Ukraine's International Reserves and the Impending Default

Ukraine's International Reserves and the Impending Default

The State of Ukraine's International Reserves

Official international reserves are the accumulated reserves of currency and gold which are under the control of a country's monetary authorities. International reserves are held in three main forms: a) foreign securities (as of November 1, 2013 76.39% of Ukraine's reserves were held in securities); b) currency in cash and currency deposits in banks (14.87%); c) gold in monetary form (8.74%).

In mid-2011 Ukraine's international reserves reached their maximum value since the country gained independence - 38 billion dollars. After that a decline in reserves began; over the course of two years (2011-2013) they dropped by 10 billion dollars (Table 1). The main reason is a deterioration of the balance of payments and an increase in the trade deficit.

Table 1. Ukraine's official international reserves from 2010 through 2013 (at the beginning of the year)


Total volume, in billions of U.S. dollars

Annual change, in billions of U.S. dollars


Annual change, %













- 2.8

- 8.1






Let us look at the changes in Ukraine's international reserves in 2013.

Table 2. Ukraine's official international reserves in 2013.



International reserves, in millions of dollars

Monthly change, in millions of dollars

Monthly change, %

as of January 1, 2013




as of February 1, 2013




as of March 1, 2013




as of April 1, 2013




as of May 1, 2013




as of June 1, 2013




as of July 1, 2013




as of August 1, 2013




as of September 1, 2013




as of October 1, 2013




as of November 1, 2013




as of December 1, 2013









In the first four months of 2013, growth in the official international reserves equaled around 700 million dollars. This growth was caused not by an improvement in Ukraine's trade balance, but by the fact that the Ukrainian Ministry of Finance was able to raise loans on the international market. In early February the Ministry of Finance issued 10-year Eurobonds in the amount of 1 billion dollars at 7.625% interest; in April 10-year Eurobonds in the amount of 1.25 billion dollars were sold at 7.5% interest. In total, the Ministry of Finance raised 2.25 billion dollars in foreign loans over the first months of this year.

However, in spring authoritative information agencies (Bloomberg, Reuter) and then the "big three" ratings agencies published unpleasant assessments of Ukraine's credit and investment risks. From these assessments it followed that the likelihood of Ukraine defaulting on its state obligations over the next year or two is very high. Higher than in African countries, and slightly lower than in the most "hopeless" countries like Argentina and Venezuela. After this Ukraine's reserves began to melt rapidly, since the country did not receive any new international loans, and the foreign trade balance continued to deteriorate.

Over just seven months (from May 1 through December 1, 2013) Ukraine lost almost 6.5 billion dollars in reserves. The largest losses (in July, September and November) were connected with the repayment of Ukraine's debt to the IMF.  As can be seen in Table 2, in November the losses of reserves were the greatest, at 1.84 billion dollars. The most important transactions which took place during this period were the following:

- the payment of a debt to the International Monetary Fund (stand-by arrangement) - 955 million dollars;

- net expenditures on currency interventions - almost 800 million dollars;

- payments on domestic government bonds - 578 million dollars;

- revenues from issuance of domestic government bonds - 822 million dollars.

The Policy of Increasing Domestic Government Debt

The question arises as to what the relationship is between international reserves and transactions with the domestic government bonds issued by the Ukrainian Ministry of Finance. First of all, let us note that for several years already, the monetary authorities have been trying to change the structure of the state debt by lowering the foreign debt and replacing it with domestic debt (Table 3).

Table 3. Ukraine's government and government-backed debt from 2010 through 2013 (in millions of U.S. dollars)




Total debt

Foreign debt

Domestic debt

Share of domestic debt, %

as of January 1, 2010










as of January 1, 2011









as of January 1, 2012









as of January 1, 2013









as of November 1, 2013










Over a little less than five years the share of domestic debt in the total volume of Ukraine's government debt went up from 33.2% to 48.8%. The great majority of Ukraine's domestic government debt is formed through the issuance of domestic government bonds; only a small part of this debt is loans from the National Bank of Ukraine to the government. The Ministry of Finance has been issuing such bonds for a long time, but in late 2011 an important event occurred in the Ministry's debt policy: it received the right to issue not only traditional hryvnia-denominated securities, but also bonds denominated in foreign currency, first and foremost in U.S. dollars. Ever since then, part of the domestic debt has been in dollars, and the Ukrainian Ministry of Finance has been meeting its obligations to bondholders  not only in hryvnias, but in American currency as well. The issuance of foreign currency bonds became especially active after Ukraine lost access to new international loans, that is, since summer of 2013. According to expert estimates, Ukrainian citizens hold between 40 and 50 billion dollars’ worth of currency in dollars and euros. Some analysts are inclined to believe that with the West's undeclared lending blockade against Ukraine, the country's government has staked on the currency savings of its citizens. Revenues from foreign currency bonds made up approximately 40% of the Ministry of Finance's total revenues from domestic borrowing in November 2013.

