Latest / Reformed Thinking / Strengthening the Ukrainian Hryvnia: Macroeconomic Stabilisation, Structural Reform, and War-Time Constraints

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Strengthening the Ukrainian Hryvnia: Macroeconomic Stabilisation, Structural Reform, and War-Time Constraints · Reformed Thinking

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  Welcome to Reformed Thinking. This is our deep dive where we
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  take the core research, the dense institutional reports, and
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  try to deliver the essential architecture of understanding
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  straight to you. Today we're looking at a really
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  crucial case study in economic statecraft, especially under
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  well under the most intense duress imaginable.
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  Our subject is the effort to stabilize and strengthen the
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  value of the Ukrainian Rivnia, the UAH, right in the middle of
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  these immense wartime economic pressures.
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  And we really have to look past the day-to-day noise of the
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  exchange rate. Yeah, the sources we've gone
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  through, they offer a clear, very methodical framework.
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  It's not about short term fixes, it's about the sequencing, the
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  policies and the very real constraints involved in building
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  genuine sustainable currency strength when a nation's very
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  existence is on the line. Our mission then is to really
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  extract those mechanisms. We need to analyze the
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  constraints imposed by the war and and really detail the non
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  negotiable order of operations. Let's say that's required to
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  rebuild trust. Right.
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  And to understand the difference between, you know, a temporary
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  number on a screen that might be hiding instability versus
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  establishing true long term real economic value.
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  That distinction, that's exactly where we need to start, because
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  when we talk about strengthening the Rivnia, there are really two
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  separate things we're looking at.
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  You have the nominal value on one hand and the real value on
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  the other. So the nominal value, that's
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  just the price tag, right? It's how many Rivnias it takes
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  to buy one U.S. dollar, the number you see on the news.
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  Exactly. It's the headline number, and
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  that's often the focus of political attention because,
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  well, it's a number politicians feel they can control, or at
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  least try to with administrative tools.
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  They can just. Fix it.
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  They can fix it. They can manipulate it in the
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  short term and that can give a a a sort of false sense of
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  security. But the real value, that's the
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  true reflection of a currency's health.
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  It speaks to the long term well-being of the people.
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  So the real value is more about purchasing power, what the
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  currency can actually buy once you account for inflation at
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  home and abroad. Precisely.
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  It measures what your arrhythmia can actually buy inside Ukraine
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  compared to what it could get you overseas.
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  You know the nominal rate is fixed, but your domestic
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  inflation is running at, say, 20%.
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  You're getting poorer. You're getting poorer in real
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  terms. Your savings are being quietly,
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  well, stolen. Long term prosperity and
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  competitiveness, they depended entirely on that real value.
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  We have to look for genuine economic strength, you know,
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  rooted in things like productivity and low inflation,
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  not just an administrative number propping up a fragile
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  front. OK, so let's set the scene.
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  Let's go back to the moment of trauma, the 2022 full scale
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  invasion. It was a massive shock.
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  And almost fatal shock to the Ukrainian economy.
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  I mean, you saw this precipitous drop in output, commercial
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  activity just stop. Millions of people were
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  displaced and infrastructure was being destroyed on a scale
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  Europe hasn't seen in generations.
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  And the state became instantly reliant on external aid just to
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  perform its basic functions. Paying pensions, paying
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  soldiers. The whole financial system was
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  staring into the abyss. The word trauma is right.
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  The immediate need wasn't for, you know, long term strategic
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  planning. It was triage.
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  It was crisis containment just stopping the bleeding,
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  economically speaking. If you look at what happened,
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  you had households, firms, banks, all facing this unheard
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  of uncertainty. There was a run on deposits, a
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  massive immediate rush for foreign currency.
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  All the normal anchors were gone.
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  So the National Bank of Ukraine, the NBU, they had to step in
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  with what the sources call a tourniquet.
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  A tourniquet, exactly. Something to prevent a total
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  collapse of the financial system and the currency.
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  And they did three things at once, really three primary
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  actions that form this tourniquet.
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  They weren't necessary, but very distortionary.
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  Let's start with the most visible one, fixing the exchange
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  rate, the emergency peg. Fixing the Rivnia to the US
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  dollar. That was a critical
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  psychological and economic move. How so?
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  Well, think about it. The market had lost all its
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  bearings, trading volumes vanished.
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  Nobody knew what to expect. This peg it instantly provided a
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  clear non negotiable nominal reference point.
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  So I just told everyone, this is what a dollar costs, period.
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  Yes. And by anchoring that one single
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  price, it allowed businesses and banks to start functioning
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  again, even under this extreme pressure.
