Dive Contest: Russian Ruble v Ukrainian Hryvnia

Only the bravest would take a position on the RUB/UAH exchange rate.

In the Summer Olympics, they have a popular and quite watchable event called "synchronized diving." I am reminded of the sport when I observe the situation of two of the fastest-falling currencies worldwide, the Russian ruble and the Ukrainian hryvnia. Synchronized by geography, conflict and tragedy, both these countries' currencies are in dire straits. Russia's economy is a one-trick pony dependent on high global prices for energy to sustain itself. Ukraine's economy, meanwhile, lurches from one crisis to another without any end in sight. Fighting each other has further drained resources from both. There are no "winners" here to speak of. Recently, both countries have tempted fate by allowing their currencies to more or less float freely. The results are informative.

(1) Despite all Putin's showboating, the truth is that Russia could not maintain a burn rate of $2 billion or so a day defending the currency. So, it decided to allow the ruble to more or less float to find its real market value absent such large-scale market intervention. Once more, falling energy prices are impacting foreign exchange market participants' expectations about Russia going forward. For now, speculators are unwilling to push the currency past 40 ruble to the dollar. 30-some percent depreciation may have to do for 2014:

Falling oil prices, which started late July, fanned downside pressure on the ruble, battered by Russia’s flagging economic growth and Western sanctions. The country is now preparing to withstand a “catastrophic decline” in oil prices, President Vladimir Putin said in an interview to the state-run news agency TASS on Friday.

The ruble eased 0.7% to 47.13 versus the dollar by 1200 GMT, moving toward its weakest-ever level of 48.50 reached last week. Hit by a drop in Brent crude prices below $80 a barrel for the first time since September 2010, the ruble’s loss on Friday was relatively small compared to the volatility of the past few weeks.

Following a gradual weakening of the ruble to record lows in October, which prompted the central bank to spend some $30 billion to ease pressure on the currency, the Bank of Russia said on Monday that it would allow the rate to float freely in the market, eliminating its regular interventions. The central bank has warned however that it may carry out massive interventions at any level to deter speculators from betting against the ruble.

“Speculators are not opening new positions now, volatility is of cosmic proportions,” said Dmitry Stadnik, chief forex trader at Rosbank, the Russian subsidiary of French bank Société Générale.

(2) What about Ukraine's hryvnia? The re-entry of the IMF has apparently not stabilized the economic situation despite turning a blind eye to its dire straits. In other words, the IMF is lending with less regard for conditionalities given the precariousness of Ukraine's geopolitical situation. How can it be when your country's political situation involves being dismembered bit by bit? First the Crimean peninsula went, now the eastern regions are claiming to have voted for independence. Whatever; the end result is the same as in Russia--a diving currency:

Ukraine's hryvnia slid to a new historical low of UAH16.05 to the dollar at the close of November 12 on the interbank market. This marks a 50% devaluation on the UAH8 to the dollar exchange rate propped up by former president Viktor Yanukovych from 2010 through to his ousting in February 2014 - at the expense of the nation's hard currency reserves.

On November the National Bank of Ukraine reacted by deciding to raise the discount rate from 12.5% to 14.0%, partly to prop up the forex market. According to Valeriya Gontareva, head of National Bank of Ukraine (NBU), the central bank intends to fully switch to flexible exchange rate policy and inflation targeting.

Today's crossing of the psychological UAH16 to the dollar mark will not be the end of the descent, top NBU officials warned. "A balanced hryvnia exchange rate will come into being when the currency stops devalution," Serhiy Ponamerenko, the NBU's head of currency operations told newswires on November 13.

"Unfortunately, it is impossible to judge where the slide of the hrvynia might stop," says Dmitry Boyarchuk, executive director of thinktank CASE Ukraine. "If you look at the fundamentals, then there is no need for further weakening of the hryvnia. The problem is that the country has lost confidence in the leadership of the NBU, and in fact we see vicious circle of devaluation," Boyarchuk told Liga.net portal. 

As the chart above shows, relative to each other, the ruble is actually doing (gulp) better than the hryvnia even if they're both plowing historic lows. It's partly a function of Russia having by far the larger foreign exchange reserves to prop up the ruble for so long, but now that it has eased on intervention, we'll see what happens insofar as Ukraine has also let up on market meddling. As I mentioned, only the bravest foreign exchange traders would bet on the direction of the RUB/UAH currency pair. What a choice to make...