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Russia Sees Belarus, Ukraine Risking Currency Crises

Russia’s western neighbors Ukraine and Belarus may face currency crises as their current-account deficits swell after demand for exports has weakened, according to Russia’s Economy Ministry.

Ukraine’s widening current-account gap may trigger a further weakening of the hryvnia this year, while Belarus may devalue its ruble by 37 percent against the dollar next year, the Economy Ministry, which oversees macroeconomic forecasting for the Russian government, said in a report dated Sept. 24.

“Supporting the managed exchange rate of the hryvnia is putting more pressure on the gradually declining currency reserves,” the ministry said. “Deflationary processes could turn into inflationary already this year as a result of a possible fall in the hryvnia along with the Ukrainian central bank halving its interest rate to 6.5 percent.”

Banks including Goldman Sachs Group Inc. have warned of an impending devaluation in Ukraine as the economy stumbles amid sagging demand for its industrial exports, with gross domestic product shrinking 1.1 percent in the first quarter and 1.3 percent in the second from a year earlier. Neighboring Belarus risks reigniting inflation and balance-of-payments pressures as a result of slowing growth, Moody’s Investors Service said in July, adding the country’s foreign-currency reserves are low in relation to its annual debt obligations of about $2 billion until 2015.

The hryvnia has depreciated 1.6 percent against the dollar this year and the Belarusian ruble has lost 5.6 percent, according to data compiled by Bloomberg. That compares with declines of less than 1 percent in the period for the Polish zloty and the Czech koruna.

Russian Disputes

Russia’s relations with its two neighbors have been roiled by disputes over Ukraine’s plan to sign a free-trade agreement with the European Union in November and Belarus’s arrest last month of Vladislav Baumgertner, the chief executive officer of OAO Uralkali, on charges of abuse of office as chairman of the Russian company’s trading joint venture, Belarusian Potash Co. Russia has disrupted the passage of Ukrainian goods across its border and has tied requests from its neighbor for cheaper natural gas imports to membership in the customs bloc it created with Belarus and Kazakhstan.

Ukraine’s economy may shrink as much as 1 percent this year, compared with the 3.4 percent forecast underlying the 2013 budget, according to the Russian ministry. Belarus’s economy may expand 2.4 percent next year after 1.4 percent growth this year, it estimates.

Belarus Devaluation

Belarus, which devalued its ruble by 64 percent two years ago, risks excessive import growth due to accelerating credit expansion, which may trigger a repeat of the 2011 crisis as the country is forced to increase borrowing from abroad, the ministry said. The current-account deficit is seen expanding to 4.6 percent of GDP this year, leading to a weakening of the Belarus ruble against the dollar by 14 percent, according to the report.

The Belarusian central bank expects a “gradual” devaluation next year, Chairman Nadezhda Ermakova told an online news conference on Sept. 18. The key refinancing rate will probably be kept at an average level of 15 percent to 17 percent next year, compared with the current 23.5 percent, while the central bank would seek to avoid an abrupt devaluation to protect the economy, she said.

Even so, a potential weakening of the hryvnia would improve the competitiveness of Ukraine’s exports, according to the ministry. A decline in imports will help its economy grow 2 percent to 2.4 percent next year, the ministry forecast.

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