Ukraine Enters The Endgame

Tyler Durden's picture

Back in March 2014 we forecast that it in the aftermath of the US State Department-sponsored military coup in Kiev, it was only a matter of time before Ukraine (all of its sovereign gold having since "vaporized") succumbed to full blown hyperinflation and economic implosion. Less than a year later, precisely this outcome has finally played out, and as a result, the entire nation has finally entered its economic endgame, one which has two conclusion: either it joins Greece in becoming a ward of Europe (of which it is not an official member) and the IMF (thank you Joe Q Public taxpayer), or it quietly fades away into insolvent "failed state" status. 

This is in a nutshell the assessment by Goldman Sachs, presented below, which really doesn't say much we didn't cover earlier in "Ukraine Enters Hyperinflation: Currency Trading Halted, "Soon We Will Walk Around With Suitcases For Cash", but which does lays out the (very unpleasant) alternatives for yet another nation brought to ruin through American neo-colonial expansion, in what may well be a record short period of time. Of these, the primary ones focus on yet another IMF bailout which the agency may find some resistance to as a result of the near-total collapse of Greece at the same time. And not only that but Goldman's "base case of IMF fund disbursement in mid-March may not come quickly enough to stabilize the Hryvnia." Oops.

Should the IMF fail to provide the much needed funding (and as of this moment the days of merely jawboning its support for the central banks are finished since Russia will once again shut down its gas to Kiev unless it is paid in full and upfront), this is what happens: "the Ukrainian authorities could tighten FX controls further. In the extreme, this could potentially involve a bank deposit freeze, a ban on retail FX purchases and/or moratorium on external payments and complete closure of the capital account."

Hence our question to Ukrainians: was the coup worth the economic disintegration of your nation, and leaving your faith in the hands of the US, whose recent global intervention case-studies include such sterling examples as Libya, Egypt and Iraq?

And before we present the Goldman piece, here is something truly funny: in discussing the causes of the collapse of the Ukraine currency, Goldman lays out "monetary financing of Ukraine’s fiscal deficits" as one of the reasons.

This is certainly not funny for Ukraine which now may have just enough cash to cover 3 weeks worth of imprts:

While monetary financing of the deficit may debase the value of the Hryvnia in the medium term, it is the shortage of FX in the system that has caused the proximate pressure on the currency, as NBU reserves declined to US$6.4bn in January (4 weeks of imports) and are likely to decline to US$5-5.5bn in February (3 weeks of import cover). These international reserves include about US$1bn in monetary gold, so the liquid amount of reserves is likely to fall to US$4-4.5bn in February (2.5 weeks of imports).

So why is it that funny? Because as the chart below shows, it is not just Ukraine that is engaged in "monetary financing of its deficit" - so is the entire developed world to the point where central banks will buy up every single dollar of debt government have to issue (and thus fund deficits) and then some!

 

In other words, we now live in a world in which the entire global fiscal, and every other, debt-funded deficit is being plugged by central banks! Therefore, for anyone curious what will eventually happen to the world's various fiat currencies, look no further than the UAH.

So without further ado, here is Goldman with "As pressure builds on the Hryvnia, short-term risks mount and may prompt policy action"

Bottom line:

The Hryvnia weakened over the weekend to UAH 30 vs. the USD, prompting the Ukrainian authorities to tighten FX controls and to intervene by a reported US$80mn today, and causing a further weakening of the currency to UAH 40 on the black market as of this morning. While pressures have subsided somewhat (with black-market, mid-market spot now around UAH 33), in our view, the current FX controls are only likely to provide temporary relief to the currency and, thus, introduce risks that the authorities could tighten FX controls further. Given that capital flight, debt repayments, ongoing imports and a destabilization of expectations in the FX market are likely to continue exerting pressure on the Hryvnia in the coming days and weeks, our base case of IMF fund disbursement in mid-March may not come quickly enough to stabilize the Hryvnia. In our view, this could cause the authorities to resort to more severe FX controls and/or could cause international donors aware of the fragility of the situation to make available emergency funds in order to serve as a bridge until IMF loans arrive.

