Why Ukraine can benefit from the weakening of the dollar – Yuriy Gorodnichenko's answer

Author

Valery Moisieiev

Interview with Yuriy Gorodnichenko

spoke with Yuriy Gorodnichenko, a professor at the University of California, Berkeley, during the IX Annual Research Conference in Kyiv, whose keynote speaker was Christine Lagarde, head of the European Central Bank. So, before talking about macroeconomics, the dollar exchange rate, Ukraine's accession to the EU, and the prospects for lending, we asked him about her.

Recently, there has been lively discussion in the media about the possibility that Lagarde will leave her post early to head the World Economic Forum in Davos. How would you assess the consequences of her possible departure for the banking sector?

– First of all, she herself immediately said that she was not going to do that. If we think hypothetically, it would be a step down for her, when you move from a higher position to a lower one. With all due respect to the Davos forum, it is not a platform where you can exert much influence. It is a place where people meet, talk, but do not actually decide anything. The European Central Bank, on the other hand, makes very important decisions on monetary policy, banking regulation, and so on.

If Lagarde left, I don't think anything would change radically at the ECB. It is a very large institution, with a governing body of five people plus the heads of national central banks, i.e. more than 20 people.

Lagarde is not a career banker; she is more of a politician. She was a member of the French government for five years, successively heading two ministries, was head of the IMF, and then moved to the ECB. She has worked in the public sector all her life and does not have much commercial experience in banking. But she has done and continues to do the right things at the ECB.

NBU Governor Andriy Pyshnyy and ECB President Christine Lagarde in Kyiv, June 19, 2025

With one exception: the ECB and Lagarde are categorically opposed to the confiscation of frozen Russian assets in favor of Ukraine. They believe that this would undermine the significance of the euro as a global currency. I think this is very unlikely.

Ukraine's future in a fragmented world

The theme of the current conference is economic and financial integration against a backdrop of turmoil and fragmentation. Do you think that the ideas of such integration remain viable against the backdrop of the actions of Trump and his supporters?

– I think so, because Trump has little influence within the European Union. For Ukraine, joining the EU is a strategically important task. Because if we become part of the European Union, we will have completely different financial resources, trade flows, and fiscal resources. We will have greater access to defense technologies. In other words, we will gain a lot if we become members of the EU. As a candidate country, we have already received money from the European Union, and we have various programs to reform Ukraine. And this was done with Trump and without Trump.

The European Union has its own problems. One of them is the principle of consensus in decision-making, another is excessive regulation. Some member states oppose Ukraine's accession. In your opinion, if we stop on the path to formal accession to the EU, will it be very bad for us or will it not have a significant impact on our course?

– That's a good question. Let me start by saying that joining the EU is always a difficult path. If you look at how Romania and Bulgaria joined, they have come a very long way. They were poor countries with corruption issues that have not completely disappeared. Macedonia renamed itself North Macedonia in order to move forward on this path because there were complaints from Greece.

Joining the EU is a long process. I hope that we will complete it within the next five years.

I think the main reason Ukraine did not become a member of the EU earlier was that we were considered to be within Russia's sphere of influence. Now they understand that Ukraine is already mentally in Europe. This has changed the fundamental approach.

The impact of the changing value of the dollar on Ukraine

In the West, there is lively discussion about the decline in the value of the dollar relative to other major currencies. In your opinion, could the depreciation of the dollar be the result of a deliberate policy by the US administration?

– Yes, there is such an opinion, and it has a right to exist, but I don't think it's part of any plan. Because it's hard to say that the Trump administration has any plan beyond 24 hours.

On the one hand, Trump wanted to improve the US trade balance. In this regard, the depreciation of the dollar is a useful process. On the other hand, the methods he uses lead to a situation where reality contradicts expectations.

For example, when tariffs are raised, according to economic theory, the dollar should appreciate, but it is losing value. Why is this happening? I believe it is because US assets are losing their appeal due to Trump's chaotic actions. Investors are deciding that it is better to invest in other countries.

Does the global depreciation of the dollar help or harm Ukraine?

– Look, the price of oil is denominated in dollars. If the dollar depreciates, Ukraine can actually buy more oil and energy. From this perspective, it is beneficial. On the other hand, Ukraine exports a lot of agricultural products, the price of which is also denominated in dollars. Here, when the dollar depreciates, we lose out.

But given that we have a very large trade deficit, I think that the depreciation of the dollar could improve our balance.

Independence of the National Bank of Ukraine

The NBU is preparing a bill to strengthen its independence. It is claimed that "only an independent central bank is capable of ensuring price and financial stability and maintaining confidence in the national currency." For a non-specialist, this connection does not seem obvious. Can you explain how it works?

– Let me give you an example from the 1990s, when we had hyperinflation. At that time, there were very large fiscal deficits, and the question was how to cover them. For example, teachers come and say that their salaries are low, but there is no tax revenue to finance a raise. Then the government or the president would demand that the National Bank print a certain number of billions of coupons. But then doctors and miners would come, and there would be a very long queue. And when the central bank prints money under pressure from politicians, that's when very high inflation occurs.

At the beginning of the full-scale war in 2022, we had a similar situation. There were very big financial problems, expenses were rising sharply because of the war, and budget revenues were falling sharply because the economy was collapsing. At that time, I remind you, there was no strong financial assistance from our allies yet.

Therefore, it was decided to turn to the National Bank. And the main sponsor of the government in 2022 was the NBU, which financed the government through the purchase of government bonds. As a result, we ended the year with 25% inflation. But then there were no other options.

Another example is when we had, let's say, a dependent central bank, no one wanted to hear about the problems of PrivatBank, and they accumulated. Then this bank was nationalized, but the Ukrainian government spent astronomical amounts of money to support the bank. This could have been avoided if we had had an independent NBU that could have exerted timely influence on PrivatBank to prevent these problems from accumulating.

The NBU believes that even formally non-binding consultations with the government on monetary policy contradict EU standards. However, they themselves express their wishes to the Ministry of Finance. This creates a kind of asymmetry.

Advice can always be given, but it should remain at the level of advice. In other words, the National Bank should not tell the Ministry of Finance what to do with taxes and so on, and the Ministry of Finance should not tell the National Bank what to do in terms of currency or banking regulations or the implementation of monetary policy.

Why are bank loans so expensive

Looking from the outside, it sometimes seems that banks, in their business lending policies, strive to issue risk-free loans at risky rates. As an expert, do you see signs of this?

– The business model here is simple: pay low rates on deposits and set the highest possible rates on loans. The only thing that can effectively influence this is competition, when banks compete for deposits and borrowers.

Yuriy Gorodnichenko moderates a presentation by Kenneth Rogoff, Professor of Economics at Harvard University, at the IX Annual Research Conference, Kyiv, June 20, 2025.

But on the other hand, we currently face enormous risks. What does the interest rate on a loan consist of? The first factor is inflation. If we have inflation of about 15%, this means that the minimum rate on loans should be 15%.

Then we add credit risk to this. Then there are some military risks; I don't know how they are assessed, but this also affects rates.

Next is the problem of non-performing loans, i.e., there is no strong mechanism to force debtors to pay their debts. This adds another percentage point to the cost of loans.

I understand why businesses complain that interest rates are too high. But there are fundamental reasons why this is happening.

Here we can return to the question of the independence of the NBU — it is also necessary so that it has the tools to reduce inflation. To curb inflation, unpopular decisions must be made.