Head of Investment Capital Ukraine (ICU) Group analytical department Alexander Valchyshen

Expert: Russia crisis is a chance for Ukraine

Alexander Valchyshen, Head of ICU Group analytical department, has told UNIAN about the consequences of the collapse of the Russian ruble for Ukraine, who is putting pressure on the hryvnia exchange rate, and what Ukrainians should expect in 2015. 

Head of Investment Capital Ukraine (ICU) Group analytical department Alexander Valchyshen

The top news of this Tuesday: the ruble hits historic lows, down to a level of RUR 100 to the euro and RUR 80 to the dollar, followed by a sharp rise in the key interest rate by Russia’s Central Bank from 10.5 percent to 17 percent, allegedly in order to save the national currency, which has been dropping in the wake of a drop of global oil prices and pressure from Western sanctions.

But this move by the central bank itself caused panic on the market. Russian experts have already called it madness – it does not give any succor to an economy teetering on the edge of stagnation. UNIAN asked expert Alexander Valchyshen what we should expect next.

UNIAN: The cash market exchange rate of hryvnia has already fallen to UAH 18 to the dollar, and on the non-cash – UAH 16. Experts name several factors that have caused the fall of the national currency - the collapse of the Russian ruble, the delay of a new tranche from the International Monetary Fund and also the pressure put on the chief of Ukraine’s National Bank, Valeria Gontareva, on the eve of her address to Ukrainian Parliament. Do you agree with any of these statements?

Valchyshen: All these factors partly matter. As for the pressure put on Gontareva, it certainly is obvious and very inappropriate, as it undermines the macroeconomic essence of government’s future actions. And this pressure weakens the hryvnia.

Behind this pressure, I see an attempt to weaken the economy management and subject it to an even greater crisis. And this pressure is very much visible in the macroeconomic assessment.

UNIAN: Who is profiting from it? Who is putting pressure on Gontareva?

Valchyshen: I can’t say exactly, as I am not part of an oligarchs’ entourage. But these people – they are not the new government’s opponents. They represent a certain interest group that always feeds on the budget, to put it simply. These people care about their future income, which I call easy money. Why do they appeal to the government? Because it’s a kind of a team work – at first sight it’s a private business, but it only survives due to certain decisions of the authorities that help it profit even more. And now their future profits are at risk. Naturally, they are trying to maintain the bond with this pressure.

UNIAN: The ruble’s downfall is also named among the factors in the hryvnia’s depreciation. On December 16, the euro and the dollar reached their historical highs in Russia against the ruble, at RUR 100 and RUS 80 respectively. Does this situation affect Ukraine?

Valchyshen: Definitely, this is currently one of the main risk factors for Ukraine’s economy and for hryvnia exchange rate.

UNIAN: What is the connection?

Valchyshen: The collapse of the ruble has been dramatically visualized in the last two days, but the fall of the Russian currency had been in sight for a long time. And it is not the geopolitical situation that resulted in the depreciation of the ruble. The fall demonstrates the economic crisis in Russia which, in my opinion, has been lasting for the past two years. Signs of the Russian economy’s failure could be observed even with oil prices at the $100 mark. So, there was an incubation period for Russia’s crisis, and now it’s in the acute phase.

UNIAN: Experts predict deep recession in Russia and a wave of mass bankruptcies…

Valchyshen: It’s pretty much a real scenario for Russia. And the crisis will last for more than just a year. Russia’s massive economy, with its numerous trading ties, including those with the former Soviet republics, will have a negative impact on its partners. The economies of post-Soviet states will also face recession. Ukraine will see its long-term partners - Kazakhstan, Belarus and others, import less of its produce. So, the situation in Russia will also affect Ukrainian business. And it will soon become obvious.

UNIAN: So, you’re saying the economic situation in Ukraine will worsen…

Valchyshen: Since Russians have been fighting with Ukraine on the trading front for quite a long time, we already experienced the influence of the Russian crisis back in 2013. The escalation of the situation in Russia will certainly affect Ukraine, but its impact will not be as negative as it is for Russia, and former Soviet countries, as the Russians had [already] restricted the export of our products before the active phase of the crisis. On the contrary – now, we suddenly have a chance: due to the economic turmoil, Russia faces a shortage of many goods, especially foodstuffs. And in order to curb the growing inflation, Moscow will perhaps consider lifting restrictions on imports from Ukraine. Otherwise, there is no way to tame inflation. So, Ukraine also sees a positive side to Russia’s recession. The market does not consider this option yet, but it is quite likely to happen.

UNIAN: The delay in transferring the next tranche of the IMF stand-by cooperation program is also seen as a factor that affects the hryvnia’s rate and the economy as a whole. When should we expect the next tranche?

Valchyshen: We will not receive the new tranche until the end of this year, since there have been technical drags with the formation of the government and the drafting of the 2015 budget. Ukraine’s government should blame itself. Besides, the Western world and the IMF will go on Christmas vacation. That is, the process will come to a halt.

In general, the provision of this tranche depends more on Ukraine itself. On the one hand - the government needs money as soon as possible, as it may calm down the financial markets. On the other hand - the government is obviously hesitating to raise public utility tariffs, and implement innovations on pensions and cuts in social payments. It’s a sort of a struggle - undermining [the confidence of] voters against saving the currency market by attracting money. It is not clear yet, what will win out. Perhaps, the winner will be the one who says that we can live through this winter without raising tariffs, the currency market will survive for some more time and all the innovations should be postponed until spring.

UNIAN: According to  the mass media, the cabinet submitted a draft budget to parliament on December 13. But it took the draft back for revision the same day, as there were disagreements concerning some of its articles. Reportedly, a UAH 20-22 exchange rate is proposed in the draft. However, Ukrainian Prime Minister Arseniy Yatseniuk has said that a UAH 17 per dollar rate is planned for 2015. Could the rate reach such level in your opinion?

Valchyshen: I’ve read about it. But I am not familiar with the draft.  As for the rate - anything can happen. But, in my opinion, it’s irrational for the current government to repeat the mistakes of its predecessors – that is fixing the rate of the national currency in the state budget. They think they can predict the rate. If we want to “live a new life” [the electoral motto of current President Petro Poroshenko and his political bloc], if we want a better life then we should abstain from remarking about the possible rate of the hryvnia. There is no need to fix the rate in any way: [via] the statements of MPs, government officials, etc. It is fundamentally wrong, and it forms false expectations.

The exchange rate may drop to UAH 20 to the dollar, and move back to UAH 15. There are good reasons for this. It is not the rate that is important, but the logic of the government's actions in managing the economy. I think that the government, knowing what the economy’s diseases are and how to treat them, still has some political fears [to overcome] to take a unique and unpopular move.

UNIAN: Yatseniuk has already warned that next year will be even more difficult. Do you share this opinion?

Valchyshen: The next year will be at least no easier than this one. Perhaps we will finally witness the end of the war in the country’s east. But it will not be much easier in terms of the economy.

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