Gross foreign reserves decline 12.8% against messy situation at the forex

UKRAINE - In Brief 07 Feb 2014 by Dmytro Boyarchuk

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We observe very ‘mysterious’ developments at the forex market since the start of the year. In January forex daily turnover doubled (to USD 2.3 billion) from average daily turnover in 2013 and on some days even exceeded USD 5.0 billion. Still the sources of the demand remain unclear. There was no currency panic among population and large part of bankers did not observe extra demand from their clients. At the same time, bankers reported some limited number of players at the forex generating the demand. We suspected the Party of Region representatives to rush for foreign cash against the backdrop of escalated conflict (the Central bank would not bless that large-scale foreign cash purchases to common people); however, we do not have any proves to this hypothesis. In any case, in light of strengthened forex demand the Central bank allowed hryvnia to break 9.0 hryvnia per $1 level what indeed made people really nervous. We do not have statistics but after dollar reached 9.4 hryvnia mark at the start of February many people indeed rushed to the banks. In return the Central bank strengthened interventions and yesterday imposed extra limitations on operations with foreign currency. In particular, the Bank envisaged very complicated and time-consuming procedure for foreign currency purchase for legal entities and individual. The regulation was enacted today on Feb 7. After all the news the Central bank informed that in January gross foreign reserves declined by USD 2.6 billion down to USD 17.8 billion (near 2.1 month of imports), which is the largest contraction since 2011. The Central bank reported USD 1.7 billion interventions and USD 1.1 billion paid on external liabilities....