Gross Reserves Fell to 5% in August

UKRAINE - In Brief 09 Sep 2013 by Dmytro Boyarchuk

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Gross foreign reserves declined $1.1 billion (4.7% m/m) in August down to $21.65 billion or 2.4 months of future imports, according to the Central bank report on September 6th.It is the lowest level of gross foreign reserves over the last seven years.  Still in 2006 when Ukraine had reserves near $20 billion it was more than 5 months of imports. QE3 tapering plans against the backdrop of steady trade deficit and continued large external redemptions are the main reasons for the fourth month of consecutive gross reserves decline.  In particular, if at the start of the year Ukraine was able to raise externally $2.25 billion for Minfin and $1.1 billion for state banks, after Fed messages in May there has been no Ukraine’s Eurobonds placements.Now it is a big question if Ukraine is able to borrow some money to compensate steep decline of gross reserves.  Media started to talk about $750 million loan from Russian banks. However, after escalated trade relations between Kyiv and Moscow and in view of harsh messages from Kremlin about approaching default for Ukraine it is difficult to say how realistic this loan might be.In our opinion, chances for the IMF agreement are negligible.  In case of the agreement with the Fund (and increased gas tariffs) political rating of Yanukovitch falls 100% while walking on the edge with slim reserves still gives a chance to avoid political costs.  And that is what the ruling group is doing – taking the risks hoping they will be lucky this fall as a year ago.Against this backdrop and in view of record high fiscal deficit we see elevated risks for nation currency through the upcoming months. The authorities try to scare off households from forei...