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Ukraine Currency Extends World’s Worst Drop on Peg Policy Shift

The hryvnia slid past 10 per dollar
for the first time as Ukraine’s central bank ended support for
the currency to shore up reserves amid political turmoil.

Ukraine’s currency lost as much as 7.4 percent to 10.50 per
dollar, before trading at 10.15 as of 6 p.m. in Kyiv, data
compiled by Bloomberg show. The central bank has adopted a
flexible exchange rate, CNBC reported, citing Sergiy Kruglik,
director of international affairs, who didn’t specify when
policy shifted. The hryvnia slumped 19 percent in 2014, the
world’s worst performer, surpassing drops of peers in Argentina
and Kazakhstan, where central banks also allowed devaluations.

International reserves fell to an eight-year low of about
$15 billion as the regulator spent dollars to stem the hryvnia’s
drop, Natsionalnyi Bank Ukrainy Governor Stepan Kubiv said
yesterday in an interview, the day after his appointment.
Ukraine’s interim government is seeking as much as $35 billion
in financial aid to avoid a default after Viktor Yanukovych was
ousted from the presidency last week amid deadly protests.

“This is a forced decision,” Vladimir Osakovskiy, chief
economist at Bank of America Corp. in Moscow, said by phone
today. “It was triggered by the drop of FX reserves.” A rate
of 10 hryvnia per dollar is “fair value,” he said.

Ukraine’s policy makers lowered the official exchange rate
by 15 percent since Feb. 6, the day before the central bank
weakened the administrative currency peg for the first time
since July 2012 and phased in capital controls.

‘Flexible’ Rate

Natsionalnyi Bank Ukrainy is the latest central bank to
loosen its grip on exchange rates amid a rout in developing-nation assets this year. Argentina allowed the peso to plunge
the most in 12 years on Jan. 23 in an attempt to shield its
reserves, while Kazakhstan devalued the tenge’s trading band by
19 percent on Feb. 11 to boost competitiveness.

The hryvnia has weakened for three reasons, Kruglik said,
according to a video on CNBC’s website. “First crisis. Second
panic of the people. Third we agreed policy of the flexible
exchange rate so it should be flexible and it will be balanced
somewhere when the market will establish it.”

Three-month non-deliverable forwards for the currency
weakened 7.9 percent to 11.15 per dollar, according to data
compiled by Bloomberg.

Reducing Risk

“Controlled currency depreciation in moderate steps could
reduce risks of widespread currency panic,” Deanie Marie Haugaard Jensen, an analyst at Nordea Bank AB, said in an e-mailed note today. A weaker hryvnia “will help correct some of
the balance of payment problems and bring relief to
international reserves,” she said.

The nation’s bonds maturing in April 2023 fell to 85.9
cents on the dollar today from 86.9 yesterday. The yield on the
securities rose 42 basis points yesterday, an increase driven in
part by Russia’s deputy finance minister Sergei Storchak who
said Ukraine faces a “high” chance of defaulting on its
sovereign debt. Russia last week suspended its $15 billion
bailout to the former Soviet republic, first unveiled in
December.

Ukraine faces the equivalent of about $15 billion of debt
repayments through the end of 2015, according to data compiled
by Bloomberg, including a $1 billion note maturing in June. The
price of those securities fell to 92.66 cents on the dollar
today from 94.12 yesterday.

New Government

Currency weakness also comes as the nation contends with
the most intense period of political turmoil since gaining
independence from the Soviet Union in 1991. Clashes last week
killed more than 80 people before the European Union brokered a
peace agreement to stem the violence, and Ukraine’s parliament
voted to remove Yanukovych from power.

Lawmakers are due to vote on the formation of a new
government tomorrow, a step that needs to happen to help the
administration secure financing, Acting President Oleksandr Turchynov said yesterday. The U.S. and the European Union have
pledged support, and the International Monetary Fund said
yesterday it was likely to send a team to Ukraine soon.

Tensions flared in the southern Ukrainian region of Crimea
today as demonstrators pushing for a referendum on joining
Russia clashed with members of the Tatar ethnic minority.

The ruble headed for a record low against the central
bank’s dual-currency basket and Russian equities extended
declines after the Interfax news service reported President
Vladimir Putin ordered military exercises amid deepening
tensions in Ukraine. The review of combat readiness in western
and northern Russia isn’t connected to events in Ukraine,
Interfax said, citing Defense Minister Sergei Shoigu.

The WIG-Ukraine Index of Ukrainian companies traded on
Warsaw stock exchange fell for a second day, losing 3.9 percent.
The country’s UX Index (UX) of stocks climbed 2.6 percent, extending
its five-day advance to 29 percent.

To contact the reporters on this story:
Andras Gergely in Budapest at
agergely@bloomberg.net;
Maria Levitov in London at
mlevitov@bloomberg.net

To contact the editor responsible for this story:
Wojciech Moskwa at
wmoskwa@bloomberg.net