Alexander Okhrimenko

President of the Ukrainian Analytical Center, Ph.D. in Economics, on the economy and business, latest trends and forecasts.

Hryvnia exchange fluctuation in Ukraine is caused by Euromaidan only. When the Ukrainian opposition leaders began illegally capturing government buildings in the regions, this led to panic spread among the population. In this situation, instead of trying to calm people down, the opposition leaders started making obviously provocative statements about possible splitting of Ukraine. Such talks from the opposition representatives caused extreme fear of the population, which led to the increasing demand for foreign currency. Ukrainian people were simply scared by the actions of opposition instigators.

In such conditions, the National Bank of Ukraine was forced to work after hours to quench the panic. For these purposes, the NBU started performing interventions at the interbank exchange market, but it could only save the situation in part. According to the results of January 2014, the purchase of foreign exchange cash made USD 660 million more than sale. The trends were clearly those of economy dollarization. Thus, the NBU approved a number of resolutions on February 6, 2014, which improved the situation at the exchange market a great deal and enhanced liquidity of the banking system.

In particular, the NBU imposed restrictions of doubtful operations which clearly had no relation to real fulfillments of foreign economic contracts. Also, the NBU enhanced control by the State Financial Monitoring System over the operations on illegal money and terrorism financing funds laundering. It led to termination of doubtful operations which bore the signs of illegal money laundering and exchange flow to offshore companies. As a result of that, demand for foreign currency decreased rapidly. Persons who dealt with doubtful exchange purchase operations and rocked the exchange market finally left it.

The NBU also restricted a number of operations performed by banks to purchase foreign currency on terms of options and futures market. Now banks cannot purchase foreign currency for early fulfillment of their liabilities, as they practiced it before purchasing currency to repay foreign loans several months before the transaction. These were not exactly deals, but an attempt to override Ukrainian exchange legislation and benefit on the exchange margin. Similar games with the exchange rate rocked and destabilized the exchange market. History of many countries of the world says that time bargains with currency is a dangerous phenomenon which causes fluctuations of the national currency to benefit exchange speculators. That’s why Ukraine used the experience of other countries and prohibited operations at the options and futures currency market until the situation at the market stabilizes.

As a result of that, after resolutions by the NBU, the situation at the exchange market changed rapidly. The hryvnia exchange rate went down from UAH 8.7 to UAH 8.55. At the same time, the NBU managed to purchase about USD 1.4 billion at the interbank market, although previously it had had to sell currency from the gold and forex reserves. Now the situation changed radically, and now there is an excessive offer of currency instead of excessive demand at the market. In this situation, the NBU simply started withdrawing foreign currency from the market to prevent excessive revaluation of hryvnia.

Transition to flexible official exchange rate allowed the NBU to improve the situation at the Ukrainian exchange market to a great extent, stimulate exporters and at the same time reduce the influence of importers. This should make a positive effect upon the foreign trade deficit and lead to its significant reduction. Although at the same time one should not forget that the Ukrainian exchange market is congested with currency cash. As soon as the political crisis initiated by the Ukrainian opposition stops, we can expect mass foreign currency to hryvnia conversions. This also might cause a great effect upon the exchange market of Ukraine and stabilize the exchange rate, providing the NBU with the opportunity to replenish its gold and forex reserves.


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