Ukraine Tightens Capital Controls as Hryvnia Drop Fuels Risk

Updated on
Withdrawing Hryvnia from an ATM
Ukrainian troops queue to withdraw hryvnia cash from an automated teller machine in Artemivsk, Ukraine, on Feb. 20, 2015. Photographer: Vincent Mundy/Bloomberg

Ukraine’s central bank tightened limits on capital movement to counter a hryvnia selloff that’s straining the country’s finances before debt restructuring talks.

The National Bank of Ukraine will curb importers’ purchases of foreign currencies and has banned banks from lending to clients seeking to sell the hryvnia in the market, Governor Valeriya Gontareva told reporters in Kiev on Monday. More tools are available if needed to limit outflows, she said.

Ukraine is grappling with a 10-month pro-Russian insurgency that has deepened the economic recession and forced the nation to seek International Monetary Fund bailout loans to stay afloat. The currency’s 44 percent slump this year is adding to the financial distress by driving up the cost of imports including oil and natural gas and boosting the foreign-debt burden as the government seeks a deal with bondholders by June.

“The hryvnia at this level is bad pretty much from every angle, driving up local energy prices and making external debt less sustainable,” Fyodor Bagnenko, a fixed-income trader at Dragon Capital in Kiev, said by phone on Monday. “War-related fears and delays in the IMF program are prompting companies to hoard hard currencies, while the central bank’s ability to break the spiral is limited by critically low foreign reserves.”

The hryvnia, the world’s worst-performing currency fell as much as 11 percent to record 31.5 per dollar after Gontareva’s comments before trading unchanged at 28 as of 7:12 p.m. in Kiev. It has depreciated 68 percent in the past 12 months as the NBU’s foreign-currency reserves shrank to a record-low $6.4 billion in January from $17.8 billion a year earlier.

‘High Time’

“The central bank said repeatedly that if the foreign-exchange market situation worsens, we can always impose additional administrative restrictions,” Gontareva said. “We analyzed the market situation last week. We think it’s high time to impose new restrictions.”

The junk-rated nation’s bonds fell for a seventh day to a record, with its $2.6 billion of 9.25 percent notes due July 2017 dropping 2.6 cents to 41.5 cents on the dollar and lifting the yield to 56.4 percent. Holders of Ukrainian debt have lost 25 percent this year, the most among 58 nations in the Bloomberg USD Emerging Market Sovereign Bond Index.

The country’s financial distress is worsened by the fact that its U.S. and European allies have adopted a “leisurely approach to supporting Ukraine,” which has received no IMF support in six months, according to Timothy Ash, chief emerging-markets economist at Standard Bank Group Ltd. in London.

‘Financial Meltdown’

“Such an extreme exchange-rate move risks payments problems, a deeper recession, bigger budget imbalances, bigger losses in banks, and much lower gross domestic product in dollars,” Ash said by e-mail on Monday. “Let’s not beat around the bush -- Ukraine is facing economic/financial meltdown,” causing “a solvency as well as a liquidity problem,” he wrote.

The sovereign debt extended last week’s record selloff as Ukraine reported more fighting near the port city of Mariupol following a fatal bomb blast in government-controlled Kharkiv on Sunday. A planned pullback of heavy weaponary from the front lines can only take place once a cease-fire agreed this month in Belarus takes hold, the military said on Monday.

“This could mark a new phase in the conflict with similar terror attacks elsewhere in Ukraine,” Ash said. Such a strategy would aim at “creating a sense of insecurity, undermining domestic political stability and also hurting the economy,” he said.

The violence and falling hryvnia risk further economic pain as the government seeks to save as much as $15 billion on debt payments in a deal with bondholders. It is also looking to receive final approval from the IMF on a $17.5 billion funding package agreed on earlier this month.

The bonds are set to extend declines as investors are underestimating losses in the planned debt reorganization, analysts at Goldman Sachs Group Inc. and JPMorgan Chase & Co. said Friday in separate reports to clients.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE