Would not it be better to switch to the renminbi, while we are at it?

National Bank of Ukraine (NBU) plans to make the ruble a reserve currency next year. “The ruble will become one of our reserve currencies after we reclassify it as a first category currency,” the NBU’s chairman Serhii Arbuzov commented for The Day. “I think it will happen next year.” He said that such a move would help in establishing the ruble market in the country. According to Arbuzov, the Ukrainian-Russian trade amounts to almost 50 billion dollars now. “Should we switch at least 10-20 percent of it to the local currencies, the market for the Russian ruble will emerge, while now such market is non-existent in Ukraine,” he explained in more detail to The Day’s reporter. Arbuzov said, in particular, that Ukraine would need 10-billion-dollars-strong ruble market to pay for energy imports from Russia in 2012.

So, it seems that Ukraine’s currency basket will soon be supplemented with one more currency, the ruble. The NBU chairman’s announcement intrigued financiers and the public. The questions appeared immediately: firstly, why choose the ruble, and not some other currency, such as the Chinese renminbi, and, secondly, could not the active use of the ruble on Ukrainian territory become the first step towards integration into the Single Economic Space with Russia? The Day asked financiers to answer these questions and some more.

Erste Bank’s director of financial markets Roman Bondar told The Day that he saw Ukraine’s new opportunity to pay for Russian energy imports not only in dollars but also in Russian rubles as the main reason for such initiatives on the part of the NBU. Let us recall that Naftohaz of Ukraine made its first partial payment for Russian gas in rubles in December 2011, transferring to Gazprom 210 million dollars and 7.2 billion rubles. Ruble interbank market in Ukraine is currently small, Bondar says, so there is not enough Russian currency on the market to satisfy Naftohaz’s needs. “Even if you look at the structure of foreign trade operations, Ukraine’s imports from Russia are about 35 percent of total imports, while our exports to Russia are only 25 percent of total,” Bondar says. So, the expert thinks that the national financial regulator is likely to take the step its chief is talking about.

According to the head of the Investment Capital Ukraine group’s analytical unit Oleksandr Valchyshen, Ukraine and Russia are now actively negotiating on cooperation in various fields (oil and gas, financial services, etc.). At the same time Russia is trying to make its currency the regional one and more convertible, and thus it needs to push the ruble through to the currency baskets which provide the basis for building official foreign exchange reserves of the CIS countries, the expert adds. He brings Belarus as an example, as this nation not only declares the active use of the ruble in foreign trade transactions with Russia, but also admits the possibility of adopting the Russian ruble as the currency to replace current Belarusian one in internal settlements, too.

Valchyshen supports the NBU’s idea and says: “There are reasons for adding the Russian ruble to the currency basket that is the basis for building our foreign exchange reserves. Use of the Russian ruble in trade settlements can bring a short-term benefit to our country through access to liquidity, that is, to the money that is denominated in Russian rubles.” According to him, Ukraine can get rubles in several ways: by selling more goods to Russia for rubles, by buying the ruble and selling currency assets that were accumulated in dollars, euros or other currencies, or by taking loans in rubles. “Judging from the NBU’s information, it will not sell its reserves to buy rubles. So we have two options left, of which the latter is less time-consuming,” he says. Valchyshen thinks, however, that pegging our finances to the ruble as a reserve currency can end badly in the long run. “A nation that gives up step-by-step its independent monetary policy and drifts towards a greater impact of any one foreign currency and monetary policy of another nation’s central bank, risks losing political independence, too,” Valchyshen describes the negative scenario of currency peg’s consequences.

Experts believe that the monetary safety net in the form of the currency basket should exist in every state. It helps to safeguard the country’s money “stash.” Financiers warn, however, against forgetting the rule of staying balanced and not overly attached to any one currency. Harmful effects of excessively rigid peg were badly felt in Ukraine during the crisis of 2008, when most loans in the economy were dollar-denominated. The dollar’s share in the current structure of the currency basket is gradually decreasing, says Valchyshen, but, he continues, it is quite significant still, at 43 percent. “When forming the currency basket for its foreign exchange reserves, the NBU should focus its attention on the currencies of the countries that according to forecasts by the bank itself, the IMF, and leading private forecasters, firstly, will be the leaders in terms of GDP size and its growth rate and, secondly, will simultaneously have the highest credit rating in the next two to three years,” he says. According to Valchyshen, the US dollar, euro, Chinese renminbi, and Japanese yen will be the strongest currencies in the coming years. “Consequently, our attention should be focused on these four currencies,” he says.