Authorities step up FX controls, as pressure builds on Hryvnia …

The Ukrainian authorities have put in place an array of FX controls since late 2012, including the mandatory sale of FX proceeds, bank FX withdrawal limits, FX bank transfer limits, and de facto restrictions on access to NBU FX provision for banks. The latter restriction caused the black-market Hryvnia rate to be 20-30% weaker than the official rate in recent months, but was dismantled in early February, leading to a sharp depreciation of the Hryvnia and aligning the official exchange rate to the black-market one. Despite these restrictions, the Hryvnia continued to weaken last week, with the official rate reaching UAH 27.9 vs. the USD as of February 20 and the black-market rate rising to UAH 31 over the weekend.

As a result, in the past week, the authorities have stepped up their FX controls significantly. The government discussed imposing a duty on non-essential imports last week and the NBU earlier this week increased scrutiny and put into place checks on import pre-payments exceeding US$50,000 (and required a letter of credit from an investment-grade-rated bank for those exceeding US$500,000), while also banning leveraged FX purchases by corporates. The Hryvnia continued to weaken in response to these measures, to UAH 35 vs. the USD yesterday on the black market, and the NBU accordingly introduced further restrictions, including a complete ban on corporate purchases of FX through end-week and restrictions for banks as well. The initial response to these measures was a sharp weakening of the Hryvnia on the black market to in excess of UAH 40 vs. the USD this morning, but the end-day rate has now settled down to around UAH 33, although the bid-ask spread has widened sharply to about 15% of the mid-market price, indicative of very poor liquidity conditions. While the official rate had been aligned with the black market during the period February 6-21, it has returned to being about 20% stronger than the black market in the past several days.

There are several causes for the weakening of the Hryvnia:

  • Net private capital outflows (excluding net IMF/official sector flows), which stood at an estimated US$10bn in 2014. This number excludes US$3.7bn in repayments to the IMF and about US$4.5bn in debt service on external sovereign bonds.
  • Current account and trade deficits, due to the collapse in exports and despite the fact that domestic demand has weakened sharply.
  • Monetary financing of Ukraine’s fiscal deficits.

While Ukraine’s current account and trade balances should close as domestic demand continues to contract and as the Hryvnia has weakened further, capital flight continues, with bank FX deposit outflows of US$600-700mn/month in November-January. Moreover, monetization of the deficit has accelerated as local banks are no longer able to absorb domestic bond issuance. The share of domestic government bonds owned by the NBU has risen to 71% in January, from 59% one year prior, with the share held by domestic banks falling by the same amount (to 20%). Meanwhile, narrow money continues to grow at around 15-20%yoy, at a time when domestic credit is now contracting by 10%yoy. While money supply growth in the mid-single digits in a context of weak credit growth may have been offset for most of 2014 by large-scale FX interventions by the NBU, withdrawing liquidity, FX interventions have slowed in H2-2014 and the NBU reportedly stopped intervening in February (although it intervened once again by US$80mn today). This has caused assets on the NBU’s balance sheet to grow by about 60%yoy in recent months and by 8%mom in January (seasonally-adjusted). In our view, with the economy and cash demand weakening, domestic credit shrinking and an absence of liquidity withdrawal via interventions, money supply growth at the current pace will ultimately prove inflationary and will cause the Hryvnia to weaken further.

While monetary financing of the deficit may debase the value of the Hryvnia in the medium term, it is the shortage of FX in the system that has caused the proximate pressure on the currency, as NBU reserves declined to US$6.4bn in January (4 weeks of imports) and are likely to decline to US$5-5.5bn in February (3 weeks of import cover). These international reserves include about US$1bn in monetary gold, so the liquid amount of reserves is likely to fall to US$4-4.5bn in February (2.5 weeks of imports).

