In 1998, amid a sovereign debt crisis, Ukraine imposed large losses on depositors that were not fully compensated, triggering public ire. Fast-forward to March 2013: Ukraine is now exposed thanks to depositor haircuts in another country, just as Kiev appears to be marching towards a balance-of-payments crisis.
While most attention has focused on the Russian impact of the Cyprus crisis, and the associated geo-political malaise, Capital Economics sounded the alarm in a research note on Thursday.
In the note, the research house argued that while Ukrainian deposits in Cyprus were low, ranging between $1 billion to $3 billion, compared with $30 billion of Russian money, disruptions to business transactions would exact a heavy, and pro-cyclical, toll for the Ukrainian economy.
The fear is capital controls in Cyprus will imperil vital transactional flows, disrupting business activity in Ukraine. At the same time, Kiev is mired in a balance-of-payments crisis and faced with a collapsing currency. The current account deficit is at a record high of 8% of GDP and the country faces a busy external debt-repayment schedule this year, totalling $55 billion, representing some 40% of GDP over a 12-month period.
And yet the central bank has only three months' worth of import cover in its FX war chest. It is little wonder that policymakers are trying to talk up the currency, in an anti-currency war.
Capital Economics concludes: "To make matters worse, the economy slipped back into recession towards the end of last year. And despite all this, there has been little progress in negotiations with the IMF over a new financing package. The Fund arrived in Kiev yesterday for a new round of talks, but with the government still reluctant to hike household gas prices [the IMFs key requirement], we think the much-needed deal may still be some way off."
It adds: "The upshot of all this is that although the direct impact from the levy on deposits in Cyprus on the Ukrainian economy is likely to be limited, wider vulnerabilities mean that the Cypriot crisis may still be enough to tip Ukraine into a financial crisis of its own. Whats more, without an IMF deal in place, Ukraine is extremely exposed if the Cypriot bailout triggers a fresh spike in financial market tensions."
Investing in the hryvnia is for the battle-weary investor.