Dip in Ukrainian exchange rate blamed on Ukrgazenergo, gas sphere shakeups

The exchange rate of Ukraine's gryvna unexpectedly dipped last week - From yahoo finance

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.

12 responses to “Dip in Ukrainian exchange rate blamed on Ukrgazenergo, gas sphere shakeups

  1. I’m off to Odessa for a few days, so will be out of touch until Thursday. If anyone wants, please feel free to add any relevant commentary and links regarding some of these ongoing situations in this comments field. Thanks!

  2. continuation of UA Pravda interview with Kolomoysky and DniproEnergo & RosUkrEnergo come up

  3. “Privat Group carries out due diligence of RosUkrEnergo”

  4. Thanks for the comments. I thought the interview was very interesting, IIU, and went ahead and translated parts of it in my most recent post.

    As for the inflation, a Ukrainian friend of mine out of the blue started complaining to me about it last week, really the first time that I’d heard much about the issue from the young professional set. It really is an important issue now.

  5. “It really is an important issue now.”

    I am astonished that people have been so long suffering with the price of a quart of cooking oil going over 12 hv. way up from 5 or 6 hv. and a report states that in the Donetsk area people spend 62% of their money on food. This is not sustainable. And prices are expected to go up – though supermarkets have been ‘threatened’ into not implementing major increases. This is a major crisis and unless things start turning around Tymo’s numbers will start plummeting and she will be in no position to win Pres. election. But then again if she does not want to go as a candidate, and Yush does, he will not win a second term and Yanu will win. Interesting scenario.

  6. Kind of reminds me of the US situation — visceral issues like Iraq (NATO, in Ukraine) are thrust in the spotlight, while the economy is really what will be most important and most affect the population.

  7. “Kind of reminds me of the US situation”

    In US poll 81% thought that the country was going in the wrong direction while 60% thought that their financial situation was in a “fairly good” state while second most 20% thought it was in a bad state. unemployment is 5% and such items as gas and the cost of health care are main areas of complaint. Any poll also tests any responders sense of optimism/pessimism and it has been shown that pessimists test better on reality testing than optimists. Perhaps Americans have been so far relatively isolated via credit card debt and optimism (low unemployment) to be unaware of how bad things really are economically? (sorry off topic but could not resist)

  8. By the way, I read an article yesterday saying that in the past few days, since Tymoshenko made her anti-inflation moves involving “voluntary” price caps in food stores, the prices of some food items have begun to decrease. Pasta, sugar, rice, things like that, dropped by maybe 20 kopeks or so. Not sure how scientific article was, but perhaps a start of a trend.

    Russia tried similar anti-inflation measures late last year, but not sure how they turned out…

  9. Now seeing reports that in US that price increases have hit food prices.

    That is when people really start to feel the pinch and that is why I am shocked at Ukrainians long suffering attitude because food prices have been going up for close to two years. But there is that tipping point between bearable and unbearable and once it crosses the line major crisis. Well the thought is that the major drop will come with the harvest (hope for a really bumper crop and superlative growing conditions.) Kazakhstan also I think did the same with price controls and it held down inflation a bit but the really worrying story is that farmers in Ukraine are not getting the funds that are due to them and this at plating time —– this is DISASTEROUS. If they don’t plant, NO harvest.
    What for the love of Mike I DO NOT UNDERSTAND AT ALL – is why the Min of Agr after all this time, is still in office? A Socialist? Whose brainchild was this? And why is he still walking the hallways and sitting in on Cabmin meetings???? Nightmare. Disasterous policies for years now from that office and now – no money to farmers or just a trickle? And the numbers are scary – ie 55 hv to be given out and not a kopek has been passed out. AARGH – sorry about the rant but it just boggles me, it really does and on marks of economy and agri, very low marks from me to current CabMin.
    And then there is the following story – sugar beet farmers and villagers trying to keep manufacturing company open and have not been paid for their product at all.
    Govt should really be working to keep jobs in the burbs (as is now the policy in China)
    or more of the ‘death’ of the villages and then who will work the fields? Immigrants?

  10. Hans,

    Again sorry about the rant but price controls, export quotas are not going to deal with the roots of inflation.

    And correction to my post the amt alloted to be distributed to farmers was 55 mil hv(need to doublecheck if the ua mil refers to millions or billions) but so far nothing has been distributed.

  11. According to last year’s edition of the Big Mac Index, the hryvnia was 40 percent undervalued.

    Despite the weakening U.S. dollar, the exchange rate has remained remarkably “stable” during the last several years.


    I call this export-friendly phenomenon McDonbas: holding the Ukrainian national currency hostage to commodity exports. (I recall Yuriy Boiko’s solemn vow to defend the dollar as “our national currency.”)

    As the dollar plunges to all-time lows, Ukraine’s dollarization further erodes Ukrainians’ meager inflation-hit incomes, the lion’s share of which goes into groceries and utility bills.

    During the recent slide, people rushed to dump their dollars only to have the banks lower the exchange rate.

    Under the McDonbas economic model, no significant revaluation appears likely. However, should any revaluation steps be taken, they should be measured and augmented with de-dollarization and diversification efforts.

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