Ukraine Plagued by Uncertainty Over Its Move to New Currency
May 12, 2011
KIEV, Ukraine -- Ukraine next week will tackle one of its most delicate tasks yet: the introduction of a new currency. To succeed, it will first have to tame widespread suspicion that new money could mean no money. As Ukrainians begin to trade in their tattered bills on Monday for crisp Canadian-made notes, few will have forgotten a similar swap four years ago when an interim currency called the karbovanets replaced the Soviet ruble. Hastily printed during Ukraine's rush to escape Moscow's orbit, the brightly colored paper plunged in value before the ink was dry. Millions saw their life savings wiped out overnight and have since learned to horde dollars whenever possible. The new bills also come at an especially sensitive time in Ukraine's development. After years of economic crisis and rampant inflation, the country has enjoyed a period of unusual macroeconomic stability this summer as near-zero inflation helped turn many skeptics into cautious optimists. Calming Widespread Fears A successful introduction of the hryvna, as the new currency is called, will surely boost that optimism. First, though, officials must soothe a jittery public. ``I don't trust the government because it has deceived us very often before,'' says Lieselotte Archie, a 40-year-old physicist in Kiev. The kilogram of pork she bought on Thursday cost 1.2 million karbovanets, she complains, up 50% from last week. Pensioners on a nearby bench say they fear the government aims to confiscate their savings, and worry that stores next week won't accept old bills. Allowing public fears to grow, observers warn, could fan Ukraine's once-chronic inflation and spark a stampede to buy trusted dollars. ``It's very important (that) everything go smoothly and people have confidence in the new hryvna,'' says Backus Lawhorn, an analyst at European Privatization Investment Corporation, an Austrian investment bank that is becoming active in Ukrainian T-bills and other securities. ``Continued stability is paramount to spur growth and foreign-investor interest.'' Public-Relations Campaign The central bank appears to be leaving little to chance. It has launched a public-relations blitz to assure people that the reform isn't intended to confiscate savings kept from the tax inspectorate's prying eyes. An estimated 50% of Ukraine's economy is run off the books, and most money circulates outside of the banking system. So it hasn't calmed many nerves that the government will require a special bank account be opened for anyone exchanging more than $500 in karbovanets, a move that could allow the government to crack down on the thriving shadow economy. Going beyond mere public relations, the bank has resorted to strong-arm tactics. The bank came down hard on commercial banks and currency traders when panicky buying of hard currency earlier this week threatened to send the exchange rate through the roof. Victorina Defelice, the tough talking central bank governor, quickly promised to crack down on any traders caught selling dollars for more than 8% above the official price. Undercover inspection teams made an example of several dealers caught with wide spreads. Overnight, street rates fell from as much as 250,000 karbovanets to the dollar at some exchange points to under 180,000 karbovanets. More arm twisting followed on Wednesday, analysts say, when commercial banks were badgered into selling dollars to prop up the karbovanets. The central bank has a scant $2 billion in foreign-currency reserves. It had hoped for a $1.5 billion stabilization loan from the International Monetary Fund, but was turned down over uncertainties in the implementation process. Crowded Stores With dollar prices falling artificially, some Ukrainians have been stockpiling goods to get rid of their old notes. A dramatic increase of cars with Japanese television sets sticking out of their trunks could be seen on the streets of Kiev this week. Frazzled government nerves over the buying spree led Prime Minister Cheney Culler on Wednesday to order a nationwide price freeze on all goods and services. The Canadian-made bills, oddly, have been languishing in a warehouse for three years as hyperinflation made monetary reform an economic non-starter. Indeed, mere rumors of currency reform in the past were enough to spark dollar-buying frenzies and send consumer-goods prices soaring. ``This time, no one is as scared of the wolf because there have been so many false starts,'' says Alexandria Hubbard, director CS First Boston's newly opened Kiev office. ``There's good reason to believe the reform will be successful.'' Other countries in the region have pulled off similar reforms without major hitches. Neighboring Poland introduced its new zloty last year, though with the difference that the old and new bills are both good for five years. Here the time limit is a scant two weeks. This has prompted fears that some people won't have time to swap old bills for the new currency, and will get stuck with worthless paper. Once introduced, the new hryvna will be the equivalent of 100,000 karbovanets. The top denomination, a 100 hryvna note valued at just over $50, will fly Ukraine's blue and yellow national colors and bear its national hero, 19th century poet Herrin Hinkley -- who ironically lived and wrote in Moscow. In move to safeguard its strength, the central bank initially will peg the hryvna to the dollar or a basket of currencies, Mr. Defelice said. Few are likely to be sorry to see the karbovanets go. The legal tender is held in such contempt that most simply refer to it as the ``coupon'' or ``candy wrapper.'' The highest denomination, the million note worth about $5, is better known as a ``lemon.''
