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Why hryvnia is holding up, and what is happening to banks

NBU. Photo: bank.gov.ua

NBU. Photo: bank.gov.ua

The Ukrainian Centre for Economic Strategy (CES) prepared an operational assessment of the state of the Ukrainian economy during wartime. As part of the study, in particular, the situation in the currency and banking markets of Ukraine was analyzed.

Despite the war, the hryvnia depreciated slightly thanks to the lightning-fast reaction of the National Bank of Ukraine. The official exchange rate was secured at 29.25 UAH/USD right away after the invasion, and an immediate ban on foreign currency transactions eased pressure on the hryvnia. The black cash market rate by the beginning of April was 31-33 UAH/USD, within 10% of the official one.

The reaction of the National Bank to the increased risks of currency and capital outflow was fast. The NBU did a brilliant job, and even in the midst of the war, the Ukrainian banking system continues to work.

On February 24, the NBU decided to revoke the license of Russian state-owned banks — two banks (subsidiaries of the Russian Sberbank and Vnesheconombank) were closed. Other banks owned by Russian individuals (Alfa-Bank, Forward Bank, and PIN Bank) are waiting for their fate to be decided. Possible scenarios range from a temporary change of management to the nationalization of banks.

The NBU also froze all operations with public debt, with the exception of the operations of the Ministry of Finance and the NBU and some other operations.

All cross-border payments, including imports and dividends, were banned, with the exception of state ones and those the special permission was obtained for.

The official exchange rate was fixed at 29.25 UAH/USD in accordance with the new temporary wartime regulatory framework. Together with strict control of transactions on the current account, the capital account and timely foreign exchange interventions, this made it possible to limit the panic in the cash market.

As of April 7, the dollar exchange rate on the black cash market was only about 10% higher than the official one. Ukrainian migrants abroad can pay and withdraw cash with some restrictions, but at the official rate. The NBU's foreign exchange reserves even grew slightly in March, from $27.6 billion to $28.1 billion.

Cash withdrawals in excess of 100,000 UAH and any cash withdrawals in foreign currency were immediately restricted. The latter was relaxed first on March 1, when daily withdrawals were allowed for the equivalent of 30,000 UAH (about $1,000), and then on March 21, when the limit was raised to 100,000 UAH as the panic subsided and an influx of foreign aid supported the hryvnia. Also recently, the Verkhovna Rada voted for a full guarantee of all deposits of individuals in Ukraine, including those exceeding the limit of 200,000 UAH, in order to increase the liquidity of the banking system.

To support the liquidity of Ukrainian banks, the NBU opened unlimited unsecured refinancing loans. From February 24 to April 7, such loans were granted in the amount of 137 billion UAH. Banking non-cash transactions were not limited, and the NBU, together with Ukrainian banks, managed to prevent panic and keep the electronic payment system working.

When banks' foreign operations and transactions with related parties were severely restricted, prudential and reporting regulations were drastically relaxed. To make the system work, the NBU removed sanctions for violation of capital requirements, liquidity and credit risk standards, currency position restrictions and reporting. At the same time, these violations must be explained, and sustainability and recovery plans must be provided to the NBU within 14 business days. All macroprudential regulation measures, including bank stability assessments and reserve management, were shelved until the end of the war.

After the war, the problems of the banking sector will become one of the key obstacles to economic recovery, as well as a challenge for the legalization of losses. Individuals and companies that have lost their assets and banks that have lost collateral should be able to file claims against the aggressor instead of resolving issues within the country, and this should be done in a manner controlled and supported by the government.

The text is based on the research of

The Centre for Economic Strategy

Ukrainian economy in war times: rapid assessment, April 2022

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