Investing in Ukrainian Banks

[Air Dog]

Hi guys,

Has anyone ever looked into putting money into Ukrainian banks?   My wife just returned from there, and said they were paying high interest, but I don't know how I would begin the process.  Also, is anyone aware of the potential pitfalls and tax liabilities?

Thanks,

Air Dog

[ScottinCrimea]

As I recall, Ukrainian banks pay about 10-15% interest. On the bad side, your deposits are not insured for much and there have been incidences of banks failing and people losing everything.  That isn't happening so much now, snd with the growth of foreign banks there is is much less likely to happen than in the past.  Still, there is a greater risk than in the US.   They typically charge 1% as a commission on withdrawals.

Perhaps the most important thing is that you have to keep very good records of where the money in your account came from or you will find it very difficult to take it out of the country.  There are some ways around this which I could share if you get to that point.

You need to know which banks are the most stable and which ones are accustomed to dealing with foreigners.  I have a bank in Simferopol that most foreigners there use as we have learned through word of mouth that it provides the fewest hassles.  We used this bank for me to wire funds from my US accounts to my wife and had no problems at all. You can open an account in either hryvnas, dollars or euros.  Still, it was strange when I opened my first account there.  I wanted to deposit an initial $1,000 cash, but they refused to accept it because I didn't have a "declaration" that showed where the money had come from.  So I was given an account but with no money in it.  Rather strange.

If you want to begin the process, just open an account in ukraine, have money wired to that account from an account n the US and you're set.  I can't tell you anything about the tax issues, but I suspect there will be none other than what you would have to declare on your US tax return.  If you want to play it safe, you can just register as an entreprenour for tax purposes, which means that you have to pay $50 a month in taxes as long as you make less than $100,000 a year.

[Shadow]

Ususally the high interest is paid on acounts in local currency (Hrivna).
And this means that the devaluation of the currency can leave you with a lot less profit as you imagined 

[ScottinCrimea]

When was the last time there was a devaluation of the Hrivna?  Seems like it has been going the other way.  Two years ago I could get 5.4 hrvna for my dollar, now just over 5.

[Mir]

Scott

True that value of Hrivna is fixed against the dollar by the Ukrainian central bank, but look at the devaluation it has had against Euro and Sterling.

[Air Dog]

Guys,

Thanks for your advice.  You've definitely given me something to think about.

Air Dog

[ScottinCrimea]

But if he's dealing in US dollars and wants to take his profit in same, what's the problem?

[Mir]

Not a problem for me and maybe some profit can be made.
But it is a high risk investment and there are other countries where higher interest may be possible on investment.

[Shadow]

The Argentinian Peso was tied to the US dollar for a long time. Anybody remember what happened the moment they let it go ?
For banks to pay out such interest rates means the economy is very stressed indeed. It also means that the banks are completely desparate for investors to put their money. Ususally that is a sign of an imminent collapse.

[ScottinCrimea]

The Ukrainian banks want the money because they can loan it out at 30% interest or invest it in real estate in Ukraine which is appreciating at a much higher APR than 10%.  Another issue is that they want to build their reserves to appear more attractive to the Western banks that are looking to acquire or merge with a Ukrainian bank.

[Bruno]

The Ukrainian banks want the money because they can loan it out at 30% interest or invest it in real estate in Ukraine which is appreciating at a much higher APR than 10%.  Another issue is that they want to build their reserves to appear more attractive to the Western banks that are looking to acquire or merge with a Ukrainian bank.

Remember whathave happen with the internet "bubble"... some people have loose million's... sorry, in FSU, price for real estate are not more realistic... few of the young people are able to buy a home or a appartment... price are too much high related to the local economic level.... one day or the other, we will know a crash... and foreign investor who have create these "bubble" will loose a lot of money...

[Bruno]

Scott

True that value of Hrivna is fixed against the dollar by the Ukrainian central bank, but look at the devaluation it has had against Euro and Sterling.

Wrong... it is mainly the GOV... bank have very few to say...

http://iee.org.ua/en/detailed/prognoz/773

...Forecasting the rates of exchange for Ukraine is easy, and difficult simultaneously. It is complex, because almost all tools of monetary policy are clamped by semi administrative measures. Practically do not work a discount rate and operations at open markets. Operations in the currency markets have narrowed the influence on economy owing to the overestimated rate of exchange of grivna and the negative current account which have reached milliard values.

On the other hand to predict in Ukraine a rate of exchange is simply. It is necessary to know only about administrative intentions of the NBU regarding an establishment of an official rate of exchange: what its NBU will declare, such it will be in the market. So, for example, if there is a consensus between the NBU and the Cabinet about gradual translation of an official rate in 2007 to value 5, 1 grn. for US dollar such it will be by the autumn 2007...

For the last 360 days, the change is 5.05 ... maybe it will change end of these year...

[Mir]

Wrong... it is mainly the GOV... bank have very few to say...

Bruno

Not that it make any difference to anyone who decides exchange rates.
Maybe you are unaware that the Central Bank is a government organization (so it is GOV).
Still can you please tell me where you got the info about how exchange rates are fixed in Ukraine ?(I want to improve my knowledge).
As for me:
Legal status, principles of organization and activities of the National Bank of Ukraine are determined by the Constitution of Ukraine and the Law of Ukraine "On the National Bank of Ukraine".

The National Bank of Ukraine is a legal entity with separated property, which is the object of the state property. Its authorized capital amounts to UAH 10 million and is the state-owned property which  is in the full economic competence of the National Bank.