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  It gave them a baseline for pricing contracts for valuing
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  what was on their books. Without that anchor, the the
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  panic would have just fed on itself.
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  You'd be looking at hyperinflationary expectations
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  very, very quickly. So it wasn't just about the
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  currency, it was about providing a mental benchmark for the
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  entire economy when everything was chaos.
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  But a fixed rate like that, it's not sustainable on its own.
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  You need the second measure, strict foreign exchange
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  controls. Right.
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  The FX controls were the dam that made the fixed rate
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  possible. What do you mean by that?
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  When an invasion starts, the most rational thing for any
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  person or company to do is to get their money out of the local
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  currency and into something stable like dollars or euros.
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  Capital Flight. Massive capital flight.
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  So these strict administrative limits, you know, limiting how
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  much you can withdraw, banning certain sales of foreign
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  currency, requiring permissions for cross-border transfers, they
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  physically stopped that massive outflow.
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  So you're trapping the money inside the country?
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  You're ensuring that the NB US scarce foreign currency reserves
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  stay in the domestic economy. That prevents the rapid drain
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  that would have made defending that fixed peg completely
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  impossible. It's the difference between
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  clubbing a small leak and trying to hold back a tidal wave.
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  The controls were the only way to stop the wave, but they also
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  had to signal strength. Which brings us to the third
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  action, sharkly tightening monetary policy.
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  This was vital for credibility. Tightening here means they
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  dramatically raise real interest rates.
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  The NBU eventually hiked its main policy rate by a huge
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  amount. And what did that do?
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  What was the purpose of that? It served 2 purposes really.
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  First, it was a clear aggressive signal that they were committed
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  to fighting inflation expectations right from the
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  start. If they'd kept rates low, people
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  would have just borrowed cheap local currency and immediately
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  tried to convert it into foreign currency.
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  Which would have just accelerated the capital flight
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  and the inflation. Exactly.
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  And the second purpose, the high rates were a form of
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  compensation. They offered a very substantial
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  return on domestic assets, things like government bonds or
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  even just bank deposits to offset the huge risks.
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  The risk of inflation and the well, the risk of holding assets
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  in a war zone. Right.
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  It was a calculated move to make holding the Rhythmia, despite
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  all the danger, financially worthwhile compared to trying to
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  get your assets out of the country.
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  So this combination, the administrative peg, the FX
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  limits and the aggressive monetary signalling, this is all
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  captured by that analogy of the tourniquet.
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  It's the perfect analogy because a tourniquet it stops the
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  massive immediate bleeding of capital flight and currency
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  collapse. It saves the patient's life in
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  the short term. But the sources are crystal
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  clear on this. It is not a sustainable long
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  term solution. A tourniquet left on too long
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  restricts circulation and causes its own damage, restricting the
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  free movement of capital, fixing a price administratively.
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  It creates distortions, it encourages black markets, and
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  it's incredibly costly to defend over time.
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  These crisis measures are, by their very nature, temporary.
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  So they bought time. They stopped the spiral, but you
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  can't rely on a tourniquet forever or the underlying
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  economic tissue starts to die. So the next phase has to be
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  about shifting from pure survival to building a genuine
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  foundation of confidence. And that takes us out of crisis
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  management and into the very hard work of macroeconomic
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  stabilization. OK.
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  So stabilization, this is the first essential pillar.
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  It's the non negotiable precondition for any kind of
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  lasting currency strength. It's not optional.
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  Without this phase. Any other reform you try to
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  build is just was built on sand. If your domestic deficits and
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  inflation are out of control, the currency is just constantly
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  being eaten away, no matter what the government says.
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  Let's break this down into its three core parts.
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  We can start with the first goal, price stability, or what
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  the source is called monetary discipline.
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  We've mentioned inflation, but why is chronic inflation so
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  damaging, not just economically but politically for a currency
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  like the rivenia? Chronic inflation is it's
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  insidious Economically, it's destructive because it just
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  shreds confidence in the local currency as a store of value.
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  It's a slow, ongoing theft of purchasing power.
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  And it penalizes savers. It penalizes savers, people on
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  fixed incomes. It is the most vulnerable in
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  society, the hardest. And when people expect inflation
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  to be high and volatile, they react rationally.
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  They abandoned the local currency.
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  They rush to dollars, to gold, to real estate, anything to
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  protect their savings. And that's the dollarization we
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  hear about. Yes.
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  And that process, that dollarization just accelerates
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  the problem. It drives rapid depreciation and
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  makes the whole financial system unstable.
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  So the central bank's role then is to be the primary anchor for
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  everyone's expectations. How does the NBU do that?
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  And what's the big political trap they have to avoid?
