Olzhas Auyezov writes:
A sudden fall of Ukraine's hryvnia against the dollar this month has highlighted investors' concerns about the impact of President Viktor Yanukovich's power consolidation drive on economic policies.
Some analysts fear the former Soviet republic is drifting back towards becoming an autocratic regime where the interests of a few tycoons take precedence over wider economic considerations.
The hryvnia fell on Tuesday to a five-month low of 7.94 per dollar, having been weakened after a reshuffle at the central bank. The fall was relatively small compared with gains made since February but has prompted concerns about the hryvnia’s future direction.
On Sept. 1, central bank First Deputy Chairman Anatoly Shapovalov, who was closely involved in the exchange rate policy, resigned and was replaced by young banker Serhiy Arbuzov, seen as a close ally of Yanukovich.
The move led to some investor concern that the government, backed by steel exporters who bank-rolled Yanukovich’s campaign, would tilt the exchange rate policy in their favour by devaluing the hryvnia — or at least stopping it from strengthening.
"The presence of a strong steel lobby in the government reduces the probability that the hryvnia will strengthen, at least within the nearest 3-6 months," ING said in a note.
The central bank, which has been buying dollars for the last few months to stop the hryvnia from appreciating too quickly, said on Tuesday it would intervene to maintain hryvnia stability.
It has, however, pledged to allow more exchange rate flexibility under a $15 billion deal with the International Monetary Fund in July.
The way in which the central bank allowed the hryvnia to weaken sharply following the reshuffle — intervening only twice — could signal it is starting to follow the fund’s wishes. But artificially keeping the hryvnia weak would displease the IMF.
SUCCESSOR?
Local business weekly "Delovaya Stolitsa" suggested on Monday Arbuzov, "a dark horse to Kiev’s financial beau monde", could become the chairman of the central bank next year.
Arbuzov’s appointment appeared to be a part of Yanukovich’s wider campaign to concentrate power which he had started by putting together a parliamentary coalition and naming his ally Mykola Azarov as prime minister after his election in January.
In June, his government effectively sidelined the elected mayor of capital Kiev, former opposition politician Leonid Chernovetsky, by stripping him of most powers in favour of a newly appointed deputy.
As part of the same campaign, Yanukovich and his supporters are seeking to reverse amendments to the constitution made in 2004 that limited presidential powers in favour of the parliament.
The move would give Yanukovich powers enjoyed by Leonid Kuchma, president in 1994-2005, whose rule has been described by observers as autocratic and driven by interests of a select group of "oligarchs", powerful and wealthy businessmen.
Current central bank Governor Volodymyr Stelmakh is seen as a confidant of previous president and Yanukovich’s opponent Viktor Yushchenko. Yanukovich has said he will not seek to remove Stelmakh this year but has given him no further public assurances.
If Stelmakh were to leave, a further bout of hryvnia weakness would look likely. But the negative market reaction to Shapovalov’s replacement makes Stelmakh’s departure less likely.
"The market has certainly voted this down (replacing Stelmakh by Arbuzov)," said Ivan Tchakarov, chief economist for Russia and the CIS at BofA Merrill Lynch Global Research.
"Replacing a central bank governor is rarely a market-positive development, in particular when set against the overall tendency of Yanukovich filling in the key positions in the government with people close to him."
In addition, while the steel makers may be pleased by the hryvnia retreat, too sharp a move risks stoking public discontent as more expensive imports eat into household budgets already strained by utility bills raised last month.
HRYVNIA DIP "UNRELATED"
Some of the analysts say the hryvnia’s weakness had nothing to do with the central bank reshuffle.
"These things are completely unrelated," said Kiev-based Renaissance Capital analyst Anastasia Golovach.
"The main factor behind the hryvnia’s weakness was that (state energy firm) Naftogaz started buying dollars from the market, unlike in previous months when the central bank sold dollars to it."
Other market participants have said the sharpness of the move was due to investor nervousness following the reshuffle exacerbating the already heightened dollar demand from Naftogaz.
Two other factors that may have contributed to the move were import contracts, traditionally renewed and paid in autumn, and demand from individual investors which grew in August, according to central bank data, Golovach said.
Thus, Golovach sees the sell-off as short-lived and expects the hryvnia to strengthen to 7.5 per dollar by year-end on strong balance of payments and inflation concerns with the main risk coming from massive speculative purchases by individuals.
Those who see the reshuffle as the key cause for the move are less bullish, with ING seeing no appreciation this year.
Tchakarov of Bank of America Merrill Lynch said he saw the hryvnia "broadly unchanged" at around 8 per dollar by year-end, supported by the same positive factors.
"On the negative side, the fiscal situation is fragile and you have local dynamics (elections) that may prove to have a negative effect," he said, referring to the October 31 elections of local councils and mayors.
