Ukraine's hryvnia slides to a new low of UAH16.05 to the dollar

By bne IntelliNews November 13, 2014

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Ukraine's hryvnia slid to a new historical low of UAH16.05 to the dollar at the close of November 12 on the interbank market. This marks a 50% devaluation on the UAH8 to the dollar exchange rate propped up by former president Viktor Yanukovych from 2010 through to his ousting in February 2014 - at the expense of the nation's hard currency reserves.

On November the National Bank of Ukraine reacted by deciding to raise the discount rate from 12.5% to 14.0%, partly to prop up the forex market. According to Valeriya Gontareva, head of National Bank of Ukraine (NBU), the central bank intends to fully switch to flexible exchange rate policy and inflation targeting. 

Today's crossing of the psychological UAH16 to the dollar mark will not be the end of the descent, top NBU officials warned. "A balanced hryvnia exchange rate will come into being when the currency stops devalution," Serhiy Ponamerenko, the NBU's head of currency operations told newswires on November 13.

"Unfortunately, it is impossible to judge where the slide of the hrvynia might stop," says Dmitry Boyarchuk, executive director of thinktank CASE Ukraine. "If you look at the fundamentals, then there is no need for further weakening of the hryvnia. The problem is that the country has lost confidence in the leadership of the NBU, and in fact we see vicious circle of devaluation," Boyarchuk told Liga.net portal.

With the currency in free fall, and the security situation unstable, the price of Ukrainian debt also plummeted to new lows for the year.

The hryvnia started to slide immediately after the ousting of Yanukovych, and accelerated as Russia proceeded to annex Ukraine's Crimea peninsula and Russian-backed insurgents seized control of Ukraine's eastern Donbass region, provoking war.  Now the hryvnia is the world's worst performing currency in 2014.

Under the new post-Yanukovych leadership, and demands from international lenders, the National Bank of Ukraine refused to intervene until September. But facing crucial parliamentary elections on October 26, and billions of dollars in payments to foreign creditors and for gas imports from Russia, newly elected President Petro Poroshenko in September called bankers and oligarchs to a meeting where he demanded of them that the hryvnia be held stable at UAH12.95 - helped by a raft of administrative  measures such as restricting sales to individuals to $200 per day.

The hryvnia then indeed stayed at UAH12.95 to the dollar, but at the price of freezing the official currency market. It proved nearly impossible to buy even tiny amounts of dollars at the official exchange rate, except for politically connected structures, and a thriving currency black market sprouted up over night. NBU head Valeriya Gontareva found this out to her cost when she demonstratively went with journalists to buy $200 from the nearest bank - and was turned away by the bank's currency exchange booth empty handed.

Following crucial parliamentary elections on October 26, the NBU removed the shackles from the hryvnia - and it  duly plummeted. 

Ukraine experienced a similarly massive devaluation during the global financial crisis 2008-9, when the hryvnia fell by as much as 60% from its pre-crisis level of UAH4 to to the dollar to UAH10 to the dollar, before stabilising at UAH8 in 2010.

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