The devaluation of the hryvnia in 2014: implications for the economy

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The fall of the hryvnia began in 2014 - the active phase of the Maidan. However, experts are of the opinion that all the prerequisites for the fall of this currency have been since the beginning of 2013 due to the extremely weak state of the economy, which has not recovered since the crisis of 2008-2009. Therefore, the exchange rate was artificially maintained by selling currency from the reserves of the Central Bank of Ukraine.

Devaluation of the hryvnia. What is it?

Devaluation is the process in which the price of the national currency falls in relation to foreign currencies, that is, the currency depreciates.

In other words, the devaluation of the Ukrainian hryvnia is a decrease in its exchange rate against foreign currencies.

Devaluation can be overt and covert. In an open devaluation, the Central Bank announces this, and the devalued funds are subject to exchange or withdrawal. When hidden, the state reduces the value of the national currency. Money is not exchanged or withdrawn.

Consequences

The results of devaluation can be positive or negative.

Among the positive ones stand out:

• increase in domestic demand;
• decrease in spending on foreign exchange reserves;
• stimulus for exports.

However, the negative consequences are very significant. In case of devaluation, the following happens:

• inflation is provoked;
• the confidence of citizens in the national currency is coming to naught;
• due to rising prices, imports of products are declining;
• people tend to withdraw all their money from bank accounts;
• buying activity is declining due to lower wages and pensions.

Ukraine. Hryvnia devaluation

In February 2014, there was a devaluation of twenty-five percent. Instead of eight hryvnia for one dollar now had to pay ten. And in May, despite the fact that the reserves of the Central Bank decreased by six billion, the devaluation of the hryvnia amounted to fifty percent.

At the same time, Ukraine received the first tranche of seventeen billion dollars. Due to this, the devaluation of the hryvnia has stopped. However, the situation continued to deteriorate. Crimea was annexed to Russia, the civil war continued in the Donbass, and enterprises located in the territories that proclaimed themselves the Donetsk People's Republic and the Luhansk People's Republic stopped paying taxes to Kyiv.

So, in August there was another devaluation of the hryvnia in 2014. The exchange rate fell from twelve hryvnias per dollar to fourteen and a half. Thanks to the actions of the Central Bank, the ratio softened somewhat, and before the elections, at the expense of the gold and foreign exchange fund of Ukraine, the exchange rate was fixed at twelve hryvnias and ninety-five kopecks per one US dollar. However, after the elections, support for the Ukrainian hryvnia ended, the exchange rate fluctuated again.

During the week, the dollar rose to sixteen-odd hryvnias, and the devaluation of the hryvnia in Ukraine (2014, end of the year) amounted to one hundred percent.

International Monetary Fund

The main reason for the deterioration of the economic situation is the acceptance of all the requirements of the International Monetary Ford. In order to obtain loans from the IMF, Kyiv agreed to a free exchange rate, an increase in gas tariffs for the population and other utility bills, which caused the population to panic. People stopped trusting their state, took money from deposit accounts and massively bought foreign currency.

Economic crises in Ukraine have happened before. In the late nineties, the country was affected by the Russian crisis, and in 2008 by the global one. In those years, the devaluation of the hryvnia also took place. However, the state did not abandon the currency corridor, as it was done in 2014.

Such a measure could only be successful in a state with a strong economy and a national currency backed by gold or goods. In the case of Ukraine, the economy was not characterized by reliability and stability. Experts have repeatedly expressed their opinion that the issue of the hryvnia withoutcontrol by the National Bank will cause an overflow of capital - they will try to buy foreign currency for hryvnia.

Release of the hryvnia. Consequences

So it happened. Money was withdrawn from deposits, while the Central Bank issued funds to other banks in order to maintain liquidity. The exchange rate began to lead the speculators.

In August, the National Bank bought government bonds of Naftogaz Ukraine for one hundred billion hryvnias. The proceeds were converted into foreign currencies, which also contributed to a new surge in prices. Thus, the Central Bank, having no mechanisms of confrontation, helped the exchange rate to grow.

In addition, enterprises exporting products tried to keep the received foreign currency for as long as possible, speculating on the course. As a result, foreign exchange earnings were reduced.

Businessmen tried to carry out settlement operations outside of Ukraine, using various schemes so that local banks could not influence capital. And they did not seek to import the money received from the settlements.

At the same time, investment has dropped dramatically. Investors tried by hook or by crook to take their capital out of the unpredictable and disturbing zone, where the risks of investing money were huge. According to state statistics, since the beginning of the year, Ukraine has lost eleven point fourteen hundredths of a billion dollars of direct investment, which amounted to about twenty percent of the total amount of investmentinjections.

Anti-crisis measures

All experts unanimously declare that the devaluation of the hryvnia was mostly due to the release of the hryvnia and the abandonment of the fixed exchange rate. And that the first step towards stabilizing the currency would be to abandon the floating rate and return to the fixed one.

As a general anti-crisis measures, it was proposed to pursue a more stringent policy aimed at minimizing speculative operations, increasing exports of products, especially the agricultural sector. There were also proposals to cancel foreign exchange auctions and raise the discount rate to the forecasted inflation.

Some Ukrainian experts believe that the National Bank has all the necessary funds to overcome the currency crisis, but for some reason does not use them. But no matter what the National Bank does, at the beginning of 2015 the hryvnia collapse worsened, the exchange rate reached thirty hryvnias per dollar.

Consequences of hryvnia devaluation in 2014

Economic analyst Alexander Okhrimenko states that during the crisis period, the average wage is about a hundred dollars, and may be reduced to fifty. Only the most active will be able to survive in the current conditions. The rest will become beggars.

The cost of loans in foreign currency is increasing, they are paid poorly or not at all. This is the result of such an unpleasant phenomenon for the economy as the devaluation of the hryvnia. In 2014, banks made a fresh decision - they becameform so-called short positions when more currency is sold than bought. By the end of 2014, short positions totaled $6 billion. But as a result, now banks cannot buy dollars at thirty hryvnias and suffer huge losses.

To stabilize the situation, Okhrimenko proposes to conduct a transparent policy of bank refinancing; to issue foreign currency treasury bills for everyone, and to increase the gold and foreign exchange reserves with the proceeds; exempt deposits from taxes and increase their rates, as well as cancel the restrictions of the Central Bank on the foreign exchange market.

It is assumed that Ukraine will be able to return to the level of 2013 in about 5-7 years. And constructive changes will become possible only after solving problems in the east of the country.

Investors in Ukraine are mainly its oligarchs. They fight among themselves for power and property. Therefore, investments from outside will only be able to come after the wars between them are over.

The essence of Ukrainian problems

All problems, including the fall of the hryvnia, it was decided to attribute to the war in the Donbass. However, for several months now, at least nominally, a truce has been in effect, and the hryvnia has reached its next peak of decline. And the situation is not expected to improve.

Obviously, they tried to attribute the inability to solve economic problems to the war. And the unwillingness to compromise with the Donbass gives rise to new and aggravates old (including economic) problems in Ukraine.

Conclusions

The war of the oligarchs is destroying the country. But the worst thing is that the war in the south-east of Ukraine leads to huge human losses. It is impossible to solve economic issues in a purely economic plane and not touch the political component. It is she who plays a decisive role in Ukraine today. The future fate of the country depends on the settlement of the situation in the southeast.