In their attempts to avert the financial crisis, the Ukrainian authorities can be compared to a psychoanalyst who keeps repeating to the public: we have done everything necessary; Ukraine is not like Russia; we have everything under control.
Without going into details of the national game titled “Find 10 differences between the Ukrainian and the Russian financial and foreign exchange markets”, let us summarize the meaning of the phrases “we have done everything necessary” in order to “control the situation”. In fact, leaving aside its daily press-conferences, the executive's activity in the last few days has been unprecedented.
On August 17, the NBU started an accelerated devaluation of the “official” hryvnia. “We believe that the level of hryvnia devaluation is an adequate response to the events that occurred in the Russian market. We maintain that our actions are adequate and sufficient,” NBU Governor Yushchenko explained the Bank’s position.
First, NBU tactics were based on restraining the exchange rate by maintaining bank liquidity at a minimal level (implementing so-called economic measures). Under conditions of market destabilization, extra monetary resources in the banking system would very probably have been used to buy hard currency. We should remind you that at critical points in the past the NBU had already resorted to withdrawing free money from the banks: in response to the sharpening of the last crisis, the NBU increased the reserve requirement for its correspondent accounts, increased interest on deposits, and the bonds yields are still maintained at a stable high level. However, all those tricks failed to reduce the demand for hard currency. Moreover, last week most banks ceased their transactions in the monetary market and completely reoriented toward buying dollars. And this was logical. The banks are just afraid that their counterparts will not implement previously concluded agreements due to the fall in hryvnia liquidity versus the high profitability of dollar resources.
The NBU acted without delay and immediately promulgated a series of administrative restrictions regarding foreign currency transactions. Since August 22, banks have not been allowed to have an open position in freely convertible currencies. Earlier the banks could, at their discretion, buy and sell hard currency up to 15% of their capital. And nobody was interested what they needed it for. Since August 14, the banks have with special intensity been extending their dollar positions, so that under favorable market conditions to be able arbitrage on dollar and ruble cross rates with regard to the hryvnia in Kyiv and Moscow. From now on banks must buy and sell hard currency strictly at clients’ requests. The NBU said it would strictly supervise this. However, banks are still allowed to buy hard currency for their own needs. Thus there is still some room for a maneuver, which cannot be said about the bank clients who forfeited their right to currency prepayment.
As far as futures market is concerned, it died while still unborn. Since August 22, banks have not been allowed to make term currency contracts, NBU Deputy Governor Volodymyr Stelmakh told banks. It is remarkable that significant open positions for term contracts were one of the factors that destabilized the Russian banking system. In Ukraine, those willing to protect themselves from currency fluctuations either relied on the NBU corridor or turned to Russian banks.
The NBU has also taken care of currency exchange sites. The National Bank established full control over the markets where currency exchange transactions were carried out in hard currency, and warned currency exchange offices that they would be closed should even insignificant violations of the regulations be found. As early as August 20, the NBU said it had information concerning legal violations by banks when carrying out currency exchange transactions and announced direct telephone lines for the population to report on violations committed by currency exchange sites. The NBU also ordered currency exchange kiosks to maintain exchange rates unchanged all day long.
In a word, the Russian financial crisis has brought about substantial changes in the Ukrainian economy. One month ago the phrase “we have done everything” meant a step toward the market economy. Now it marks the start of a return to administrative control.






