20 June 2014
Kyiv Post publishes commentary by Roman Stepanenko on the National Bank of Ukraine requirement for exporters to sell half of their foreign currency-denominated revenue

Central bank stuggles to give shaky hryvnia a softer landing.

National Bank of Ukraine ex-governor Stepan Kubiv let the hryvnia freely float when he was appointed to the post more than three months ago, but he kept a measure in place to mandate foreign currency earners to convert half their revenue to hryvnias.

To preserve Ukraine’s dwindling foreign reserves, the National Bank of Ukraine requirement for exporters to sell half of their foreign currency-denominated revenue has been in effect since Nov. 19, 2012. The measure’s latest extension took place on May 20 and will stay in effect until Aug. 20.

However, the provision doesn’t apply to indi­viduals who earn less than Hr 150,000 in for­eign currency. The norm, instead, applies only to business entities - corporate or individu­al ones.

Individuals who receive payments that ex­ceed the threshold do not have to personally sell the currency themselves. Banks that re­ceive funds do this for them, explains Andriy Sydorenko, a lawyer for Ilyashev and Partners firm.

Ukraine’s exports reached $63.3 billion in 2013, thus half of this amount was mandatorily converted into hryvnias.

The measure initially took effect under the NBU governorship of Serhiy Arbuzov, who is currently wanted by authorities on suspi­cion of embezzling state assets. He and his successor at the central bank, Ihor Sorkin, were obsessed with keeping the hryvnia pegged closely at Hr 8 to the U.S. dollar, and in quelling the appetite for foreign currency. Meanwhile, ex-central bank governor Stepan Kubiv had let the hryvnia mostly float free­ly, a monetary policy inconsistent with making it compulsory to sell half of foreign curren­cy earnings.

Since the beginning of the year, the hryvnia has lost as much as a third of its value, sink­ing to 13.3 to the dollar in the second half of April, before settling recently closer to 12.5/$1. Mandatory sales of foreign currency earn­ings didn’t help much to avoid devaluation. Public panic following the political crisis that saw the overthrow of former President Viktor Yanukovych’s regime is responsible for the sharpness of the decline. Russia’s annexation of Crimea and war against Ukraine in the east­ern oblasts haven’t helped any.

Sydorenko of Ilyashev and Partners says that, theoretically, the NBU requirement is advantageous for importers as it pushes the hryvnia rate up, which leads to cheaper prices for foreign goods in hryvnia terms. However, this is not beneficial for exporters, who can’t hold on to hard currency in order to sell it when the hryvnia becomes cheaper, he adds.

The measure seems to be working, at least in terms of reducing the demand for hard cur­rency on the interbank market, saysRoman Stepanenko, head of the banking and finance department at Egorov Puginsky Afanasiev & Partners. There is now more foreign currency on the market and the NBU does not have to make monetary interventions.

However, the NBU did not have too many instruments at its disposal to keep the hryv­nia from falling and it is still debatable wheth­er the regulator should have kept the hryvnia from weakening, adds Stepanenko. Had the central bank not conducted such a stringent monetary policy since 2010, when Yanukovych came to power, the hryvnia’s landing would’ve been much softer than this year’s devaluation shock.

Olena Shcherbakova, head of the mone­tary policy department at NBU, thinks that the provision’s short, three-month extension is a sign of the central bank’s optimism about the country’s economic prospects. By contrast, the previous extension had a six-month term.

“Reducing the period of the measure’s valid­ity can be explained with better market expec­tations in the context of resumed cooperation with international financial institutions,” said Shcherbakova in a statement published on the NBU website on May 19.

She mainly means the May 1 agreement with the International Monetary Fund to re­ceive a $ 17 billion two-year loan with a 3 percent interest rate aimed at stabilizing Ukraine’s state budget.

However, the market should not be overly optimistic in its expectations, thinks Ilyashev and Partners’ Sydorenko. The current eco­nomic situation remains complicated and will likely compel the central bank on Aug. 20 to prolong the mandatory sale of export revenue in foreign currency for another term.

Iryna Yeroshko