NBU reserves drop to a nine year low

Photo: Konstantin Melnitskiy

In October the international reserves of the National Bank of Ukraine dropped by nearly 25% to US $12.6 bn. Overall, since the start of the year, the NBU coffers shrunk by US $7.8 bn. If in addition to payments for gas the central bank resorts to supporting the rapidly declining hryvnia its reserves will set a new record low.

Repaying somebody else’s debts

The debts of the national joint stock company Naftogaz of Ukraine drilled the biggest hole in the international reserves of the country. NBU explains that nearly US $2 bn of the US $3.8 bn that the reserves lost in October were spent on repayment of the company’s Eurobonds and payment for natural gas from European suppliers. In addition to that, the NBU sold US $1.185 bn on auctions and in the course of interventions. Another US $641 mn went for repayment and servicing of the national and the government guaranteed debt in foreign currency, including US $233 mn that was paid to the International Monetary Fund. At the same time, the replenishment of the reserves was insignificant – a mere EUR 40 mn from the placement of government bonds denominated in hard currency.

Payments of Naftogaz, which purchases currency straight from the NBU, will continue to erode the remains of Ukraine’s international reserves until the end of the year, says Senior Analyst at the International Center for Policy Studies Oleksandr Zholud.

On November 3 the Cabinet of Ministers allowed Naftogaz to use the funds from the US $3.1 bn reserved on the account of the NBU for repayment of the debt to Gazprom for supplied gas. On the same day, Naftogaz transferred US $1.45 bn to Gazprom for gas supplies in November-December 2013. Another US $1.65 bn for gas supply in April-June 2014 must be transferred by the end of December. In addition to that, Naftogaz must make a prepayment for gas supplies in November.

Gazprom drew up the account for November at the price that was formed taking into account the discount – US $378 per 1,000 cu m. Now, having received this bill (it was received on Friday – Capital), the Ukrainian side will have to make a prepayment over the next several days, according to Russian Energy Minister Aleksandr Novak. He said that Gazprom charged for the supply of 2 bn cu m of gas, which means that the total cost is US $756 mn.

This amount, however, may not be fully used from the aforementioned US $3.8 bn until the end of the year. Novak specified that the Ukrainian side has the right to pay the prepayment for November by installments. However, even on condition that Naftogaz will limit itself to the purchase of US $1.45 bn from the NBU, the reserves may collapse by the end of the year to US $10-11 bn, believes Head of the Analytical Department at SP Advisors Vitaliy Vavryshchuk. He says that Ukraine will still have to spend US $550 mn in November-December for payments on currency government bonds and US $190 mn to the IMF. At the same time, proceeds to the reserves will be limited. Only the IMF will be able to influence the volume of the reserves by the end of the year, provided that it approves the decision on allocation of the third and fourth tranches for the total amount of SDR 1.8 bn (US $2.7 bn).

The twilight zone

Ukraine’s international reserves may hit another nine year low even before the end of the year not only thanks to gas payments, but also in the event that the rapid collapse of the hryvnia rate is not reeled in. The official hryvnia rate dropped from UAH 12.95/US $1 on Tuesday to UAH 14.47/US $1 on Friday.

Functioning of the Ukrainian economy is under question until a new equilibrium of the exchange rate is set. “If the market does not cope with this, we will have to reinforce administrative measures and resort to interventions again, though we hope that the market will find a new equilibrium,” NBU Governor Valeriya Hontareva promised on Friday. The regulator is planning to discuss these steps with the heads of Ukraine’s 40 largest banks today, on November 10.

While the currency auctions in their current format do not bear a serious threat to the international reserves of the NBU, since their volume is limited to US $10 mn per day, the interventions will inflict harm on the bank’s reserves. Indeed, in September-October the regulator spent US $1.6 bn on currency interventions through auctions alone. If the NBU resorts to similar expenses in the remaining two months until the end of the year, the volume of the reserves will drop lower than the critical level, which covers two months of import.

In addition to that, these interventions may simply turn out to be ineffective. “In October, with higher reserves and more optimistic forecasts the more than billion in interventions did not hold back the hryvnia from devaluation. At the current volumes of international reserves, conducting major interventions would have been a senseless squandering of the reserves,” believes Vavryshchuk.