rules of the game

Hryvnia absorbs punch

16.08.2013 | Olha Danylenko

Ukraines currency has developed immunity to economic adversity by preserving its independence

Despite the recession and the new wave of economic crisis in Ukraine, the official NBU exchange rate of the national currency remains unchanged. Over the past 3 years the drop in the value of the hryvnia was insignificant: the fluctuation in the official exchange rate of hryvnia to dollars since 2010 was all of 0.63%

The stability of the hryvnia surely impacts the moods of Ukrainians. According to the results of a survey of DW-Trend conducted by the Ukrainian branch of the IFAK Institute of Public Opinion upon the order of Deutsche Welle, over the past year the level of trust of Ukrainians in their national currency has almost doubled. 38% of the surveyed responded that they have trust in the hryvnia, while only 29% responded that they have more trust in the U.S. dollar. Only 13% of the surveyed responded that they trust the Euro.

Ukrainians who not too long ago heatedly bought up dollars have today cooled down in the US currency, so in April and May Ukrainians preferred to sell greenbacks. The volume of sales of the U.S. dollar for the first time in four years exceeded the volumes of buying. According to statistics of the NBU, in February 2013 the size of the hard currency deposit portfolios of average citizens fell by US $182 mn and in March by US $196 mn. In April and May the outflow of freely convertible currency from banks continued, though at a lower pace (the drop was US $5.4 mn and US $4.4 mn respectively). According to DW-Trend, the majority of Ukrainians (37%) preferred to hold their savings in hryvnia. The number of people who prefer to hold their savings in dollars and euros is significantly lower at 20% and 6% respectively.

Ukraines national currency has not only earned the trust of its citizens, but also preserved its status quo when introducing regional currencies was a worldwide trend. The idea of raising the status of the Russian ruble to a regional currency for settlements in post-Soviet republics was nurtured by Russia. For Moscow this should have been the first step toward making the ruble a reserve currency. However, pulling Ukraine into the ruble zone of Russia failed, even though Moscow did its best. The NBU rejected the idea of including the ruble in its reserves and did not receive any proposals currency swaps from Russia.

Similarly, it did not receive wide dissemination and crediting in rubles, which Russian banks tried to introduce in the sphere of issuing loans to enterprises and auto financing and home mortgages for the people. It is worth noting that not all republics of the former Soviet Union withstood the pressure of Russia that actively planted its ruble there. For example, starting in 2009 Belarus calculates its exchange rate of its currency based on the currency basket into which the ruble was planted instead of the US dollar or the Euro.

The hryvnia remained on the sidelines from these global currency wars. On the contrary, the war against devaluation launched by the government and the NBU that has characterized Ukraines economic policy over the past several years is contrary to the notion of lowering the exchange rate of the national currency in order to support the competitiveness of domestic products on foreign markets.

By the way, by pegging the exchange rate of the hryvnia to the dollar Ukraine in a certain sense is engaging in currency wars on the side of the U.S. If the latter manages to maintain the value of the dollar at a relatively low level, Ukraine will gain just the same as the U.S.

According the assessments of economists, so far the U.S. is winning the currency war. When the hryvnia is pegged to the dollar in this way there is the flipside of the coin. First of all, in order to maintain the stability of the exchange rate Ukraine needs a constant inflow of foreign capital. Conversely, in order to support the exchange rate the NBU is forced to spend its own hard currency reserves.

Secondly, to a large degree the level of dollarization of Ukraines economy remains high due to the pegging of its currency to the U.S. dollar. Moreover, the crisis is deepening and today this indicator exceeds 30%. By the way, the hryvnia has started making its first timid steps towards entering global capital markets. Starting July 14 stock exchanges in Moscow began trading hryvnia-dollar futures.

The organizers of trading forecast that by the end of next year the trading volumes could reach US $5-10 mn per day. Up until now, non-deliverable forward (NDF) hryvnia-dollar futures were offered on the London Stock Exchange (its quotations reflect the expectations of foreign stock exchange operators regarding the future exchange rate of the hryvnia).

That start of trading of Ukraines currency on Russian stock exchanges means that in the future a part of the settlements between Russian and Ukrainian companies can be effectuated in the Ukrainian currency. But the main thing is that this is a true step forward for the hryvnia towards free convertibility.

Naturally, there are many risks for the Ukrainian hryvnia along this path. In essence, then the exchange rate of the hryvnia will not only be set by the NBU, but also on international exchanges. This, in turn, means that managing the rate manually will be even more difficult, because the circle of competitors wanting to turn a profit on exchange rate fluctuations will grow even wider.

Skeptics do not rule out that exchange rate swings could be arranged upon the order of Moscow officials, which as a result will give it yet another instrument of pressure on Ukraine. Incidentally, the economic reality is that the more open and free a currency is, the more prone it will be to the risks of fluctuation.

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