Why Ukrainian hryvnia falls: Secrets of the real exchange rate policy

Author : Oleksiy Kushch

Source : 112 Ukraine

Financial and industrial groups that control the power in Ukraine do not want to share, especially with those who do not have the real power, that is, with the people
23:28, 21 December 2017

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The situation on the Ukrainian foreign exchange market and the forecasting of the hryvnia exchange rate to the US dollar was always presented to the population as a mysterious fata morgana, a complex optical phenomenon in the atmosphere, consisting of several forms of mirages. For analysts, the definition of the hryvnia exchange rate forecast is a solution to an equation with an unknown number of unknowns components.

The main problem is the use of exchange rate policy to manipulate two basic categories of life of our society, namely: a) changing the level of inequality in society in favor of large financial and industrial groups due to depletion of broad sections of the population; b) alignment of the curve of profitability of the largest financial-industrial groups to ensure their profitability by washing away the circulating assets of small and medium-sized businesses.

Related: Economic forecast for Ukraine: Hryvnia weakening, high inflation and tarrifs

Nobel laureate Joseph Stiglitz identified two main factors that distinguish an economy based on an inequality system from other types. This is primarily a high proportion of monopolies and rental type of formation of financial flows. Everything is clear with the first phenomenon: the basic markets are either monopolized or divided among several large participants. And what is a rental model? Every month you see its functioning in your utility payments...

If our wonder-country has rich reserves of natural resources, for example, oil and gas, then the rental model allows to smear something better on a sandwich than ordinary people. In the Russian Federation, the appreciation of the ruble in the second quarter of 2017 by the second quarter of 2016 was 14.4% (in the bi-currency basket). On the one hand, this somewhat slowed down the economic growth and damaged the local oligarchs, on the other, it evened out a part of property inequality in the society. Is this not the reason for Putin's notorious popularity among Russians?

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But financial and industrial groups that control the power vertical in Ukraine do not want to share, especially with those who do not have real power, that is, with the people. Therefore, there is only one solution in the context of the crisis: to solve the problem of financial deficits solely due to inflation and devaluation, universal "taxes", which are most heavily "taxed" by the most socially unprotected groups of the population. So it was after the crisis of 2008. But it was already impossible to overcome the crisis of 2014-2015 at the expense of 20-30% of the inhabitants of the country. It was necessary to involve the redistribution to 60-80% of the total population. Not only those who lived from salary to salary, but virtually the entire middle class had to suffer.

During 2013-2015, the disposable income of the population (equivalent in dollars) decreased from 152 billion dollars in 2013 to 55 billion dollars in 2015. Total population losses amounted to $ 176 billion for two years (2014-2015), or more than $ 4 thousand per capita. Some of these resources were redistributed in favor of several key financial and industrial groups, and the hryvnia exchange rate to the dollar was used as a redistribution tool.

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If Western macroeconomists have determined that the current system of property inequality in developed countries is formed by the current model of taxation, in Ukraine the system of property inequality is regulated not by taxes but by an exchange rate: the state nominates basic social standards in hryvnia, and then selects their real part with inflation and devaluation: inflation selects a part of the population's incomes and directs them to the central budget, and devaluation selects some of the real income in favor of several financial and industrial groups, exporting raw materials and semi-finished products.

The exchange rates of the hryvnia in 2017 were more or less prosperous for only one reason: the level of UAH devaluation in 2015-2016 was exceeded by at least 15-20% due to the fact that exchange rate mechanisms provided redistribution of assets of bankrupt banks between pro-government parties involved in the process groupings. As you know, the bankruptcy of a hundred banks and the nationalization of PrivatBank cost the economy 14% of GDP (and this is only direct fiscal expenditure). But the factor of bankrupt banks was partially "digested" by the system, and the "sediment" in the form of devaluation remained. In 2018 this factor of an undervalued hryvnia will no longer exist (or not so much). At the same time, we expect an expansion of the trade balance deficit to minus $ 8 billion (imports grow more dynamically than exports) and the beginning of a tense track on the payment of external debts. The deficit of the balance of payments may exceed the $ 5 billion. There is no need to talk about an "ideal storm" for the hryvnia (this period is postponed until 2019, when a new flight of elites is expected and the NBU's exchange rate policy will serve this flight). Although it is possible that, taking into account the growth of basic interest rates, the US Federal Commodity Prices, starting from the third quarter of next year, either will cease to grow, or even begin to decline. Considering this, in the autumn of next year one can expect an “exchanging rate microinfarction.”

Related: Ukrainian National Bank consider to release electronic hryvnia

What does NBU do in these conditions? It stubbornly opposes strengthening the hryvnia exchange rate against the dollar by conducting auctions for the redemption of currency in the domestic foreign exchange market. Interventions of the NBU on repurchase of currency on the interbank market for January-November of this year amounted to $ 2.2 billion, and intervention for sale - only $ 0.77 billion! Thus, we observe only an imitation of the NBU's actions aimed at maintaining the hryvnia exchange rate. In fact, it is a policy of counteracting its strengthening. Speaking about strengthening the national currency, we do not mean a primitive tactic of 4.95 or 7.95, when the rate was more an indicator of political stability and an instrument of victory in elections than an economic category. Ukraine needs the real exchange rate policy, or the "European Currency Snake", which was used by European countries to minimize currency risks. Ukraine has formed inflation costs (and not income inflation, as in Western countries), when the prices for meat and milk are growing not because Ukrainians have eaten and drunk more, but because of rising of the production costs, which are tied up at world prices (raw materials and energy resources). That is why you can curb inflation in Ukraine only against the background of strengthening the national currency.

This autumn, indicators of the interbank lending market indicated a significant revival. Unfortunately, it happened not in the interests of lending to the real sector of the economy. Banks "smelled the blood" - another exchange rate swings, on which you they make good money. And what else do they have to do when the current policy of the NBU and the government actually closed them as a gin in a bottle with UAH 70-80 billion free liquidity in addition.

Related: Fear and loathing: Why Ukrainian hryvnia depreciates

If the NBU implemented the "ideal" exchange rate scenario, it should have avoided participation in the currency redemption on the interbank market and allow the hryvnia rate to strengthen to the level of 23.5 this summer. In this case, in the winter of 2017-2018. the rate would be 25.5, and at the end of next year - 26.

Instead, we observe the devaluation of the hryvnia to the next benchmark - 28. This exchange rate consensus will be reached in December, after which we are waiting for a period of relative stabilization with several exchange rate peaks and corrections. In the spring-summer of 2018, it is possible to strengthen the exchange rate to the level of 26.5-27, and then a new cycle of the autumn devaluation with the search for a new benchmark in the interval 29-29.5 (at the end of 2018 - early 2019). This is the basic course scenario.

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