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Ukraine: Currency Falls As National Bank Fails To Defend It

Kyiv, 2 March 1998 (RFE/RL) -- Ukraine's national currency has dipped slightly - but decisively - below the psychologically important two-to-one dollar level.

The hryvnia, introduced last year and one of Ukraine's few economic successes, had come increasingly under siege in the wake of the Asian market crash, and shrinking National Bank of Ukraine reserves to prop it up.

"The National Bank of Ukraine (NBU) simply has run out of cash to support the hryvnia," says Odessa-based financial analyst Andrei Reptushenko. "There are many reasons, but the bottom line is that, right now, there's a lot of people who have hryvnias who don't want them any more."

Last month, the hryvnia fell in value by seven percent against both the dollar and the German mark. The NBU described the reduction as managed, and well within the present currency corridor, set in January with an anticipated possible low for the hryvnia at 2.25-to-one dollar.

"This is part of the market working normally," said NBU spokesman Dimitro Rikberg. "We see no cause for alarm."

But market analysts do not forecast clearing skies.

"The NBU tried to keep the hryvna above two-to-one, and they just couldn't," said Alfa Capital Kiev Research Director Paul Gregory. "The next stopping point is logically 2.25 to 1. That would mean an effective 12 percent currency devaluation."

"The hryvna is simply overvalued," argued Gregory. "The NBU has kept it at an artificially high level, and there just is not enough trade with Ukraine to justify an exchange rate at its present level."

Odessa-based analyst Reptushenko says people are preoccupied with the (March 29 parliamentary) elections. It's normal for a country that is politically unstable to take a hit in exchange rates prior to any election," he says.

Ukraine's stock market is also undergoing a crisis of confidence.

International investors met Oleh Mozgovoi, Chairman of the Securities and Stock Market Commission of Ukraine (SSMC), at a conference last week also sponsored by Washington-based Financial Markets International.

The President of Haas Consulting S.A, Philip Haas said, "In order to attract foreign investment the stock market has to be well-regulated and transparent. The legal system needs to be stable and solid. Today we must have serious doubts that this is the case in Ukraine," Haas said.

The conference also heard criticism of Ukraine's erratic privatization program.

"You change the terms of a major privatization to exclude foreigners or favor a local company - that sort of thing gets around," said ING Barings Ukraine Corporate Finance Director Robert Foresman. "And that keeps the foreign money out, which is not good for the Ukrainian economy."

But, the Assistant Chairman of Russia's Federal Securities Commission, Valery Zavadnikov, said, "We should not be talking about protecting foreign investors, we should be talking about protecting investors, period. There are plenty of possible institutional investors in Russia who would be willing to invest locally if they felt it was a safe investment. I don't believe the situation is very different in Ukraine."

One of the few advantages of Ukraine's delayed transition is the opportunity to learn from the experience of others. When it comes to regulating the market, better, proven solutions are available.

"We have a system of rigorous control and regulation," said Assistant Chairman of the Federal Securities Commission of Poland, Miroslav Kachinevsky. "All stock transfers in the country are electronic, and we analyze each transaction closely."

Advice is easy. Putting it into practice less so.

"We have a good idea of what we need to do to make the market here function more transparently," said Ukraine Securities Chief Mozgovoi. "But we are short resources, time and money," he said.