Fragments from a War Diary, Part #45
Ukraine has a latent currency crisis. By latent I mean that it is not at all obvious, even to Ukrainians; but the indications of the crisis can be perceived by the astute observer who is looking for the right things. The first thing I noticed about Ukraine is that cash seems to be in the process of being phased out: something very unusual for a country at war, and also very unusual for a low income country such as Ukraine. Following a trend found substantially in southeast Asia, Ukrainians are taking to electronic payments in person outside the international Mastercard / VISA network of debit cards and credit cards. Payments are either made in a contactless fashion from one mobile telephone to another, to domestic electronic accounts credited with funds from regular bank accounts for this purpose; or they are made using domestic plastic cards that represent electronic funds held in specifically designated “cash wallets”.
I have seen relatively few internationally valid debit cards and credit cards used by Ukrainians. Although they do exist, there is an application for such cards because they can be used abroad and they effectively hook Ukrainian bank accounts into the global network of financial transactions. By contrast opening a bank account with solely a domestic payment card is a far easier procedure. Virtually everyone has learned to accept money in this way. Not only can online payments be made via websites or mobile phone Apps; people can just touch their mobile phones or bring them into Bluetooth contact with one another when paying for things as mundane as a cup of coffee in a kiosk. Alternatively a street vendor can purchase a simple payment receipt terminal, connected to the internet or a mobile telephone network, for a fraction of the cost of a modest mobile telephone. Suddenly everybody can undertake plain cash transactions without carrying any cash.
One side-effect of this has been to eliminate tipping, something which was never very prevalent in Ukrainian culture. Another consequence may have been to increase the facilitation of corruption and tax dodging. Because electronic payments even between private individuals have become so straightforward, people may bypass the use of corporate structures (with the concomitant tax consequences) altogether when they make their payments. To give a straightforward example, when you pay in a cashless way in a restaurant in Ukraine now then you may be paying your money directly to a private person’s domestic account such as that of the waiter or manager, rather than to a corporate account. The result of this is not only that taxes are not paid but that the business is defrauded by its employees. At least that is how we would describe matters in the West. For Ukrainians, it is just a means of survival on a daily basis in an environment in which salaries may not routinely be paid. In many cases it is a struggle to obtain a receipt where an electronic payment is made with either a domestic or international card, which is a cause for concern.
The absence of cash is compounded by the fact that very few bank ATM’s I have found anywhere in the country hold substantial reserves of cash money. Although in theory there is a 1000 Gryvnas bank note (about 25 Euros), I have never seen one. As a practical matter the largest bank note is 500 Gryvnas (12.50 Euros), and many people do not have change for these notes. The largest note for which change is easily available is 200 Gryvnas (5 Euros). A multitude of smaller notes exist, of variable quality, right down to the 10 Gryvnas note (0.25 Euros) and even the one Gryvna note (two and a half Euro cents). There is also an eclectic collection of coins all of extremely small value. The 10 Kopek coin is worth one quarter of a Euro cent. These coins and small notes seem of use only on public transport but even on dilapidated trams and trolleybuses I have noticed that electronic means of payment are becoming increasingly prevalent. But the major problem is that many cash machines are not refilled with any frequency, even if they are part of apparently substantial banks. Even where they are (and it is often just good luck; I have had this problem in the centre of Kyiv) there may be a swingeing limit upon cash withdrawals each day from any particular ATM. I have noticed daily cash withdrawal limits as low as 6,000 Gryvnas (150 Euros); 5,000 Gryvnas (125 Euros) and even 1,000 Gryvnas (25 Euros). I have never found an ATM will to dispense me more than 8,000 Gryvnas (200 Euros).
