Hryvnia Set to Extend World’s Worst Loss on Gas Price Increase

Ukraine’s hryvnia is set to extend the world’s worst slump this year as the price of natural gas imported from Russia rises, according to Royal Bank of Scotland Group Plc and Standard Bank Group Ltd.

The hryvnia has lost more than 27 percent in 2014 to 11.345 per dollar and may weaken to 12.50 by year-end, RBS forecasts.

The currency fell 2.1 percent to a record low yesterday after OAO Gazprom, Russia’s natural-gas monopoly, increased prices for Ukraine in the second quarter by 44 percent. A deal for a lower price negotiated by ousted President Viktor Yanukovych expired and Ukraine has run up a debt of more than $1.7 billion since 2013, Gazprom said.

“As Ukraine cannot, in the short term, completely diversify away from Russian gas imports, the hike will weigh on its current-account performance,” Tatiana Orlova, a senior economist at RBS in London, said by e-mail. An international bailout “will not be used for foreign exchange interventions and, in the absence of those, a further devaluation is required to reduce the huge imbalances.”

Ukraine is awaiting final approval for a bailout of as much as $18 billion in a two-year loan from the International Monetary Fund. As part of the deal, Ukraine has agreed to narrow its budget deficit to 2.5 percent of gross domestic product by 2016, raise retail energy prices, maintain a flexible exchange rate and address banks’ bad loans.

‘Far North’

“The IMF wanted a flexible exchange rate and I guess they now have it,” Tim Ash, chief economist at Standard Bank Group Ltd., said by e-mail today. The best case is 12 to 12.5 hryvnia per dollar, “worst case - with Russian intervention - would be far north from there.”

Ukrainian stocks jumped the most in almost a month yesterday after Russian President Vladimir Putin said he ordered a partial withdrawal of troops from the country’s eastern border. The Ukrainian Equities Index rose 0.8 percent to 1,086.18 in Kiev today. The WIG-Ukraine Index of Ukrainian stocks traded on the Warsaw Stock Exchange extended gains for a third day, rising 3.7 percent.

Putin told German Chancellor Angela Merkel March 31 he’d ordered a partial pullout of troops amid the worst regional standoff since the fall of the Soviet Union. NATO Secretary General Anders Fogh Rasmussen said yesterday intelligence hasn’t picked up evidence of a scaling back of the buildup and pledged to shore up the alliance’s eastern defenses.

Ukrainian foreign debt extended a rally, with the yield on the government’s 2023 dollar notes falling to a two-month low of 8.60 percent. Dollar notes maturing in June traded at 98 cents on the dollar, having risen for 15 days in a row.

Ukraine may return to international capital markets after the IMF loan with a new Eurobond, Finance Minister Oleksandr Shlapak said today. Ukraine is seeking to pay a maximum of 7 percent on a five-year bond, he said in Kiev.

Central Bank Governor Stepan Kubiv said today the government will complete stress tests on 37 banks “soonest.” He also forecast inflation at between 12 percent and 16 percent this year.

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