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Ukraine Aid Limbo Deepens Reserves Squeeze: East Europe Credit

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Pedestrians Pass a Bank Advertisement Showing Hryvnia Currency
Pedestrians pass a bank advertisement showing hryvnia currency banknotes on a street in Kiev. The dwindling war chest and collapsing hryvnia, which touched a more than a four-year low yesterday, are a risk to Ukraine’s financial stability, according to Fitch Ratings. Photographer: Vincent Mundy/Bloomberg

Feb. 5 (Bloomberg) -- Ukraine is running short of time to end a political stalemate and win more international aid from either Russia or the West as foreign-currency reserves shrink and hryvnia touched a five-year low today.

Reserves probably contracted to $18.8 billion in January from $20.4 billion a month earlier, according to the median estimate of seven analysts surveyed by Bloomberg before the central bank publishes the data by Feb. 10. That would tie November for the lowest level since 2006, before Russia pledged $15 billion in emergency loans a month later.

The dwindling war chest and collapsing hryvnia, which weakened to a more than a four-year low today, are a risk to Ukraine’s financial stability, according to Fitch Ratings. They also threaten to intensify a selloff that has made the nation’s bonds the worst-performing in Europe this year, even after a rebound in the last two days amid speculation an aid package may be forthcoming from the European Union and the U.S.

“Ukraine’s international reserves are too low to defend the exchange rate, and I’m not too optimistic on the political situation,” Viktor Szabo, a money manager who helps oversee $10 billion at Aberdeen Asset Management Plc in London, said by e-mail yesterday. “I can’t really envisage a U.S./EU package of adequate size. Last year there was an opportunity to provide support but that ship has sailed.”

Russian Aid

Russia, which bought $3 billion of Ukrainian bonds in December, has delayed the next tranche of aid to ensure its neighbor doesn’t reverse President Viktor Yanukovych’s rebuff of an EU cooperation deal. A failure to embrace the EU may mean a continuation of the biggest anti-government rallies since Ukraine gained independence in 1991, which have killed seven protesters and helped turn the country’s bonds into the worst performers in Europe this year.

Ukraine’s dollar bonds have handed investors a 3.2 percent loss since Dec. 31, the worst among 13 countries in emerging Europe tracked by the Bloomberg Dollar Emerging Market Sovereign Bond Index, which has dropped 0.5 percent in the period.

The hryvnia slumped as much as 2.6 percent to a five-year low of 9 per dollar today before erasing losses amid speculation the central bank intervened selling foreign currency, Tim Ash, chief emerging-markets economist at Standard Group Plc in London, said by e-mail. It closed steady at 8.7750 per dollar, according to Bloomberg prices, and has depreciated 6.1 percent this year. Olena Perepelytsia, a spokeswoman for the central bank, did not answer her mobile after regular working hours.

Controlling Depreciation

A controlled depreciation “isn’t necessarily a bad thing for Ukraine,” Charles Seville, director of Fitch’s sovereign group in London, said in a Feb. 3 interview. An “uncontrolled” decline would pose a threat to the financial industry, while a sharp drop in reserves or a worsening of the political situation would probably lead to a downgrade, he said.

“I don’t think we are in that situation yet,” he said. “The central bank is still selling dollars.”

While Ukraine’s political crisis is putting pressure on the hryvnia, there is no economic reason for the weakening, acting Prime Minister Serhiy Arbuzov said today in Kiev.

Ukraine has an equivalent of $5.67 billion in government debt maturing this year, including a $1 billion dollar note in June. It faces a further $3.81 billion in interest payments in 2014, according to data compiled by Bloomberg.

Current Account

The yield on Ukraine’s dollar bonds due in June increased 261 basis points, or 2.61 percentage point, to 15.59 percent, the highest level since Dec. 13. The rate fell 171 basis points in the previous two days as prospects of western aid emerged.

The opposition urged lawmakers to curb Yanukovych’s powers yesterday, a week after the resignation of Prime Minister Mykola Azarov’s government prompted Russia to delay further aid. The EU and the U.S. are considering emergency funding for Ukraine if a new government is formed, U.S. State Department spokeswoman Jen Psaki said Feb. 3.

Fitch rates Ukraine’s debt B-, six levels below investment grade and on par with Egypt. Standard & Poor’s and Moody’s Investors Service each cut Ukraine rating in the past week.

The nation’s current account deficit narrowed to $4.77 billion in the fourth quarter from a record $5.89 billion in the third quarter, data compiled by Bloomberg show.

The cost of insuring the country’s debt with credit-default swaps increased 19 basis points to 1,000, according to CMA data. CDS for Egypt traded at 490 basis points.

‘Fast Money’

Yanukovych’s government quit bailout negotiations last year with the International Monetary Fund, which had urged the authorities to increase the flexibility of the exchange rate and streamline public finances. It isn’t clear if a potential EU and U.S. aid deal would include the IMF.

An IMF-backed bailout would require “long discussions” and impose “harsh conditions,” said Lutz Roehmeyer, who oversees $1 billion of emerging-market assets, including bonds from Ukraine, at Landesbank Berlin Investment in Berlin. The country would have to stop energy subsidies, cut the budget gap and weaken the hryvnia, Roehmeyer said by e-mail yesterday.

“The market thinks that fast money out of Russia with no big changes in Ukrainian politics and lesser strings attached is more credible and generous than the IMF package,” Roehmeyer said. “The Russian package is the sweeter deal for now. It is longer-term unsustainable, so longer-term Ukraine has to fix all issues and should go the European way.”

To contact the reporters on this story: Andras Gergely in Budapest at agergely@bloomberg.net; Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

To contact the editors responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net; Daniel Tilles at dtilles@bloomberg.net

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