Although life in Ukraine is cheap, these artificially low limits for the withdrawal of cash must have a purpose and I think I know what it is. In principle the Ukrainian Gryvna is a fully convertible and very stable currency. It appears pegged to the Euro within a band of between 39 and 40 Gryvnas to the Euro. I understand that this is undertaken with the backing of the US Treasury using instruments called Central Bank Liquidity Swaps issued by the US Federal Reserve. Sitting in Ukraine it is not possible to undertake sufficient research on international monetary policy to establish precisely how this works or how much it costs the US taxpayer each year to achieve this, but the Gryvna is stable notwithstanding Ukraine’s wartime economic free fall essentially by reason of international financial underpinning using complex derivatives that have the effect of purchasing Gryvnas on the international financial markets to assist in maintaining its value. Were the Gryvna to collapse under the weight of Ukraine’s heavy wartime borrowing then that would undoubtedly compound the misery of its civilians and make the provision of international financial and other assistance to Ukraine even more challenging than in fact it is. Nevertheless because the Gryvna is in principle fully convertible - if I have a swatch of Ukrainian cash then I can go to a bank or an exchange office, of which there are many all over the country - and convert my Ukrainian currency into Euros or Dollars without any paperwork or complications.
In principle the possibility of this taking place entails a risk of capital flight. Wealthier Ukrainians planning on leaving the country might withdraw all their Gryvnas from the country’s banks, convert them into hard currency, and then exit, never to return. Not only would this increase the exodus of civilians from the country together with their money, it would dramatically increase the costs to the US taxpayer of maintaining the stability of the Gryvna by reason of the adverse reaction of the financial markets. Hence strict limits are placed upon the withdrawal of cash to counterbalance the fact that the Gryvna is, at least in principle, fully convertible - although in light of the restrictions on cash withdrawals that convertibility starts to look somewhat ephemeral.
There is another feature of the Ukrainian banking system which compounds this concern. Although it is relatively straightforward to make international wire transfers from outside Ukraine into the country (although they take a few days to be cleared, suggesting that there is a complex process of central banking accounting going on in the background to maintain the Gryvna’s stability in light of fluctuations in international capital flows), it is extremely difficult to make an international wire transfer from Ukraine to the rest of the world. In theory it is possible; in practice it is extremely hard unless you are a branch of government. Some kinds of government or banking permission or authorisation are always required, and in practice these amount to the same thing as the government has taken substantial control over the banks as is common in a wartime economy. The paperwork involved, in justifying the payment, is typically overwhelming.
Ukraine always had such a system of restrictions upon international wire transfers; I recall having to issue invoices in the past to Ukrainian clients that met very specific formal requirements if I wanted to get my invoices paid by way of international wires from within Ukraine. Since the war began, those types of restriction have tightened to the extent that it now appears virtually impossible to pay foreign businesses or to wire money to friends or relatives abroad. I have not tried the international money transfer systems such as Western Union so far; but let us just surmise that the current Ukrainian system of financial regulation apparently focuses on foreign remittances being transferred into Ukraine rather than the other way round.
Some foreigners I have met in Ukraine have opened domestic bank accounts to facilitate the sort of electronic cash payment schemes I have described and to avert the need to find physical cash that can often be burdensome. All I can say about this is that I would not advise using these accounts for savings purposes, as any money to transfer electronically into Ukraine you may find very difficult to transfer out later. On the other hand, Ukraine does not seem to be suffering from inflation. On the contrary, the costs of many things, including hotel accommodation, foodstuffs and domestically made textiles, seem to me to have dropped significantly since the beginning of the war. So living in Ukraine in the middle of the air raid sirens and artillery rounds is a relatively cheap exercise. The greater majority of foreigners working in Ukraine at the current time are volunteers, and that may be a good thing given that the economy has developed substantial illiquidity.
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Almost immediately upon publication, this article elicited a number of comments from people present in Ukraine. We will not quote them here but just seek to summarise a few of them.
Not everyone has had my experience of using cash machines (ATM's) in Ukraine with foreign cards, although some have. Different ATM's and bank networks seem to be highly variable. There seems to be a consensus that Privatbank (a state-owned bank, despite its name, formerly owned by the now imprisoned Ukrainian Oligarch Ihor Kolomoisky) is one of the more reliable ATM networks. It is the ATM from which I found myself able to withdraw 8,000 Gryvnas.
It has been observed that contactless electronic payment mechanisms are a good thing, eliminating the need for cash which can be inconvenient. No observations are made about this in the article above. The points being made are only that most wartime economies are cash ones, whereas in Ukraine the reverse trend is being observed and that calls for explanation why; and that contactless electronic cash may assist in subverting revenue collection systems that in Ukraine are focused heavily upon the regulation of accounting mechanisms of corporate entities rather than upon personal taxation which, in common with many countries with relatively low standards of rule of law, is often ignored.
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