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Week's balance: "Martial law" economy, swinging hryvnia, and EUR 500 mln aid from EU

15:00, 01 December 2018
6 min. 1650

Ukraine, for the first time in modern history, is learning how to live under martial law and it is not yet clear how this will affect the national economy, although the hryvnia responded immediately by going into a steep dive, only to regain positions shortly. The EU finally allocated the first EUR 500 million aid tranche, while IMF also sent positive signals by not turning away from Ukraine and being ready to consider the allocation of the next tranche. The country's main airport became closer as Ukrzaliznytsia launched an express railbus line, connecting it with the Kyiv center - these are the key economic news of the outgoing week.

Martial law introduced in 10 regions of Ukraine is definitely the top news, having a rather serious impact on the country's economy. Although, President Petro Poroshenko literally immediately assured the public that no restrictions on rights and freedoms provided for by martial law will apply if Russia doesn't launch ground aggression.

“I emphasize that a special regime will be introduced only in the case of the ground operation of the Russian regular forces outside the Joint Forces Operation zone and outside the illegally annexed Crimea,” Poroshenko told a Verkhovna Rada meeting.

"In the decree, I asked for the right to be given to the president: as soon as the Russian soldier crosses the border, I will not lose a second to ensure protection of the Ukrainian land," he added.

For his part, Prime Minister Volodymyr Groysman assured that martial law would not affect doing business in Ukraine. According to him, the special regime "in no way can affect businesses or the rights and freedoms of Ukrainian citizens."

The fact that martial law will not adversely affect the economy was also confirmed by largest enterprises. Naftogaz CEO Andriy Kobolyev stressed that gas production and the operation of the gas transmission system would remain stable, but expressed hope that the company's counterparts would not abuse the force majeure clause in contracts.

Acting head of the board of Ukrzaliznytsia, Yevhen Kravtsov, also assured of the company's readiness to ensure uninterrupted delivery of goods to private businesses and the military.

Ukrainians should not worry about the timely delivery of pensions and mail either as the Ukrposhta postal service said that customers would continue receiving their services at post offices as usual, and that there were no changes in prices of services and business hours.

The readiness of the largest Ukrainian companies to work in full swing in the conditions of martial law is not surprising, as for the fifth year already, the country has been living in an actual state of war with Russia, but there is a risk that foreign investors who decide to invest in our country may reconsider their plans.

For example, on December 13, a tender will be held on the sale of the state-owned stake in the energy generating company Centrenergo, where companies from Georgia and Belarus are among the bidders: Georgian International Energy Corporation and Oil Bitumen Plant. The press service of the State Property Fund stressed that they were not going to postpone the auction.

“The introduction of martial law does not affect privatization procedures, both large and small. But at the same time, the investor, in any case, will take this factor into account. And this is logical. All auctions for the sale of small-scale privatization objects in the Prozorro. Sales will take place according to the dates earlier announced. The competition for Centrenergo is scheduled for Dec 13. Applications are now being received. The process will continue until Dec 5. Companies will have to make guarantee payments, and only then will it be possible to talk about the number of participants and name them,” the Fund’s press service said.

Despite positive reports, the economy almost instantly responded to martial law introduced in 10 regions. Particularly sensitive to these processes was the national currency.

Confused hryvnia

Photo from UNIAN

On the news of the introduction of martial law, the hryvnia literally the next day went into a steep dive, having won back positions only by the end of the week. The cost of the dollar in Kyiv exchange offices on Monday, Nov 27, rose to UAH 28.95. In some exchange booths, it was impossible to buy a dollar for less than UAH 29.

In the interbank forex market on Nov 26, the hryvnia fell by 15 kopiykas, on Nov 27 – by another 23 kopiykas, on Nov 28 – by another 18 kopiykas, to UAH 28.30/28.33 to the dollar, gaining strength on Nov 30 to UAH28.18 /28.21 to the dollar.

The National Bank tried to reassure Ukrainians that the situation in the forex market is the result of the psychological factor caused by the latest news, and after its pressure is weakened, competition among market participants will strengthen the hryvnia exchange rate back to the market level.

“To ensure stability in the foreign exchange market, the National Bank continues to closely monitor its condition and, if necessary, will come out with interventions to smooth out excessive exchange rate fluctuations. The National Bank has enough resources to this end – the volume of international reserves today reaches $17.8 billion,” the National Bank’s commentary said.

It is also noted that during the period of martial law, the banking system will work as usual, and if necessary, the NBU has pledged liquidity support to banks on permanent refinancing instruments.

Experts interviewed by UNIAN noted that the imposition of martial law in some regions of Ukraine would have no significant impact on the country's foreign exchange market, while the hryvnia to dollar rate by the end of the year will be at about UAH 29/USD, as had been predicted earlier.

Thus, Vadym Iosub, a senior analyst at Alpari, noted that the main phase of the growth in the currency value was already over. On the gray market Tuesday morning, the dollar even slightly dropped to Monday levels.

