Graham Stack in Kyiv -

Ukraine is not planning to nationalise bank deposits, the finance ministry, the central bank and the largest commercial lender Privat Bank said in a coordinated statement, following reports from respected quarters alleging such a plan was in the works.

While such a drastic step is not seen as likely in the immediate future, even discussions surrounding such a subject show the gravity of Ukraine's financial plight as the fighting in the east of the country against pro-Russian rebels grinds on.

Ukraine “has no plans to conduct so-called 'temporary nationalization' of citizens' deposits,” the Ministry of Finance said in a statement, in response to an article published on February 7 in the respected pro-European weekly Zerkalo Nedeli.

The report said that the government is considering nationalising deposits over UAH200,000 ($8,000) to fund the budget, in the event of a state of war being declared.

Ukraine's banking system has been hit by “severe” deposit outflows, according to a report by SigmaBleyzer published on February 10. Some 33 banks have been declared insolvent to date since the beginning of 2014. On February 6, Nadra Bank, the country's eighth largest by assets, was declared insolvent.

Adding to the massive strain on banks, Ukraine's hryvnia currency has collapsed from UAH17 to UAH24 against the dollar since the National Bank of Ukraine (NBU) let it float on February 5, significantly worsening banks' assets and adding to expectations of emergency measures.

Ukraine is hoping for a large International MOnetary Fund (IMF) bailout programme, but the IMF may not be able to disburse the funds given the conflict wracking Ukraine's east, IMF head Christine Lagarde said in an interview with Le Monde on January 26.

The finance ministry in its statement acknowledged that the draft bill, entitled "On Ukraine's financial system during the special period”, had been considered in April 2014 when Ukraine first struck the financial rocks. “The decision of the Cabinet of Ministers of Ukraine regarding this project was rejected, and the Government does not intend to return to reviewing this bill,” the statement said.

The NBU backed up the finance ministry's denial. “The National Bank of Ukraine has repeatedly said that it is categorically against this bill which contains norms capable of heightening panic in society, destabilising the economy and the banking system and violating the law 'On the National Bank of Ukraine'.”

Privat Bank, Ukraine's largest bank owned by Dnipropetrovsk governor Ihor Kolomoisky, called the reports “dirty fake news” that were “spread by the enemy to undermine the national economy,” in a statement issued by its first deputy CEO, Oleh Gorokhovsky, on February 10.

Difficult situation

The finance ministry argued that while the macroeconomic situation is difficult, it's manageable, with ongoing negotiations for a mid-term IMF programme, US guarantees for $2bn of Eurobonds, an EU loan worth €2.2bn, $160mn from Canada, €500mn from Germany and $300mn from Japan.

Chief economist at brokerage Dragon Capital, Olena Bilan, sees the country's economic situation now as significantly worse than in 2014 when the deposit nationalisation bill was first discussed, she said in an interview with LB.UA. “It is worse now that in April-May 2014, and worse than in 2009. If the IMF does not give us funding, than in a few months there will be no international reserves left, and the 2009 crisis will seem very straightforward by comparison,” Bilan warned.

The NBU's international reserves had fallen to only $6.4bn at the start of February, leaving only a few weeks of import cover.

According to the NBU's director for monetary policy, Serhiy Nikolaichuk, as quoted by Interfax Ukraine, the government and central bank need to make $1bn in foreign currency payments in February and March, while state energy company Naftogaz needs around $500mn in hard currency per month. In 2015, the government needs to make around $11bn in payments on sovereign direct and guaranteed debt.

Ukraine has said it is in talks to restructure its sovereign debt, including with Russia.

Russian roulette

Russia holds a $3bn Ukrainian Eurobond that's due for redemption in December 2015. The bond's covenant allows the holder to demand early repayment in the event that Ukraine's debt/GDP ratio exceeds 60%, which many analysts believe is already the case.

Russia's finance minister, Anton Siluanov, said February 11 that Russia had told Ukraine it would not agree to restructure the Eurobond, as quoted by Interfax Ukraine. “The return of resources invested at one time in the obligations of another country is very important. For that reason, we are not prepared to offer a postponement or rescheduling," he said.

Siluanov did not say whether Russia might demand early repayment, on publication of statistics showing that a a breach of the 60% debt/GDP limit.

According to Dragon Capital's Bilan, national statistics determining the debt/GDP ratio will be published in March. And if Russia demands early repayment, redemption would be brought forward by six months from December to June 2015. “On the whole it does not make much difference, but it will be difficult to pay now, because our biggest problems with hard currency liquidity are now in the first half of the year. By the end of the year, probably, the situation will become easier,” Bilan said.