Emerging Europe

Risk of a bank run heightens in Ukraine

Fears of a bank run in Ukraine are rising, as central bank reserves sink and some 7 percent of bank deposits were lost in just 3 days.

Ukraine's reserves currently sit at $15 billion, according to the country's newly appointed central bank governor, Stepan Kubiv. Kubiv said 7 percent of deposits, or 30 billion hryvnias ($3.3 billion), were lost between February 18-20, when the violence in the country reached its zenith and snipers opened fire on protesters.

Goldman Sachs has estimated the country's foreign currency reserves have declined to $12 - $14 billion.

(Read more: Russia the 'swing factor' in Ukraine's future)

The central bank is considering providing loans to five of the country's banks, according to analysts, in order to prevent a bank run – when a large number of customers withdraw money simultaneously, increasing the likelihood of the bank running out of funds.

Reuters reported later on Wednesday that the central bank was taking measures to stop capital flight from the country.

"As suspected, February saw a further reserve loss - likely around $3 billion," said Timothy Ash, the head of emerging market research at Standard Bank. "I assume this was from people on the street, and I guess from former regime 'elites'. Reserve cover is now likely below two months of import cover."

"Clearly a very challenging job for the new governor, just 24 hours into the job," he added.


Bank run fears mean some financial institutions operating in Ukraine closed branches and imposed limits on cash withdrawals earlier this week - some of which have since been lifted.

Italy's Unicredit closed eight branches temporarily, while other branches reduced opening hours and imposed withdrawal limits of 1,500 hryvnias per day for Unicredit customers and 500 a day for customers of other banks.

The limit was lifted on Monday, but one branch still remains closed.

(Read more: Volatile Ukraine may now face default risk)

, Russia's largest lender, said it was no longer signing off loan agreements, although it has not reduced the amount of cash customers can take from ATMs.

"The bank continues to consider applications from potential borrowers building up a project portfolio. The bank will get back to signing loan agreements once the financial situation improves," said Igor Yshko, the chairman of Sberbank in the Ukraine, in a statement.

Russia's second largest bank, VTB said it "continues to operate as normal in Ukraine" but did not clarify whether limits on cash withdrawals are still in place on Wednesday.

Meanwhile, the country remains without a fixed government, days after the ouster of President Viktor Yanukovych. Ukraine's currency tumbled 4 percent on Wednesday to 10 hryvnia against the dollar, a new record low.

CNBC reported on Wednesday that a central bank executive from Ukraine confirmed there has been a change in policy. The bank has abandoned the peg of the hryvnia to the dollar and now instead is letting the currency weaken.

(Read more: Ukraine's ousted president wanted for mass murder)

The slump also hit the Russian rouble, which hit a fresh five-year low versus the dollar.

Nicholas Spiro, managing director of Spiro Sovereign Strategy, said Ukraine was on the brink of financial collapse, as it faces a 1990s-style emerging markets crisis, with the central bank burning through its rapidly dwindling foreign exchange reserves "in a hopeless defence of an exchange rate peg which has just been jettisoned."

"Even capital controls haven't helped shore up the hryvnia. Both the current account and budget deficits are in the 8 percent of GDP (gross domestic product) territory, tax revenues have collapsed and there's a run on the liquidity-starved banking sector, as deposits are withdrawn in anticipation of a sharp devaluation of the currency. We're witnessing a financial meltdown," he said.

U.S. government officials are currently visiting Kiev and International Monetary Fund officials have spoken of a potential $15 billion aid program. This falls short however of the $35 billion requested by the new administration in Kiev.

"Kiev is now at the mercy of its western allies. It's a race against time: will a first tranche of western aid arrive quickly enough in order to avert a complete collapse of the currency and the banking sector?" said Spiro.

By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave