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Polish zloty harnesses Ukraine

Author : Polish outlet OBSERWATOR FINANSOWY

The popularization of the zloty in Poland's trade with Ukraine would undoubtedly stimulate its development
10:12, 2 April 2019

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The Polish zloty (PLN) is becoming more and more popular in Ukraine, and the change in its position is perfectly illustrated by the situation on the Ukrainian online currency platform. Only a few years ago, buy and sell offers could be counted on the fingers and reached several hundred zlotys on average, today the daily turnover is on several hundred thousand zlotys, and the average offer to buy amounts to tens of thousands of zlotys. This also shows the change in the nature of the transaction: if several years ago the sellers and buyers were tourists traveling to Poland, today they are mainly small importers and exporters.

A good indicator of the growing interest and popularization of the zloty in Ukraine is the decreasing difference between the buying and selling exchange rate of PLN at the exchange offices; in December 2014, it reached 16.5%, since 2017 it remained at 4%, and currently fell to about 2.4%. This is a result of the increase in turnover, which resulted in the reduction of intermediaries' margins.

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Although it is still more than in the situation with the US dollar, where the average difference in the exchange rate is 1.5%, it is comparable to the euro, where the difference fluctuates around 2%, and it is incomparably better than in the case of the Russian ruble, for which the margin is as much as 10%.

Currency expansion

The zloty's expansion also has a territorial dimension. Only a few years ago it circulated only in the regions of the Polish-Ukrainian borderland, in Lviv and sporadically in Kyiv. Today, thanks to Ukrainian labor migrants, it is bought and sold even in the remote Ukrainian province.

The International Organization for Migration (IMO) calculated that in 2017, Ukraine’s labor migrant have sent 12.1 billion USD; these estimations are even higher than the ones from Ukrainian central bank NBU –9.3 billion USD. It's 8% from Ukraine's GDP if we take the data of the NBU or even 11% of Ukraine’s GDP if we believe IMO.

Transactions from Poland accounted for 33.6% of the total amount of 3.1 billion USD. In 2015, it was 19.1%  and 1.3 billion USD respectively. Data from the first three quarters of 2018 show an amount of 2.7 billion USD. The dynamics of growth is 156.5 %. in 2017, and an additional 20 % after three quarters of 2018.

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The foundations for increasing the zloty circulation over the Dnieper are therefore strong and undoubtedly beneficial for the real sector of the Polish economy.

The golden lever of trade

Poland is Ukraine's main trading partner among the countries of Central and Eastern Europe and the fourth-largest trading partner of Kyiv. From year to year, trade between our countries is growing, Ukrainian vice-Prime Minister Stepan Kubiv notes.

However, if you look closely at the results provided by the State Statistics Service of Ukraine, it will turn out that the situation is not as good for Poland as it could be. It is true that the balance is positive; Polish companies have exported goods for USD 3.63 billion USD last year and imported for 3.26 billion USD. But Ukraine is in a better position because the dynamics of trade exchange is unfavorable for Warsaw - exports from Ukraine to Poland increased by 19.6% in 2018, while Polish exports to Ukraine increased only by 5.2 %. The amount that Ukrainian labor migrants send back home is almost equal to what Polish companies receive from exports to Ukraine.

With these results, Poland is far behind considerably smaller exporters – the US with exports by 650 million dollars lower than Poland reached a positive balance of 1.85 billion USD in 2018. France has a surplus three times more than Poland, with exports for less than 1.5 billion USD, although it achieved this result despite the export decline by 5.6 % in comparison with 2017. Lithuania’s nett reached 534 million USD in surplus, which sold its goods for 877 million USD. Czech Republic has a much better trade structure than Poland, with a surplus of 157 million USD (with export of 1 billion USD and export growth rate exceeding 19%), United Kingdom has 303 million USD (with 888 million USD exports), Sweden with 395 million with 465 million USD of exports; and Canada, which obtained a surplus of 255 million USD by exporting only 333 million USD. In addition, all countries (except for France) have a higher growth rate of exports than Poland.

