The currencies of two hostile brothers, Ukraine and Russia, are experiencing opposite trends. While the ruble is at its highest level since 2015, the hryvnia, Ukraine’s currency, is backed by its central bank at arm’s length. It has lost a third of its value against the Russian currency this year.
Even before the start of the Russian attack, the National Bank of Ukraine (NBU) intervened to support its currency, which had lost 7% from the beginning of January until the start of the war. He then increased his interventions from $2 billion to $3.5 billion between March and May. The NBU makes sure that the dollar does not go too far above the mark of 30 hryvnia. This year, the dollar has gained 8% against the Ukrainian currency. The dollar is worth 29.50 hryvnia, compared to an average of between 26 and 27 in the previous two years. The Ukrainian currency is stable against the euro, which costs 31 hryvnia.
The war caused its reserves (its financial cushion) to fall by $9 billion to $25.1 billion at the beginning of June due to foreign exchange interventions up to 80% in the dollar and 20% in the euro. , according to central bank statistics. With his capital limited to support his currency, he more than doubled his interest rates in early June, raising them from 10% to 25%. This tightening of monetary policy has temporarily stabilized the hryvnia, preventing inflation, which currently stands at 18%, from skyrocketing in the coming months. Real rates went into positive territory.
Sergei Nikolaychuk, deputy chairman of the NBU, said that downward pressure on the currency would remain, but further intervention would likely be needed. The country’s banks will lose more than 20% of their loan portfolio due to war-related defaults and bankruptcies. Half of the top 20 banks should remain profitable, but the state will have to take over and increase its lending.
To attract investors, Ukraine must secure higher returns on its “war debt” meant to finance its defense. She hopes, in particular, for the help and financial support of the Ukrainian diaspora, especially those located in the United States.
“The NBU has become the main contributor to budget financing, and its share in the holding of Ukrainian government bonds has increased from 34% to 45%. The international community has allocated $23 billion to Ukraine this year, but the money is coming in too slowly, at the rate of $3 billion a month. The market is worried about the risk of Ukraine’s sovereign debt restructuring,” explained Elina Rybakova and Benjamin Hilgenstock in a note from the Institute of International Finance. Ukraine has already received nearly $6.8 billion in financial support since the Russian invasion. The country has been receiving assistance from the International Monetary Fund (IMF) since 2015 and received a $5 billion loan.
The financial system is destroyed
At the beginning of the war, “the NBU had cash reserves in several settlements, but the conflict disrupted its distribution to banks and ATMs,” the IMF noted in a report on the country’s economic and financial situation in early March. In Ukraine, withdrawals were limited to UAH 100,000 (€3,225) per day. This restriction remains in effect. The 5 million Ukrainian refugees who are still abroad (Poland, etc.), for their part, can withdraw a maximum equivalent of 50,000 hryvnia per month in the currency of the host country. Two times less than before.
Some of this money is indeed sent back to Ukraine, especially to families, but these undeclared foreign exchange flows are beyond the control of the central bank. They can feed the black market and various traffic. The country would like to get as much money as possible from Ukrainian citizens abroad in order to contribute to a very costly war against Russia.
In early June, the Kyiv School of Economics estimated the destruction (houses, roads, factories, airports, infrastructure, etc.) caused by the war at nearly $104 billion. In the end, the reconstruction will also be a money hole. Werner Hoyer, president of the European Investment Bank, estimates it at 1 billion euros, and for him “Europe will have to play a significant role.”
$135 million in cryptocurrencies and NFTs
Ukraine has just resold CryptoPunk #5364, which was handed over to it on March 2 to participate in military operations. The country recovered 90 ethers, or $104,000. However, since the beginning of March, the second cryptocurrency has lost 60% of its value. Three weeks after the start of the conflict, Oleksiy Bornyakov, Ukraine’s digital minister, estimated that cryptocurrency donations from around the world allowed his country to buy, among other things, 5,500 bulletproof vests, 410,000 combat rations, 500 helmets, 3,427 medicines, and 3,125 heat detectors. Images. Ukraine has raised almost 135 million donations in cryptocurrencies and NFTs (non-fungible tokens) since the Russian invasion.