promises continued volatility at the ForEx. At the same time, we do not believe IFIs and donors will stop funding Ukraine.They will offer just enough to prevent Ukraine’s default until the government shows serious efforts at addressing inefficiency and corruption, which are minimal so far.