I have written on these pages that the Russian currency, the rouble, is attractive at these levels and investors should start to pick their entry points.However, I get many questions on Russia’s sister currency, the Ukrainian Hryvnia. Ukraine is where slavic civilization started and the two countries have a long, shared history. As the saying goes, Russia by itself is a country, Russia with Ukraine is an empire. “Should we buy here?” I am frequently asked. The Ukrainian currency certainly has been decimated, now trading with a fifteen handle versus the U.S. Dollar.
The sixty-four thousand dollar question is, what does the future hold for the Hryvnia? The short-answer is, unfortunately, nothing good.There are striking fundamental differences between the Russian and Ukrainian economies and geopolitical realities. The Ukrainian economy is in shambles. Stunted and stifled by corruption before all of this conflict started, the war in East Ukraine or Novorossiya (New Russia), has only made things significantly worse.
Most of Ukrainian industry is located in the East, where Russia has overtly supported the rebels with outright Russian marked armor, soldiers, artillery, and supplies. President Putin wants access and control of this industry for the Russian defense industrial complex. This is one of the main reasons for the conflict to begin with. This loss of industry has further strained a dire economic situation for Ukraine. Ukraine needs peace to recover and Putin will not allow peace.
The Ukrainian Central Bank actually did a credible job of attempting to peg the Hryvnia to a dollar 13 handle during the recent months of conflict.However, with currency reserves dwindling, the Central Bank has given up the fight and the currency has lost a high single digit percentage in recent days. There simply are no more reserves left. This is going to make the rescue of the Ukrainian economy much more difficult for the IMF.
Speculators have obviously jumped on the short Hryvnia train and there is simply too much momentum at this point for the Central Bank to break.The bank has threatened to act surprisingly to hurt the short trade but this is simply an empty threat and the short-sellers know it. In contrast, Russia has much more heft behind it’s central bank’s threat to break the speculator’s back. She still has a half trillion dollars of foreign exchange reserves and the Russian president of the central bank has been deft in her use of firepower in defending the RUB. Although most likely in recession, Russia still is a two-trillion dollar economy.
Ukraine is also losing human capital and intellectual talent. The people are unhappy with the reforms promised after the Maydan revolution.Corruption is still rampant. Politicians on the take are still in positions of power, not removed as promised. There have even been threats by the Ukrainian patriots fighting in the East to remove the government themselves if Ukrainian President Poroshenko does not make progress in reforming the federal apparatus.
All things considered, I would stay away from the Hryvnia. There is just too much risk, even for the sophisticated investor. In the absence of government reform, heavier IMF involvement, or Russia pulling out of the East, the future for Ukraine looks bleak. Until any of these possibilities materialize, look for other opportunities.
