Ukraine's Central Bank helps make $23-billion dent in pockets of Ukrainians

In early October, when the talk about the looming financial crisis was becoming loud in Ukraine, we heard soothing comments from National Bank of Ukraine officials...

In early October, when the talk about the looming financial crisis was becoming loud in Ukraine, we heard soothing comments from National Bank of Ukraine officials and the finance minister. Strangely enough, while the dollar sank in the world, it surged in value in Ukraine. The officials said the rise of the dollar was only temporarily and the NBU would soon stabilize and strengthen the hryvnia.

It cannot be denied that, in part, the hryvnia devalued due to a severe political crisis, with the president and premier engaged in a cat-and-dog fight and the balkanized and stalled legislature bickering about the coalition. Becoming a weighty negative factor, such political goings-on contributed to fuelling domestic inflation and panic buying of hard currency by Ukrainians. 

Nonetheless, the NBU cited the ongoing financial crisis in the West as the basic cause of the hryvnia downfall. Not a word was spoken about the NBU share of the blame.

To explain the dollar surge, NBU governor’s chief advisor, Valery Lytvytsky, went on the air, saying the NBU is not guilty and the hryvnia rate of 7.3 to one dollar was too low. He said the fair exchange rate was Hr. 5.5-5.6 per $1.

He failed to explain, though, who or what stopped the NBU from selling dollars at this rate or why the rate was too low.

 

True causes of hryvnia downfall

Meanwhile, the causes of the high dollar value can be seen with a naked eye.

The NBU did not sell dollars to all banks that asked for it, selling greenbacks only to the chosen few. It led commercial banks to buy the hard currency from other banks. Currently, the NBU provides credits to commercial banks at 8-12% interest rate. The banks, in their turn, give credits to legal entities at a staggering 25-30%, a killing rate for businesses. 

To shield itself from accusations, the NBU started sales of American currency: for example, while the banks applied for $433 million on Dec. 3, the NBU sold merely $93 million. On some days the NBU did not sell dollars at all, whipping up demand and panic even higher.  

The hryvnia downfall has been also caused by the large negative trade balance of Ukraine. Now that the national currency has devalued by almost 50%, many importers will be forced to stop to buy foreign goods and move into other areas of business. (There’s a silver lining, the low hryvnia will make Ukrainian exports more competitive.)

Even if Ukraine’s trade balance improves, it does not mean that the economy will recover. That is why financial experts predict a high exchange rate of 7.5 for $1 for the hryvnia (or even 8 according to the IMF forecast for 2009). Striking a pessimistic note, many bankers say it may take the hryvnia 3-5 years to recover to the 5.5 exchange rate.

As the demand for dollars dramatically exceeded the supply, the dollar value ballooned.

NBU and Yushchenko must take the blame

Many experts maintain that there were no real causes for the hryvnia downfall. The blame for it must be taken by the NBU and Pres Yushchenko as well as the cabinet for failing to react adequately to what the first two were doing.

 

When the dollar craze began in Ukraine, the country’s trade balance was the same as Armenia’s, Georgia’s, Moldova’s and Tadjikistan’s. Although some of these countries have even a worse trade balance, their national currencies were sinking by a mere 1.5-2% in a month.

 

A simple assumption can be made: by fanning inflation and forcing companies to go bankrupt, Ukrainian and other tycoons will soon be able to buy them up for a song. In what appears to be a well-orchestrated scenario, NBU Governor Stelmakh and NBU board members (P.Poroshenko, A. Kliuyev and others) handed out millions of hryvnias to their insider banks that launched a massive attack on the hryvnia.

In a telling example, the Ukrhazbank owned by Mr. Horbal, one of NBU board members, was selling dollars last week at a highly speculative rate of 7.5 hryvnia. Was it Mr Horbal’s way to stabilize the currency market?

Hypocritical moves by president

The NBU has a lot of levers to rectify the situation but, strangely, it has not used them.  On Dec. 1, Viktor Yushchenko gave a stern warning to NBU Governor Stelmakh, saying he would fire him unless the hryvnia stabilized. The incumbent even specified the exchange rate of 5.8 to 5.9 per $1 he wants for the hryvnia. Nothing has happened ever since, neither the first nor the second. Result: Stelmakh is still NBU governor.

 

Now, as many new facts have surfaced, we see that the NBU cashed in on the financial slump, playing its own sinister role. The central bank wouldn’t have dared to behave so blatantly without a blessing from the highest office.

In a quite hypocritical move, Pres Yushchenko stated on Dec. 2 that there are no economic or financial grounds for the hryvnia devaluation. 

Commenting on the panic buying of dollars, he pinned the blame on the “psychological factor”, accusing the NBU and cabinet of being unable to cope with the panic among Ukrainians. 

Faced with a barrage of presidential criticism, Premier Yulia Tymoshenko dismissed accusations of inadequate reaction, stressing that, first, the NBU is not accountable to the cabinet under the Constitution, and, second, that Stelmakh is a close associate of Yushchenko and bringing him to heel was easy for the incumbent. 

 

Lawmakers threaten probe into NBU operations

Meanwhile, Rada lawmakers have threatened to bring Stelmakh to account. Dec. 2, Anatoly Hrytsenko, head of VR committee on defense and security, proposed opening a criminal investigation into Volodymyr Stelmakh’s track record as NBU governor.  

In a related move, Regions lawmaker Mykola Azarov has publicly lashed out at the NBU and tabled a motion to create an investigation commission in parliament to examine the NBU activities. Given a negative assessment by the commission of his work, Stelmakh can be fired by the Rada without Yushchenko’s consent. 

“When NBU operations began to threaten hryvnia stability and the country’s financial system, lawmakers set up a work group to examine the NBU activities since the start of 2008. The group has reached a conclusion that there were not only blunders but also corrupt dealings and law violations,” Azarov stressed. 

 

It is becoming common knowledge in Ukraine that all personnel appointments by the president seem to have their concrete monetary dimension - in terms of kickbacks. A group of people have lined their pockets as a result of the hryvnia fluctuations. If the group’s profits were low, Stelmakh wouldn’t be governor of NBU.

 

This is the bottom line of what is happening around the Ukrainian currency. No doubt, like in the similar past hryvnia downfalls, in a couple of weeks the hryvnia will be stabilized, but the wallets of ordinary Ukrainians have already been made lighter by 160 billion hryvnia ($23 billion), Yury Kostenko said (incidentally, a loyal Yushchenko supporter), putting forward his Ukrainian People’s party demand to the incumbent to fire Stelmakh).   

COMMENTARY & ANALYSIS: By Volodymyr Hrytsutenko

Professor of Current Ukrainian History, Lviv Franko University, Lviv, Ukraine

Action Ukraine Report (AUR), Kyiv, Ukraine, Monday, December 8, 2008