Ukraine Currency Extends World’s Worst Drop on Peg Policy Shift

The hryvnia slid past 10 per dollar for the first time as Ukraine’s central bank ended support for the currency to shore up reserves amid political turmoil.

Ukraine’s currency lost as much as 7.4 percent to 10.50 per dollar, before trading at 10.15 as of 6 p.m. in Kiev, data compiled by Bloomberg show. The central bank has adopted a flexible exchange rate, CNBC reported, citing Sergiy Kruglik, director of international affairs, who didn’t specify when policy shifted. The hryvnia slumped 19 percent in 2014, the world’s worst performer, surpassing drops of peers in Argentina and Kazakhstan, where central banks also allowed devaluations.

International reserves fell to an eight-year low of about $15 billion as the regulator spent dollars to stem the hryvnia’s drop, Natsionalnyi Bank Ukrainy Governor Stepan Kubiv said yesterday in an interview, the day after his appointment. Ukraine’s interim government is seeking as much as $35 billion in financial aid to avoid a default after Viktor Yanukovych was ousted from the presidency last week amid deadly protests.

“This is a forced decision,” Vladimir Osakovskiy, chief economist at Bank of America Corp. in Moscow, said by phone today. “It was triggered by the drop of FX reserves.” A rate of 10 hryvnia per dollar is “fair value,” he said.

Ukraine’s policy makers lowered the official exchange rate by 15 percent since Feb. 6, the day before the central bank weakened the administrative currency peg for the first time since July 2012 and phased in capital controls.

‘Flexible’ Rate

Natsionalnyi Bank Ukrainy is the latest central bank to loosen its grip on exchange rates amid a rout in developing-nation assets this year. Argentina allowed the peso to plunge the most in 12 years on Jan. 23 in an attempt to shield its reserves, while Kazakhstan devalued the tenge’s trading band by 19 percent on Feb. 11 to boost competitiveness.

The hryvnia has weakened for three reasons, Kruglik said, according to a video on CNBC’s website. “First crisis. Second panic of the people. Third we agreed policy of the flexible exchange rate so it should be flexible and it will be balanced somewhere when the market will establish it.”

Three-month non-deliverable forwards for the currency weakened 7.9 percent to 11.15 per dollar, according to data compiled by Bloomberg.

Reducing Risk

“Controlled currency depreciation in moderate steps could reduce risks of widespread currency panic,” Deanie Marie Haugaard Jensen, an analyst at Nordea Bank AB, said in an e-mailed note today. A weaker hryvnia “will help correct some of the balance of payment problems and bring relief to international reserves,” she said.

The nation’s bonds maturing in April 2023 fell to 85.9 cents on the dollar today from 86.9 yesterday. The yield on the securities rose 42 basis points yesterday, an increase driven in part by Russia’s deputy finance minister Sergei Storchak who said Ukraine faces a “high” chance of defaulting on its sovereign debt. Russia last week suspended its $15 billion bailout to the former Soviet republic, first unveiled in December.

Ukraine faces the equivalent of about $15 billion of debt repayments through the end of 2015, according to data compiled by Bloomberg, including a $1 billion note maturing in June. The price of those securities fell to 92.66 cents on the dollar today from 94.12 yesterday.

New Government

Currency weakness also comes as the nation contends with the most intense period of political turmoil since gaining independence from the Soviet Union in 1991. Clashes last week killed more than 80 people before the European Union brokered a peace agreement to stem the violence, and Ukraine’s parliament voted to remove Yanukovych from power.

Lawmakers are due to vote on the formation of a new government tomorrow, a step that needs to happen to help the administration secure financing, Acting President Oleksandr Turchynov said yesterday. The U.S. and the European Union have pledged support, and the International Monetary Fund said yesterday it was likely to send a team to Ukraine soon.

Tensions flared in the southern Ukrainian region of Crimea today as demonstrators pushing for a referendum on joining Russia clashed with members of the Tatar ethnic minority.

The ruble headed for a record low against the central bank’s dual-currency basket and Russian equities extended declines after the Interfax news service reported President Vladimir Putin ordered military exercises amid deepening tensions in Ukraine. The review of combat readiness in western and northern Russia isn’t connected to events in Ukraine, Interfax said, citing Defense Minister Sergei Shoigu.

The WIG-Ukraine Index of Ukrainian companies traded on Warsaw stock exchange fell for a second day, losing 3.9 percent. The country’s UX Index of stocks climbed 2.6 percent, extending its five-day advance to 29 percent.

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