Ukraine's Costly Addiction to the Dollar

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
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What European country has more U.S. dollars in circulation than it does its own currency? What capitalist democracy is home to a thriving black market in foreign exchange? Unlikely as either may seem, there is an answer: Ukraine.

Ukraine's affair with the dollar stretches back at least 21 years. Ukrainians learned to covet the U.S. currency during the hyperinflation of the early 1990s, and never quite kicked the habit to the extent that their neighbors in Russia did. The supply of the national currency, the hryvnia, is equivalent to $25 billion today, while about $80 billion in U.S. cash circulates in the Ukrainian economy, according to economist Alexander Okhrimenko.

The slightest concern can send Ukrainians running to exchange offices to stock up on U.S. currency. Ahead of the Oct. 28 parliamentary elections, Ukrainians bought some $3.34 billion amid fears that the government would stop propping up the hryvnia once the vote was over. The panic buying, the greatest since the financial crisis of 2008, forced the central bank to spend some $2.4 billion in currency reserves in an effort to keep the hryvnia stable. It succeeded, and the ruling Regions Party triumphed in the election, coming close to controlling a majority in the new parliament.

Now, Ukraine's economy is suffering in a way that suggests the hryvnia needs to fall. Prime Minister Nikolai Azarov said on Nov. 27 that the country would likely see zero economic growth in 2012. The high interest rates required to keep money in hryvnias -- 25 to 28 percent for bank deposits, which translates into similarly elevated lending rates -- are strangling investment. Whenever the central bank tries to loosen the purse strings, banks go straight to buy dollars in the currency market. The country is importing more than it exports, creating a current-account deficit that the International Monetary Fund estimates will reach 5.6 percent of gross domestic product this year, up from 2.2 percent in 2010.

The government, however, is still unwilling to let the hryvnia drop from the 8-per-dollar perch where it has sat since 2009. Instead, officials have found all sorts of creative ways to prop up the currency. The central bank has required exporters to sell half of their foreign-currency earnings for hryvnias. Parliament has considered imposing a 15-percent tax on purchases of dollars, and set up a committee to combat illicit currency trading. The committee's head, central bank official Yuri Gorshkov, went so far as to warn that black marketeers could face criminal punishment.

"It became more or less obvious that the Regions Party headed by Secretary General Viktor Yanukovich are the true Communists in Ukraine," journalist Sergei Shcherbina commented on "The biggest question: How can this bacchanal help the rate of the hryvnia and the plummeting economy?"

Commentators were quick to point out that repressive moves would only strengthen the black market. Two wealthy capitalists who hold ministerial positions in Yanukovich's government, Pyotr Poroshenko and Sergei Tigipko, spoke out sharply against the proposed tax. "We cannot burden ordinary economic transactions with additional taxes," Economics Minister Poroshenko said. Former acting Finance Minister Igor Umansky called the tax proposal a ruse to cheat Ukrainians out of the dollars under their mattresses.

Parliament put off consideration of the tax bill, but the government has kept its grip on the currency. Of all the economic indicators Ukrainians may read about in the news, a stable exchange rate is what they value most. That's the way they have been conditioned since Soviet times. So if the government wants to find solutions to the country's economic woes, it will probably have to look elsewhere. Twenty-year-old addictions are hard to cure.

(Leonid Bershidsky, an editor and novelist, is Moscow and Kiev correspondent for World View. Opinions expressed are his own.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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Leonid Bershidsky at

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