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  Well, the NBU has to show that it's completely independent
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  politically. It needs to have a sustained,
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  credible commitment to tightening policy.
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  This means the politicians can't be telling them what to do with
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  interest rates. The NBU has to manage liquidity
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  aggressively and keep real interest rates high, so the
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  return has to be positive after inflation.
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  That prevents temporary shocks like a factory getting hit from
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  turning into a persistent economy wide inflation spiral.
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  Exactly. And that political trap you
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  mentioned is the critical constraint here.
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  It's avoiding something called fiscal dominance.
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  This is a key concept. It's where fiscal needs just
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  completely overwhelm monetary policy.
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  Can you elaborate on that? Because it seems like the core
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  conflict. A fiscal dominance is it's like
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  the original fin in this kind of economic scenario.
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  It's what happens when the government, which is facing
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  these massive, unavoidable wartime deficits, I mean, they
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  have to buy bullets, pay soldiers, keep basic services
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  running, starts to pressure the central bank to become its Piggy
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  Bank. They forced the central bank to
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  print money. In simple terms, yes, they
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  source the central bank to monetize the deficit.
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  The central bank buys government bonds directly from the
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  Treasury, which is the same as creating new money out of thin
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  air to pay the government's bills and.
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  No matter how independent the NBU claims to be or what
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  interest rate it says it's setting, if it's forced to do
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  that, the currency is just doomed.
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  It's doomed. The supply of money explodes.
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  It floods the system. You can't be trying to cool the
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  room with the air conditioner if you're also setting a bonfire in
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  the middle of it. The sources are very clear.
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  If the central bank becomes just a tool of the finance ministry,
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  it loses all credibility, all control over inflation and it
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  negates every other effort. So avoiding that requires real
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  political courage from the government to find other ways to
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  fund the war. And that leads us right to the
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  second pillar, fiscal responsibility, managing that
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  war deficit. A wartime deficit is a grim
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  necessity, but how it's funded is the defining factor for the
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  Rivnius stability. So what does sustainable
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  financing actually look like in a war zone?
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  It has to be non inflationary financing.
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  The state absolutely cannot finance the bulk of its huge
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  defense and social spending but just printing money.
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  And it also can't do it by issuing so much domestic debt
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  that it crowds out all private borrowing.
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  So where does the money come from?
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  This means relying very heavily on grants and concessional loans
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  from international partners. Grants are straightforward.
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  They're basically gifts. But what about concessional
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  loans? How are they different from
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  normal borrowing? They're loans with highly
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  favorable terms, very low interest rates, very long
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  repayment periods. This is fundamentally different
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  from going to the commercial market for debt.
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  And that distinction is vital. It's vital for long term health.
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  Commercial debt, especially during a war, would be
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  incredibly expensive because of the risk, and it just creates a
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  huge repayment problem down the road.
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  Using grants and concessional financing, even with strings
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  attached, ensures that you're fighting the war today without
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  destroying the currency's future solvency.
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  That international support is a direct subsidy to the Rivnia's
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  stability. But it can't all be external
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  help. The sources also talk about the
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  need for domestic discipline, even during a war.
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  What kind of actions are we talking about?
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  The government has to signal its own long term financial
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  sobriety. This means taking difficult
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  steps at home. It means broadening the tax
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  base, fighting evasion, making sure everyone who can pay does
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  pay. And critically, it means
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  strictly prioritizing spending. Cutting out the waste.
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  Ruthlessly, any wasteful or poorly targeted spending has to
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  go. You have to ensure every single
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  Rivnia is being used efficiently for the war effort and for
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  essential social services. This sends a crucial signal to
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  your own citizens into international partners that
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  you're managing your house responsibly, even under all this
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  pressure. The analogy of a household in a
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  medical emergency really fix here.
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  You need help from family or charity, the grants that's
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  responsible. You don't just Max out all your
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  high interest credit cards. Right, because that would ruin
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  your reputation and your future financial standing.
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  And that idea of reputation and future standing, that's the
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  perfect bridge to our third and final pillar of stabilization,
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  debt sustainability. OK.
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  So if the market starts to believe that the total debt load
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  is just unsustainable, what does that do to the currency right
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  now? The perception alone is
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  devastating. It creates this, this almost
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  existential crisis of trust. Because investors start to
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  anticipate a default. They anticipate one of two
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  painful outcomes. 1 is an outright hard default on the
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  debt. The other, which is often the
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  preferred political path, is a soft default, just inflating the
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  debt away, deliberately weakening the currencies
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  purchasing power so the real value of what you owe shrinks.
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  And knowing that's a possibility, investors demand a
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  huge risk premium to hold your assets.
