Ukraine gross reserves slide 1.3% in June

Ukraine’s gross international reserves slid 1.3% m/m,
or USD 230 mln, to USD 17.7 bln in July, the National Bank of Ukraine (NBU)
reported on Aug. 7. The losses were due to FCY-denominated debt repayments that
exceeded receipts from a local Eurobond placement and net currency purchases by
the central bank on the ForEx.

In July, FCY-based debt repayments totaled USD 321.5
mln (in the equivalent). In particular, repayments and servicing of local Eurobonds
totaled USD 231.6 mln. The NBU boosted FCY net sales on the ForEx to USD 64.4
mln in order to smooth out exchange rate spikes amid growing demand. Local
Eurobond placements for USD 130.9 mln and EUR 60.5 mln respectively was the
major source of reserves replenishment.

The NBU also reported on a securities revaluation of
USD 45.9 mln (adjusted to market value and the currency exchange rate), which
apparently also had a negative effect on reserves.

As of Aug. 1, Ukraine’s gross international reserves
covered 3.0 months of imports.

Evgeniya Akhtyrko: Ukraine’s
gross reserves have now declined to the minimum accepted “safe level” of three
months of imports. With FCY supply on the ForEx dwindling in the last two
months, the NBU has lost the ability to replenish reserves through currency
purchases. At the same time, demand for local Eurobonds has declined in recent
weeks.

We are likely to see further losses in gross
international reserves in August due to relatively high payments on foreign
debt. In particular, this includes an IMF repayment of about USD 600 mln, as
well as repaying and servicing local Eurobonds worth USD 384 mln. We expect the
government will make an effort to raise more foreign currency with the sale of local
Eurobonds this month. However, this alone won’t compensate the debt repayments.

With its worsening ability to raise foreign
currency, we expect Ukraine’s gross reserves will fall around USD 400 mln
during August to well below the “safe level” of three months of imports. This
will trigger a downward spiral, as the continuously declining reserves will
harm Ukraine’s prospect on the global debt markets. The main factor that can
stop this spiral is an IMF loan tranche, which is critical for bringing Ukraine’s
gross reserves back above the “safe level” and restoring foreign
borrowing.