IMF-Sized Hole Too Big for Ukraine’s Central Bank to Fill

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A bank worker rolls up uncut sheets of ten and one hryvnia banknotes at the headquarters of the National Bank of Ukraine in Kiev, Ukraine.

Photographer: Vincent Mundy/Bloomberg
  • Bank has been replenishing reserves via FX-market purchases
  • Bailout delays slowing efforts to rebuild financial defenses

Hold-ups in Ukraine’s $17.5 billion bailout have left the central bank treading a lonely path to rebuild the nation’s financial defenses. While foreign reserves are creeping up, the former Soviet republic isn’t out of the woods yet.

Ukraine sealed an International Monetary Fund rescue last year to shore up the economy after political and economic shocks ravaged its stash of gold and currencies, as well as the hryvnia. Since then, only $6.6 billion has reached Kiev, with disbursements on hold for a year because of government wrangling and delays in reforms.

The central bank has plugged some of the gap by buying dollars on the market: reserves have advanced beyond three months of imports -- a key threshold for economists determining a nation’s financial health. While a Bloomberg survey predicts they’ll swell to $16 billion by year-end, that’s well short of the $20 billion they could have reached with the IMF on board, according to investment bank Dragon Capital.

“The central bank can’t look into the future with confidence,” Olena Bilan, Dragon’s chief economist, said by phone. “The current level of reserves is only sufficient to withstand small and short-term pressure on the hryvnia.”

Amid higher prices for Ukrainian exports such as steel, the central bank has bought a net $1.5 billion this year. Reserves edged up to $14.1 billion from $14 billion the previous month, missing the $14.4 billion estimate in a Bloomberg survey of five economists.

“We’ve been actively buying foreign currency since April as global market conditions turned favorable,” Oleg Churiy, the central bank’s deputy governor in charge of foreign-exchange policy, said in an interview. “Being in the IMF program would have spurred foreign investments and allowed us to replenish our reserves more actively.”

The situation isn’t critical at present. The economy is recovering from a 1 1/2-year recession, international investors have driven bond yields down to levels not seen in more than two years and the government sees IMF funding resuming this month or next. Reserves have more than doubled since plummeting to $5.6 billion in February 2015 after a second revolution in a decade and amid a violent insurgency.

The hryvnia is also stable, and analyst expectations for weakening may be overblown, according to Churiy. Unlike previous years, state energy company Naftogaz has been accumulating its own foreign-currency reserves and won’t need to buy as much on the market to cover natural gas imports for the winter, he said.

Even so, there’s potential turbulence ahead. The specifics of the U.K.’s exit from the European Union and U.S. presidential elections are both looming. Churiy said the central bank will push ahead with its foreign-currency purchases, and plans to continue gradually relaxing capital controls.

If global financial conditions remain the same, “the trend we have now will continue,” he said. “We use our FX-market interventions for inflation-targeting, to smooth volatility and, of course, to replenish our reserves. That has a positive impact on financial stability in case there are any external shocks.”

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