Ukraine Floats Currency. It Sinks.

Feb 5, 2015 12:06 PM EST
By Leonid Bershidsky

Only yesterday, the Belarusian ruble was the year's worst-performing currency in the world. Today, after Ukraine's National Bank effectively floated the hryvnia, it overtook the neighboring country's currency in a race to the bottom. In the weeks ahead, despite expected financial aid from the International Monetary Fund, the hryvnia's fall will be hard to top.

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 Ukrainian currency is now down 35 percent for the year, joining the Belarusian ruble and the Russian one (with drops of 29 percent and 15 percent, respectively) as the three worst-performing currencies in the world.

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http://www.bloombergview.com/articles/2015-02-05/ukraine-floats-currency-it-sinks-