Can someone spot the flaw in this?

[ETC]

Hi guys, I've been looking at term deposits overseas and have found that in the Ukraine you can get 20% p/a. I thought this was too good to be true so I checked the inflation rate in the country and saw that it is currently -0.2%. If I use the fisher equation for the real rate of interest I get 20.2%. I also checked the exchange rate between the Ukrainian Hryvna and US Dollar and discovered that the currency has traded between a very tight range for the last four years.

Now my question is this... what am I not spotting that makes this a bad idea? Are there tax issues, fees, political problems, bankruptcy issues, continued problems with inflation? What are the cons?

[Halebop]

Not an expert on Ukranian banks but presumably you can check the credit worthiness of the bank in your link?

I read an article maybe a year or two ago that stated the whole Ukranian banking system was caught in a credit squeeze. Locals sending money in the Euro$ and US$ and the banks caught in a classic lend long borrow short squeeze. Rates had risen as a consequence as Banks competed against each other and the foreign alternatives. Liquidity was also poor across the whole banking system. Am assuming this hasn't changed? Would want to carefully check the liquidity of the whole system and not just the Bank you want to invest in. If things are bad it only takes the first failure to get crunchy on the rest (consider consequential currency risks as well).

Demographics in the Ukraine are also awful. The population has been shrinking and forward projections are dire. This isn't a great scenario for property and lending.

Nice rate but perhaps not for the faint hearted?

[CJ]

What is the exchange rate meant to do as well. If there exchange rate is 30% lower next year, and you only got 20% interest, then you have made a negative return.

[ETC]

Yep, the exchange rate was my main concern. If it moved against me it could easily wipe out any gains I'd make. Currently the USD/UAH pair has trade between a very tight range: http://www.xe.com/currencycharts/?fr...to=UAH&view=5Y

I'm unsure why this is. Maybe the Ukraine government have pegged their currency similar to the Swiss with the Euro.

My thinking is, as long as the bank doesn't fall over and the exchange rate stays the same/similar, I'm good.

[ETC]

Thanks Halebop and CJ for the replies.

I'll definitely look at the credit worthiness of the bank and read up about the liquidity issue with the Ukranian banking system.

Also I didn't think to look at the demographics. Will check to see what the growth prospect for Ukraine economy is. Hopefully it's not too dire.

[CJ]

Where are you based. Do you know if Ukraine banks will even take deposits from you and is the admin hassle worth it for the amount you plan to invest?

[BIRMANBOY]

Where is your common sense located? If it was a good investment option they would have been flooded with funds...obviously if they are having to give investors 20% they are charging borrowers 22/23 %. Who in their right mind would borrow at those prices???...desperate people with a very high default rate comes to mind.

Hi guys, I've been looking at term deposits overseas and have found that in the Ukraine you can get 20% p/a. I thought this was too good to be true so I checked the inflation rate in the country and saw that it is currently -0.2%. If I use the fisher equation for the real rate of interest I get 20.2%. I also checked the exchange rate between the Ukrainian Hryvna and US Dollar and discovered that the currency has traded between a very tight range for the last four years.

Now my question is this... what am I not spotting that makes this a bad idea? Are there tax issues, fees, political problems, bankruptcy issues, continued problems with inflation? What are the cons?

[GTM 3442]

Now my question is this... what am I not spotting that makes this a bad idea? Are there tax issues, fees, political problems, bankruptcy issues, continued problems with inflation? What are the cons?

What are the mechanics of remitting the money to Ukraine, and remitting money from Ukraine.

What's the spread on the fx buy and sell rates, and what are the fees/charges for the conversions and remittances ?

What will you need to do to provide "proof of identity" - front up in person, or will a notarized passport copy do ?

Let us all know how it goes. . .

[shasta]

Hi guys, I've been looking at term deposits overseas and have found that in the Ukraine you can get 20% p/a. I thought this was too good to be true so I checked the inflation rate in the country and saw that it is currently -0.2%. If I use the fisher equation for the real rate of interest I get 20.2%. I also checked the exchange rate between the Ukrainian Hryvna and US Dollar and discovered that the currency has traded between a very tight range for the last four years.

Now my question is this... what am I not spotting that makes this a bad idea? Are there tax issues, fees, political problems, bankruptcy issues, continued problems with inflation? What are the cons?

The Ukraine is still fairly corrupt, alot of promises & hype & not much on the delivery front is my experience with Ukraine based investments.

Basically is risking 100% of your capital worth a 20% return, which would be further taxed in NZ?

My advice, AVOID.

[ETC]

Hey everyone you are correct... this is a bad idea.

While the exchange rate is currently pegged at 8:1 against the USD the National Bank of Ukraine is looking to softly devalue the currency by 10% over 2013. This basically makes the process pointless when you take into account remittance, bank fees, taxes and the hassle of setting up the account.

Surprisingly though Prominvestbank seemed legit, it had a B3 rating similar to HNZ BBB-, though long term deposits in Ukraine Hryvna (local currency) were rated B1.

Thanks for all the replies.