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Rublising Ukraine



On Sunday 1 May 2022, Russia decreed that all of the oblasts (regions) of Kherson and Zaporizhzhiya under its control would henceforth use the Ruble as their official currency. What does this mean, and what economic and political effects can it have?


Although various media sources provided hearsay accounts of how old ladies in Kherson would be changing their ruble pensions back to Gryvnas to pay for groceries as symbolic acts of defiance, these stories really miss the point. No government, whether one of military occupation or otherwise, can dictate to people how they pay in cash transactions. The people of Kherson can buy their groceries in gold Napoleons or Bitcoins if they want to, or they can decide to stop using cash altogether and just use barter. Absent a massive structure of secret police watching the colours of banknotes handed over at the tills of local supermarkets, nobody can stop this - except the market, and government. And the latter uses the former to eliminate Gryvnas from existence. Let us explain.


The rublisation of the region is not just a matter of declaring what currencies people will use in the shops. It is the systematic re-denomination of every bank account in the territory under control, systematically changing banks' accounting records from Gryvnas to Rubles, so that they now show Ruble balance sheets and the banks re-denominate their customers' accounts using a government-set fixed exchange rate. So when a banking customer went into the bank on 3 May 2022, they discovered that their account statement now revealed a balance in Rubles. At the same time stacks of pre-printed Rubles were imported in trucks from Russia to fill the region's cash machines. The way this was enforced was by the financial police, reinforced with teams of financial accountants.


It is estimated that there are about three million accounts in the occupied Zaporizhzhiya and Kherson oblasts. So all the money in these accounts is now set in rubles. Moreover the banks will no longer accept cash deposits of Gryvnas without converting them at the fixed denomination rate into Rubles. As Gryvna notes are accepted into banks, they are burdened. After a while, this process is accelerated by closing the informal exchange offices that dominate southern Ukraine; or by seizing any Gryvna cash balances they find in their offices and burning those. The exchange offices will get the hint, deposit in their (now Ruble) accounts their Gryvna cash balances, and refuse to change any more Gryvna cash sums that customers may proffer them. At the same time, credit card payment facilities in shops and on the internet with their accounts with banks in the affected areas have the currency of credit and debit card payments changed to Rubles.


The Russians are experts at currency switching, having in recent years done it inter alia in Crimea, Donetsk People's Republic, Luhansk People's Republic, Abkhazia and South Ossetia. In theory currency switching for regional branches of national Ukrainian banks is prohibited by Ukrainian Central Bank regulations; but in practice this is unenforceable and Russia will simply send in the accountants to the Kherson and Zaporizhzhiya oblast bank branches and impose the change down the barrel of a proverbial, or not so proverbial, gun.


What consequences will this have for the Ukrainian economy as a whole? The short answer is that we are not sure. Nevertheless here are a few ideas.


  1. All banks have a final account with the central bank of the country within which they are operating. Here that is the Central Bank in Kyiv.

  2. Hence the regional branches of the national banks that have been rublised will start reporting to the Central Bank proportions of their balance sheets in Rubles.

  3. This will make the process of central banking generally and Central Bank and inter-bank loans more complicated, because the assets against which they are lending will now be in substantial part the currency of a hostile state with whom Ukraine is at war.

  4. Ukraine will then as a state whose net private and indeed public assets are denominated in substantial part by Rubles. After all, two out of three of Zaporizhzhiya's electricity production assets (that together supply some 25 per cent of Ukraine"s power consumption) are now under Russian control in Russian-occupied Zaprorizhzhiiya; and this will feed through to regional banks recording those asset values in Rubles.

  5. This is obvious not least because one consequence of rublisation of the Russian-occupied territories will be that the two Enerhodar power stations in Russian-controlled Zaporizhzhiya oblast will now start invoicing their clients, including Ukrainian sovereign and sub-sovereign entities (for example the city of Zaporizhzhiya), in Rubles. These institutions will surely also amend their commercial banking facilities, so as to hold their assets only in banks accepting Ruble deposit accounts - in other words, bank branches in the rublised regions.

  6. If the Ukrainian entities buying power from rublised power stations do not pay in Rubles then they will be cut off, just as have been Poland and Bulgaria.

  7. Hence these power-purchasing Ukrainian entities will need to sell Gryvnas (their currency of day-to-day operations) to buy Rubles, to pay their power bills.

  8. This will both drive down the value of the Gryvna by reason of the currency's mass sale by anyone who uses power sourced from Enerhodar (the dual power station complex southwest of Zaporizhzhiya and under Russian control); and increase the value of the Ruble, which must be purchased in order to pay for Enerhodar-sourced power.

  9. Because the United States is currently funding free Ukraine's governmental expenditure and buying Gryvnas to maintain Gryna parity with the US Dollar and avoid a Gryvna currency run leading to Ukraine's total economic collapse, rublisation of Enerhodar energy production facilities will cost the United States substantial sums.

  10. That is because on the one hand, the US Government will have to spend increasing amounts on buying Gryvnas (an increasingly worthless currency as Ukraine's principal industrial assets opt out of it) in order to maintain Gryvna currency parity and prevent a run on the Gryvna that would reduce Ukraine to a level of economic penury not seen since the early 1990's.

  11. And on the other hand, to the extent that the US Government is funding the Ukrainian public sector deficit, the United States will be forced to buy Rubles to achieve this where Ukrainian government institutions' debt has been re-denominated by Russian occupying forces in Rubles.

  12. As an alternative to burning Ukrainian Gryvna notes, the Russians might just put them all in trucks and drive them to the city of Zaporizhzhiya, the nearest Ukrainian held territory, and hand them out to people.

  13. This way they further undervalue the Gryvna, causing fewer people to use more Gryvnas in circumstances of economic contraction. they cause inflation (at say 8 per cent - if you assume the two occupied oblasts account for 8 per cent of Ukraine's economy), which is something else the US Government has to pay for by buying useless Gryvnas that have suddenly flooded the market, in order to maintain the stability of the Gryvna in wartime, an absurdly expensive and misguided policy.

  14. To describe this as humiliating would be put things mildly. The greater concern is that power-selling institutions in Russian-occupied routine set a fixed, non-market based, Gryvna-Ruble exchange rate for the sale of power. In other words, the Enerhodar power stations just increase their prices unilaterally knowing that their Ukrainian consumers have nowhere else to go; and in doing so they rinse the United States taxpayer as the ultimate originator of funds.


We do not have sufficient econometric data to calculate the actual cost to Ukraine and hence the United States of the rublisation policy in respect of Kherson and Zaporizhzhiya. However the achievement of leverage to charge the free parts of Ukraine whatever they want for power achieves for the Russians substantial economic leverage over what they view as eventual rump Ukraine. The United States cannot fund the possibility of arbitrary nationwide Ukraine power price increases forever; nor will she want to do so in circumstances that strengthen the value of the Ruble and thereby undermine the effect of international sanctions that the United States is in substantial part responsible for inaugurating. Finally the United States will not want to spend money buying up dumped Gryvna banknotes.


Given the potentially massive increase in leverage over both free Ukraine and the United States that the regional rublisation policy imposed by Russian occupiers upon Russian-controlled Ukraine - leverage that can only increase as Russia occupies ever more of Ukraine and rublises those newly acquired territories, what are Ukraine's and the United States' policy responses going to be?


Right now, the issue is barely understood and therefore the answer is that nobody really knows what to do. Reactive policies will need to be formed, and immediately before the problem gets any worse.