Ukraine hryvnia weakens to five-year low

The Ukrainian hryvnia declined to 8.33 UAH/USD on Jan. 14 (from 8.31 the prior day), its lowest level since August 2009. The national currency’s weakening occurred against the backdrop of gross international reserves rising USD 1.6 bln in December, reaching USD 20.4 bln as of Jan. 1.

Alexander Paraschiy: The national currency’s weakening looks rather strange after part of the USD 3 bln Russian loan in December was used to strengthen gross international reserves. No doubt, the trade deficit will keep pressing on the hryvnia even after Russia’s natural gas price discount but the National Bank of Ukraine (NBU) indicated it would take the stance of balancing the market and protecting the national currency from major volatility.

We see several possible explanations for the recent hryvnia decline, the first being an attempt by the NBU to establish a “hands-off’ hryvnia stability policy in light of widely discussed Russian financial support for authorities. If so, it would be more evidence that the economy is not healthy and the Russian loan will soon be exhausted for balancing the ForEx market. A second explanation is the NBU is once more probing the market and trying to understand whether more hryvnia flexibility could be applied. Thirdly, we cannot rule out that the drop reflected debt redemption. In particular, Naftogaz of Ukraine owed Gazprom more than USD 2 bln for natural gas supplied in 2013. It would come as no surprise that the Kremlin requested that money returned at the loan’s expense.

In any case, we do not see the hryvnia’s decline as an omen of an approaching currency shock given Russia’s financial support expected this year. We expect the hryvnia to stay below 8.5 UAH/USD in 2014.