Ukraine reserves fall 12.8% m/m amid political instability

Ukraine’s gross international reserves fell USD 2.6 bln to USD 17.8 bln (2.1 months of future imports) in January, according to National Bank of Ukraine (NBU) data released on February 7.

Alexander Paraschiy: Gross foreign reserves shrunk more than we expected (we estimated about a USD 2.0 bln decline). The escalated political conflict, USD 0.65 bln in IMF redemptions, and the delayed USD 2 bln loan from Russia were the key reasons of gross reserves decrease through the month. In light of this trend, we expect gross reserves to keep sliding over the upcoming months. The political crisis is unlikely to be resolved soon and promises more escalations ahead. Nearly USD 400 mln are due to the IMF in February. What’s more, Moscow made it clear that the next loan tranche (USD 2.0 bln) is conditional on a USD 3.3 bln Naftogaz debt repayment for gas imported in 2013 and January 2014.

Against this backdrop, we anticipate gross foreign reserves losing an extra USD 1.0-1.5 bln in February and very likely will approach the USD 15.0 bln level by the end of March. There is some chance that the ForEx restrictions taking effect Feb. 7 might reduce the speed of gross reserves depletion by easing pressure on the official ForEx market. But on the other hand, they might boost the country’s “black market” for foreign currency. We do not believe in the effectiveness of such administrative measures in this situation given the notorious experience of Belarusian currency crisis of 2011.