… raising short-term risks, until IMF funds arrive …

In our view, while the current FX controls may provide some temporary relief, pressure is likely to continue to build on the Hryvnia until expectations stabilize, confidence is restored, and the country’s FX reserves are replenished. Given the poor liquidity and destabilization of expectations in the FX market, the ongoing conflict in Donbass that undermines confidence, and the continued need to import natural gas and other essential goods and make external debt payments, these factors are likely to continue to exert pressure on the Hryvnia, at least until the IMF Board approves the newly-agreed program and makes its first disbursement. However, this will likely take at a minimum 2-3 weeks and there are risks of delays. First, the authorities must fulfil their prior actions for the program, and notably the Rada must approve a new budget law. This is scheduled to take place in a session on March 3, although PM Yatseniuk is attempting to accelerate this process by holding an extraordinary Rada session to approve the legislation. Even if the session is moved forward, in our view, there is no guarantee that the law will be approved immediately and delays are possible. Once prior actions are fulfilled, the IMF Board can meet, approve the new program, then disburse funds shortly thereafter. Our base case is that this will take place in mid-March (the current board review date is reportedly scheduled for March 11), although it is possible that this could be delayed. With the current pace of reserve depletion and pressure build-up on the Hryvnia, it is possible that the IMF funds may not arrive quickly enough. This raises the short-term risk of a significant further increase in pressure on the Hryvnia.

… and implying potential need for emergency policy action

Given the balance of payments and monetary pressures on the currency, the authorities and international donors, in our view, have several policy options. First, the Ukrainian authorities could tighten FX controls further. In the extreme, this could potentially involve a bank deposit freeze, a ban on retail FX purchases and/or moratorium on external payments and complete closure of the capital account. Second, international donors (bilateral lenders and IFIs) could recognize the fragility of the current situation and the fact that the IMF timeframe may prove to be too slow to stabilize the currency. Thus, in our view, the international community could make available emergency funds in the coming days or weeks, effectively bridging financing for Ukraine until the IMF disbursement arrives. However, bureaucratic, legal and political hurdles may exist to any large-scale emergency disbursement to Ukraine, either bilaterally or multilaterally. Thus, there is no guarantee that such emergency funds could or would be made available. This introduces further short-term policy uncertainties.

Finally, the recent and sharp weakening of the Hryvnia, as well as significant recent shifts in money demand and supply, could necessitate an overhaul of some of the IMF’s program assumptions and targets. In our view, this could require further technical work on the part of the IMF and could cause additional delays to disbursement of IMF funds. As the monetary and financial dynamics evolve rapidly, so may the IMF’s working program assumptions and the parameters of the program.

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HonkyShogun's picture
HonkyShogun (not verified) Feb 25, 2015 5:34 PM

Thanks Soros, Nudelman and the Hymie entourage.

NoDebt's picture

Damn, and I just finished a 2 year long project to make perfect counterfeit 100 Hyrivnia bills.

(Yes, I know, all fiat is counterfeit.  Just roll with the joke.)

kaiserhoff's picture

or it quietly fades away into insolvent "failed state" status. 

Like all of Latin America, and nearly all of Africa?

When did Mexico "fade away"?  I missed the proclamation.

 

cossack55's picture

They decided to "fade north" instead.

RafterManFMJ's picture

Fucking Nazis!

They were Nazis, Dude?

Oh, come on Donny, they were threatening castration! Are we gonna split hairs here? Am I wrong?

MisterMousePotato's picture

Am I to understand from this article that there are still people in, oh, Kiev, for instance ... who are still paying their mortgages and/or worrying about it?

actionjacksonbrownie's picture

The truly crazy part of all this, is that the average ukrop "patriot" STILL thinks the u.s. is only there to help them, and russia is the root of all evil.

