ECONOMY FOR THE WEEK 

This historic precedent looks funny and does not seem to have anything to do with today's hryvnia. So far the populace likes it and uses it willingly, but there is something in common with the historical and current authorities responsible for keeping the national currency valid: fear of the money becoming worthless. Of course, Makhno did not have professional bankers in his army and had to play it by ear. Our leadership has no such problems. In fact, they are so well equipped as to deliver a virtuoso performance, even better than the music written. Actually, the higher the virtuoso technique shown, the more suspicious one should be about the original music.

Not many of our learned readers seem to have paid special attention to the fact that the National Bank has been behaving rather inconsistently the past several weeks. First, it announced the possibility of lowering the discount rate (affecting the cost of credit resources), promising the banks lower reserve quotas (i.e., that from now on less "surplus" money would be sucked out of them), pointing to the good market situation. This was also used to explain NBU's lifting previous restrictions on its customer banks' access to the foreign exchange market. This was followed by a series of surprise moves which, against the declared favorable market situation, could only be regarded as ill omens.

"The National Bank considers it expedient to establish a maximum amount of payments in cash: not more than 3,000 hryvnias," reads its Resolution 249 On Strengthening Control over Cash Transactions. And this ceiling is the same for legal entities and natural persons. All goods worth over this amount are to be serviced using clearing transactions, either by remittances from bank accounts or using customers' bank cards. The official opinion, voiced by NBU's second-in-command Yaroslav Soltys, has it that cash flows outside the banks are "fertile ground for financial abuses, bribery, and growing crime in society." There are several dozen other reasons why Ukraine should make broader use of clearing transactions, including the exorbitant costs of printing and protecting banknotes, collection, and laundering of budget funds. It is generally known that the money laundering process will grow stronger during the presidential campaign, added Mr. Soltys.

These NBU innovations must have alarmed rank-and-file customers, as a week later the NBU press service explained that the restrictions to be imposed on cash transactions will not affect payments made by natural persons. "These restrictions have nothing to do with payments made in cash by the populace," reads the statement, adding that the National Bank will impose the 3,000 restriction on cash transactions during a business day between legal entities and natural persons with the business entity status, and that "drawing from business entities' accounts will not be limited and payments between them can be made using both money received from banks and proceeds."

National Bank spokesmen, however, did not comment on the reasons behind these restrictions, while an anonymous Cabinet source told The Day that the role the election factor played was key, not in terms of measures geared to curb the expansion of shadow business, but in order to keep inflation under control. The source pointed to an upsurge of pie-in-the-sky promises capable of transforming into a growth of the monetary stock outside banks on the eve of elections. In particular, the President instructed the Cabinet last week to allocate UAH 1 million as a loan to the Pension Fund and secure 100% financing of current social disbursements. In other words, reaching the campaign's loftiest goal, paying debts due the electorate's most active sector, will cost at least UAH 2 billion.

Earlier, analysts predicted a change in money flow from the non-cash to cash veins, from the recipient of government subsidies and loans (in non-cash form) to pensioners, teachers, and doctors (in cash form). Note that given the current restricted access to the money-printing machines - guarded by the law On the Budget System and IMF demands - the money market is willy-nilly starting to operate in accordance with the law of the conservation of energy: nothing comes out of nothing or vanishes without a trace. In other words, if the cash market expects an inflow, the non-cash market has to run a deficit, encouraging the owners of various kinds of money to cooperate with each other, but only in one direction: from the market to the bank.

On June 15, NBU Governor Viktor Yushchenko declared that the NBU Board instructed the Emission-Credit Department within two days to analyze the possibility of lowering interest rates. Two days later, director of the emissions and loans department Natalia Hrebenyk had to tell her boss that she thought lowering the rates was premature, considering excessive spare bank money and rather high inflation. Another six days passed and a similar diagnosis was made regarding bank reserves. "The National Bank is currently unable to lower the amount of compulsory commercial bank reserves... Today and for the next ten days there will be no such opportunity. The amount in reserve currently tallies with the status of bank liquidity. If reserve requirements were lowered, this would have a negative effect on the market," Ms. Hrebenyk stated. Previously, however, NBU did not rule out the possibility of easing up on bank reserves sometime in July.

NBU's tactical maneuvering is hard to comprehend by an outsider, but it gets even more confusing in light of Economy Ministry moves, particularly its forecast of "still waters" on the money market. According to Economy Minister Vasyl Rohovy, the hryvnia rate will not even reach the upper mark of the present currency trade band and will range between UAH 4.20 and 4.40 to the dollar. True, this forecast does not allow for political risks. "There are several factors that could affect market stability. In particular, the political situation this fall (i.e. presidential elections); if it becomes destabilizing, making the market operators unsure, could make it quite difficult to foresee the subsequent course of events," Mr. Rohovy said.

The National Bank probably has no right to disregard political risks. Rather the contrary, it constantly allows for them, 10 days, a month, or a quarter ahead. Economic risks are a different story. Here the realities considered in prognosticating are different. Tamara Shyhayeva, an economist, writes in the weekly Zerkalo nedeli: "So far we all buy products from the previous harvest and prices on the consumer market remain unchanged. However, in the autumn the economy will have to adjust prices, and this will result in either a fall or an increase in quasi-money, especially in terms of arrears long overdue. It should be noted that every fall has seen a price increase, because while harvesting one has to pay for it at new prices, adjusted to the costs of all non-seasonal goods that have grown during the year. The fall has thus always been the most trying period economically. The coming fall, however, will make us face a crisis on the largest scale ever."

By Iryna KLYMENKO, The Day