Bank Runs, Currency Devaluation - What's next for Ukraine

[MattSh]

Bank Run Full Frontal: Ukrainians Withdrew 7% Of All Deposits In Two Days

Well that escalated quickly. It seems the ouster of Yanukovych, heralded by so many in the West as a positive, has done nothing to quell the fear of further economic collapse in Ukraine:

• *UKRAINIANS WITHDREW AS MUCH AS 7% OF DEPOSITS FEB. 18-20: KUBIV
• *DEPOSIT WITHDRAWALS STILL HIGH IN THE EAST, KUBIV SAYS

http://www.zerohedge.com/news/2014-02-25/bank-run-full-frontal-ukrainians-withdrew-7-all-deposits-two-days

Ukraine's bonds resume fall; hryvnia hits record low

The hryvnia fell more than 6 percent on the day to 9.80 per dollar, on track for its biggest one-day loss since February 2009.

Ishitaa Sharma, a strategist at Citi said the hryvnia's slide was likely to add to jitters among the population, with many people left holding a depreciating currency.

"They are all looking for hard currency. There is no buyer out there for the hryvnia," Sharma said.

http://www.reuters.com/article/2014/02/25/ukraine-crisis-bonds-idUSL6N0LU3PS20140225

UPDATE: Current rate today is 10.15.

My Commentary on the above…

Bank Runs

Okay, so in practical terms, what does this mean? Well first, this 7% number I find a bit astounding. Why? Because in the euro zone, it’s a general requirement that 1% be held in reserve. And while in the USA there is a 10% requirement, that only applies to checking accounts. So in all practicality, that number is a whole lot lower. So a 7% withdrawal rate would eliminate all cash reserves in most banks in the USA and in the Eurozone.

But let's look at this even closer. It's not likely at all that major corporations with operations in Ukraine are holding anything beyond a couple weeks operating expenses in Ukrainian banks. They’re not considered to be all that reliable. So the 7% number has nothing to do with a couple of major corporations moving money out of the country. They never had that money there in the first place.

Of course, this is not surprising. Especially among the older population, there's a strong memory of the collapse of the USSR and the ensuing collapse of the banks. Those who remember those times understand full well that you should have minimal trust in banks and that once things appear to be going downhill, you get your money out quickly.

Currency Devaluation

So now, what are the practical effects of the second story? What do these numbers mean? For the last few years, the Ukrainian currency has generally been in a fairly stable range when compared to the US dollar at about an 8 to 1 ratio. Now the number is about 9.7 and I have already predicted the ratio hitting 12 to 1 before the May elections. Although now it appears even I may have been a bit optimistic about that. Time will tell.

At the 12 to 1 ratio, the practical effect of this is that any imported goods will see a 50% price increase as soon as it crosses the border. After that, there will likely be additional increases tacked on because the cost of transportation will also have increased. So, this must be good for domestic industries, correct?

Sadly, that is not correct. One of the biggest costs of any manufacturing operation is energy. Energy to run the factory, energy to build product, energy to extract resources, and energy to transport resources, both to and from a factory. Since energy is also an import, energy costs will rise 50% at least. I say at least because a recent agreement with Russia led to a 33% cut in the cost of Russian gas. Since it is not likely that Ukraine will uphold their end of that agreement, it's very likely that Russia will see no need to uphold their part of the agreement. And often, goods produced domestically have some imported content. That imported content will also cost more.

So, is this as bad as it gets? Sadly, the answer again is no. Everything that has happened up to this point has not yet taken into account austerity measures that will be imposed by any IMF agreement. Pensions and salaries at a minimum will be frozen; or worse, they may be cut. And on top of that, tax increases and new taxes will likely be introduced. The IMF will be paid back, one way or another.

Since the fall of the Soviet Union the population of Ukraine has already dropped about 10%. The current troubles will likely lead to a further drop, some to emigration and some to putting off having children. Those in the west of Ukraine will likely try to flee toward Europe, and can expect not to be welcomed. Those in the East would tend to head east toward Russia, an area they are more likely to get a warm welcome.

And I can tell you with absolute certainty that except maybe for the top 1%, nobody will be seeing raises this year anywhere close to 50%.

[dipsydoodle]

1. Boracic / Skint - to coin a phrase.

Even with the EU trade agreement and the associated offer of Schengen passports they will only be able to flee to Europe for 90 days. Those are the conditions - 90 day stay max and then leave the Schengen area completely.

At least hyperinflation shouldn't be new to them - they had their worst ever hyperinflation 1992 - 1994.

[MattSh]

3. Actually,

I was suggesting more of a refugee crisis. Of course, anyone from Ukraine applying for asylum would automatically be turned back as an economic refugee. But that would stop them from coming, even if illegally.

[malaise]

2. Let me see

Downgrading and then being fugged royally by the IMF and Western Governments followed by a fire sale of their best assets.

Next??

[Xithras]

4. IMF is already moving in. "Next" is probably a split with Crimea.

The Crimeans were actually holding mini parades to welcome home their soldiers from Kiev. The ones who were SHOOTING the protesters. They don't consider themselves Ukrainian anyway.

[dipsydoodle]

5. I think you might find that the IMF will suggest to the US and the EU that they go whistle.

The IMF has been screwed twice by Ukraine - 2008 and 2010. The second time the IMF revised their rules to affect all who borrow from them - break agreed conditions of loans and / or repayment terms and funding ceases period.

[dixiegrrrrl]

6. Interseting how that has been happeniing in country after country...

Greece...Cyprus....Ireland...Spain...Italy....

[malaise]

7. Hey dixiegirl

Don't ever forget Chile, Argentina, Brazil, Jamaica, Guyana, Grenada, Belize, Mexico...need I go on.
Right now they're working on the USA.