How to find refuge as fear rises over wobbly hryvnia

Last week’s bump in the hryvnia-dollar rate reignited fears of rapid devaluation, sparking even faster reassurances by Ukrainian government officials that everything was under control. Experts agree some level of devaluation will occur before or after the Oct. 28 parliamentary election, but also point to ways in which citizens and businesses can safeguard their assets or even turn a profit amidst the turmoil.

Falling international reserves. chronic current account deficits and a drop in international metal and ore prices have long convinced experts that devaluation was a question of when, not if. Some even argue it is the only way Ukraine can regain some of the competitiveness it lost to its neighbors. Over the past three months, the hryvnia has lost marginally to the dollar, but has gained relative to some regional currencies, 8.7 percent on Poland’s zloty, for example.

Nonetheless, memories of the 40 percent devaluation in 2009 have scarred Ukrainians. Thus, the relatively small jump in the exchange rate in days running up to Sept. 4 was enough to rattle nerves. During that period, the hryvnia slid at street side currency booths from around 8 relative to the US dollar, to above 8.2.

Investment banks currently estimate

an end-year exchange rate of 8.5-8.9, highlighting that the banking sector is much more resilient than it was three years ago. Nonetheless, knowing that herd mentality could easily turn a trickle into a flood, government officials were quick to point fingers and try to reassure the population.

"The rush and speculations were created by banks that have spare funds and can buy huge amounts of currency. They can hire so-called mercenary experts, media, and create hysteria and a rush, thus, forcing ordinary people to buy dollars they don’t need," Ukrainian Prime Minister Azarov said.

Whatever, the devaluation scenario, there are ways to protect and even increase your assets, experts note.

First and foremost, don’t keep the money under your pillows in hryvnia.

Long-term options, according, to Vadim Brailovskyi, head of European Capital Management, are moving your cash abroad to invest in real estate, for example. His top picks are Bulgaria,

Greece, Portugal and other countries discounted by the crisis.

The options, of course, depend on the type of investor and what they are betting on, said Vitaliy Sivach, a fixed income trader at Kyiv’s Investment Capital Ukraine.

Residents of Ukraine have a fairly straightforward option in so-called retail government bonds, as long as they trust the government to pay back. Denominated in U.S. dollars, they are set to be issued by the Ministry of Finance via state banks in coming months, with a face value of $500. "It gives 9 percent [annual] yield and hedges a player totally against hryvnia devaluation," said Sivach.

There are other defensive strategies.

Warsaw-listed sunflower oil producer and grain trader Kernel, for instance, has around 90 percent of revenue in foreign currency making it "the most defensive name among Ukrainian (foreign) listed companies," said Tatjana Telezko, agribusiness analyst at Kyiv-based investment bank Dragon Capital. Another example is grain farmer IMC, which has 80 percent of its revenues tied to the dollar, but only 40 percent of its costs.

More sophisticated investors can hedge their bets using derivative instruments, Sivach said. For example, foreigners selling products bought in dollars but sold in hryvnia at some point in the future can enter forward contracts, in which hrvynia are at some point in the future. This bet is on the future exchange rate, however, and only accessible to large players.

Quick, easy and feasible with even small amounts of money, opening a dollar-denominated account at a major bank is a solid solution, Brailovskyi said. Large banks are currently offering annual deposit rates of 8 or more percent, an absurdly high level by Western standards.

It seems to already have gained popularity among Ukrainians, who poured an additional Hr 3.2 billion into foreign currency deposits in August.

This solution carries another advantage in times of panic, when a surge in demand drains the dollars from the market. Should immediate exchange of cash prove impossible, it is always possible to open a dollar account and lock an exchange rate in.

Buying physical gold is also an extreme alternative. While its price has risen sharply in recent years - beyond what some experts say is sustainable — it offers the ultimate hedge against economic collapse.

"Gold preserves assets in an Armageddon scenario, when most Western economies will enter economic recession and will be forces to print money like there’s no tomorrow," Sivach said.

There’s always the option to bet the other way, he added. A non-resident can try to sell dollars via the forward option, for a six month rate of Hr 9.15. This would give a 26 percent return, over half a year.

"It’s not a free lunch though. If the hryvnia will devaluate to 9.15 or above, losses will be very substantial," Sivach said.

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