Conflict hurts Russian and Ukrainian currencies
Moscow (AFP) – With their economies rocked by conflict, the Russian and Ukrainian authorities have deployed different tactics to defend their weakened currencies, with varying degrees of success.
The Russian rouble, which traded around 80 to the dollar before Moscow sent troops to Ukraine on February 24, lost 40% of its value in the following days, crashing to an all-time high of 150 for a dollar.
It has since recovered much of it, trading at around 105 rubles to the dollar, apparently having taken advantage of talks between Moscow and Kyiv to end the dispute.
Despite having been cut off from much of its foreign currency reserves due to Western sanctions, Russia’s central bank has nonetheless sold some on occasion to prop up the rouble.
Coupled with tight capital controls that force exporters to sell most of their foreign currency to the central bank and limits on consumers accessing their assets, the measures appear to be working.
“Over the past 10 years, the central bank has only intervened directly on several occasions, which now works in favor of stabilizing the market exchange rate,” said analyst Alexander Kudrin of the bank. Aton investment.
“The first signs of stabilization are already appearing,” he added.
Russian economics expert Janis Kluge of Berlin-based think tank SWP recently tweeted that the ruble is strengthening on the back of tight capital controls and strong oil and gas revenues following the initial sanctions “shock”.
In Ukraine, which is under martial law, the central bank has suspended all currency trading and set a fixed exchange rate of around 29 hryvnia to the dollar.
It also banned foreign currency withdrawals and most cross-border payments.
Volodymyr Lepushynskyi, director of monetary policy at Ukraine’s central bank, said officials had already prepared a plan in case of conflict.
“We always hoped we wouldn’t need to put it in place, but we were ready,” he told AFP.
“Through the experience of working within administrative constraints, we had a clear understanding of what needs to be done to prevent the destabilization of the financial sector and to establish its effective functioning under such circumstances.”
Black market danger
Finance Minister Sergiy Marchenko recently told Ukrainian television that the central bank’s actions have created “certain conditions under which there is exchange rate stability today.”
He also noted that Ukraine has received support from its international partners, including the European Union and the World Bank, adding that the International Monetary Fund has approved a $1.4 billion emergency aid package. for Ukraine.
Ousmene Mandeng, a visiting scholar at the London School of Economics, warned that while the measures may be justified by the extreme circumstances, they carry certain risks.
“The suspension of foreign exchange operations amounts de facto to a price freeze and (…) if it is prolonged, it can lead to a black market for foreign exchange and de facto to the use of several currencies”, he said. he told AFP.
“A resumption of foreign exchange trading…would be desirable to minimize implicit distortions,” Mandeng added, noting that Ukraine’s central bank had eased some restrictions and some interbank foreign exchange trading appears to be slowly resuming.
The central bank’s Lepushynskyi said he plans to ease restrictions as soon as he sees the opportunity to do so.
“After the liberation of Ukraine from Russian invaders and the normalization of the economic situation, we will resume full functioning of the foreign exchange market and lift currency restrictions to pre-war levels as soon as possible,” he said. -he declares.
Mandeng also noted that Ukraine had about $28 billion in foreign exchange reserves at the start of the month.
“That should provide some short-term comfort, but it may need to be rebuilt eventually,” he said.
Ukrainians fleeing the country with the hryvnia in their pockets face the most direct problems due to the lack of convertibility of the currency.
European Commission Executive Vice-President Valdis Dombrovskis said recently that the commission was working with the European Central Bank “to provide some sort of convertibility assistance so that people can convert at least some amounts of their savings into hryvnia to euro”.
© 2022 AFP