Hryvnia drops in value by 20 percent Gas shortage seen as cause of destabilization (08/15/99)

Hryvnia drops in value by 20 percent Gas shortage seen as cause of destabilization

by Roman Woronowycz
Kyiv Press Bureau

KYIV - A gasoline shortage in Ukraine has caused the destabilization of the hryvnia and a 20 percent drop in its value against the dollar in the last two weeks.

The Ukrainian currency, which had held at around 4 hrv to the dollar on the Ukrainian currency exchange for most of the year, began to fall about a week after gas prices more than quadrupled in the country almost overnight beginning on July 16. Although prices have fallen back by more than a third from a high mark of around 6 hrv for a liter, the currency has continued to decline.

The currency plunge became critical on August 9 when the hryvnia surpassed the upper limit of the currency corridor set by the National Bank of Ukraine at 4.60 hrv to the dollar for 1999. The is a value parameter set by the NBU to foster confidence in the stability of the Ukrainian currency against the dollar and other foreign currencies.

On August 10 the foreign exchange rate for the hryvnia dropped to 5.05 to the dollar before strengthening some.

NBU Chairman Viktor Yuschenko has refrained from using any of the $1.2 billion in foreign currency reserves that the bank holds because such an intervention would not support the hryvnia. He said the hryvnia will only strengthen after the government puts together effective measures to stabilize the market for oil products.

"If we get a balanced situation in the market, we don't exclude that we will resort to [an intervention]," said Mr. Yuschenko on August 11.

A day earlier, as the currency slightly rebounded, the NBU chairman said he saw no reason to expand the corridor and that the currency would naturally, move back within it. "It has been an unpleasant brief episode," said Mr. Yuschenko, who has been appearing on national television regularly to contain some of the currency damage and build trust in the hryvnia, which to some degree has been propelled downward by public mistrust in the inherent stability of the currency.

The hryvnia's fall has been exacerbated by a run, albeit a modest one, on currency exchange points, where Ukrainians have been changing their hryvni into dollars in anticipation of further devaluation.

Mr. Yuschenko has stated that the National Bank of Ukraine would blackball banks that have been exchanging their own hryvni for dollars; he offered a list of 12 such banks, among them several major financial players.

Mr. Yushchenko's restraint has been supported by President Leonid Kuchma, who on August 7 said the fall of the hryvnia was not totally unexpected.

"Look at the state of the economy," said the president. Do you think that the exchange rate that we had was realistic given our situation?"

But several days later the government was ready for a limited intervention.

Both Vice Prime Minister of Economic Reforms Serhii Tyhypko and the president's chief economic aide, Pavlo Haidutsky, called for the NBU to intercede to keep the hryvnia within the currency corridor after it had strengthened to 4.50 hrv against the dollar the morning of August 11.

"Today, when the turmoil on the oil product market is subsiding, an opportunity has appeared to use the potential of an intervention to improve the situation on the foreign currency market for supporting the hryvnia," said Mr. Haidutsky.

He explained that 90 percent of the hryvnia's drop in value can be attributed to the sharp rise in oil products. He said that had the NBU intervened earlier, oil and gas traders could have made even more money by converting their already usurious profits from the astronomical rise in oil prices into dollars. He said that it was better to have let the hryvnia float, which deflated the added income the traders could have made.

The same day the NBU and the government issued a joint statement in which they detailed a plan to keep oil price instability from affecting the strength of the national currency in the future. The plan calls for governmental non-interference in price formation and oil distribution, and incentives to lure oil and gas traders back into the Ukrainian market.

The government has said the acute oil and gas shortage that hit Ukraine in mid-July was caused by a drastic depletion of in-country reserves after the harvest season went into full swing. The marketplace would have replaced the stocks naturally, but many of the trading companies were leery of the Ukrainian market after the government had stopped subsidizing import tariffs.

In addition, many of the firms that had supplied Ukraine with oil and gas, most Russian-based, lately have been turning to other markets, where they can demand a higher price for their product.

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