Ukraine Risks Triggering Defaults With Ban on Hryvnia Trading

By Emma O’Brien

April 16 (Bloomberg) -- Ukraine may stoke corporate defaults as new foreign-exchange restrictions make it harder for companies to buy the $10 billion in foreign currency they need to repay debts due by October, BNP Paribas SA said.

Policy makers’ ban on trading currencies for future settlement on the inter-bank market may limit dollar purchases, said Serhiy Yahnych, head of fixed-income research in Kiev at AKIB UkrSibbank, one of Ukraine’s top five financial firms by assets and a unit of Paris-based BNP.

The former Soviet republic has been increasing restrictions on its currency after the hryvnia lost 35 percent against the dollar in the past six months, the second-biggest decline worldwide. The Washington-based International Monetary Fund provided a $16.4 billion loan to Ukraine as the global financial crisis reduced demand for the nation’s exports.

“I see a prerequisite for increased risks because of this increased control,” Yahnych said in a telephone interview from Kiev. “They now have a much more limited access to purchases.”

President Viktor Yushchenko urged regulators to leave “no stone unturned” in investigating banks for speculating on the currency last month. The hryvnia plunged as the nation’s current-account deficit widened 76 percent to $3.75 billion in the fourth quarter from the previous three months. Three of the country’s 20 largest lenders need injections of state funds, the central bank said last month.

Directive

Repayments by local companies of foreign-currency debt will peak in the second and third quarters, with about $10 billion due on bonds and loans, according to BNP estimates.

The hryvnia added 0.4 percent to 8.0800 per dollar in Kiev yesterday, and gained 0.7 percent to 10.6579 per euro, according to data compiled by Bloomberg.

The Natsionalnyi Bank Ukrainy ordered local banks in March not to buy or sell hryvnia at a level weaker than the average daily rate calculated by policy makers, and warned lenders not to post lower rates on their Web sites and on information systems such as Bloomberg and Reuters.

New rules coming into force on April 18 will require banks to complete foreign-exchange transactions on the day the deal is made or the next day, shorter than the three days allowed now, said Yahnych, whose bank received a copy of the directive.

Need Proof

Lenders seeking dollars and other currencies from the Natsionalnyi Bank will also need to show that the money is being used to repay foreign-denominated loans that have been converted into hryvnia, said Yahnych.

“If anything goes wrong and a bank doesn’t have permission to buy currency, then it could make repayment more complicated,” he said.

Serhiy Kruhlik, head of the central bank’s external relations, didn’t answer calls to his mobile phone over the past two days seeking comment. Ukraine needs more “administrative measures” to control the currency, Petro Poroshenko, head of the central bank’s advisory council, said March 31.

Local companies had been using the forward market for hryvnia as a way to hedge against a weaker exchange-rate increasing the cost of repaying debt in foreign currencies, Yahnych said. “The NBU wants a harder grip on the market so it is prohibiting everything that is not standard, every operation that could be used to speculate on the currency,” he said.

Default Swaps

The central bank plans to provide as much as 201 billion hryvnia ($25 billion) in loans to banks this year, according to BNP. That’s “a massive injection of money” that could potentially be used to bet against the hryvnia, said Yahnych.

Loans from the Natsionalnyi Bank contributed to 70 percent of all bank refinancing so far this year, according to Amsterdam-based ING Groep NV.

The cost to protect Ukrainian debt using credit-default swaps is the second-highest in the world behind Argentina, which halted payments on $95 billion of debt in 2001, according to Bloomberg data. Industrial production plummeted more than 30 percent for a third month in March as output of steel, the country’s biggest export earner, slid 43 percent, a government report yesterday showed.

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net