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  A very high risk premium immediately.
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  It makes all your domestic assets, your bonds, your stocks
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  look incredibly unattractive compared to safer foreign
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  assets. Why would I hold a Rivnia bond
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  if I think it's going to be inflated away?
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  So you need a clear, coherent strategy for managing all these
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  obligations. You absolutely do, and this is
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  where that international engagement becomes so
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  structural. It means doing things like
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  negotiating a restructuring of your existing debt, trying to
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  extend maturities so payments are pushed far into the future,
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  and crucially, setting clear, verifiable medium term debt
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  targets. And these are often anchored by
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  an IMF rogram. Yes, an IMF rovides the
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  framework and the monitoring. That kind of commitment
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  dramatically reduces the erceived risk of default.
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  It lowers that risk premium investors demand, and that
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  directly supports the Rivnya's value by making domestic assets
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  A safer, more viable thing to hold for the long term.
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  Which brings us back to the power of that external
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  reinforcement. The IMF, the allies, they aren't
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  just giving cash, they're providing an external anchor
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  through conditionality. Conditionality is often a
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  politically unpopular word, but economically in this situation,
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  it's a lifeline. It's the mechanism that enforces
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  the discipline. Right.
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  It means that to get the grants and the loans, the nation has to
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  meet agreed upon milestones for monetary and fiscal management.
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  This external framework reinforces the domestic promises
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  and acts as a powerful brake against political pressure to,
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  you know, just turn on the printing presses or delay
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  painful cuts. Without that external oversight,
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  the pressure to abandon discipline in a war would be
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  almost impossible to resist. OK.
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  So we've established that macroeconomic stabilization,
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  that's phase one. It stops the collapse, it stops
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  the bleeding, it sets the table. But to actually increase the
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  currency's real long term value, the economy itself has to get
• 15:45
  better, has become more efficient, more trustworthy.
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  And that means moving into the politically very difficult work
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  of Phase 2 structural reforms. We're moving from stopping the
• 15:55
  loss of blood to actually building muscle.
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  This is where the real political friction starts, isn't it?
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  Because this changes who holds economic power.
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  Stabilization with high interest rates is a general pain that
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  affects everyone, but this is targeted, yes.
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  Governance and structural cleanup.
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  They target specific powerful actors.
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  Why is this second phase so much harder politically than just
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  managing interest rates? I mean things like cleaning up
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  the judicial system, state owned enterprises, customs.
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  Because structural reform directly disrupts entrenched
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  interests and patronage networks.
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  You're talking about powerful groups, often oligarchic
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  structures or corrupt officials, who actually benefit from the
• 16:35
  current dysfunction. They profit from the chaos.
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  They profit from it. They extract what economists
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  call rents from the system. Cleaning up customs, for
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  example, eliminates the money they make from smuggling.
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  Reforming the judiciary eliminates their ability to buy
• 16:49
  court decisions to protect their assets.
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  You're threatening their income stream.
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  So these actors are well organized, they have money, and
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  they can mobilize serious political opposition to block
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  these changes. Exactly.
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  It becomes a pitched battle. You're asking the government to
• 17:03
  fight a war on the frontline and at the same time fight its most
• 17:06
  powerful domestic financial interests.
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  That is the fundamental challenge of Phase 2.
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  Let's break down the specific levers here that are needed to
• 17:14
  build this real value, starting with lever a institutional
• 17:18
  quality. The sources call weak
• 17:20
  institutions a kind of governance tax.
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  Is a tax, it's a tax that every single investor whether they're
• 17:27
  from Ukraine or from abroad has to pay just to operate in that
• 17:31
  environment. They demand a higher expected
• 17:34
  return, that risk premium we talked about because they have
• 17:37
  to price in non economic risks. What kind of risks?
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  The risk that the government might just decide to expropriate
• 17:43
  their property, or that they'll face arbitrary regulatory
• 17:47
  changes that wipe out their business model.
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  Or, maybe most critically, that their contracts will be
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  worthless because of corrut court decisions.
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  This systemic fear is baked into the price of the Rivnia and the
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  cost of all capital in the country.
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  So things like strengthening the rule of law, protecting property
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  rights, fighting corruption, these aren't just, you know,
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  good governance talking points. They're critical economic tools.
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  They're absolutely essential. Reducing this governance tax
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  makes long term planning possible.
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  If an investor trusts that a contract signed today will still
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  be valid in five years, they'll invest in a factory that takes 2
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  years to build. Without that certainty, they
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  only make short term liquid bets they can pull out quickly.
