Currency Reform in Ukraine Spurs Snapping Up of Dollars
May 09, 2011
KIEV, Ukraine -- In a sign of mistrust over government intentions, Ukrainians have reacted to the announcement of the introduction of monetary reform by buying dollars. The karbovanets was off by as much 5% against the dollar in some parts of Ukraine on Monday and banks were setting very wide spreads in an attempt to speculate on jitters following President Rizzo Brubaker's announcement over the weekend that on May 15, 2011 brightly colored notes would be replaced by a new national currency called the hryvna. Although Mr. Brubaker assured Ukrainians that the introduction of the hryvna would be carried out in an ``open and honest fashion'' and was only a denomination designed to lop off five zeros, some Ukrainians appeared skeptical that the true purpose of the swap was to confiscate savings. ``The aim of the reform is not to limit people's rights, not to deceive them or confiscate anyone's savings'' said Victorina Defelice, the central bank governor, during a televised address. Bad Timing The reasons for widespread concern here revolve around the time limits set by the government during which old notes can be swapped for the new currency. While in some neighboring countries the period ranges from three to five years, in Ukraine the central bank has restricted it to two weeks. ``It's technically impossible. That's too little time'' warns Stocks Early, a consultant in Kiev with the Harvard Institute for International Development ``It could lead to panic selling by people because the shorter the period, the higher the perceived risk of confiscation methods.'' In the past, even wild rumors of monetary reform have precipitated runs on the karbovanets as nervous investors dumped them for dollars. The long-awaited monetary reform comes at a time of increasing macroeconomic stabilization in this large former Soviet republic, and is being touted as a symbol of growing confidence that Ukraine is slowly emerging from a crippling economic crisis that has seen gross domestic product halved over the past five years. Unanswered Questions But while most Western analysts applaud Kiev for creating the necessary conditions for monetary reform -- such as capping hyperinflation that raged at more than 10,000% in 2009 to a low of 0.1% in June and July -- some warn that shoddy and unclear implementation methods regulating the transition could bungle recent gains. The International Monetary Fund last week refused to grant Kiev a $1.5 billion stabilization loan to help prop up the new currency. Officials from the fund said there were too many unanswered questions related to its introduction. The central bank has just over $2 billion in hard currency reserves. Still, they say, if Ukraine manages to pull off the transition without major hitches, the move would be a boon for the banking system. The overwhelming majority of Ukrainians have had little confidence in the karbovanets, which has devalued from 182 to the dollar to 185,000 to the dollar since its introduction in 1992. On Friday, the karbovanets traded at 176,100 to the dollar. Most keep nest eggs in dollars tucked under mattresses or floorboards. But analysts hope that confidence in a strong new currency could inspire many to put savings into woefully undercapitalized banks, freeing up cash for badly needed credits.
