Blog Post

Ukraine’s currency crash

It's therefore fair to say that Ukraine’s economic challenges are mounting, yet the current critical situation of the country also provides a great opportunity for sweeping reforms.

By: Date: April 7, 2014 Topic: European Macroeconomics & Governance

Ukraine’s crisis of politics and territorial integrity has left its mark on the exchange rate of Ukraine’s currency, the Hryvnia. From 2009 until the protests on Maidan square intensified towards the end of 2013, the Hryvnia had a quite stable rate against the US dollar of around 8, but over the past three months, about one-third of its value relative to the dollar has been lost (Figure 1), reaching a rate of 11.6 Hryvnia to 1 USD on April 4th. The exchange rate continued to fall during recent days, suggesting the bottom has not been reached yet.

How has the value of Hryvnia changed against the basket of its trading partners’ currencies? We used the recently updated Bruegel database on real effective exchange rates (REER) to answer this question. This database includes data up to March 2014. 

In order to get a first impression on developments in the first days of April, we approximated an April 2014 REER by using the average exchange rate from the 1st to the 4th of April (see further details in the notes to Figure 2). Figure 2 shows a dramatic depreciation of the Hryvnia: its real value against the basket of 138 trading partners’ currencies fell by 27 percent from December 2013 to April 2014 and the April 2014 value is the lowest since January 1995. The currencies of some other former Soviet Union countries have also fallen in the same period, such as in Russia, Kazakhstan and Kyrgyzstan, though the Russian Rouble recovered somewhat at the beginning of April. Not all the currencies of former Soviet countries have fallen however, as indicated by Panel B of Figure 2.

The major currency fall that Ukraine has experienced will reduce imports by making them more expensive in Hryvnia. It could stimulate exports, if exporters are able to respond by producing more and lowering their export prices quoted in foreign currency units. But there is a significant danger that the major collapse of Ukraine’s currency will wreak havoc to Ukraine’s financial system, its economy and its people (see also David Saha’s blogs review on the Ukrainian economy). 

According to the EBRD’s vulnerability indicators, Ukraine’s external debt amounted to 77 percent of GDP in 2012 – a relatively large figure –, a ratio that has most likely increased due to the collapse of the currency (external borrowing is typically made in foreign currencies, while the foreign currency value of GDP falls with the collapse of the exchange rate). This makes it more difficult to service external debt. 

While the share of domestic bank loans to the private sector is not that high, 21 percent of GDP, 38 percent of these loans were granted in foreign currencies and thereby borrowers (ie households and companies) will find it much more difficult to service their debt as well. The share of non-performing loans, which was already at a very high level at 21 percent of total loans, will likely increase further and thereby undermine the stability of the banking sector. A weaker banking sector could in turn have a negative impact on the economy, lower output, employment and thereby could culminate in a banking crisis. 

Inflation is also likely to accelerate after such a major currency fall, with adverse impacts on the investment climate and poorer people, who used to consume a larger share of their income. It’s therefore fair to say that Ukraine’s economic challenges are mounting, yet as Ricardo Giucci and Georg Zachmann argue, the current critical situation of the country also provides a great opportunity for sweeping reforms.

Figure 1: Daily nominal exchange rates against the US Dollar, 1 January 2013 – 4 April 2014 (1 January 2013 = 100)

Source: Datastream. Note: a decline in the index indicates depreciation of the home currency against the US dollar.

Figure 2: Monthly consumer price index based real effective exchange rates, January 1995-April 2014 (December 2007 = 100)

Source: Bruegel. Note: the real effective exchange rate was calculated against 138 trading partners. The March 2014 REER is based on the actual March 2014 nominal exchange (average of all business days of the month) and a projected March price consumer level, for which we assumed that the 12-month inflation rate was the same in March 2014 as in February 2013. Therefore, the March 2014 REER will be revised when the March 2014 inflation figures will be published (this revision may not be large). The April 2014 REER is based on the average exchange rates of 1-4 April 2014 and a projected priced level for April. Therefore, the April 2014 REER will also be also subject to revision if nominal exchanger rates will change after the 4th of April. A decline in the index indicates real depreciation of the home currency against the basket of trading partners’ currencies.


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