 

The farce is strong in this one.

philipat's picture

So, all in all, the perfect time for Russia to call default on the $3 Billion loan to Ukraine and demand repayment? Remind me again who is "winning" this game?

manolios's picture

They can't do that or they will lose the Ukrainian people forever as an ally

kaiserhoff's picture

Sure they are paying mortgages, because they can do it for the price of a cup of coffee.

Hyper inflation can be fun.  Life is unpredictable, and most of the predictions made on ZH are crap.

Paveway IV's picture

If you wrap Hryvnia in food wrap and keep the bundles properly cooled in a refrigerator, it won't devalue nearly as fast.

Kprime's picture

But I'll tell you what, after seeing Los Angeles and this here story I'm about to unfold, well, I guess I've seen something every bit as stupefying as you can see in any of those other places, and in English, too.

PartysOver's picture

Is the Obama Admin this stupid or are all these failed missions, Tunisia, Libyia, Egypt, Syria, Ukraine, actually part of a plan to recreate the world?  I honestly do not know.

Majestic12's picture

I would have guessed (considering the new, rather large contingent of "Before It's News" followers here) that someone would have posted:

"wham-bam, thank you Ma'am".

It would have actually been appropriate.

But alas...[sigh]

TahoeBilly2012's picture

Destroy all nation states...guess Iceland will be last.

Majestic12's picture

"I honestly do not know"

Sarc aside, start reading... http://blog.redefininggod.com/

PartysOver's picture

Double Post.  Alcohol was involved.

Majestic12's picture

That's ok, just financially monetize this second post and it will carry through the bottle.

But of course, there will have to be "reforms" and austerity measures until you can create a space-time warp and reverse the second post.

Nope, don't even ask...nein, nein, nein, nein. No chasers.

Icelandicsaga...............................................'s picture

Mexico wont fade away .. we will harmonize . integrate . and become a bad case of Brazil disease .. top crust and the millions below.WE will blend into NORTH AMERIC     the meme . .keep saying that  NORTH AMERICA . . we are no longer USA . we are NORTH AMERICA .. say it over and over again .... we already got the cartels and corruption and 20 million illegals.. why not the entire enchilada. so to speak. Canada wont be too happy about it .. we already tried to scam their water resources to fix water shortages in the southeast .. they refused. but hey . there is always tomorrow... .

Icelandicsaga...............................................'s picture

Mexico wont fade away .. we will harmonize . integrate . and become a bad case of Brazil disease .. top crust and the millions below.WE will blend into NORTH AMERIC     the meme . .keep saying that  NORTH AMERICA . . we are no longer USA . we are NORTH AMERICA .. say it over and over again .... we already got the cartels and corruption and 20 million illegals.. why not the entire enchilada. so to speak. Canada wont be too happy about it .. we already tried to scam their water resources to fix water shortages in the southeast .. they refused. but hey . there is always tomorrow... .

Majestic12's picture

"we are no longer USA"

When were "we" ever America? Who is "we"? The banksters? The MIC? The NSA, CIA, FBI, DHS?

You want to include yourself in "the above" and call it "America"?

Do you think that "they" include "you"? Ha, ha, ha,!

"this is not, Amer-i-ca...la, la, la, la....[Bowie/Metheny]

MollyHacker's picture

Mexico is already in a failed state of law and order. It's currency pegged to the fed.

813kml's picture

Would have been best to put a whiteboard in place of denomination.

Majestic12's picture

I guess they sold the Sex Farm....

y3maxx's picture

As there is no more food left...President of Ukraine will supply chocolate to all the citizens.

RafterManFMJ's picture

He's already increased the weekly chocolate ration from 50g to 30g!

HonkyShogun's picture
HonkyShogun (not verified) y3maxx Feb 25, 2015 6:29 PM

Dude, that ain't chocolate.

