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UPDATE 3-Fear drives Ukraine dollar rush before polls =2

Olzhas Auyezov
Thursday, 25 Oct 2012 | 2:24 PM ET

* Ukrainians fear devaluation of national currency post-election

* Hyrvnia weakens to 8.1790 per dollar

* PM says no threats to hryvnia's stability

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KIEV, Oct 25 (Reuters) - Ukrainians rushed to buy dollars on Thursday, driving the hryvnia currency to a seven-week low on speculation that officials will allow a sharp depreciation after elections on Sunday.

Though there were no visible queues at exchange points and banks as there were four years ago when the hryvnia plunged by 38 percent, bankers said they saw increased demand from ordinary Ukrainians trying to protect their savings.

The hryvnia, which has been loosely pegged to the dollar since early 2010, weakened to 8.1790 per dollar on Thursday morning after closing at 8.1590 on Wednesday.

State-run Oshchadny Bank then quickly entered the market with bids that brought the rate up to 8.1680 per dollar. Later on Thursday, Ukraine's central bank offered to sell dollars at 8.05 hryvnias per dollar.

Analysts say the hryvnia is over-valued, as evidenced by Ukraine's widening trade and current account deficits, and there are widespread expectations that officials will back off efforts to prop up the currency after the elections are over.

Earlier this week, in an interview with Reuters, Prime Minister Mykola Azarov defended policy on the hryvnia.

``There are no threats to the hryvnia's stability,'' he said, adding that despite falling steel export revenues Ukraine had many other sources of foreign currency.

``This allows us to both maintain currency reserves at the necessary level and support a firm national currency while fulfilling our debt obligations and making for payments for (Russian) gas,'' he said.

PRESSURED RESERVES

Most financial sector players are far less convinced.

Brokerage Renaissance Capital said in a note this week the hryvnia was trading 15-20 percent above the value which would have brought Ukraine's current account gap to a sustainable level and removed the pressure on central bank reserves.

``This suggests that the equilibrium value of the hryvnia is about 9.2-9.6 hryvnias per dollar,'' it said.

Ordinary Ukrainians, as is the case across the former Soviet bloc where confidence in local currencies is traditionally weak, have been increasing foreign currency purchases since September, when the hryvnia briefly slipped to a 33-month low after a liquidity injection by the central bank.

``Ordinary people are panicking and emptying banks' (foreign currency) cash reserves for fears of devaluation,'' said a trader at a large local bank.

Local companies are trying to keep as much of their cash as possible in foreign currency. Analysts say exporters are withholding their revenues while importers are making advance payments in foreign currency which they can cancel later.

The government has never openly said it intends to allow the hryvnia to depreciate. But the central bank spent $2.5 billion on interventions in the first seven months of this year and analysts say it would struggle to maintain that sort of support for the currency in the future.

``If the central bank sticks to the stable hryvnia pledge its reserves will fall by another $2.0-2.5 billion in October,'' said another local bank trader.

NO GREAT LEAP

Little has come of hopes Ukraine would revitalise its communist-era infrastructure and move away from an oligarchical economic model since an Orange Revolution in 2004 which shook up its political elite.

Foreign investors say its bureaucracy remains opaque and difficult to deal with and the economy and public finances have lurched from one crisis to another since the global financial turmoil of 2008.

Among other things, the International Monetary Fund, with which Ukraine hopes to reach a new loan agreement soon, has recommended Kiev allow more exchange rate flexibility.

Ukraine's economy, dominated by steel exports, appears to have shrunk year-on-year in the third quarter as growth slowed to an estimated 1 percent January-September from 2.5 percent in the first six months of the year.

The government, however, hopes the full-year figure will remain positive and growth will rebound next year thanks to domestic demand boosted by pre-election wage and pension increases.

(Reporting by Olzhas Auyezov and Natalya Zinets; Editing by Richard Balmforth and Patrick Graham)