Less than two weeks after the International Monetary Fund (IMF)announced a US$17.5 billion bailout loan for Ukraine, the centralbank tightened capital controls to prevent the country from runningout of foreign currency.

In spite of what has been pledged, Ukraine hasn't received amajor injection of IMF cash since a $1.4 billion disbursement onSept. 3, the lender's website shows. With its foreign reservesdropping 61 percent, to $6.4 billion, in the four months throughJanuary, the country's “cupboard is basically bare,” said TimothyAsh from Standard Bank Group Plc.

Central bank Governor Valeriya Gontareva announced new limits onthe amount of foreign exchange available to importers, and bannedbanks from lending money for clients to buy foreign currency. Morerestrictions may follow as the country's economy contracts amid adeadly conflict with pro-Russian rebels in the country's east,Gontareva said on Monday. The hryvnia fell as much as 11 percentper dollar and bonds tumbled.

“Aid can't come fast enough,” Richard Segal, head ofemerging-markets credit strategy at Jefferies International Ltd. inLondon, said by phone Monday. “The way things are going, thecentral bank may need to declare a moratorium on money leaving thecountry, perhaps through an interruption in debt servicing asArgentina did.”

Ukraine's $2.6 billion of 9.25 percent bonds due in July 2017,the sovereign's benchmark security for foreign investors, droppedfor a seventh day to an all-time low of 41.5 cents on the dollar at7:24 p.m. in Kiev, increasing the yield to 56.43 percent. Thehryvnia weakened to a record 31.5 per dollar on Monday beforerecovering to 28, the same level at which it closed on Friday,according to data compiled by Bloomberg.

IMF Lifeline

The IMF-led aid package, announced on Feb. 12, totals $40billion when including bilateral deals with nations as well asabout $15 billion in savings expected from negotiations the countryis pursuing with bond investors.

The Washington-based lender has stalled payouts under a previousfunding plan as the nation held presidential elections in October,lawmakers delayed the passage of this year's budget, and while thesides negotiated the second bailout.

“The implementation of strong policies and reforms under the newIMF program, including a flexible exchange rate, will help theeconomy adjust and lay the basis for a return of growth andconfidence,” an IMF spokesman said by email on Monday. “However, inthe short term, tightening of the administrative measures on atemporary basis may be necessary to support the foreign exchangemarket.”

Ukraine's debt is poised to extend declines as investors areunderestimating losses in the country's planned debtreorganization, analysts at Goldman Sachs Group Inc. and JPMorganChase & Co. said on Friday in separate reports.

“Ukraine is bankrupt, and the only reason the bonds are tradingat 40-45 is because of IMF involvement,” Dmitri Barinov, a moneymanager who oversees $2.6 billion of emerging-market bonds at UnionInvestment Privatfonds GmbH in Frankfurt, said by email on Monday.“Ukraine has neither the possibility nor the willingness to pay itsdebt, but will be forced to restructure under IMF conditions.”

The hryvnia's 44 percent depreciation per dollar this year,following a 48 percent drop in 2014, is driving up the prices ofimports and energy, while making external debt payments moredifficult for Ukraine. Governor Gontereva yielded control of thecurrency earlier this month, allowing it to weaken in an IMF-backedmove that helped eliminate an unofficial street market for currencytransactions.

“The National Bank of Ukraine has few options, with the Weststill dragging its feet over financial support,” Ash, the chiefemerging-markets economist at Standard Bank in London, said byemail. “History will judge Western leaders very poorly for how theyhave managed” to help Ukraine, he said.

–With assistance from Krystof Chamonikolas in Prague and AndrewMayeda in Washington

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