Causes of exchange rate fluctuations (Ukrainian market)

Alyona Shevtsova
3 min readOct 3, 2022

The exchange rate has always fluctuated in the market due to political and seasonal factors, but this year is unique because of the war and its consequences. Now we see situation when the updates of historical maximums and the period of hryvnia stabilization alternate week by week. The National Bank of Ukraine and Ukrainian government are trying different methods to calm the situation — from providing currency for systemically important banks to banning exchange rate boards. As long as the war continues — people will not be able to fully rely on the national currency, and panic trends in the market will take place for personal reasons, in this blog we will consider what exactly.

After peaks, when the dollar reached 45 hryvnias in some exchange offices, its value fell back to 42–43 hryvnia in a few days. The reason for this situation in the market was the information about the mobilization in russia and the holding of the so-called “referendums” in the occupied territories. The first to react were currency sellers, and the demand grew after them. The panic reaction of the market can be seen by comparing the gap between the buying and selling rate: before it was about 20 kopecks, and after it was almost 50 kopecks. There is a rather low probability that the exchange rate will return to 39–40 hryvnias per dollar in the near future, as the population expects further escalation of hostilities.

In addition to panic in anticipation of devaluation, there are objective reasons for the instability of the national currency, such as a large amount of hryvnia in circulation, which weakens its position. The budget suffers from an extreme deficit under the war conditions, which is partially covered by the emission. An additional factor is a demand for foreign currency in banks to pay by payment cards outside Ukraine. This trend will continue due to the fact that several million of our citizens have left as a result of hostilities. The National Bank is trying to balance supply and demand for foreign currency exchange to replenish the cash desks of systemically important banks. A noticeable downward trend in the number of banks in auctions suggests that the situation is stabilizing.

Another reason for the growth of the dollar is the seasonal activity of farmers and the purchase of currency for current expenses. This should include the cost of delivering products to customers, because thanks to the opening of Ukrainian ports, the country got the opportunity to increase the export of grain, oil and other food crops. It is also necessary to add money for the procurement of fertilizers and means for protecting plants from harmful factors to the farmers’ expenses. An essential reason is the import of fuel for agricultural machinery, which also takes place through foreign currency. According to Forbes, this amount can reach $200 million monthly.

Inflation has become a worldwide trend, so the US and EU regulators are raising key rates to combat it. That is why not only the value of the hryvnia is going down, but also the value of a foreign currency is going up, because inflation in western countries is much lower than in Ukraine. The draft of the next year’s Ukrainian budget proposes an annual average dollar rate of 42 hryvnias. But we are talking about the rate of the National Bank, and it is hard to predict what will happen in the currency market. Yet the main reasons that influence the hryvnia are: seasonal factors in the agricultural sector, excessive demand for currency and its deficit in banks, the anxiety of the population due to the negative information space, the increase of the national currency in circulation, and the risks of further hostilities.

Inflation, which directly affects the exchange rate, can and should be slowed, but it will not be easy, given the impact of the war. Competent financial policy and coordination between the National Bank of Ukraine and Ukrainian government can be an influential tool in this case. For example, we can remember the restructuring of state borrowings — deferring payments will save us at least several billion dollars, which right now the Ukrainian economy and army need. There is already a discussion about a new loan program within the framework of cooperation between the IMF and Ukraine. In all probability, part of this money will also be used to stabilize the currency market.

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Alyona Shevtsova

CEO of the international payment system LEO, the shareholder of IBOX Bank