Simple reasons behind the weakening hryvnia

19 January 2022, 11:50 PM

Currency exchange rates in Ukraine have seen rapid change lately. The hryvnia slumped to UAH 28.0 to the dollar – a low the Ukrainian currency has not experienced in a while. The fall was rather rapid, leaving many people alarmed, and predictably spawning a whole host of conspiracy theories.

But what exactly happened?

Well, the answer is pretty simple and unambiguous: Putin. But let’s elaborate on that.

First, it will do us good to recall how the last year went for the Ukrainian hryvnia. Up until November, the hryvnia was doing exceptionally well, getting stronger and stronger exchange rate-wise. In fact, the hryvnia was on track for being among the world currencies that strengthened the most against the U.S. dollar.

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Surging global demand for Ukrainian exports was responsible for this dynamic. Sky-high prices for metal and agricultural goods contributed to hryvnia’s confident growth. The staggering 30 percent growth rate of Ukraine’s IT industry also was a major factor: After selling their services abroad, Ukrainian IT professionals then spent their earnings right here, at home.

At the same time, Ukraine was importing goods much more sparingly, in particular, the country bought little natural gas – even before gas prices reached today’s ludicrous levels.

Basically, everything was going fine until November 2021. Then Putin’s madness struck the first blow at the Ukrainian national currency. It’s hardly the first time something like that happened – the crash of the hryvnia back in 2014-2015 was largely caused by Russian aggression.

At any rate, last November the Western media started to sound the alarm about a possible new Russian invasion of Ukraine, which naturally spooked foreign investors.

This meant that the Ukrainian government could no longer easily and cheaply borrow on overseas markets, which put the hryvnia under strain. Non-residents started a sell-off of hryvnia-denominated bonds, introducing further downwards pressure on the exchange rate.

By the end of the year, the hryvnia had slid to UAH 27.3 against the dollar, and seemed to have settled there. Everyone’s attention focused on Ukraine’s economic prospects for 2022, which turned out to be not all that encouraging.

Some factors that are positive for the hryvnia are still there: agricultural produce will likely remain relatively expensive, due to weather patterns indicating a less-than-bountiful harvest in the southern hemisphere. But that would be no different from 2021.

This time around, however, Ukraine will have no choice but to purchase more natural gas, and do so soon, at the current eye-watering prices.

Meanwhile, rising incomes will nudge Ukrainians towards spending more on imported goods – more bad news for the hryvnia exchange rate.

Based on economic factors alone, experts were forecasting that the hryvnia would come to the end of 2022 in a bit of slump, at around UAH 28.5 against the dollar, under nominal, stable conditions.

The traditional Ukrainian fiscal policy of frenetic holiday spending sprees began to play its role as well. We’ve all seen those playgrounds for children being installed into frozen winter ground, year after year. And so every year, our banking system is showered with cash, some of which immediately is dumped into foreign currency. The very beginning of 2022 saw cash reserves in Ukraine’s banks surge by a quarter, to UAH 250 billion. Reacting to this, the hryvnia slipped a little to UAH 27.5 against the dollar, in a routine, hardly worrisome, development. Everyone assumed it has finally settled.

Turns out, those assumptions were wrong. On Jan. 13, Russian envoys started another round of their outrageous thuggery and sabre-rattling, in a violent reaction to NATO rejecting Putin’s ultimatum.

And then all hell broke loose.

Foreign investors had a proper scare. World media resumed their diligent, detailed coverage of a potential new Russian invasion of Ukraine – with scary-looking maps and everything.

Unsurprisingly, another massive sell-off of Ukrainian bonds followed. On one side, Russian ruble and stocks were being sold left, right, and center, due to potential Western economic sanctions.

On the other, a veritable chainsaw massacre was going on around the hryvnia and Ukraine’s Eurobonds. With investors recoiling away, hardly anyone was buying our bonds, and the hryvnia sagged from UAH 27.0 to UAH 28.0 to the dollar. We’re lucky that this panic did not affect our domestic bond market. Ukrainian investors seem to have kept their cool.

Perhaps they became quite used to this sort of thing since 2014, or maybe they just don’t follow Western media.

Putting in all their effort into stabilizing the turbulent currency markets, the National Bank of Ukraine had to spend $300 million of its foreign reserves last week alone.

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What’s next? Well, at this point it’s a matter of psychology. There are no fundamental economic reasons for the hryvnia’s sharp decline.

Should Putin and his buddies continue to ratchet up tensions, the hryvnia will remain under strain. If they instead choose to calm down and de-escalate – the hryvnia will stabilize in response.

Ultimately, the key to forecasting what the future holds for Ukrainian hryvnia lies in Putin’s head. Alas, his head is an arcane, inscrutable realm, most unsuited for prognostication.

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