|The exchange rate of Ukraine’s gryvna unexpectedly dipped last week, allegedly due to financial moves arising from instability in the gas sphere – Graph from finance.yahoo.com|
Over the past week and a half, the exchange rate of the Ukrainian gryvna (UAH) versus the US dollar has fallen by about 5% at exchange stations across Kyiv. While the official central bank rate has remained at UAH 5.05 to $1, most of the exchange booths littered across the city have dropped their selling rate to around UAH 4.80.. The buying rate has remained closer to UAH 5.00.
Besides frustrating those of us who get paid in dollars, the dip in the rate has a significant effect on the large number of Ukrainians who keep their savings in dollar form. Indeed, much of the economy is based off the dollar benchmark, with distrust in the local currency stemming from wide rate fluctuations and high inflation in the 1990s. The continued heavy reliance on the dollar in Ukraine has remained despite a relatively long period of stability. (Inflation levels are excessively high now, however.)
When exchanging some dollars last week, I asked the woman working at the booth if she knew of the reason for the decline. “No one knows,” she said, shrugging her shoulders. Now it appears the adjusted exchange rate can be traced back to–what else–problems in Ukraine’s natural gas sphere.
The lowered exchange booth rate is a reflection of the decline interbank exchange rate (represented in the graph above), punctuated by a sharp drop on March 24th to nearly UAH 4.90. The fall began last week, as a source in the National Bank of Ukraine (NBU) told Kommersant:
The market was expecting on the 20th or 21st of March the traditional output (offering) of Ukrgazenergo for the purchase of currency on the bank exchange, but the expected offer of grynas didn’t happen.
From what I understand, Ukrgazenergo usually will convert the gryvnas it receives for its gas sales within Ukraine to dollars, which it pays to RosUkrEnergo for gas imports (which are calculated on dollars, i.e. $179.50). Because Ukrgazenergo appears to be on its way out of the gas supply scheme, this influx of grynas didn’t occur and pushed the exchange rate down.
In response, the NBU allowed the state oil and gas company Naftogaz to exchange currency on the market in the place of Ukrgazenergo. It now appears that Naftogaz is continuing its gradual takeover of Ukrgazenergo’s duties, key to PM Yulia Tymoshenko’s goal of ridding Ukrgazenergo and gas intermediaries from the supply scheme.
Recall that the latest gas contract between Naftogaz and Gazprom explicitly gave the duties of purchasing gas at the Ukrainian border to Naftogaz, a job previously held by Ukrgazenergo. (Who they buy it from–Gazprom or RosUkrEnergo–is not specified.) This transition, which appears to be happening even though we are still waiting for all the technical and commercial contracts to be signed which would make the agreement official, seems to be the reason for the currency’s tumult.
Ukrgazenergo asserts that the reason it didn’t follow its traditional pattern is that it lacked the currency to due so, and should no longer be expected to fill this role. Its press secretary Vitaly Kisel asserted that the company hadn’t been receiving payment from Naftogaz since January:
“In accordance with the external economic contract, since the new year Ukrgazenergo buys natural gas solely for the needs of the industrial sector,” he said. “Naftogaz Ukrainy in its turn uses gas from the external supplier RosUkrEnergo for the consumption of the gas transport system, budget consumers, and the communal heating plants. It’s clear that in the absence of a contract for these categories of consumers, Naftogaz has not settled accounts with RosUkrEnergo for the gas nor has it purchased currency for this goal,” asserted Mr. Kisel.
Because the relevant contracts have not been drawn up, Naftogaz being allowed to convert currency on the exchange market is technically illegal, as participants must have documented proof of their economic transactions. In the interest of financial stability and continued gas flow, however, it appears that the NBU and the government nonetheless will allow Naftogaz to undertake this task.
The entry of Naftogaz into the exchange market, however, may have cost the energy company a few million dollars due to the purchase of dollars at the depressed rate. The company is also in the process of restructuring its financial operations to go through the state-owned Oshchadbank, with the goal of streamlining payment procedures.
Naftogaz’s currency bailout is also being connected to Tymoshenko’s program–administered via Oshchadbank–of returning portions of lost savings from the former USSR’s savings bank (Oshchadbank’s predecessor). This populist program is about to enter its second wave of repayments, and Tymoshenko was worried that the exchange rate dip would have resulted in uneven results. The original repayments of $200 were calibrated on a UAH 5.05 exchange, so Tymoshenko apparently demanded this next round also adhere to this same rate. Enter Naftogaz to drive the rate back up again, essentially killing two birds with one stone.
Tymoshenko and the current government have hinted at a gryva re-evaluation, strengthening its worth against the dollar in an effort to fight inflation. While they may eventually wish to drop the exchange rate to around UAH 4.80, now is apparently not the right time.
Meanwhile, the Ministry of Fuel and Energy put in price caps on gasoline, which has risen by about 20% in the past month or so. The price increases stem both from rising global oil prices as well as internal problems. Kremenchug’s output is still down, refineries are struggling to adapt to new quality control laws, and Ukrnafta–Ukraine’s largest oil producer–halted deliveries to its filling station network (the country’s largest) in late February.
Based on the oil sphere problems and the natural gas situation, it’s reasonable to suggest that stability in the energy sphere could help the country’s economy. Assuming, of course, that populist measures don’t tank it even further.
Note: Interesting commentary from current and former officials at the Kyiv International Energy Club Q-Club, a lobbying group concerned with promoting general increased energy sphere performance along with greater energy security for Ukraine.