Ukraine to Ease Capital Controls as Bailout Buoys Hryvnia

Ukraine plans to phase out capital controls as a potential $17 billion International Monetary Fund rescue buoys the hryvnia, a document obtained by Bloomberg News shows.

The Natsionalnyi Bank Ukrainy will draw up a plan by the end of July to gradually cancel curbs on foreign-currency sales imposed in February, according to an April 22 letter of intent to the Washington-based lender, obtained by Bloomberg. The bank won’t set new restrictions or expand the existing limits, according to the document, which covers economic policy and is signed by officials including Premier Arseniy Yatsenyuk.

“We aim to maintain the implementation of a flexible foreign-currency policy,” the Ukrainian officials said in a memorandum attached to the letter. “In exceptional cases, the NBU may sell a limited volume of foreign currency to help restrict devaluation expectations.”

The central bank’s press service declined to comment immediately on the authenticity of the document. IMF spokeswoman Olga Stankova also declined to comment.

Ukraine is awaiting IMF approval for a loan to boost its shrinking economy as separatist unrest threatens to split the nation’s east and raises Russia-U.S. tensions to levels not seen since the Cold War. Reserves at a nine-year low and forecasts gross domestic product will plunge 5 percent in 2014 have made the hryvnia the world’s worst-performing currency.

Reserves ‘Critical’

Even as Ukraine limited the amount of foreign currency individuals are allowed to buy, the hryvnia has lost 28 percent against the dollar this year, the most among more than 150 global currencies tracked by Bloomberg. The central bank halted its defense of the hryvnia so as not to burn through reserves.

Foreign-currency and gold reserves, which fell to $15.08 billion at the end of March, equivalent to less than two months of imports, will remain at a “critically low” level this year, according to the document, which was also signed by central bank Governor Stepan Kubiv, Finance Minister Oleksandr Shlapak and acting President Oleksandr Turchynov.

“Reserves will stay at critical levels throughout 2014 despite significant financial aid,” the Ukrainian officials said. “The central bank will try to gradually increase reserves through buying on the market.”

Economy Contracts

Ukraine’s economy shrank 1.1 percent from a year earlier in the first quarter as anti-government protests toppled President Viktor Yanukovych and Russia annexed the Black Sea peninsula of Crimea, preliminary data from the statistics office showed today. GDP fell 2 percent from the fourth quarter.

The IMF has said Ukraine’s loan would unlock an additional $15 billion of international assistance as the eastern European nation’s government prepares for $9 billion of debt payments by year-end. The first tranche of about $3 billion may be transferred early next month after approval from the lender’s board today.

The government plans to use $2 billion from the first disbursement to support the budget as it seeks to trim the fiscal gap to 8.5 percent of GDP this year and 6.1 percent next, according to document. The shortfall includes subsidies to state-run energy company NAK Naftogaz Ukrainy.

Ukraine’s 15 biggest lenders will complete stress tests by the end of July, while 20 more will follow suit by October, according to the document. The government may help supply additional capital.

Naftogaz must repay a $1.6 billion Eurobond that matures in September, purchasing foreign currency from the central bank in the process, according to the document. It will also have to repay $2.2 billion debt to Russia’s OAO Gazprom for natural gas.

“Considerable repayments on domestic and foreign debt that need to be made in the next two years, coupled with significant payments for natural gas imports, will weigh on the economy and public finances,” according to the document.

(Updates with GDP contraction in ninth paragraph. For more on Ukraine’s crisis, see EXT2.)
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