Ukraine Faces Backlash as Devaluation Ravages Foreign-Currency Borrowers

Photographer: Vincent Mundy/Bloomberg

Protestors inspect damage caused by recent anti-government protests on Independence Square following recent clashes in Kiev, Ukraine, on Thursday, Feb. 20, 2014. Six months of political turmoil have rocked Ukraine’s finances, turning the hryvnia into 2014’s worst performer versus the dollar and prompting the government to sign a $17 billion bailout with the International Monetary Fund. Close

Protestors inspect damage caused by recent anti-government protests on Independence... Read More

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Photographer: Vincent Mundy/Bloomberg

Protestors inspect damage caused by recent anti-government protests on Independence Square following recent clashes in Kiev, Ukraine, on Thursday, Feb. 20, 2014. Six months of political turmoil have rocked Ukraine’s finances, turning the hryvnia into 2014’s worst performer versus the dollar and prompting the government to sign a $17 billion bailout with the International Monetary Fund.

As central Kiev burned amid deadly street protests in February, Ukraine’s currency dived and Alex Bukovetskiy stopped paying his dollar-based mortgage.

The 41-year-old joined hundreds of angry borrowers at parliament last week to demand the authorities provide relief after the hryvnia lost a third of its value in two months. Payments to Universal Bank on his flat in the capital’s suburbs have jumped 40 percent to $1,250 since President Viktor Yanukovych was toppled.

“I don’t have that kind of money,” Bukovetskiy, who’d been dipping into savings to pay his mortgage after losing his marketing job last autumn, said June 5 by phone. “I’m not hiding from my bank. I’m ready to pay but I want a compromise.”

Six months of political turmoil have rocked Ukraine’s finances, turning the hryvnia into 2014’s worst performer versus the dollar and prompting the government to sign a $17 billion bailout with the International Monetary Fund. Already battling an insurgency in the nation’s east, officials must now decide between placating the borrowers and further undermining the nation’s fiscal position or antagonizing them by doing nothing.

The situation could be worse: Ukrainian banks, which include Dnipropetrovsk-based Privatbank, Russian lenders such as OAO Sberbank (SBER) and foreign institutions such as Raiffeisen Bank International AG (RBI), have been limited to issuing hryvnia-based home loans since the 2008 financial crisis ravaged the economy.

Photographer: Pete Marovich/Bloomberg

Stepan Kubiv, governor of the National Bank of Ukraine. The central bank is proposing converting loans into hryvnia at the current exchange rate, while capping monthly repayments at end-2013 levels and extending the maturity of loans accordingly, Kubiv told reporters June 6 in Kiev. Close

Stepan Kubiv, governor of the National Bank of Ukraine. The central bank is proposing... Read More

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Photographer: Pete Marovich/Bloomberg

Stepan Kubiv, governor of the National Bank of Ukraine. The central bank is proposing converting loans into hryvnia at the current exchange rate, while capping monthly repayments at end-2013 levels and extending the maturity of loans accordingly, Kubiv told reporters June 6 in Kiev.

Bled Dry

Before that, Ukrainians lured by cheaper rates had already piled into mortgages denominated in foreign currencies, which still amount to 48.3 billion hryvnia ($4 billion), or almost a quarter of total retail lending.

The ratio of banks’ non-performing loans will reach 30 percent this year as credit costs rise, Moody’s Investors Service predicted in a May report. Ukraine had 81,000 foreign-currency home loans as of May 1, central bank data show.

Some are already feeling the pinch. Svitlana Miryanova, a 40-year-old mother of two who works as a product manager for a cosmetics distributor, says her dollar mortgage now swallows 70 percent of her monthly pay check, up from 45 percent before.

“The hryvnia devaluation is bleeding me dry,” she said.

Ukrainians have been stung twice in the last six years by plunges in the local currency and aren’t shy about venting their anger. Having flooded the streets to unseat Yanukovych in February, some are now back in central Kiev to demand banks revert to 2008’s hryvnia rate of 5 per dollar.

Currency ‘Slavery’

Another protest is planned at parliament tomorrow, while a Facebook group urging lawmakers to pressure lenders has been created and has 1,500 members. The group’s slogans include “No to foreign-currency slavery!”

The pleas for help echo the predicament of borrowers in other eastern European nations. Hungary last year forced banks to swallow losses by easing the burden on people who’d taken out loans in Swiss francs following a dive in the forint. In Poland, non-performing home loans denominated in currencies other than the zloty rose for a sixth month in April.

“The government can’t ignore the situation,” Olena Bilan, chief economist at Dragon Capital in Kiev, said yesterday by phone. “A compromise needs to be found. It must take some action as this problem could cause social unrest.”

Officials are sympathetic and say they may throw borrowers a lifeline. Parliament has banned banks from repossessing homes. The government is working to broker a deal between lenders and borrowers without harming the flow of credit, according to Economy Minister Pavlo Sheremeta.

Shielding Banks

“If the banking system is damaged, the repercussions will be quite severe, so we can’t allow that to happen,” he said in a June 6 interview in Wroclaw, Poland. “We need to have some kind of compromise. We’re working on that.”

The central bank is proposing converting loans into hryvnia at the current exchange rate, while capping monthly repayments at end-2013 levels and extending the maturity of loans accordingly, Governor Stepan Kubiv told reporters June 6 in Kiev. President Petro Poroshenko today asked parliament to dismiss replace Kubiv with investment banker Valeriya Gontareva.

Ukraine’s lenders are already in a precarious position, according to the IMF, which estimates that the nation’s biggest 22 banks would require fresh capital of as much as 5 percent of gross domestic product if the hryvnia averages 12.5 per dollar this year.

As well as putting pressure on lenders, changing the exchange rate on loans could test the terms of Ukraine’s bailout, according to Simon Quijano-Evans, head of emerging-market research at Commerzbank AG in London.

Aid ‘Disarray’

“We can’t start talking about individual measures as that would bring the support and reform program into disarray,” he said by e-mail. “The banking sector and its exposure really need to be part of that.”

The commotion around foreign-currency loans could yet be contained, according to Vadim Khramov, an economist at Bank of America Corp. in London. If this year’s hryvnia exchange rate can hold at 10.5 percent, loan losses would remain within parameters already set out by the IMF, he said.

“If the government can assure the IMF the proposed measures wouldn’t substantially increase costs to the budget related to bank recapitalization, the program is unlikely to change,” Khramov said by e-mail.

The IMF’s press service in Washington didn’t respond to e-mailed requests for comment on foreign-denominated loan relief.

‘Go Hungry’

The banks themselves are already suffering as the separatist violence in Ukraine’s easternmost regions curbs economic activity and damages investor sentiment.

Raiffeisen said in June that 2014 loan-loss provisions may rise by 22 percent to 1.4 billion euros ($1.9 billion) this year, rather than remain little changed as previously predicted, mainly because of events in Ukraine and Russia. Ukraine’s crisis is “damaging economically,” Chief Executive Officer Karl Sevelda told shareholders at their annual meeting in Vienna this month.

Proposals in parliament, including one to fix the hryvnia at a stronger exchange rate in loan contracts, amount to “populism,” Roman Shpek, a senior adviser at Alfa Bank, said by phone.

Bukovetskiy, the Kiev home owner, says borrowers need the government to take action because his lender is offering no respite. Monthly repayments on his 50-square-meter (500 square feet) apartment are three times higher than in 2008. Universal Bank’s press service declined to comment.

“Prices have risen for everything and people need to eat,” he said. “I’m ready to pay but am not ready to spend all my money on debt repayments and go hungry.”

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Daria Marchak in Kiev at dmarchak@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Andrew Langley

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