Foreign Currency Bonds and Some Beneficiaries of a Default

Foreign currency bonds are an interesting financial instrument with two advantages which are attractive to investors. First, the government fully guarantees its obligations for foreign currency bonds. Second, these securities can bring investors a large profit in the case of a default, a sharp drop in the value of the hryvnia and thus a sharp increase in the purchasing power of the dollar, especially on the Ukrainian market, where everything will cost pennies. The media point out that it is difficult for common citizens to purchase foreign currency bonds; only the chosen few have access to these securities. The National Bank of Ukraine has reported that in November 2013 most of the new issues of Ministry of Finance foreign currency bonds were bought by nonresidents.

The majority of foreign currency bonds (500 million dollars' worth) were bought by persons unknown in the last ten days of November. Almost all of the purchases were made on two days in that month: November 21, when N. Azarov announced the suspension of preparations to sign an association agreement between Ukraine and the European Union (300 million dollars in purchases), and November 28, the day of the Eastern Partnership summit in Vilnius (200 million dollars).  Sales also went well under the cover of the carnival of protests on the Maidan in early December. According to media reports, as of December 4 nonresidents held domestic bonds in the amount of 9.3 billion hryvnias (approximately 1.1 billion dollars). It is conjectured that it is these anonymous bondholders who have an objective interest in a default taking place in Ukraine. Even if there is no currency in the state treasury, the government will still have to pay the holders of foreign currency bonds. After all, it can pay not only in money, but in kind, for example, in land or stock in Ukrainian enterprises... Or put state assets up for sale (privatization) and use the proceeds to pay off the debts. The purchasing power of these foreign currency bonds will be high, as in the case of a default the assets of Ukraine's economy will be practically worthless.

International Reserves as a Means of Covering Foreign Debt

For some reason the attention of the media and experts is focused on whether or not there will be a government default in Ukraine. However, this question is part of a broader question, that of a "great default" in Ukraine. A "great default" is when not only the government, but private companies also refuse to honor their debts.

The fact that the Damoclean sword of default is hanging not only over the government, but also over the country's entire economy is illustrated in Table 4. It turns out that Ukraine's total foreign debt is almost 4 times greater than the foreign government debt. 73.4% of Ukraine's foreign debt comes from the private sector of the economy; in absolute terms, this is 104 billion dollars. The private sector's foreign debt comes from bank loans and corporate Eurobonds. Now the market value of such bonds has dropped abruptly, with a simultaneous rise in yield (payment for increased risk).

Table 4. Ukraine's foreign debt and its main components, as of July 1, 2013


Billions of dollars

Relative to the GDP, %

Share in the total foreign debt, %





Public sector








Other sectors of the economy





In order to assess the overall international creditworthiness of the Ukrainian economy and the likelihood of a "great default", it is helpful to compare the amount of the country's foreign debt with its international reserves. Table 5 gives the calculation for this figure, and for illustrative purposes the creditworthiness of the Ukrainian economy is compared with that of the Russian economy. For Ukraine, coverage of the foreign debt by the international reserves in the middle of this year was 4.2 times lower than for Russia.


Table 5. The foreign debt and international reserves of Ukraine and Russia as of July 1, 2013 (billions of dollars)


Foreign debt

International reserves

Coverage of the foreign debt by international reserves, %










Let us look at this figure for other countries as of 2011 (%): China - 464; Japan - 48; Saudi Arabia - 551; Taiwan - 361; Brazil - 87; South Korea - 77; Singapore - 1008; Algeria - 4205; Thailand - 151; Indonesia - 86; Malaysia - 186; Hong Kong - 77; Mexico - 70.  Russia's 2011 figure for coverage of foreign debt was 99%.

Of course, there are a number of countries for which this figure is low. Here are the 2011 data for some of them (%): Germany - 4; France - 3; Italy - 7; Switzerland - 24. However, the rich countries of the West have no need to maintain high coverage of foreign debt by international reserves, as their central banks issue currencies which are used as reserve currencies. They can use the printing press to cover their foreign debt obligations; Ukraine does not have that option.

Ukraine's Foreign Debt Expenses

Let us assume that the average percentage rate for foreign loans to the government is 7.5%. Then the annual debt expenses would be:

30.4 billion dollars X 0.075 = 2.3 billion dollars

The terms are more severe in the private sector; I would place the rate for debts in the private sector at the level of 9.5%. Then we get the following estimate for private foreign debt expenses:

104 billion dollars X 0.095 = 9.9 billion dollars

The total annual foreign debt expenses of Ukraine can thus be estimated at 12.2 billion dollars. The yield of Ukrainian 10-year treasury bonds maturing in April 2023 was 10.35% in early December.  According to Markit, the average yield of Ukrainian corporate bonds at closing on December 9 was 15.25%, almost 2 percentage points higher than in late November; this is a two-year record figure. In March, incidentally, the yield was 7.5%. Estimates are already appearing in the media that Ukraine's total foreign debt expenses for 2014 will amount to 15 - 17 billion dollars or even more.

