Ukraine looks to liberalise currency

By bne IntelliNews May 21, 2007

Ben Aris in Kazan -

Ukraine will "revolutionalise" the currency regime as soon as parliament, the Rada, goes back to work, Volodymyr Stelmakh, the governor of the National Bank of Ukraine (NBU) said during the EBRD meeting in Kazan at the weekend.

"There is a draft law in to introduce quasi-convertibility as soon as the Rada is working. The only question is, when will the Rada go back to work? September?" said Stelmakh. "In one to one an half years the hryvnia will be a fully convertible currency, but we need the support of the government to do this."

President Viktor Yushchenko said in comments over the weekend that business has been largely unaffected by the political problems because the economy continues to grow strongly, partly encouraged by the rock-solid exchange rate.

"During times of political instability the currency must be very stable and this has promoted business in Ukraine," said Stelmakh

Apart for a brief blip during the height of the Orange Revolution when the exchange rate fell to UAH6 to the dollar, the national currency has been trading consistently in a band of UAH4.95-UAH5.1 – and this is not because of state intervention.

"There have been several months in the last year where the NBU has not intervened in the [foreign exchange] market at all. These prices are set by the normal market mechanisms," said Stelmakh.

However, the NBU is poised to loosen the reigns even further.

"We have been warning the government and banks, 'get ready for currency risk, its coming'," said Stelmakh. "When there is more political stability in the country and a political consensus, we will introduce more flexibility."

The NBU would like to reduce the country's dependence on the dollar; although most of the country's trade is with Europe 90% of these contracts are denominated in dollars. The response of both the state and business has been slow, but the share of euro-denominated contracts is creeping up.

The NBU also intends to adopt the Russian ruble as a reserve currency, which is possible since the ruble became a fully convertible currency from the start of this year and is also a reflection of Russia's importance in Ukraine's trade.

"We believe in the ruble and we are prepared to keep a large share of our currency reserves in rubles if it is adopted as a reserve currency [by the government]," said Stelmakh.

The NBU is also asking the state to increase the amount of domestic debt issued. Currently, 14% of the sovereign debt is denominated in local currency.

As part of these reforms, Ukraine will also launch a Ukraine Prime Rate index, similar to Russia's highly successful Mosprime rate, to provide a benchmark against which interest rate swaps and futures can be priced to help support the development of the local capital markets.

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