The president, the Cabinet and the NBU agreed on the exchange rate of UAH 12.95 per US $1

Average citizens are not the only ones scared by the growth of the U.S. dollar exchange rate

Photo: Reuters

Yesterday, bank managers, treasurers and their clients met with President of Ukraine Petro Poroshenko, Premier Arseniy Yatsenyuk and Governor of the National Bank of Ukraine Valeriya Hontareva behind closed doors. Bankers said in conversations with Capital that the country’s leaders announced at the meeting a new hryvnia exchange rate at which banks and their clients are required to buy and sell foreign currencies.

“The meeting reminded me of April 2009. Yesterday, we were given a clear message that exporters should not sell and importers should not buy dollars at the rate exceeding UAH 12.95 for a US $1,” said the chairman of the board of one of the banks on condition of anonymity. The bankers consider that the need for such administrative measures in conditions of war is justified, yet they don’t believe in their effectiveness. “Maintaining the hryvnia rate by treaty is a road to nowhere, although such a method can be used for a limited period of time. In order for the market to work, there should be supply,” said Chairman of Credit Agricole Bank Yevhenia Chemerys. At the same time, such issues as the shortage of currency and the existence of the black market were not discussed at the meeting.

Illogical games

On the same day, a few hours prior to the meeting, General Director of the NBU Department of Monetary Policy Olena Shcherbakova held a press conference during which she shared her concerns about the future of Ukraine’s financial system. “The situation is complicated, to say the least,” she admitted. The main task the entire system currently faces is staying alive, she said. “Today we must survive. To do this, we need consolidation [of the efforts of all the parties]. We must honestly acknowledge everything that transpires and at the very least diagnose our disease,” said Shcherbakova.

At present, the main disease is devaluation of the hryvnia. Yesterday, the interbank foreign exchange market closed with a UAH 0.15 rise in the purchase of dollars and a decrease in its sales by UAH 0.05. The rate was fixed at UAH 14.85–14.90/USD. Pressure on the hryvnia is intensifying. In January – August the net purchase of foreign currency was US $1.74 bn, which is 6.6 times higher than over the same period last year.

In order to artificially reduce the demand for foreign currency, on Monday the NBU imposed restrictions on its sale to the public. From now on it will only be possible to buy foreign currency in banks equivalent to UAH 3,000 per day. The NBU hopes that this will reduce the demand five-fold. “Yesterday, Ukrainians bought US $23 mn and sold to banks US $10 mn. Therefore, the daily demand, according to our estimates, will drop to US $4–5 mn a day,” Shcherbakova added. At the same time, she requested journalists not to criticize such restrictions and give them an opportunity to work for at least a week. If after seven days such measures prove to be ineffective, the NBU will revise them.

Currency weather forecast

When the IMF assessed the risks for provision of financial assistance in the amount of US $17 bn, it came to the conclusion that the banking sector would need assistance in the amount of at least 5% of GDP if the exchange rate reached UAH 12.5/USD. During the first review under the Stand-By Arrangement the IMF reduced this estimate from UAH 12.5/USD to UAH 10.5/USD and admitted that Ukraine would need another US $19 bn to patch the holes, presuming that the conflict in the east of the country does not end by the end of the year. Now the IMF expects that Ukraine’s economy will decline by 6.5% in 2014. But even such forecasts are too optimistic, acknowledged Shcherbakova. “The indices used by the IMF will not be fulfilled. Who could have foreseen that Ukrainian factories would be blown up? Devastated enterprises mean a shortfall of currency earnings. 25% of the country’s capacity is supported by those regions stricken by the ATO,” said the representative of the regulator.

Shcherbakova admitted that the NBU was prepared for further devaluation, but the banking system did not support such a decision. The further surge in the dollar exchange rate will lead to hyperinflation, warns Chairman of Privat Oleksandr Dubilet.

“There is a critical rate that will cause the collapse of all banks, even such a healthy bank as Credit Agricole,” says Chemerys. The financial institutions have a certain share of their obligations in foreign currency, while their capital is pegged to the hryvnia. “That is why if the official exchange rate rises to UAH 14.0 – 14.2/USD all the regulations will come crashing down,” she explained. For example, the banks will not have enough capital. A number of major banks are already on the verge in terms of this index. For example, Delta Bank has a capital adequacy ratio of 10%, which is the required minimum. As it was previously reported by the NBU upon completion of a stress test of the top 15 banks, it turned out that 9 of them are in need of recapitalization, including all state-owned banks – Oschadny, UkrGazBank and Ukreximbank. “Further escalation of the dollar exchange rate will lead to a collapse of the banking system,” warns Chairman of UkrGazBank Serhiy Mamedov. “It is better to be able to buy US $200 at the rate of UAH 12 – 13/USD, than to buy dollars without any restrictions at the rate of UAH 20 – 25/USD. This will be a point of no return”.