It's difficult to say how great Ukraine's reserves will be in a year, or even in a few months. For example, in September Fitch Ratings predicted that Ukraine's reserves would shrink to 17.8 billion dollars at the end of 2013 and to 12.9 billion dollars at the end of 2014. Considering the events of Euromaidan, analysts from the American bank Morgan Stanley believe that if processes in Ukraine continue to develop as they are now, by March 2015 nothing will remain in the international reserves. From this they draw the conclusion that in order to maintain the level of reserves existing in Ukraine at the end of 2013 during the period from January 2014 through March 2015, it will be necessary to raise at least 18 billion dollars. There are only three likely sources for these funds: the IMF, the European Union and Russia.

The Exchange Rate of the Hryvnia and Default

A wide range of factors are currently contributing to the decline of the exchange rate of the hryvnia, and this is making life difficult for many companies and entire industries. In 2013 the National Bank of Ukraine began currency interventions to support the hryvnia. The NBU spends several hundred million dollars to this end each month. In summer the exchange rate was 8.0 UAH, and now it is 8.3 UAH (1 UAH = 0.12 USD). Analysts predict that in 2014 the exchange rate could be as follows: 1 USD = 9.2 - 9.4 UAH. However, this is perhaps a mild prediction, based on the assumption that there will be no default. It is difficult to even guess what the hryvnia exchange rate will be like in the case of a default. After the 1998 default in Russia, the exchange rate of the ruble to the dollar dropped to 4.5 times lower than it was before the default. And as a result of the financial crisis in the countries of Southeast Asia in 1998, international speculators like Soros engineered the collapse of national currencies and the subsequent buying up of cheap assets in the countries of this region.

An abrupt devaluation of the hryvnia could lead to mass bankruptcies of Ukrainian enterprises.  Unlike Russia, Ukraine has no large sovereign wealth funds, like the Reserve Fund or the National Wealth Fund, which could come to the rescue of foundering enterprises. Such severe shocks as a sovereign default are not even needed to start an epidemic of bankruptcies in Ukraine. Just recently the State Statistics Service of Ukraine published data on the financial performance of the country's economy for three quarters of 2013. 40.2% of Ukrainian enterprises ended this period at a loss. Two out of five enterprises are struggling just to survive! According to official data, the total losses of such enterprises was 107.43 billion hryvnias. Each day hundreds of notices of the sale of enterprises appear, from tiny shops to giants of heavy industry; this is an indirect sign that Ukraine's private sector is in a pre-default state. However, there are no buyers. Serious investors with foreign currency resources are waiting for the right moment. It's a scheme as old as the world: investors come when the national currency has collapsed and assets can be bought for pennies.

The physical assets of Ukraine's economy, if assessed at their real value, are many times greater than Ukraine's international reserves. In 2005 the national wealth of Ukraine was assessed at approximately 2 trillion dollars. About half of that was non-material components ("human capital" and financial resources), but approximately 1 trillion dollars came from the material component: fixed assets (about 300 billion dollars) and natural resources (about 700 billion dollars)1. It is around these "physical reserves" of Ukraine that the struggle is now unfolding.

Default and Privatization

In the case of a default, not only will many of Ukraine's private enterprises be put up for sale, but the remainder of the state's assets will be as well. In the beginning of this decade a program for privatizing state property was adopted; this program was planned to last for four years (until 2014) and was supposed to boost the government coffers by a total of 5 billion dollars. The program has been revised several times. As the list of strategic state enterprises was shortened, the range of enterprises slated for privatization became broader. The previous list of enterprises whose privatization was prohibited included 1492 enterprises. It was gradually reduced fivefold, to 296 enterprises. Such giants as Naftogaz of Ukraine, Chernomorneftegaz, Ukrinterenergo, Ukrspetstransgaz (a transporter of liquefied gas) and Druzhba Main Oil Pipelines were crossed off the list of enterprises which could not be privatized. Privatization makes no fiscal sense. The share of proceeds from privatization in total budget revenues was and still remains miniscule (Table 6). Furthermore, after privatization the enterprises stop paying taxes altogether or pay a bare minimum by using offshore tax havens and other clever tricks. The privatization plan fails every year.

Proceeds from privatization in Ukraine as of November 1, 2013 were 982.7 million hryvnias, or 9% of the target for this year. And this when there is an acute shortage of money in the coffers! Perhaps the government has decided to give up on privatization and set a course for the economic rebirth of the country? It doesn't look like it.  That is why the suspicion that privatization is being postponed until defaults break out in the country has emerged.

Table 6. Ukraine's state budget revenues from privatization of state property from 2008 through 2012 (in millions of hryvnias)




State budget

Revenues from

Share of budget revenues, %






















Privatization will be necessary in order to meet obligations toward the abovementioned holders of foreign currency bonds. Naturally, for those who have money in the form of foreign currency, privatization will be at its most profitable at the moment the hryvnia drops to its lowest point. And it is likely that some Ukrainian financial and industrial groups will be pushed aside, and the main beneficiaries of wide-scale Ukrainian privatization will be transnational corporations and banks.


1) Lyakhovets, O.O. (Ляховець О.О.). Оцінка національного багатства України//Наукові праці.- 2010.- №113(126).- С. 5-10; Національне багатство України [Монографія] / За ред. Дорогунцова С.І. – К.: РВПС України НАН України, 2005.

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