The head of the analytical department at Concorde Capital, Oleksandr Parashchy also left unchanged the forecast for the hryvnia exchange rate at the end of the year at UAH29.0-29.5/USD.

“Obviously, some panic sentiments could lead to the rate reaching around 29 a bit earlier than by year-end year, but this should not significantly affect the balance of demand and currency supply,” he believes.

Executive Director of the Center for Economic Strategy, Hlib Vyshlinsky, pointed out that the panic in the cash foreign exchange market lasted no more than half a day.

“Neither the scale of confrontation in the Kerch Strait, nor the format of martial law introduced, have a direct impact on the economy. Further provocations on the part of Russia, or a complete closure of the strait for merchant ships, which was not the case, would have a direct impact,” he explained.

The expert believes that the fundamental factors, including a record grain harvest, falling oil prices, this year's tight fiscal policy, and the adoption of the 2019 budget in accordance with agreements with the IMF, are on the side of the hryvnia stability.

“New business projects and private investments in Ukraine may be postponed until the beginning of 2019, but they will have no significant impact on the stability of the financial market. If there is no serious aggravation on the part of Russia, the rate will remain in the range of UAH 28-28.5/USD,” Vyshlinsky predicts.

IMF satisfied with reform, to continue cooperation


An important signal for Ukraine is that its main creditor, the International Monetary Fund, despite the introduction of martial law, will continue cooperation with the country. By the way, the authorities had in 2014-2015 stated that they wouldn't pass the law over fears of the negative impact on relations with the IMF.

Another point is that the IMF Managing Director Christine Lagarde publicly spoke of her phone conversation with President Petro Poroshenko. The Fund is satisfied with the key indicators of the state budget of Ukraine for 2019, according to Lagarde.

The International Monetary Fund also expects the Ukrainian authorities to complete by December 10, 2018, interim measures required for launching the new stand-by program, after which the Fund will hold a meeting of the Executive Board to discuss the issue.

In addition, the Fund has explored the possibility of providing technical assistance to improve tax administration and make the fiscal system "friendlier," while ensuring debt sustainability.

ICU senior financial analyst Taras Kotovych, in a comment to UNIAN, noted that the approval of the new agreement with the IMF will allow Ukraine financing $9 billion in payments on foreign currency debts in 2019, while the first tranche of stand-by deal in the amount of $1.9 billion may be received before year-end.

Kotovych also said that after the IMF’s decision to send the money and the World Bank’s decision to provide a financial guarantee, Ukraine could be expected in the first quarter of 2019 to issue Eurobonds worth $1-1.5 billion.

According to the expert, the escalation in the Black-Azov seas area and the imposition of martial law in Ukraine caused quite a standard reaction on the part of investors. However, after a fairly active withdrawal from Ukrainian assets, the quotes calmed down at new levels and halted their significant slide.

Also a major event of the outgoing week was the positive decision of the European Commission to allocate Ukraine the first tranche of the fourth program of macro-financial assistance worth EUR 500 million, as reported on Facebook by President Petro Poroshenko.

"Very important signal of the unwavering assistance of the European Union against the recent challenges from the Russian aggressor," Poroshenko wrote on Facebook.

Ukrzaliznytsia launches express railbus to Boryspil Airport

Photo from UNIAN

At the end of the outgoing week, JSC Ukrzaliznytsia launched an express railbus between the central railway station in Kyiv and the Boryspil International Airport.

The opening ceremony of the new railway connection was held, attended by President Petro Poroshenko, Prime Minister Volodymyr Groysman, Vice Prime Minister Volodymyr Kistion, Chairman of the Supervisory Board of Ukrzaliznytsia Sevki Acuner, as well as the company's acting Chairman of the Board Yevhen Kravtsov

The President noted that the project had been implemented for UAH 480 million, whereas previously it was estimated at UAH 11 billion, and the implementation time took only 9 months, which Poroshenko called a good timing for the “birth” of the express.

“9 months is a very good period, both for women to give birth, and for our express. And it is very important that today, on the last day of November, we're seeing the new rail express being born,” said the president.

Indeed, discussions about creating such an express line to the airport have been going on for years. Back in 2011, Ukraine reached an agreement with China's Eximbank on receiving a $372 million loan for the implementation of the Air Express project.

In September 2014, the Ministry of Infrastructure stated that within the project, supervised at that time by head of the State Investment Project, Vladyslav Kaskiv, some $50 million of the loan had vanished. After that, the ministry called the project “unpromising” and started talks on its reformatting. As a result, the country saw a modified and significantly cheaper express railway project launched in a fairly short period.

The express between the capital's central train station and Ukraine's main airport will operate 24/7. Estimated travel time is 35 minutes. As expected, the launch of the high-speed communication will not only significantly simplify the commute for passengers, but also become a relief for some key urban highways.

Ihor Orel

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