Hryvnia Falls After Record Weekly Advance as Accord Unraveling

The hryvnia retreated after the biggest rally on record last week as an international agreement to ease tension in eastern Ukraine showed signs of unraveling.

The Ukrainian currency depreciated 3.8 percent to 11.75 per dollar by 4:45 p.m. in Kiev following a 12 percent jump in the five days ended April 18. The yield on the government’s dollar bonds due in 2023 rose one basis point to 9.86 percent.

The hryvnia, the world’s worst performer this year, rebounded last week after the central bank raised its key interest rate and restricted trading in the currency. While U.S. Vice President Joe Biden expressed support for the government during a visit to Kiev today, Nomura Holdings Inc. says too little has been done to implement the Geneva agreement reached last week by the U.S., Russia and European Union.

“We remain cautious as far as political stabilization is concerned,” Dmitri Petrov and Peter Attard Montalto, London-based analysts at Nomura, wrote in an e-mailed report today. “The vague nature of the agreement means that it is too early to talk about any practical solutions.”

U.S. Secretary of State John Kerry warned Russian Foreign Minister Sergei Lavrov yesterday of “consequences” if Russia doesn’t act in “the next pivotal days” to restrain separatist activists, spokeswoman Jen Psaki said in Washington. Lavrov called on the U.S. to hold Ukraine’s government accountable for not reining in what Russia portrays as right-wing militias.

Poor Outlook

“The outlook isn’t great,” Viktor Szabo, who helps manage more than $11 billion in emerging-market debt at Aberdeen Asset Management Plc, said by phone from London today. “In this environment, it’s hard to see Ukraine getting back on its feet economically in the short term.”

To defend its currency, Ukraine’s central bank raised the policy rate by 3 percentage points to 9.5 percent April 14. The regulator added to its defenses by “temporarily” disconnecting 14 lenders from the interbank foreign-exchange market, citing moves that had a “destabilizing effect” and created “negative expectations,” it said in an April 15 statement on its website.

The Geneva accord will probably fail to prop up the hryvnia and the trading restrictions may backfire by increasing pressure on the currency, Ulrich Leuchtmann, a Frankfurt-based strategist at Commerzbank AG, wrote in an e-mailed report today.

“The political landscape is not developing in favor of the hryvnia,” Leuchtmann said.

Ukraine’s government sealed a preliminary accord with the International Monetary Fund last month for as much as $18 billion in loans in the next two years. The rescue would unlock additional international financing, bringing the total package to $27 billion.

While Ukraine will probably avoid default thanks to the external aid, it may not unleash as much foreign investment and policy overhaul as the economy needs, Aberdeen’s Szabo said.

“I wouldn’t touch the hryvnia,” he said. “It’s hard to gauge the level where the exchange rate may stabilize, based on the fundamentals.”

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