Reasons for Hryvnia’s Collapse

Reasons for Hryvnia’s Collapse

By the end of «black Wednesday», Feb. 25, the Ukrainian currency exchange rate went down to 33 hryvnias to the dollar and never bounced back. It also plummeted as low as 50-60 hryvnias at the black market to stay there. The official rate was around 15 hryvnias to the dollar in mid-February. On February 25, the Ukraine’s national currency fell against the dollar more than 2 times in a day. It has fallen by 4 times in a year. Central bank chief Valeria Gontareva rushed to comment the currency fall. «There are no fundamental reasons for such a severe fall in the hryvnia rate», she said. Finance Minister Natalia Yaresko lent a helping hand saying the situation at the currency exchange was the result of speculations and emotions. 

The leaders of Ukrainian financial agencies are clearly involved in propaganda efforts: first, they want to evade personal responsibility; second, the goal is to prevent people from knowing the real state of things. I think that even housewives, who have little to do with finances, did not fall prey to the cheap propaganda tricks of Gontareva and Yaresko. 

In general, the reason for the currency collapse is the economic crisis transforming into a national disaster. Ukrainian Prime minister Arseniy Yatsenyuk has acknowledged recently that the economy dropped 20 % in 2014. No growth is looming this year. 

According to the recently published forecasts, the GDP is to fall by 5, 5 % in 2015. The yearly inflation is estimated to be 25-26%. The crisis has also spread to banks. The net banking sector loss was 52, 5 billion hryvnias in 2014. The outflow of bank deposits exceeded 126 billion (including 9 billion hryvnias in foreign currency). On February 27, Gontareva said the bank deposit outflow reached 17, 2 billion hryvnias since the start of the current year.

Yulia Timoshenko did not miss the opportunity to criticize the government for the currency fall. According to her, the reason was monetary emission without any back-up and the Ukraine’s National Bank’s uncontrolled refinancing of commercial banks. It should be understood that by refinancing the commercial sector the National Bank tries to compensate for the deposits outflow. In the period from January 1, 2014 up to February 1, 2015 the National Bank of Ukraine provided 121, 8 billion hryvnias for refunding with a term of up to 30 days, including Russian banks. Timoshenko believes the National Bank’s money is buried in the sand. Or, to be more precise, is being stolen. The former Prime Minister knows what she is talking about, so the statement can be trusted. According to her, 109 billion hryvnias of refunds were not returned to the National Bank. She says the money, a quarter of the Ukraine’s budget, will never be returned. 

Now, let’s have a look at the macro economic situation which led to the hryvnia’s collapse. Here is the balance sheet provided by the Central Bank of Ukraine (table 1). 

The balance of payments deficit is the main reason for making the national currency plummet. This is a basic rule. Last year the balance of payments was minus 13, 3 billion hryvnias. There were two reasons for that: the deficit of trade balance and the net capital outflow. The capital simply flees the country. The Ukraine’s GDP is equal to 120 billion hryvnias, the balance of payments deficit is 13, 3 billion – a substantial sum. No wonder, the currency exchange rate plummeted by two times last year. It would have fallen more, but the Ukraine’s National Bank made currency interventions. Of course, they were of limited scope as the Ukraine’s international currency reserves are very limited. 

Table 1.

Ukraine’s balance of payments, 2014 and January 2015 (million dollars) 


2014 г.

January 2015 г.

Current account



Goods (net)



Capital and financial account



Overall balance



What has really happened? Perhaps, some it’s the fault of some mysterious «speculators» who have all of a sudden gone rampant? Their involvement is beyond doubt but they are not that daring. They act only if they know it’s a sure thing. The implementation of such operation needs two preliminary conditions. First, the absence of capital controls (or the possibility of introduction of such controls by the state). Second, the guarantee that the National Bank will not intervene to protect the hryvnia. 

It can be said there were no significant currency controls. The country continues to live according to the recipes of the International Monetary Fund which does not welcome the idea of introducing such measures. True, Kiev has made some steps to counter the negative trend. For instance, now exporters in Ukraine are required to sell 75% of their hard currency income to the Central Bank. The effectiveness of this step may be not as high as expected because there are many «loopholes» in the law that make possible going around the norm (to understate revenues, shady schemes, the use of offshores). 

The second condition is really important. The speculators understood there would be no interventions because Kiev was running low on international reserves as demonstrated by Table 2. In 2014 the net reduction of reserves was equal to 12, 4 billion hryvnias. As of January 1, they were reduced down to 6, 4 billion hryvnias. According to the Ukraine’s National Bank’s data, the net reduction of reserves in January was 1, 1 billion hryvnias. 

Table 2.

Ukraine’s International reserves (million dollars)


As of 01.01.2015


January 2015 г.




Thus, as of February 1, the reserve assets dwindled to record low 5, 3 billion hryvnias (part of reserves are special drawing rights - supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund with the value based on a basket of key international currencies reviewed by the Fund every five years - monetary gold and foreign currency accounting for only 85% of all reserves). For comparison, the average import of Ukraine last year was equal to 5, 2 billion hryvnias. It means that today Kiev has less currency that needed to pay for an average monthly import. According to the International Monetary Fund recommendations, the country should have at its disposal the reserves to pay for at least three-month national imports. The Ukraine’s government has no leverage over the national currency’s rate. The International Monetary Fund will certainly not provide Ukraine with loans for the purpose of currency interventions. The money will be given only to meet credit commitments. 

Last year there was a lot of noise raised about Western financial aid provided to Ukraine. It happened to be nothing else but much ado about nothing. In reality Ukraine spent 14 billion hryvnias to meet the debt commitments while receiving only 9 billion. The West is tightening debt loop around the Ukraine’s neck. 

The issue of introducing effective capital controls has not been on the government’s agenda since the «black Wednesday». Neither has it been discussed by the National Bank of Ukraine. Perhaps, it will all boil down to currency exchange in foreign exchange bureau. Neither Ukrainian tycoons, who still use offshores, nor foreign investors and creditors, will let serious capital controls be introduced. The latter have great interests in Ukraine. 

According to the Central Bank’s data, as of October 1, 2014 the total foreign debt of Ukraine’s economy was equal to 135, 9 billion hryvnias exceeding the entire national GDP. Supposing that the credits and loans were granted with interest rate at 10 % (in reality it was higher taking into account the country’s low rating), Ukraine will have to give 10 % of its GDP to its Western «benefactors». It must pay it off in foreign currency, not in hryvnias. It means that under the present colonial model of social economic development, Ukraine is doomed to use the hryvnia with ever plummeting exchange rate. 

Tags: IMF  Ukraine