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  And This is why EU integration is mentioned as such a powerful
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  force here. Aligning with the EU aqueous,
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  the body of Common European law is so much more than just a
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  bureaucratic exercise. It's a massive institutional
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  upgrade. It forces the adoption of
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  external, internationally recognized standards of
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  governance and regulation. It signals stability.
• 18:46
  It signals stability and regulatory convergence.
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  It lowers the perceived risk dramatically because it provides
• 18:52
  this external rules based anchor that's very difficult for
• 18:55
  domestic entrenched interest to get around.
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  It effectively lowers that governance tax for everyone.
• 19:01
  Let's move to lever be productivity and exports.
• 19:04
  This is the real engine where the currency strength gets
• 19:07
  rooted in actual output. The source talks about something
• 19:10
  called the Belasa Samuelsson effect.
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  Can you break that down for us? Sure.
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  This effect is, it's fundamental to understanding how real long
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  term currency appreciation happens.
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  In simple terms, it's the idea that as an economy gets real
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  productivity gains and it's tradable sectors, things like
• 19:27
  manufacturing, technology, anything you can sell abroad,
• 19:30
  it's able to sustain a stronger real exchange rate.
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  So if Ukrainian workers become, say, 20% more efficient at
• 19:36
  making a product than workers elsewhere?
• 19:39
  Then the Ukrainian economy is creating more value per hour of
• 19:43
  Labor, and that increased value creation justifies a stronger
• 19:47
  currency, because that currency can now buy more both at home
• 19:50
  and internationally. The Rivnia's strength becomes
• 19:53
  justified by the fact that the underlying economy is just
• 19:55
  fundamentally more productive. But that seems so
• 19:57
  counterintuitive. During a war when productive
• 19:59
  capacity is being destroyed daily.
• 20:01
  How can you even begin to leverage that effect?
• 20:04
  It highlights the long term vision that's required while
• 20:07
  destruction is happening now the planning has to focus on the
• 20:10
  post war reconstruction as the moment to bake in these
• 20:13
  productivity gains. But even during the war, some
• 20:17
  sectors can thrive, like the IT sector, and this focus has to be
• 20:21
  paired with export diversification.
• 20:23
  Why is getting away from just exporting raw commodities so
• 20:26
  critical for the currency? Because a currency needs a
• 20:29
  steady, resilient stream of foreign earnings to be stable.
• 20:33
  If your economy relies too heavily on raw commodities like
• 20:36
  iron ore, bulk grain, you're vulnerable to two huge risks.
• 20:41
  Global price shocks. Right.
• 20:42
  Global commodity prices swing wildly.
• 20:44
  And the second is physical disruption.
• 20:46
  A mine or a port is a very easy target in a war.
• 20:49
  True resilience comes from moving up the value.
• 20:51
  Chain from selling raw grain to selling processed food products.
• 20:55
  Exactly. Or moving from raw materials to
• 20:57
  advanced manufacturing or service exports like IT.
• 21:00
  These things generate a higher and more stable stream of
• 21:03
  foreign currency that makes the Rivnia less vulnerable to
• 21:06
  external shocks. This is how you build strength
• 21:08
  on tangible value, not on speculation.
• 21:11
  And the final lever here is lever CD dollarization.
• 21:15
  This is about persuading your own people to trust the revenue
• 21:18
  again. Dollarization is the most
• 21:20
  visible symptom of deep public distrust.
• 21:23
  People hold dollars because they have a historical fear of
• 21:26
  inflation and bank failures. The only way to reverse that is
• 21:30
  not by banning dollars, but by making the Rivnia a more
• 21:33
  attractive choice. So the main incentive is just
• 21:36
  offering attractive real interest rates.
• 21:38
  That's the pull factor. Savers have to be confident that
• 21:40
  the interest they earn on their Rivnia deposits won't just be
• 21:44
  eaten up by inflation. If the real rate of return is
• 21:47
  consistently positive, so the interest rate is significantly
• 21:50
  higher than the inflation rate, then holding RIV NIA becomes the
• 21:53
  rational profitable choice. But beyond just the rates, the
• 21:57
  sources also talk about building systemic trust.
• 21:59
  What does that mean for the financial system itself?
• 22:02
  It means you need a well capitalized banking system that
• 22:04
  people trust isn't going to collapse in the next crisis.
• 22:07
  It also means developing deep liquid domestic bond markets.
• 22:11
  Why is that so important? Because it allows the government
• 22:13
  and large companies to borrow money locally in Rivnia, this
• 22:17
  hugely reduces the systemic risk from foreign debt.
