Ukraine mulls return to mandatory sale of hard currency

By bne IntelliNews July 27, 2012

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In a move that smacks of increasing desperation, the National Bank of Ukraine (NBU) is pushing for the reintroduction of regulations forcing exporters to sell the hard currency they earn to the government.

Local media reports that the NBU has submitted a draft bill on the issue to the Rada, although it stresses that the move would be a temporary measure, valid for up to six months. The plan is designed to give the central bank a new tool to manage the economy and has been prompted by growing fears that a fresh crisis is around the corner. Other governments are also getting ready. In a similar move, Russia widened its ruble-trading corridor last week to give the currency more room to absorb a crunch.

The mandatory sale of hard currency export earnings was a measure widely used amongst the Commonwealth of Independent States (CIS) during the 1990s as cash-strapped governments desperately grabbed every dollar they could to bolster hard currency reserves. However, as most of the region started to prosper, the conversion rule was abandoned by almost everyone more than a decade ago. Ukraine cancelled the mandatory sale rule in 2005.

The push to re-impose the rule in Ukraine underscores just how desperate are the straights in which the country finds itself. The NBU's hard currency reserves are just above the three-months import cover threshold considered the minimum to ensure currency stability - and several economists believe the hryvna is already ripe for devaluation. Currently trading at UAH8 to the dollar, analysts say the "fair" level is closer to UAH10. However, the government is desperately propping it up ahead of parliamentary elections slated for October.

Analysts at VTB Capital point out: "The news supports our view that pressure on the [the hryvnya] is still elevated, or even intensifying. NBU data for June indicated monthly interventions to support [the currency] surged to $704m, from $45m in May (in March-April, the NBU was actually a net buyer)."

The clear six-month time limit included in the NBU bill heavily suggests the central bank merely wants to make it past the election, and will then allow a devaluation. "We continue to think UAH stability will be ensured in the near term until the [exchange] rate is adjusted/moved to a more flexible regime in late 2012/early 2013," VTB continues. "The scale of the adjustment remains an open question and we continue to stick to our year-end forecast USD/UAH of 9.50 for the time being."

The NBU submitted the draft bill with parliament on July 25. The draft aims to give the NBU the right to force the sale of hard currency receipts, although it can choose not to exercise the rights, with the tool a "prophylactic" according to the central bank.

"The IMF says there is a high risk of another crisis arising, which could spread to countries with developed economies and those with emerging markets. Amid the impact of negative factors on the progress of economic processes in Ukraine, the central bank should always have a range of flexible instruments that can enable it to impose certain foreign currency requirements on the currency market," the explanatory note to the bill - posted on the NBU website - says.

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