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. Last Updated: 07/27/2016

Ukraine on Verge of Banking Crisis

APResidents in the eastern Ukrainian city of Donetsk standing in line to get their deposits at the entrance of a local bank Tuesday.
KIEV -- Ukraine's Central Bank tightened controls on cash operations and dollar sales on Tuesday to prevent a banking crisis and stop capital flight out of the ex-Soviet state after a weeklong political crisis.

In the east of the country, panic-stricken Ukrainians besieged bank branches to withdraw savings and many cash machines were closed due to the rush for hard currency.

"This political situation is so tense that people are scared. I have money in the bank and how can I live if I cannot get my money. I am scared about what is happening," said Anna Golyn, a pensioner on the edge of the jostling crowd outside Ukrainsky Biznes Bank in central Donetsk.

In Kiev, people said they were having also having difficulty when they tried to withdraw money from cash machines.

Ukraine's Central Bank introduced limits on dollar sales to companies and individuals, ordered commercial banks to end early deposit withdrawals and set limits on withdrawals from cash machines.

"This is a variant of weighted regulation and it should help stability of the banking sector," Arseniy Yatsenyuk, acting Central Bank chairman, told a news conference.

He said they would be in place until Dec. 31.

The Central Bank measures were taken after days of mass protests and various pronouncements of a looming economic crisis following last week's disputed presidential election that handed victory to Prime Minister Viktor Yanukovych.

Rating agency Standard & Poor's warned that Ukraine's banking system was under the threat of disruption and could impact economic stability if the bitter political standoff lingered.

"The economic and industry risks pertaining to the banking system of Ukraine are very high and take into account economic and market turbulence," said S&P analyst Alwin Greder.

"A prolonged political crisis could severely test the banking system's liquidity, however," he added. S&P rates Ukraine below sub-investment grade.

Opposition leader Viktor Yushchenko, whose supporters have flooded the streets in the capital Kiev and western towns, has accused the authorities of stealing the Nov. 21 vote.

President Leonid Kuchma said on Monday the financial system could collapse within days "like a house of cards."

Analysts said the political crisis could cast a shadow on the functioning of financial institutions in Ukraine.

Ukraine's Central Bank chairman Serhiy Tyhypko resigned on Monday to focus on politics, but distanced himself from Yanukovych.

"It's very bad news for macro stability and probably we are going to see high inflation in November and December because there are growing concerns about monetary management and leadership at the Central Bank," said Frank Gill, emerging market strategist at IDEAglobal in London.

The Central Bank said it would limit cash dollar sales to $1,000 a day and non-cash dollar sales to $50,000. Withdrawals from cash machines were limited to 1,500 hryvnas ($282) a day.

Companies would be allowed to withdraw 80,000 hryvnas a month on top of wages and some other operational costs.

Yatsenyuk said those wanting to deal with higher amounts of money would require more checks under an anti-laundering law.

"It is one more step to stop capital flight. It is radical but absolutely fair in the current situation," Yatsenyuk said.

He said individual deposits slipped by 1.6 percent since the start of month. It compares with 30 percent growth of deposits since the start of the year.

The Central Bank spent about $2 billion from its reserves in the last two months to meet a growing demand for dollars fueled by capital flight and inflation fears.