• 22:21
  If all your debt is in your own currency, a currency
• 22:23
  depreciation doesn't automatically trigger a default
• 22:26
  crisis. It makes the whole system more
• 22:28
  resilient and builds confidence in the Rivnia as the primary
• 22:32
  currency for finance. The analogy they use is great
• 22:35
  here. Reducing dollarization isn't
• 22:37
  about banning off road vehicles the dollars.
• 22:39
  It's about paving the roads, stabilizing inflation and
• 22:42
  upgrading the bus fleet, strengthening your banks and
• 22:44
  bond markets. It's perfect.
• 22:46
  When the local financial system, the bus fleet, is cheaper,
• 22:50
  faster, more reliable, and offers a better return than
• 22:53
  holding cash onto your mattress, people switch.
• 22:55
  It's a rational choice based on good stewardship.
• 22:58
  The RIV NIA then becomes a legitimate store of value,
• 23:00
  backed by the choices of its own people.
• 23:03
  So we've laid out this logical path of stabilization and
• 23:06
  reform. But we can't forget the giant
• 23:08
  reality hanging over all of this.
• 23:10
  The sources are explicit. The ongoing conflict is the
• 23:13
  dominant binding constraint. It complicates and often just
• 23:17
  frustrates every single policy decision we've discussed.
• 23:20
  The war introduces a layer of risk that frankly conventional
• 23:24
  economic models Really struggle with.
• 23:26
  It creates this massive war driven risk premium that can
• 23:30
  break the standard market mechanisms.
• 23:32
  Let's talk about that risk premium.
• 23:33
  Normally, monetary theory says if you raise interest rates, you
• 23:36
  should attract capital. But the sources point out the
• 23:39
  ineffectiveness of rate hikes when the risk is war itself.
• 23:43
  Why is that? Because the risk premium that
• 23:46
  extra return investors demand for holding assets in a
• 23:48
  dangerous place, can get so large that it completely offsets
• 23:52
  the attractive returns from high interest rates.
• 23:55
  Can you give an example? Sure, imagine the NBU is
• 23:57
  offering a 20% interest rate on a government bond.
• 24:00
  On paper, that looks fantastic. But if the market perceives,
• 24:03
  say, a 30% chance that the country could face a strategic
• 24:06
  set back, or that the government might have to default, or that
• 24:09
  capital controls will trap their money, well, that risk of a
• 24:12
  catastrophic loss just completely negates the 20%
• 24:16
  return. So the fear of total loss
• 24:18
  Trump's the promise of high returns.
• 24:20
  You can turn up the interest rate tap as high as you want,
• 24:22
  but the risk premium is like a giant hole in the bottom of the
• 24:24
  bucket. That's the practical reality.
• 24:27
  Your standard monetary tools become blunt instruments, and
• 24:30
  the sheer uncertainty of the conflict also dramatically
• 24:33
  shortens the planning horizons for everyone investors, firms,
• 24:38
  even regular households. And how does that affect the
• 24:40
  payoff from those crucial long term reforms we were just
• 24:43
  talking about? It creates A vicious cycle.
• 24:45
  Why would a foreign company invest hundreds of millions in a
• 24:48
  new factory that takes years to build if they fear could be
• 24:51
  destroyed by a missile? It's stifles the very foreign
• 24:55
  direct investment, the FDI that you need for those belassa
• 24:59
  Samuels and productivity gains. It also must dampen the
• 25:02
  political will to push those hard reforms like property
• 25:05
  rights, of course. Because the payoff from those
• 25:08
  reforms feels very distant and uncertain, while the political
• 25:11
  cost of fighting entrenched interests is very real and
• 25:14
  immediate, the war short circuits the long term thinking
• 25:17
  needed for deep reform. The house insurance analogy
• 25:20
  feels very apartment here. The war is like having your
• 25:23
  house located in a permanent flood zone.
• 25:25
  Doesn't matter how great the plumbing or the wiring is
• 25:27
  inside, the insurance premium is going to be sky high because the
• 25:31
  external environment is fundamentally dangerous.
• 25:34
  And that dangerous environment also creates severe constraints
• 25:37
  on supply and inflation control. That monetary policy is
• 25:41
  powerless. But the war is actively
• 25:48
  destroying the economy's ability to produce.
• 25:50
  That is the critical distinction.
• 25:52
  You have the physical destruction of factories, of
• 25:54
  logistics, of infrastructure. Bridges are down, ports are
• 25:58
  blocked. This creates real physical
• 26:00
  shortages of goods and services. The inflation that comes from
• 26:03
  that is a supply side constraint.
• 26:05
  And you can't fix a shortage of steel or fuel by raising
• 26:08
  interest rates, no. The problem isn't that people
• 26:11
  are demanding too much, it's that there's simply isn't enough
• 26:14
  to sell or move around efficiently.
