Graham Stack in Kyiv -

Ukraine's devaluation is gathering pace, with the local currency dropping to a record low as investors desert the country that's in turmoil. The National Bank of Ukraine's (NBU) ability to stem the fall is hampered by its dwindling reserves, though some critics say the central bank's untransparent refinancing of local banks is making the situation worse.

Ukrainians on their way to work on the morning of February 28 got a nasty shock as banks and exchange booths hung out their new exchange rates for the day: banks are now offering an average of UAH11 for a dollar after the currency's slide has gathered pace during the week. This follows four years of UAH8 to the dollar during the administration of ousted president Viktor Yanukovych.

Devaluation of the hryvnia in fact started under the Yanukovych regime in January, reflecting a growing structural current account deficit combined with dwindling central bank reserves, at the same time as Ukraine's main trading partners, Russia and Kazakhstan, saw their currencies depreciate.

But the fall in the hryvnia accelerated this week as Yanukovych's administration collapsed and top officials were replaced. On February 27, the NBU raised its official dollar exchange rate by UAH0.47 in one go. With banks and bureaux de change prohibited by law from changing exchange rates during the course of the day, it was only on February 28 that the population of this import-dependent country found itself confronted with the new reality.

Faced with an exchange rate collapse as Ukrainians run to the banks to withdraw hard currency deposits or buy dollars, the NBU announced it was imposing limits on withdrawals of hard currency from February 28 to UAH15,000 ($1,500) per day. Same-day withdrawals from deposit accounts will be transacted at the (lower) sell rate for foreign currency, newly appointed head of the National Bank of Ukraine, Stepan Kubiv, said in a statement, explaining that the move was a response to a rush to withdraw hard currency deposits on the part of the population.

NBU's "first big mistake"

Not everyone sees the sharp fall in the hryvnia as the result of an unsustainable policy under Yanukovych and the aftershock of a revolution.

According to Oleh Ustenko, head of the Ukrainian Academy of Science's Centre of World Economy and an adviser to new Economy Minister Pavlo Sheremeta, the blame for this week's collapse in the currency rests squarely on the shoulders of the NBU's new chief. Ustenko explains that it was not the macroeconomic conditions, but UAH4.5bn (roughly $450m) in opaque refinancing loans disbursed to banks during the night of February 25 that caused the devaluation to surge. "Immediately after the new chairman was announced February 24, refinancing took place. Just a small group of less than ten banks was able to get this refinancing," Ustenko tells bne. "This is a repeat of [the banking crisis of] 2008, when the refinancing was terribly untransparent: the main question is whether you have a close relationship with the central bank and if yes, then you can get refinancing."

"What really worries is that they did not announce anything. We found the data only when we saw the correspondent accounts of the commercial banks," Ustenko adds. "The banks then used the funds to play amongst themselves on the currency markets, putting huge pressure on the hryvnia." Ustenko declined to say which banks had received refinancing loans.

The NBU denied any untransparency in its dealing in a statement on February 27. "Banks will be given the necessary volumes of liquidity including cash funds, but exclusively on transparent conditions and with control of their use," it said, adding it would deal "strictly" with breaches of regulatory norms.

And they're off...

bne sources say that at least some of the criticism of the NBU from within the new government may be motivated by the start of the presidential election campaign, with presidential elections slated for May 25.

Ustenko is an adviser to Economy Minister Sheremeta, who is a member of the circle of Petro Poroshenko - a popular and experienced liberal politician who was prominent in the victorious protest movement. Poroshenko was widely tipped to become either prime minister or to chair the NBU. In the event, both posts went to members of presidential frontrunner Yulia Tymoshenko's party, Batkivshchyna, the largest opposition party. While Kubiv was appointed to the NBU, the party's second in command, Arseny Yatsenyuk, was named prime minister. Batkivshchyna's third in command, Oleksandr Turchynov, is parliamentary speaker and interim president.

In a Facebook post on February 27, Poroshenko said that new Economy Minister Sheremeta - whom Ustenko advises - was one of four figures in the cabinet who can "can count on my full support". "Regarding the rest of the government I have not a few questions," Poroshenko wrote. "And a few words, the reason why I was not offered to head the government: unfortunately political fighting is continuing in the country. The rest you can fill in yourselves..."

The comment appears to be a reference to Poroshenko's notorious feud with the recently released Tymoshenko. The feud dates back to the Orange Revolution of 2004 when Tymoshenko became prime minister, only to be dismissed by then president Viktor Yushchenko in August 2005 - a decision Tymoshenko blamed on the influence of Poroshenko, a close ally of Yushchenko.

Poroshenko is likely to run against Tymoshenko in the May 25 presidential election, and she may have wanted to keep him out of government to sideline him. Tymoshenko's second-in-command in Batkivshchyna, Prime Minister Yatsenyuk, declared on February 27 that he would not run for the post of president, leaving the field open for her.

In a further jockeying for position ahead of the election, Vitaly Klitschko's UDAR party stayed out of the new government entirely, apparently to avoid association with unpopular austerity measures that will need to be implemented during the presidential election campaign. The latest opinion polls showed Klitschko to be neck-and-neck with Tymoshenko at the 16-17% mark. But this was when Yanukovych was still in the race (not likely now), polling around 17%; with Tymoshenko still in jail and thus sidelined from media coverage; and with Yatsenyuk in the race.

Running on empty

The official start to the presidential election campaign was declared February 25, after the Verkhovna Rada had voted to allocate around $200m for the polls. But unless there is swift international financial assistance to Ukraine, the country will run out of money long before the election in May.

Prime Minister Yatsenyuk shocked the country in his acceptance speech to the Rada on February 27, stating there was only UAH4.3m - roughly $400,000 - left in the state treasury, suggesting widespread looting by the previous administration before it fled.

Commentators treated the astonishing figure sceptically. "There is a tendency for Yatsenyuk to talk up, or rather down, the current state of the economy," Standard Bank's Tim Ash wrote in a note. "That said, the UAH4.3m number left on the single Treasury account is simply shocking."

Ustenko was also sceptical about Yatsenyuk's figure. "I think the figure is clearly exaggerated, but I do know however that miners at state-owned mines in east Ukraine have not been paid for several months... If nothing is done quickly, they will come here to Kyiv for their money."

While there are not yet widespread reports of salary or pension arrears, there are increasing signs the country is running on empty: according to documents seen by bne, at an energy ministry meeting on February 19, chaired by then deputy minister Andrei Bondarenko, as a first priority state energy managers were ordered to "take all measures to (ensure) transfer of funds from the state treasury and payment of salaries to units responsible for security of Ukraine's nuclear power stations and nuclear objects."

On February 24, according to another document seen by bne, the then acting deputy prime minister for infrastructure, Oleksandr Vilkul, ordered the ministries of the regions and infrastructure, as well as the state railways and state road-building agency to suspend all payments except salary payments.

Luckily, it looks like Ukraine will get some emergency funds from international backers to stave off collapse. German Minister for Foreign Affairs Frank-Walter Steinmeier, meeting his US counterpart John Kerry in Washington DC on February 27, said that the US could fork out $1bn in short term funds for Ukraine, the EU would match this, and the International Monetary fund could also disburse some contingency funds. "Urgent help is needed," Steinmeier said.