When Olena Polikarchyk crosses the border now, she stuffs her bags with wads of euros and dollars.
(Bloomberg) — When Olena Polikarchyk crosses the border now, she stuffs her bags with wads of euros and dollars.
Since Russian troops invaded her home country Ukraine, it’s been her only option: The central bank slapped a lid on how much people can charge on their debit cards abroad to halt a stampede of cash that could have crushed the economy.
It’s part of a web of restrictions and other policies — including devaluing the hryvnia and pegging it against the dollar, as well as an emergency hike of the main interest rate to 25% — that the central bank imposed after Russian tanks stormed across the border in February 2022.
But in a sign of policymakers’ increasing confidence, the bank is gearing up to ease the limits.
With Kyiv’s forces already weeks into a counteroffensive to retake occupied territory from Russian invaders, and the Kremlin scrambling to quell the fallout from Wagner mercenary leader Yevgeny Prigozhin’s short-lived mutiny, Ukraine is hoping to turn a corner this year both in the war and for its economy.
Of course, Russian missile attacks across the country are still destroying crucial infrastructure in a stark deterrent to investors and Ukrainian forces are yet to report any major breakthroughs. But growth is starting to come back all the same, and the hryvnia-dollar street price is approaching the central bank’s official fixing, which may provide room to loosen the shackles on the currency to spur business activity crucial for Ukraine to rebuild.
That’s good news for both businesses and people, especially for the more than 6 million Ukrainians who’ve fled abroad and are struggling to pay bills in foreign countries with a 100,000 hryvnia ($2,700) monthly limit.
“This amount is sufficient to cover one’s everyday needs,” said Polikarchyk, who runs a business in Ukraine but lives with her French husband in the town of Lyon. “I’m not complaining, but what if you need to cover larger expenses?”
The central bank forecasts a slight increase in economic output after the economy cratered 30% following the attack last year, while the business outlook showed positive expectations for a third month in June.
Against that backdrop, the central bank approved a strategy last week, in part to meet the demands of its main financial benefactors, the International Monetary Fund, to transition to a flexible exchange rate and return to an inflation-targeting approach to monetary policy.
The bank didn’t provide details on the plan, which it said it will publish by July 7. The strategy, which is being finalized, contains a list of possible steps but doesn’t provide the sequence in which they will be carried out, two people familiar with the process said on condition of anonymity because of the sensitivity of the discussions.
One of the first steps the central bank may take is allowing Ukrainian companies with foreign stakeholders to expatriate dividends from this year’s operations, one of the people said.
The other person said the measures were divided into two groups, with the first affecting the movement of capital. These will probably take place only once the currency shifts to a flexible exchange rate, the person said. The second group will affect day-to-day operations.
One of the most visible indicators that pressure is easing on the hryvnia is that Ukrainians can now trade hryvnia for dollars on the street at a rate much closer to the central bank’s. Cash withdrawals from Ukrainians have also significantly dropped off since February, plunging to about 9 billion hryvnia ($244 million) in March.
In June, Ukrainian households sold more foreign currency than they bought for the first time in almost a year, the central bank said on Tuesday.
While it may take time for measures to start benefiting small businesses and people like Polikarchyk, the beginning of the process is expected to help ease conditions for foreign lenders, a crucial factor to help rebuild the war-devastated economy.
“As of today FX liberalization is a driver that can spur economic processes in the country and demand for it is quite high,” central bank Governor Andriy Pyshnyi told reporters last month.
These aren’t the first capital controls imposed by the National Bank of Ukraine. It also locked down the currency for half a decade after Russian-backed forces seized Crimea and territory in the eastern Donbas region and the Kremlin set up separatist administrations in violation of international law in 2014.
The bank has already made several steps toward liberalizing the foreign exchange market this year, allowing investors in government debt to repatriate some interest payments, easing operations for insurance firms and letting borrowers repay some foreign loans.
“It will be important that contingency plans continue to be prepared and updated given the balance of risks to the outlook,” Ukraine’s government said in a memorandum with the IMF.
Spurring Investment
Until the controls are lifted, business will continue to struggle, particularly for anyone wanting to get in early to invest in rebuilding Ukraine once the war ends.
Because many Ukrainian companies are owned through off-shore shareholding structures, mergers and acquisitions are particularly thorny because it’s virtually impossible to pay foreign stakeholders and significantly limits deals.
“It’s a big problem,” said Igor Verhogliad, the founder of Kyiv-based investment boutique Soul Partners. “Isn’t it time to handle this issue if we want to attract private investment?”
Defending the exchange rate has also partially depleted the central bank’s reserves. The amount of dollars the bank has sold to prop up the hryvnia has eased this year, but a float will further alleviate the need to intervene.
It will also make it more predictable for the millions of people who own or work in businesses dependent on imports, with many having to avert the central bank’s currency limits by seeking dollars and euros in the gray market.
Polikarchyk is one of those people. To fund the imports she needs for her dental-implant business, she lost an average of 4.4% on currency exchange last year, a severe blow to her 20% profit margin, she said.
“Before I was able to buy foreign currency any time I believed the exchange rate was favorable,” she said. “It’s a very big loss.”
–With assistance from Slav Okov and Ben Sills.
(Updates with foreign currency purchases in 14th paragraph)
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