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Thursday, February 05, 2015 3:25 PM

Ukraine Floats the Hryvnia: It Sinks, As Expected, Down 45% Today; Carpetbaggers Take Over

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On February 3, I posted a chart of the "official" exchange rate at 16.24 hryvnias to one US dollar. In reality, the true exchange rate on the black market was on the order of 21.5 hryvnias to the dollar.

See Black Market in Ukrainian Currency Masks True Extent of Decline; Banks Impose 30% Foreign Exchange Fee; Freely Floating Hryvnia Announced.

Rumor had it that Ukraine would float the currency today. That rumor was correct as was my call as to what would happen. This is what I said on February 3:

How Low Will It Go?

From 8 [a valuation just over a year ago] to 21.5 represents a 62.7% decline. And I suspect it won't stop there. Why should it?

A plunge from 8 to 30 would be a 73% decline in just over a year. And that's my initial guess barring some quick monetary rescue by the IMF.

If and when the Ukrainian National Bank does float the currency, other sites will note the "shocking overnight" plunge.

In reality, the plunge has already taken place, over time. The charts just don't show that yet.

Hryvnia One Day Price Action

Chart courtesy of Bloomberg. Click on chart for sharper image.

The decline shown today is 45.13%, but as stated above, that decline really occurred over time, as measured by the black market.

What are those intraday gyrations all about? I strongly suspect intervention to prevent an even bigger plunge. If so, another collapse is coming up.

In the last year the Hryvnia sunk from 8.29 to the dollar to 24.35 to the dollar. That's a decline of 66%, not far off my 73% projection.

It will get there, and probably more unless the IMF steps in very soon.

Ukraine Floats Currency, It Sinks

Bloomberg reports Ukraine Floats Currency, It Sinks.
In recent months, Ukraine was probably pursuing the most clueless exchange rate policy in Europe. In the run-up to the October parliamentary election, President Petro Poroshenko used his good relationship with National Bank governor Valeria Gontareva to persuade her to keep the exchange rate below 13 hryvnias to the U.S. dollar. In late September, banks were ordered not to sell more than 3,000 hryvnias' worth of foreign currency per day to their customers. At the same time, the National Bank started holding special auctions in which it sold $3 million per day to banks to set a so-called "indicative rate" that they were supposed to follow in transactions with clients.

After the election, even that artificial rate dropped quickly, moving to 16 hryvnias per dollar in a matter of days. The banks, however, only displayed that rate at exchange offices, where citizens could barely buy any foreign currency anyway. Among themselves, they traded at rates that were about 20 percent higher than the official one. For ordinary Ukrainians, there was also a lively black market, where rates were closer to the interbank ones than to the official benchmark.

Today, Gontareva announced the end of indicative auctions, allowing the banks to move to a single, market-determined rate. The result was a collapse of the hryvnia's value.

At a press conference today, Gontareva vehemently denied that she had agreed to an exchange rate of 25 hryvnias to the dollar with the IMF. "It's not even being considered," she said. But at the time of this writing the hryvnia was trading at 24.85 to the dollar.

The National Bank's decision to float the hryvnia will hardly change anything for citizens or businesses -- they just won't have a useless official exchange rate to laugh at. Ukraine saw 25 percent inflation last year; this year, prices will keep rising at a fast clip.

Today, the National Bank said its international reserves had shrunk to $6.4 billion at end of January.

The Ukrainian financial authorities' blundering has worsened the country's already desperate economic situation. The IMF is effectively setting Ukraine's policy now, because it is the country's only reliable source of foreign currency. It needs to focus on preventing Ukrainian politicians from making stupid self-serving decisions like the ones that caused the hryvnia debacle and spawned the black market. The Russian-instigated war in the east is not Ukraine's only problem: When it inevitably ends, bureaucratic incompetence, plaguing the country's transition to a modern economy, will remain behind.
Carpetbaggers Take Over

The last paragraph above says it all. The only thing I disagree with is the reference to the "Russian-instigated" war.

Make no mistake, this was a "US-instigated" war. Russia merely stepped into it, in support of separatists.

The IMF Carpetbaggers have arrived. Total destruction of the country is at hand.

Mike "Mish" Shedlock

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