• 26:17
  And this problem is compounded by the tragedy of human capital
• 26:20
  flight. The brain drain.
• 26:22
  Yes, the continued emigration of skilled workers, professionals,
• 26:27
  families, it's a huge long term drag on the economy.
• 26:31
  It shrinks your future workforce, it slows your
• 26:34
  potential growth, and it erodes your tax base.
• 26:37
  A shrinking economy cannot support a strong currency in the
• 26:40
  long run, no matter how good the central bank is today.
• 26:44
  Let's go back to that powerful analogy the sources use for this
• 26:46
  situation. The central bank is trying to
• 26:48
  cool a room that's controlling inflation using the air
• 26:52
  conditioner interest rates. Right, but the supply
• 26:54
  destruction from the war is like having all the windows smashed
• 26:57
  open. Heat is just rushing in from the
• 26:59
  outside because your productive capacity is gone, and if the
• 27:02
  government were to resort to fiscal dominance, that's like
• 27:05
  having a bonfire burning in the middle of the room.
• 27:07
  The air conditioner is rendered almost useless when the sources
• 27:10
  of heat are so powerful and outside of its control.
• 27:12
  And finally, we have to touch on the risk that comes from the
• 27:15
  dependency constraint. The Rivnia stability right now
• 27:18
  is heavily underwritten by that flow of external aid.
• 27:21
  This reliance introduces a massive vulnerability, and it's
• 27:25
  a political 1, not an economic one.
• 27:27
  The currency is directly exposed to the risk of support fatigue
• 27:31
  or political shifts in donor countries.
• 27:34
  So if there's an election in a partner country or a budget
• 27:36
  fight and the aid gets delayed. The market will immediately
• 27:40
  anticipate A funding gap. That anticipation wood forest
• 27:43
  the Ukrainian government to look for alternatives and if the non
• 27:46
  inflationary options are exhausted, the only one left is
• 27:49
  printing money. The mere fear of that could
• 27:52
  trigger devaluation pressure. It means the currency stability
• 27:55
  is in part being decided in foreign capitals, which limits
• 27:58
  the NBU's autonomy. So given all these intense
• 28:02
  constraints, the war, the politics, the supply issues, the
• 28:05
  source material argues very strongly that the policy path
• 28:08
  has to be gradualist and it has to follow a specific non
• 28:11
  negotiable sequence. The order matters.
• 28:14
  The order's everything it's path to pending.
• 28:15
  Getting it wrong can be disastrous and lead you right
• 28:18
  back into a crisis. OK, so let's review that optimal
• 28:20
  sequencing, moving from survival to sustainability.
• 28:23
  It's essentially 3 phases. Phase one is crisis containment.
• 28:26
  That's a tourniquet stage. We talked about fixed rate FX
• 28:29
  controls and establishing that basic macroeconomic foundation
• 28:33
  of fiscal and monetary discipline, pure survival.
• 28:36
  Then Phase 2. Phase 2 is the structural
• 28:38
  reform. This is the hard political slog
• 28:41
  of cleaning up institutions and boosting productivity.
• 28:44
  This is building the real economic muscle.
• 28:47
  And only then can you move to the final phase.
• 28:49
  Only then. Phase 3 is gradual
• 28:51
  liberalization. This is where you slowly loosen
• 28:54
  the FX controls and move towards a managed float, letting the
• 28:58
  market start to work again. The sources really hammer home
• 29:01
  the danger of jumping to phase three too soon.
• 29:03
  What happens if a country opens its capital account or abandons
• 29:06
  the peg before Phase 2 is done? You risk immediate massive
• 29:10
  capital flight and a new crisis. Liberalization without having
• 29:13
  robust, well capitalized banks and without having inflation
• 29:16
  expectations firmly anchored is just a it's inviting disaster.
• 29:20
  Because if people still don't trust the institutions or fear
• 29:23
  inflation, the second you let them, they'll move their money
• 29:26
  out. They will.
• 29:27
  They'll convert their Rivni into dollars and exit the system.
• 29:30
  You simply cannot open the gates until you are sure the
• 29:33
  foundation is solid enough to support the currency's value.
• 29:37
  Premature liberalization would just throw away all the hard won
• 29:40
  gains from phase one. So the central move in this
• 29:43
  whole process is what's called the anchor transition.
• 29:46
  This is the shift away from the external anchor, the fixed
• 29:49
  exchange rate to an internal one, inflation targeting.
