As Default and Devaluation Loom, Ukraine Bails Out Oligarchs and Hammers Everyone Else

Today, the Ukrainian Central Bank announced changes to foreign exchange laws in a bid to help oligarchs while hurting the average Ukrainian.

The limit on company's foreign exchange holdings has been altered to allow 25% of revenues to be held in non-hryvina denominated currency from a prior 0%. At the same time the Central Bank cut the maximum an individual citizen of Ukraine is allowed to transact to 3,000 hryvina (around 230 dollars) from 15,000. 

The move is all too reminiscent of Yeltsin's decision to default and devalue the Russian Ruble in August 1998. The previous 12 months had seen the Russian Central Bank paying out 27 billion dollars to defend the currency (around 6% of GDP at the time). What they were really doing was letting many of the well-connected convert their Ruble holdings ahead of the devaluation. 

The Ukrainian Central Bank has so far lowered its foreign currency reserves from 20 billion to 15 billion in the past 9 months. This is on top of 1 billion dollars of IMF money and 1.5 billion of World Bank money which has been injected, implying that they have spent 7.5 billion propping up the currency, equivalent to about 8% of GDP. This is if we trust their excel spread-sheet from August, I would not be surprised if we discover five years later that the real amounts were much larger owing to theft. 

Last Friday the Central Bank sold 80 million dollars to Ukrainian institutions, this will be stepped up to 200 million dollars on Tuesday 23rd September. The minimum buy-in amount is 500,000 dollars-worth of hryvina - an amount in spare cash that only the largest oligarch owned institutions can afford. 

As written earlier in my article about their 22% collapse in industrial production in August, Ukraine must soon repay Russia $2 billion as the debt GDP ratio will have breached 60% this month. Quite simply Ukraine cannot pay this money, bailout its banking system (which needs a minimum 10 billion dollar capital injection), defend its currency, pay interest on its debt and pay for imports (Ukraine's fourth quarter imports were 27 billion dollars in 2013).

The sum of all of this makes the Central Bank's 15 billion (for August) in reserves look meaningless. 

Ukraine will be forced to default and once-again devalue its currency akin to what Russia did in 1998, and just like Yeltsin chose, Poroshenko has decided to bail-out the Oligarchs by letting them exit ahead of the restructuring while preventing the masses from exchanging anything.