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The exchange rate risk

The popularization of the zloty in Poland's trade with Ukraine would undoubtedly stimulate its development and change its structure, which would be favorable for Warsaw. The Ukrainian importer, who intends to buy goods abroad, must make two basic choices – choice of the supplier and the currency of the contract. With the available and popular zloty on the market, it would be much more likely to consider a supplier from Poland first than settling a contract in a different currency. It would also help to cope with the exchange rate risk, which in a situation of economic instability can seriously mix up and spoil the financial results of the transaction, and often even lead to its breaking.

Its practical consequences could be assessed on the example of the 2011 crisis and the related abrupt devaluation of the zloty against the dollar – the most popular currency for contracts in trade between Poland and Ukraine. Within a few weeks from August to October, the zloty lost rapidly against the US currency, while Ukraine maintained a fixed hryvnia exchange rate against the dollar. As a result, although both currencies were part of the same Eastern European basket, one lost its value, while the other did not. Until recently, dollar-denominated contracts between Polish and Ukrainian entrepreneurs have been profitable for both parties; now, for Polish importers of Ukrainian raw materials have become almost day-to-day harmful ballast. On the other hand, when the zloty strengthens against other currencies, it hits exporters whose product in the currency equivalent becomes more expensive for the final recipient, although its price on the internal market does not change. And Polish entrepreneurs exporting to Ukraine have felt it many times.

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Earnings of Ukraine’s labor migrants sent from Poland amounted to 12 billion PLN in 2017 and more than 10 billion PLN for three quarters of 2018. Unfortunately, they were converted to US dollars and euros just before the transfer, and the conversion breaks their relationship with the Polish economy, which would be maintained in the case of money transfers in PLN.

Golden "primus inter pares"

The popularization of the zloty in Ukraine would be particularly important for the future of the Intermarium concept, which will be weak without economic keystone (compared to the competitive projects of regional integration).

It is difficult to talk about an economic component without a currency. Due to the size of the market of countries that would create a new block, only the Polish zloty and the Ukrainian hryvnia can enter the game. Taking into consideration the fatal situation of the Ukrainian economy and finance, there is no chance for it. Through the process of elimination, the financial part of the Intermarium project would rely on zloty. And promoting zloty in the trade exchange of the two largest countries of this block would be a natural way to facilitate its regional position.

In this context, it is worth mentioning the assessment of Amanzhol Koshanov, the economist from the Academy of Sciences of the Republic of Kazakhstan, who in 2012 analyzed the economic basis of the Customs Union created by the Kremlin, perfectly describing the situation of other regional blocs, including Intermarium project.

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"In the conditions of independence of states within a separate regional bloc, some currency should be dominant. Transnational currencies within the framework of regional alliances can occupy their position in two ways. The first is the introduction of a supranational unit of account denominated in the currency of the country leader, the second is a situation in which one of the currencies of the member countries of the regional bloc (a country with the most developed economic potential) can fulfill the role of a supranational accounting unit," he wrote in Society and Economy outlet. The latter of these variants perfectly fits with the Polish zloty and the Intermarium concept.

Good potential, poor instruments

Unfortunately, the broadening of the zloty’s usage over the Dnieper currently remains as a dream. And not because the Ukrainians do not want it, but because Poland still uses its existing potential to a limited extent.

There is a lack of appropriate financial instruments in Ukraine. There is only one financial institution on the Ukrainian market that allows the use of the zloty – Kredobank bank, owned by PKO Bank Polski (Polish largest bank, -ed.), but even this entity has very limited possibilities. Business clients have an opportunity of taking out a loan in PLN, while individual clients, who could currently be the most important source of supplying zloty to Ukraine (these are several billion zlotys annually transferred by labor migrants) do not have such an opportunity.

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Since 2017, they have got an opportunity to open zloty accounts and receive a gold Master Card, but their possibilities end there. They cannot even open a term deposit in PLN (earned in Poland), because the bank accepts deposits only in hryvnia, dollar, and euro.

Read the original text at Obserwator Finansowy.

This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.  

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