Ukraine reserves fall to lowest level in seven years

Ukraine’s gross international reserves fell 4.7% (USD 1.1 bln) to USD 21.65 bln in August (2.4 months of future imports), according to National Bank of Ukraine (NBU) data released on September 6. These reserves reached their lowest level since autumn 2006.

Alexander Paraschiy: The gross foreign reserves decline in August was very close to our estimates. A USD 920 mln redemption to the IMF was the main reason for reserves drop through the month. Still, gross reserves lost more than that in foreign cash (USD-1.25 bln), being slightly compensated by the increased value of gold in its reserves.

In September, there will be no state external redemptions, which means that a gross reserves decline – which we view as likely – will purely depend on the trade balance. We expect at least a USD 0.5 bln reserves decline on the back of increased natural gas imports. The further pace of deteriorating NBU reserves through the year end will depend on the availability of external funding.

If the government fails to secure any loans, we expect reserves to fall to USD 18.0 bln by December on the back of an extra USD 1.6 bln redemption to the IMF and growing trade deficit. This level will correspond to just two months of future imports, which is a dangerous threshold. Without help from the IMF or EU, we expect a reduction in Ukraine’s sovereign rating and enormous devaluation pressure on the hryvnia. Meanwhile, the local currency lost 0.6% on the interbank exchange last week, settling at 8.175/USD, its highest level year-to-date.