ThroxxOfVron's picture

"Moreover, monetization of the deficit has accelerated as local banks are no longer able to absorb domestic bond issuance. The share of domestic government bonds owned by the NBU has risen to 71% in January, from 59% one year prior, with the share held by domestic banks falling by the same amount (to 20%). Meanwhile, narrow money continues to grow at around 15-20%yoy, at a time when domestic credit is now contracting by 10%yoy. While money supply growth in the mid-single digits in a context of weak credit growth may have been offset for most of 2014 by large-scale FX interventions by the NBU, withdrawing liquidity, FX interventions have slowed in H2-2014 and the NBU reportedly stopped intervening in February (although it intervened once again by US$80mn today). This has caused assets on the NBU’s balance sheet to grow by about 60%yoy in recent months and by 8%mom in January (seasonally-adjusted). "

 

They are printing with complete wreckless criminal abandon: bonds and currency!  

The level of monetization is way more than triple what The US Treasury and The FED have admitted to colluding together to float the system with as a gross percentage of bonds and currency en todo.  ..& The FED had a huge stock of MBS to soak as well as the global payments system to disburse the emission to 

This is a massive torrent of raw unsterilized counterfeiting of preposterous proportion to the existing stock.

Christine LaGarde presonally sent the Ukrainians letters telling them to flat out stop it or the IMF wouldn't give 'em any more emergency loans.

 

"We Weimar'd some folks."

 

This is gonna be one for the history books easily rivaling the German and Hungarian tsunamis of the last centrury.

There is no way in hell this can be reversed or mitigated at this point.  Ukraine is doomed to suffer the full destructive force of a currency collapse.  The damage is by no means completed...

IMHO, regretably, the Ukrainian citizenry would have been far better off being quietly wholly subsumed by Russia than face this tragedy.  Everyone is trying to 'save' Ukraine ( for their own greedy purposes ) and they are burning it to the ground 'saving' it.

Disgusted and anguished do not fully convey the feelings I am experiencing...

IF you do such things as pray, you should pray for these people; -they are going to go straight through Hell.

Majestic12's picture

"IMHO, regretably, the Ukrainian citizenry would have been far better off being quietly wholly subsumed by Russia than face this tragedy. "

Russia does not want their Nazi, lazy asses. Who would. The East is the center of industry and called "restive". Oh, and they all speak Russian?

Who knew. Hard-working, productive, hard playing people, and they're Russian?

ThroxxOfVron's picture

Partition would have been a better answer than what is unfolding.

Who would actually want the 'Nazi, lazy'?  Average Ukrainians, the EU, the British, the Israelis, the USA?

Unless I am mistaken the general consensus is that true Nazi types are not really welcome in most 'polite' company.  

They would be a dangerous fringe element no matter the constitution of the nation unless they were to seize power and use it to disenfranchise the remainder, and any fringe/minority ideological element that seizes power and disemfranchises the remainder majority is unpopular no matter the ideology.  See: Neocon, Neolib, Zionism, Feudalism, 1%er, Junta, Annanuki, etc... 

The fact is that Ukraine only has a tiny minority that espouse such ideological concepts, and I suspect many of these only use the imagery as a front for more classic mobsterism and warlordism.   Espoused Nazis may be a dominant militant organization in some parts of Ukraine; but, I am doubtful that Ukraine is generally predominantly dominated by Nazi ideology...

Al Tinfoil's picture

This is life-saving by the Madeleine Albright model.

Motasaurus's picture

That's what the support of the neo-Nazis is all about. They are just replaying WWII, only slight further to the West. After all the original German Nazis were funded, finances, politically supported and built by the Western powers terrified of being voraciously murdered in bolshevic revolutions. 

Of course those "powers" were played for fools by those who fund them. I am fairly convinced that the entire 20th Century was simply a socio-psychological experiment to determine whether National Socialism or Communism was a better method for controlling the masses. 

Millivanilli's picture

Maybe Greece could forward the terms of their, cough, Troika bailout.   Oh and in a couple days they'll run out of gas.   HA HAH.  US foreign policy is fucking insane.

