Good luck for the hryvnia. How did the exchange rate change during the two-year war and what saved the foreign exchange market from collapse?

Since the Russian invasion on February 24, 2022, the national currency has depreciated rapidly, losing more than 36% of its value. What decisions were decisive in the exchange rate stability of the hryvnia and whether the exchange rate would remain at current levels?

In fact, as of February 22, 2024, two years after the start of the Russian occupation, the hryvnia exchange rate on the interbank foreign exchange market was 38.62 hryvnia per dollar, according to the NBU. Two years ago on this day the interbank exchange rate was 28.32 hryvnia per dollar. That is, in two years the national currency lost 36.3% of its value. Focus He investigated how the hryvnia exchange rate changed during the two-year war and what factors influence this now.

Rescue solution: What helped save the track from a steep dive immediately after the Russian invasion?

Experts call Decision No. 18 dated February 24, 2022 “On the functioning of the banking system during the period of martial law” as the most important document adopted by the Central Bank in its time. Let us remind you that in this NBU document:

  • cash withdrawal from the client’s account limited to UAH 100,000 per day (without taking into account the payment of wages and benefits);
  • prohibited cash withdrawals in foreign currency from customer accounts;
  • ordered that ATMs be loaded with cash without restrictions and that non-cash payments be carried out without restrictions;
  • ordered banks to ensure uninterrupted operation of branches in the absence of a threat to the life and health of the population, to ensure uninterrupted access to safe deposit boxes;
  • suspended the functioning of the Ukrainian foreign exchange market, except for the sale of foreign currency by customers;
  • Fixed the official exchange rate as of 24.02.2022;
  • introduced a moratorium on cross-border currency payments;
  • It stopped the execution of debt transactions by servicing banks to the accounts of residents of the Russian Federation.

The timely decisions of the Central Bank helped prevent mass withdrawals of funds from accounts, and also stopped the panic that could arise in the foreign exchange market and lead to an absolutely catastrophic decline in the hryvnia. The consequences of the crisis were avoided thanks to Decision No. 18, which the Central Bank later added and amended many times.

“In case of any crisis (and a full-scale war is not even a crisis, but a “situation of survival”) the economy finds itself on the brink and the demand for money increases significantly. And any restrictions will only stimulate it. And Resolution No. 18 will only be in time It was also strategically important. It became necessary and mandatory to establish the official exchange rate, revise the discount rate (increase it to 25%), impose foreign exchange restrictions on the cash market, impose restrictions on foreign currency transfers and pay foreign currency liabilities of enterprises, which, on the one hand, stopped the decline of the hryvnia (for example, they detained it ) on the other hand, steps that keep most of the currency available in Ukraine within the country“, explained in a comment Focus Taras Lesovoy is the head of the treasury department of Globus Bank.

And then – a flexible exchange rate: what important decisions affected the foreign exchange market and supported the hryvnia

For a long time, payments in the interbank market took place at the fixed rate of the NBU – from February 24, 2022 to July 21, 2022, the rate was 29.25 UAH. per dollar and from July 21, 2022 onwards 36.6 hryvnia per dollar.


Europe helped: Why is the hryvnia exchange rate strengthening and how can it happen in February?

“The new exchange rate level will be the anchor for the economy and will stabilize the economy in conditions of uncertainty. The continuation of the fixed exchange rate policy will allow the Central Bank to maintain control over inflation dynamics, as well as to maintain the smooth functioning of the exchange rate.” “This is an important prerequisite for the stable functioning of the economy, which is vital in war conditions,” said NBU chairman Kirill Shevchenko at the time.

The Ukrainian foreign exchange market had a fixed exchange rate until October 2023; until the Central Bank implemented a flexible managed exchange rate regime with its Decision No. 121 dated October 2, 2023. “Long-term fixation of the exchange rate will lead to the accumulation of risks for the economy and the financial system.”. Given the unprecedented uncertainty, at the beginning of a full-scale war, the introduction of such a regime ensured the stable functioning of the financial system and also contributed to the adaptation of business and the population to an all-out war. At the same time, as the experience of Ukraine and many other countries shows, such a regime is optimal only in a limited time perspective. It loses its effectiveness over time, causing exchange rate risks to accumulate and micro and macroeconomic imbalances to increase. All of this could currently weaken the economy and financial system and make it difficult for business activity to pick up again during Ukraine’s recovery phase.“, NBU reported then.

Important in stabilizing the cash market were decisions to expand the public’s purchase of non-cash money by depositing it.

“The main event for the foreign exchange market is, of course, the abandonment of the fixed exchange rate in favor of a managed flexibility regime. This is of course not a panacea, but this step had a very strong impact on the market.” . I understand that many Ukrainians are much more comfortable living in a fixed exchange rate regime, but de facto in the cash market this has never been the case. However, from an economic point of view, such a regime only leads to the formation of imbalances and subsequent inevitable shocks. Important in terms of stabilization of the cash market were the decisions to expand the purchase of non-cash money by the population by depositing them and the introduction of direct online purchase of money by Ukrainians in the non-cash market. These decisions significantly limited exchange rate fluctuations in the cash segment,” said Anna Zolotko, manager of treasury operations department at Unex Bank, which is important for the hryvnia exchange rate.

