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There’s early indication that the Ukraine and Kazakhstan want to prevent capital flight through outright taxation on investment withdrawals and may require exporters to sell some or all of their foreign-currency earnings to the Central Bank at rates it indicates.

So much for free market Capitalism…welcome socialist Regulation!

Ukraine and Kazakhstan are among the countries often referred to as “Eastern Europe,”  a region that has been plagued with double digit declines in stock market performance YTD (despite upticks in March) and severe currency devaluation over the last six months due to the global recession, especially as demand from the Eurozone, the region’s main trading market, has been smashed.

Kazakhstan and the Ukraine, both heavily dependent on commodity exports (oil, steel, and agricultural commodities) have been hammered in particular by oil’s price plunge since its highs in the summer of last year. Oil’s deflationary pressure has helped increase default risk on foreign-denominated debt, leading to the IMF bailing out the Ukraine to the tune of $16.4 Billion late last year. The Ukraine used some $12 Billion to purchase the local Hryvnia to prevent it from being dangerously devalued, the outcome of which depleted its currency reserves.

Now the Ukraine and Kazakhstan, both desperate for foreign currency to bolster its reserves, are preventing their banks from returning money to investors in foreign denominated currency and may prevent companies from paying dividends to international shareholders. Additionally it’s being reported that the governments are compelling exporters to sell foreign-exchange earnings to the government for local tender. 

The new rules and controls the government hopes to levy to protect against the flight of foreign capital and augment currency reserves will only encourage investor to flee amongst the uncertainty of policy. Foreign investment is paramount for these emerging market countries, and these measures will surely be antithetical for foreign investment needed to aid these struggling countries.

Matthew Hedrick
Analyst