Sages wife's picture

Not if you guzzle a 26 of vodka and look at it backwards and upside down.

SilverIsKing's picture

The problem with the Hryvnia is that it's called Hryvnia.  WTF is that?

I think a quick name change would provide some currency stability.

 

 


NoDebt's picture

Oh, don't worry.  They WILL be changing its name at some point in the near future.  It will henceforth be called the New Hryvnia.  They'll probably change the colors, too.

permarig's picture

Small trivia.
There's a bullshit piramid-eye symbol on the 500 Hryvna note.

https://commons.wikimedia.org/wiki/File:Ukraine-2006-Bill-500-Reverse.jpg

You never know these days, maybe that's their target for the USD/UAH rate.

Kprime's picture

I like  Hryvnia eats Ruskie: The sequel

" A moving, down on ur knees game of life" 

Jack Burton's picture

The end game will have winners. Expect the usual suspects to walk away with some nice profits. And the Ukrainian farm lands, fracking potential and what little of industry remains, will all be sold to western baks for pennies on the dollar. Again, you can be certain the usual suspects, whose name can not be mentioned, will own Ukraine.

The people went to Maidan on the promise of a German lifestyle and EU passports which entail freedom of movement within the EU. Thus the mass exodus of youth for Paris, London, Berlin, Rome, Stockholm, Madrid. In the flush of freedom, at least 2 million youth will move within weeks. More will follow as they arrange transport. Anywhere in Germany or west of Germany will be their target sites.

tired1's picture

Spain has a Ukie Consulate in Malaga, Spain to service their folks. I expect more to come.

JuliaS's picture

They were promised a German lifestyle, and they got it - the WW2 version.

turnoffthewater's picture

"Expect the usual suspects to walk away with some nice profits. And the Ukrainian farm lands, fracking potential and what little of industry remains, will all be sold to western baks for pennies on the dollar. Again, you can be certain the usual suspects, whose name can not be mentioned, will own Ukraine"

Maybe some of the perps will be found here:

"The government discussed imposing a duty on non-essential imports last week and the NBU earlier this week increased scrutiny and put into place checks on import pre-payments exceeding US$50,000 (and required a letter of credit from an investment-grade-rated bank for those exceeding US$500,000)"

sidney sloth's picture

This doesn't end with anybody from the west owning anything in Ukraine.

Once the regime crumbles to a critical level, and it is crumbling, the backlash against those allied with the west will be brutal in the extreme.

Putin is milking the attack by the west on the east for all he is worth, but don't be fooled. The future for everyone in Ukraine who took part in maidan or was ever associated with western politics is grim. If they are not on the last chopper out of Lvov with Porky and our man Yats, god help them for what they be judged to have done to their people.

WhackoWarner's picture

I can't keep track of which one, exactly, of the Protocols of Zion we are now on.  I think it is a combo actually. Media control, military civilian police, politicians bought and paid for, globalization of corps, slavery of populations,,,,  But one of them covers this strategy of bankrupting nations so as to own the world.

PINKY:
Gee, Brain, what do you want to do tonight?

BRAIN:

The same thing we do every night. Try to take over the world.

 

 

They're Pinky and the Brain
Yes, Pinky and the Brain
One is a genius, the other's other insane
They're laboratory mice
Their genes have been spliced
They're Pinky, they're Pinky and the Brain
Brain, Brain, Brain, Brain, Brain, Brain, Brain, Brain

 

Before each night is done
Their plan will be unfurled
By the dawning of the sun
They'll take over the world

 

Before each night is done
Their plan will be unfurled
By the dawning of the sun
They'll take over the world

 

They're Pinky and the Brain
Yes, Pinky and the Brain
Their twilight campaign is easy to explain
To prove their mousy worth
They'll overthrow the earth
They're Pinky, they're Pinky and the Brain
Brain, Brain, Brain, Brain, Brain, Brain, Brain, narf

 

Songwriters
STONE, RICHARD / RUEGGER, TOM