Experts say that the “managed flexibility” regime returns free exchange rate formation to the interbank market and, in fact, reorients the cash market to the interbank market in exchange rate policy. “In addition, the market gradually became ready to abolish the fixed exchange rate, and the regulator approved another vector for the “convergence” of non-cash and cash rates,” said Taras Lesovoy. He believes that: Among the most important decisions regarding the foreign exchange market is the introduction of “conversion deposits”, which significantly reduced demand pressure on the market (citizens wishing to purchase foreign currency were given the opportunity to purchase it at a fixed rate, but mandatory placement on deposits is required for at least 3 months. ) The next important step, the expert says, is to allow businesses to make foreign currency payments on loan obligations (this decision is still awaited).

One of the prerequisites for further liberalization of the currency is that the foreign exchange market can operate with greater autonomy and not be so dependent on NBU interventions.

Sergey Kucheryavyi, director of Kredobank’s liquidity and securities control department, thinks: The main factors affecting the hryvnia during the two-year full-scale war were international financial assistance and the NBU’s actions to stabilize and smooth out fluctuations in the foreign exchange market.. The expert specifically noted the following:

  • In the first year of the large-scale occupation, the National Bank of Ukraine provided all the necessary monetary conditions;
  • There was a rather calm transition to managed exchange rate flexibility, which is one of the steps towards the implementation of the strategy to ease foreign exchange restrictions in the autumn of 2023;
  • banks were allowed to sell non-cash currency to the public within the monthly limit of 50 thousand UAH equivalent in one bank and to increase the monthly limit from 100 thousand UAH to 200 thousand UAH equivalent for the public to purchase non-cash foreign money on deposit from three months.

In general, the National Bank is preparing to ease restrictions on the foreign exchange market in 2024, as NBU chairman Andriy Pyshny recently announced. But he says the preconditions for further liberalization are important. “We are actually talking about the ability of the foreign exchange market to operate with greater autonomy, without being too dependent on NBU interventions. This is the first condition necessary to increase export potential and relieve pressure.” The impact of imports on the trade balance. On the other hand, much depends on Ukraine receiving financial assistance from Western partners. It was these funds that helped the exchange rate to remain relatively stable over the past year and a half and at the same time increase gold and foreign exchange reserves,” said Anna Zolotko.

The hryvnia is weakening: What will affect the exchange rate on the second anniversary of the start of a full-scale war with Russia?

Recently, the hryvnia has failed to strengthen, but in February 2024, no unforeseen situations were noted in the foreign exchange market. According to this Sergei Kucheryavyi, One of the factors for the growth of the exchange rate in February was the more pragmatic behavior of the NBU in the face of reduced aid received from partner countries and reduced supplies from exporters..

Experts noted: The first two decades of February became one of the least active periods in the Verkhovna Rada since the beginning of the war – the average daily trading volume fell to $110 million, $40-50 million less than usual.. “Demand has decreased significantly, and the supply, especially from agricultural producers preparing for the planting season, has, on the contrary, increased. Therefore, for example, in the second week of February, the volume of NBU interventions decreased to 2.5 million” Minimum 201 million dollars. At the same time, the autonomy of the foreign exchange market increased significantly: on some days, the NBU’s foreign exchange interventions accounted for only 25-30% of the total transaction volume. Moreover, the regulator even had to enter the market by purchasing the situational foreign exchange surplus,” said Anna Zolotko.

If the security situation improves, we can expect a weakening in public demand for currency

Exchange rate forecasts for March are quite cautious. According to Sergei Kucheryavyi, Foreign exchange supply in March will be affected by the volume of financial assistance received from partner countries, foreign exchange sales by exporters limited due to logistical problems, and the behavior of the regulatory body.

According to Anna Zolotko, In late February and early March, we should expect a revival in foreign exchange supply, especially for agricultural producers who need free hryvnia liquidity for cultivation.. “If the security situation improves, we can expect a weakening of the public’s demand for foreign currency. We should also expect an increase in the demand for foreign currency from importers, but this factor also largely depends on the general assessment of the situation by society, because everything puts pressure on consumer demand,” said the expert.


Even more hard currency: Why the Central Bank lifted currency restrictions and what will happen to the exchange rate?

One of the most important factors affecting the exchange rate is the macro-financial assistance Ukraine receives from the West. According to Taras Lesovoy, the long-awaited macro-financial aid could “free the hands” of the regulator and give it greater flexibility. However, the expert continues: The important thing is to maintain the supply-demand relationship and balance for a long time because this is what is important for the foreign exchange market.

Source: Focus


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