The National Bank of Ukraine (NBU) on November 15 followed the lead of the Russian Central Bank (RCB) and raised its annual refinancing interest rate from 15 to 25 percent. (Russian agencies, November 15) While the rate hike was, in large measure, a reaction to the RCB’s own November 10 increase in its refinancing rate from 21 to 28 percent, the move also reflects some economic problems specific to Ukraine.
As was the case in Russia and in many other emerging markets, the NBU’s decision reflects the desire to stem the outflow of portfolio investment linked to the on-going crash in East Asian capital markets. But Ukraine’s relatively weak financial system, combined with the importance of short-term speculative capital from abroad (as opposed to foreign direct investment) in financing Ukraine’s current-account deficit, suggest that the significance of this threat is greater in Ukraine than in many other emerging markets. Moreover, the recent conflict between President Leonid Kuchma and the parliament over attempts by lawmakers to weaken Ukraine’s privatization program has exerted additional downward pressures on Ukrainian security markets. Finally, Ukraine’s continuing recession — GDP is likely to shrink by some 5 percent in 1997, in contrast to the slight growth now forecast for Russia — and Kyiv’s relatively greater reliance on Asian financial markets for raising capital, suggest that Ukraine could be more susceptible to the "Asian flu" than Russia. Ironically, the restrictive effects of the NBU’s rate hike are likely further to cloud prospects for economic recovery in Ukraine.
Perhaps the greater irony lies in the fact that the rate hike occurred during Russian first deputy prime minister Anatoly Chubais’s visit to Kyiv, a visit that Kuchma, on November 14, described as helping to end the "economic war" between the two countries. That "war" had been waged largely over trade issues. (Itar-Tass, November 14) In fact, however, the RCB’s decision to raise interest rates on the eve of Chubais’s departure for Kyiv — a decision supported by Chubais — can also be seen as another salvo in that war. The RCB’s rate increase signified an attempt to redirect speculative capital towards Moscow and away from Kyiv and other emerging markets. Seen in this light, the NBU’s November 15 response represented Ukraine’s attempt to protect itself from a Russian attack on its finances.
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