According to Article 99 of the Constitution of Ukraine, adopted in 1996, the main function of the country's central bank is to ensure stability of monetary unit-the Hryvnia.  To carry out its main function, the National Bank shall foster the stability of the banking system and, within its competence, the price stability.

According to the Law of Ukraine "On the National Bank of Ukraine", the National Bank is the central bank of Ukraine, a specific central body of the state administration, its issuing center which pursue common state policy in money circulation, credit, strengthening of monetary unit; it coordinates functioning of the banking system in general; determines exchange rate of the monetary unit against foreign currencies. The National Bank determines a kind of bank notes, their denomination, distinctive features and their protection system. The National Bank of Ukraine ensures the accumulation and custody of the gold and currency reserves and the conduction of transactions with them and the banking metals. The National Bank of Ukraine sets up  the order of determining a discount rate and other interest rates;  it gives permission for commercial banks' registration and licenses banking business; determines the standard of emergency funds for commercial banks and other financial and credit institutions.

 Functions
Main Function

According to the Constitution of Ukraine, the main function of the National Bank is to ensure the stability of Ukraine's monetary unit.
To carry out its major function, the National Bank shall foster the stability of the banking system and within its competence, the price stability.


From: http://www.bank.gov.ua/ENGL/NBU/index.htm

Now as your understanding of Ukrainian banking system is better then mine can you tell me if I am wrong to conclude from the above information that fixing exchange rates between UAH and dollar is one of the functions of this bank.

[Bruno]

Still can you please tell me where you got the info about how exchange rates are fixed in Ukraine ?(I want to improve my knowledge).

First, the link from my previous post... second, the article from some dutch financial expert ( http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6W8Y-4KPX8S7-1&_user=10&_coverDate=10%2F31%2F2006&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=d893a01eca531299e6daeb1303280f1a )

And seriously, it is some year that i follow the $/grivna exchange rate... specialy since one of my post have become a "top" post... and recently on the main page here... yep, the exhange rate on the main page is one of my finding... 5.05 from the last 360 days...try it... click on one of the change rate... yep, it lead you to http://finance.ua/ ... sorry, it is inUkrainian... but interesting information too...

Is it these post replying to your question or do you wish know more ? I Don't really know what you wish to know ? 

Edit : If you wish a more realistic change related to $; take  look at the rubble exhange rate to $... these is not blocked by some political administration... and in these  case, the $ is not so low when compared to the Euro... more near like the real exhange rate used in the rest of the world... today, the $ was more strong in the world... Euro was losing... in ukraine, it have not show the stronger $...

Edit two : take a look at http://www.pasos.org/content/download/10461/68615/file/nl_eng_20070709_0371.pdf ... you will seee that the NBU have not the full power... far from it !!!

[Mir]

OK Bruno I will tell you what I mean.

Fact:

Ukrainian National Bank is the Central Bank of Ukraine and decides what is the parity between UAH and US dollar.

You say this is wrong.

However while I have given you the link that confirms the fact and tell you the legal and constitutional status of Ukrainian National bank and its role in stabilization of UAH, you have not been able to provide any reason why you think that my statement (of the fact) that Ukrainian central bank fixes the exchange rate between UAH and US dollar is (in your openion) wrong.

Did I say that the Central Bank of Ukraine has full power? No, I just said that it has fixed the the exchange rate of UAH to the dollar ( Scott

True that value of Hrivna is fixed against the dollar by the Ukrainian central bank, but look at the devaluation it has had against Euro and Sterling)

And the article you have refered says:
What’s wrong with the current
approach?
ICPS economist Oleksandr Zholud presented
a report on Ukraine’s monetary policy
and possible options for regulating the
exchange rate. Generally accepted monetary
regulation includes three approaches
to exchange rate policy: targeting the
exchange rate (Ukraine does this), targeting
the growth of monetary aggregates and
targeting inflation.

Yes the decisions may be politically motivated, so what? They are still implemented by the Bank.I give you one example:
In UK the third aproach is used by the bank.
What will happen if the Sterling falls from 1.49 euros to 1.03 euros in 2 days? There will be several actions by the Bank of England, it can buy sterling for euros to defend it, or it can increase interest rates so others buy sterling. Such decisions will be taken by the Chancellar and the government, but the Bank will implement it.

And seriously, it is some year that i follow the $/grivna exchange rate... specialy since one of my post have become a "top" post... and recently on the main page here... yep, the exhange rate on the main page is one of my finding... 5.05 from the last 360 days...try it... click on one of the change rate... yep, it lead you to http://finance.ua/ ... sorry, it is inUkrainian... but interesting information too...

Here I have no idea what you are saying and what was your finding.

[ScottinCrimea]

Mir, I don't really follow the value of the Euro or Sterling.  Unless I am traveling in the UK or Western Europe, it doesn't make the least bit of difference to me.  When I am in the US I spend dollars.  When I am in Ukraine I spend hryven or dollars.  Do you also keep track of the hryvna versus the yen or peso?

[DKMM]

They will stick with tying to the dollar.  Its easy because the dollar keeps falling.  Seriously, its not a bad investment.  There is some political risk. 

Credit markets are going through some hell right now.  I pulled a quarter mil out of the stock market on Monday to roll it over... and now i'm having the cash just sit there watching this market fall and am very pleased with the luck.

Its so bad even Gazprom delayed a bond offering today.  If things start unravelling further, look out!  Russia is actually a greater risk than Ukraine because they are so over extended on credit.  Plus the budget will outstrip their revenues soon (even with all that oil & gas).  The Ruble is becoming more at risk of devaluing again the further it appreciates... and don't even get me started on inflation.