Ukrainian central bank backtracks on closing forex interbank market

By bne IntelliNews February 26, 2015

Graham Stack in Kyiv -


The Ukrainian central prohibited banks from purchasing hard currency for their clients on February 25 but then withdrew the rule the same day after a political outcry, as the country continued to slide towards a financial crisis.

After a 50% devaluation of the hryvnia since the start of February, the National Bank of Ukraine (NBU) pulled the emergency brake on the morning of February 25, prohibiting banks from purchasing hard currency for their clients for three days.

The surprise move stopped the hryvnia's fall, but provoked a political storm, since it contradicted the conditions for a $17.5bn bailout from the International Monetary Fund (IMF). Ukraine desperately needs the IMF funds after international reserves fell to $6.4bn in January 2015, comprising around three weeks' export cover, down from $17.8bn in January 2014.

The NBU's move wreaked havoc on financial markets, with spreads widening to as much as UAH10 between asking and selling price for cash dollars.

The regulator was left as the only purchaser for hard currency revenues that Ukraine's exporters have to sell domestically. It caused the average weighted exchange rate to spectacularly leap UAH10 in the course of the day to UAH21.7 to the dollar.

At the same time, the black market rate dropped towards UAH40 to the dollar. Retailers of import goods questioned by bne IntelliNews were adjusting their prices according to an exchange rate of UAH38-40 to the dollar, the price quoted on the black market.

This has triggered political fallout. Reverting to a fixed exchange rate threatens the disbursal of funds from the International Monetary Fund, as it requires that Ukraine has a market-based exchange rate.

The NBU's unilateral move provoked a furious reaction from Prime Minister Arseny Yatsenyuk. "The National Bank of Ukraine on its own, as always, with no consultations whatsoever, made a decision to close the interbank foreign exchange market, which will definitely not add to the stability of the currency, which is what the National Bank is responsible for," he said.

Yatsenyuk demanded a meeting with President Petro Poroshenko and NBU head Natalia Gontareva for the latter to explain the situation.

The emergency meeting took place in the afternoon - involving the country's top officials, alongside President Petro Poroshenko, Yatsenyuk and Gontareva, also attended by Rada speaker Volodymyr Hroisman, finance minister Natalie Jaresko, National Security Council head Oleksandr Turchynov and Presidential Administration head Borys Lozhkin. “As a result, a set of measures to stabilise the foreign exchange market has been elaborated,” the presidential administration said in a press release.

Following the meeting, Jaresko and Gontareva held a joint press briefing, in a demonstrative display of unity between the NBU and the government that included an embrace between the two.

At the briefing Gontareva backtracked on the controversial rule announced in the morning.

She said that the market had “misconstrued” the rule, and that the NBU had never intended a blanket ban on banks from buying hard currency for their clients, except in the case of advance payments on import contracts. The NBU on February 24 had already put advance payments on import contracts under special control, as a channel of illicit capital flight.

Gontareva underlined that these measures were entirely within the competence of the NBU according to legal norms and agreements with the IMF. But following the briefing, the NBU retracted the February 25 rule entirely.

Both Jaresko and Gontareva claimed that there were no fundamental reasons for the hryvnia collapse since tight controls were removed on February 6, triggering a devalution of around 50%. Gontareva called the market's behaviour “speculative” and “irrational”, while Jaresko said that it was “driven by emotions”.

Gontareva said that Ukraine could receive as much as $8bn from the IMF in 2015 alone. İn email comments to Bloomberg  on February 25, the IMF said the programme would be “heavily front-loaded, including a significant initial disbursement.” 

Jaresko said that the IMF's board would meet on March 11 to consider Ukraine's request for an Extended Funding Facility. “We should receive the first tranche some days after the IMF takes the relevant decision," she added.

Ukraine's parliament is currently debating amendments to its budget for 2015 to reflect IMF conditions. Jaresko said that the parliament would vote on the package on March 3, and all parties in the governing coalition had declared their support. The 2015 budget is based on an exchange rate of UAH21.7 to the dollar.

According to sources quoted by Bloomberg, one remaining risk to the IMF deal is a major escalation of hostilities in East Ukraine, including open Russian intervention.

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