Ukrainian hryvnia falls as Russian invasion fears rise

19 January, 09:18 AM
Author: Petr Shevchenko

Russian President Vladimir Putin may have failed to intimidate the United States and NATO with his threatening behavior regarding Ukraine, but that doesn’t mean that investors, and the forex market, aren’t spooked: The Ukrainian hryvnia has hit a new low this year, and Ukrainian eurobond yields in U.S. dollars are riding at about 27 percent.

As of Jan. 17, one U.S. dollar is currently worth UAH 28.28 on the interbank market.

NV Business spoke to a host of experts on this subject, and they’re all of one mind: Foreign investors are afraid that Russia will invade Ukraine. We take a look at how much further the hryvnia can fall.

Why the hryvnia is plunging against the U.S. dollar

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“Buying gas is still a key topic for Ukraine. However, the hryvnia's depreciation can be traced back to geopolitics rather than economic prerequisites,” said Anton Kurinny, a top analyst at OTP Bank, in a comment to NV.

On Jan. 13, media outlets worldwide reported on the news that the United States and NATO were unable to strike a deal with Russia to guarantee Ukraine's security. Unfortunately, that was the same day that Ukrainian eurobonds went on the market. Their yield, marked for repayment in September 2022, exceeds that on domestic government bonds denominated in hryvnias.

“After the first round of the U.S.-Russia talks, foreigners took to decision to sell off their Ukrainian government bonds and eurobonds,” said Kurinny.

“That inevitably put pressure on the exchange rate and eurobond yields.”

The situation resembles the events of early March in 2020, says Raiffeisen Bank top manager Serhiy Kolodiy. At that point, when investors started selling out their eurobonds en masse, their value plummeted while yields soared.

Kolodiy is certain that Russian escalation on Ukraine’s border – meaning the Russian military buildup that has seen over 100,000 troops idling on the Russian-Ukrainian border – and the looming threat of Russian invasion are making the Ukrainian currency extremely vulnerable.

The National Bank of Ukraine, the country’s central bank, has already sold half a billion U.S. dollars in an attempt to arrest the fall – and it hasn’t worked. The lessening foreign interest in domestic government bonds is another blow to the hryvnia’s value.

What does the future hold for the hryvnia? Will the currency exchange stay at 28 hryvnias to the dollar?

Kolodiy is certain that there are no purely economic reasons for such a rapid drop in the Ukrainian currency's value. But geopolitics has always affected the markets.

Most experts believe that if the risk of Russia's invasion of Ukraine does not fade, the Ukrainian hryvnia will keep plummeting. The currency's value could quickly drop to UAH 29 per dollar, and perhaps even further.

On the other hand, if Putin blinks and withdraws his troops, the hryvnia will almost definitely make a comeback, Kolodiy told NV.

Oleksandr Parashchiy, the head of analytics at Concorde Capital, also agrees that the hryvnia's future will to a large extent depend on Russia's actions. Parashchiy is confident that if the threat of an invasion diminishes, the demand for Ukrainian bonds would quickly recover. However, even that would be unlikely to bring demand back to its late 2021 levels.

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