In spite of expectations and the rate of UAH 29.4 per dollar, laid down in the 2019 budget, in the second half of this year it was UAH 24-25 per dollar. However, if hryvnia appreciation in mid-2019 was driven by objective circumstances, the strengthening of the national currency we've been observing over the last two to three months is not the result of effective economic policy but rather of currency speculation.

There have been no objective reasons for hryvnia strengthening over the recent months. First of all, two tranches of the International Monetary Fund, which Ukraine was supposed to receive under the existing stand by program by the end of the year worth $2.5 billion were never allocated. Accordingly, the country never received the second half of the EU tranche (EUR 500 million) because EU tranches are directly linked to those of the IMF. The situation with the new IMF cooperation program, which is being postponed until at least spring 2020, remains unclear.

There have been no objective reasons for hryvnia strengthening over the recent months

Moreover, the negative trade balance has been growing monthly and now amounts to negative $8 billion. Foreign direct investment has also disappeared. Accordingly, GDP growth remains very small. In addition, the industry has been declining for the sixth consecutive month, at a rather high rate.

That is, given all these factors, from an economic perspective, the hryvnia strengthening is an anomaly. That is why it is not the economic policy but currency speculation. First of all, we are talking about the so-called pyramid of domestic government loan bonds. It creates high demand for the hryvnia, because the bonds are hryvnia-denominated and the government sets sky-high rates for them.

Currency speculation is an endeavor of those who, above all, have sufficient free capital and have primary source tips on how the National Bank of Ukraine will operate every day.

The purpose of currency speculation is simple: to buy up foreign currency as cheap as possible to sell it with maximum profit after the collapse of the hryvnia. That is, making money of thin air.

The situation is threatening because the hryvnia collapse could happen at any time. It is likely that this may happen in January, when all Ukrainians are celebrating for almost a month, with many extra days-off. Few are able to keep up with the forex rate amid a holiday spree.

When exactly the government will lower the hryvnia exchange rate is something that cannot be predicted. After all, how can anyone make forecasts on speculation? However, the government together with the NBU indicated that the hryvnia exchange rate would fall, as the 2020 budget set it at UAH 27.5 per dollar. Moreover, in the original version of the budget at first reading had another rate laid down: UAH 28.2 per dollar, but before the second reading it was reduced to UAH 27.5. Compared to the current exchange rate, this means a devaluation by about 15%, which is a lot for such a short period.

However, the hryvnia may fail even below the target because the economic situation is seeing no growth trends. First of all, it can be seen by the state of the industry. This is the basic sphere of the economy, and if it continues to decline and retains the current pace, then, of course, GDP growth of 40% within five years will be off the table. Therefore, the hryvnia can slide more, because the industry today is a huge factor in our exports, above all, it is about metallurgy and chemistry. If these industries lower their output, exports and, as a result, foreign currency earnings to Ukraine will decrease accordingly. Meanwhile, the agrarian exports are too dependent on the yield factor.

From an economic perspective, the hryvnia strengthening is an anomaly. That is why it is not the economic policy but currency speculation

If the industry is on decline and the agrarian sector fails to grow at the same rate as in 2019, foreign currency inflows will decrease. And then the risk is quite high of a deeper evaluation of the hryvnia than that stated in the budget.

The reason that might trigger hryvnia collapse could be anything. The NBU and the Government may use any argument to explain the fall. For example, another delay in the IMF tranche (which is quite realistic) or an escalation of hostilities in Donbas, or issues with gas transit. That is, anything could become a catalyst.

What should an average Ukrainian do to protect themselves from exchange rate shocks that seem inevitable? I would recommend to those who have certain savings to split their funds into three equal "baskets": in hryvnias, dollars, and euros. The savings should be kept in commercial banks, not under people's mattresses because the interest will, at least partially, protect depositors from inflation. Banks are now offering higher interest rates for hryvnia, while hard currency savings will allow playing symmetrically. In other words, with any exchange rate fluctuations, if people lose on hryvnia devaluation, they will symmetrically win on investments in dollars and euros, and vice versa in the case of a revaluation, as we're witnessing now. This way, Ukrainians could protect themselves as much as possible from any forex fluctuations in any direction.

Andriy Novak, Chairman of the Committee of Economists of Ukraine, Candidate of Economic Sciences