• 29:53
  When is that shift appropriate and how does that new system
• 29:56
  work? It's only appropriate once
• 29:58
  you've achieved that stability, Once inflation expectations are
• 30:02
  low and stable and you have enough foreign reserves to
• 30:04
  handle some volatility. In this new system, you
• 30:07
  abandoned the fixed rate for a managed float.
• 30:09
  Meaning the exchange rate can move around.
• 30:11
  It's allowed to fluctuate. It acts as a shock absorber, so
• 30:14
  when an external shock hits, the exchange rate can go up or down,
• 30:18
  and that insulates the domestic economy a bit.
• 30:20
  The NBU stops defending a specific number of Rivnia to the
• 30:24
  dollar. And instead it defends what?
• 30:26
  It defends a specific target for domestic inflation, say 5, 50
• 30:30
  per year. The central bank then uses its
• 30:33
  tools, mostly interest rates, not to manage the dollar price
• 30:36
  but to keep domestic rices stable, to keep them near that
• 30:39
  exlicit target. The whole focus shifts inward.
• 30:43
  That's a huge philosophical shift.
• 30:44
  It sounds like it relies completely on credibility.
• 30:47
  That's it. The credibility of the central
• 30:49
  bank becomes the anchor for the entire system.
• 30:51
  The market, businesses, households.
• 30:53
  Everyone has to believe that the NBU is willing and able to
• 30:57
  control inflation, even if it means making unpopular decisions
• 31:00
  like hiking interest rates in a way that slows down the economy.
• 31:03
  If that trust is lost, the whole system breaks down.
• 31:06
  It's the difference between tying your boat to a dock.
• 31:09
  That's the fixed regime. It feels stable, but if the rope
• 31:11
  snaps, it's a catastrophe. Right.
• 31:13
  Versus a modern ship that uses a gyroscopic stabilizer.
• 31:16
  That's the inflation targeting regime.
• 31:18
  The ship is moving freely on the waves, but its internal
• 31:22
  discipline system is keeping it balanced.
• 31:24
  So it's a difference between external constraint and internal
• 31:27
  control. The fixed rate is easy to
• 31:29
  understand, but it's brittle. The managed float is messier
• 31:32
  day-to-day, but it's more resilient as long as the central
• 31:35
  bank maintains that crucial credibility.
• 31:38
  It's a powerful picture of the long road from just surviving a
• 31:42
  crisis to creating a fundamentally more robust and
• 31:45
  trustworthy system. Hashtag, tag, tag, outro.
• 31:48
  When you synthesize all of this, the central finding is just
• 31:51
  inescapable. Sustainable arrhythmia strength
• 31:54
  requires this synchronized strategy across governance,
• 31:57
  finance and productivity. A currencies health is really
• 32:00
  just a summary reflection of the national economy's integrity and
• 32:03
  it's trustworthiness. That strength depends on getting
• 32:06
  stabilization through fiscal discipline and low inflation.
• 32:09
  It depends on achieving real structural reform by
• 32:11
  establishing the rule of law and boosting productivity.
• 32:14
  And it depends on having predictable external support to
• 32:17
  financing and security guarantees.
• 32:19
  You can't just pick one. You can't.
• 32:21
  Each element reinforces the others to get genuine, lasting
• 32:25
  strength. You can't have one without the
• 32:27
  others. The currency's value is, in the
• 32:30
  end, the summary expression of the nation's diligent
• 32:33
  stewardship of its economic life.
• 32:35
  Yeah, we've seen that strengthening the Rivnia
• 32:37
  requires this painstaking fiscal discipline, a rejection of short
• 32:41
  term political temptations and the building of reliable
• 32:44
  institutions. Now, economists often describe
• 32:46
  this as a purely technical process, you know, managing
• 32:49
  reserves and interest rates. But when you look at the
• 32:51
  requirements for sound money, honesty in the accounts,
• 32:54
  diligent stewardship of resources, predictable and
• 32:57
  ordered governance, they really start to mirror the very virtues
• 33:00
  that should guide a nation's stewardship of its affairs and
• 33:03
  its people. So when we look at the immense
• 33:05
  political pressure to inflate debts away, to seek that
• 33:07
  temporary financial relief, it raises A challenging question
• 33:11
  for you, the listener. Are the hardest reforms Ukraine
• 33:14
  faces fundamentally economic and in technical, just requiring
• 33:17
  expertise? Or are they, at their very core,
• 33:20
  tests of institutional character and moral discipline?
• 33:23
  Food for thought indeed, and a reminder that economic stability
• 33:27
  is rarely separable from the moral and political architecture
• 33:30
  of a society. Thank you for joining us for
• 33:32
  this deep dive into the constraints and choices facing
• 33:35
  the Ukrainian Frivnia.