Role of National Bank in Ukraine's Macroeconomic Outlook during February - April 2022

Oleh Zahnitko 28.06.2022

INTEGRITES partner Oleg Zahnitko contributed to the June Issue of EBI Briefing (European Banking Institute's publication). Please read his article below.

I. Introduction

In Although the Ukrainian National Bank’s (NBU) principal function is to ensure the stability of Hryvnia (UAH), as a lender of last resort/regulator/prudential supervisor it must proceed from the priority of achieving and maintaining price stability in the country [i, Article 6].

The NBU has fully embraced the inflation targeting policy (IT) as of the 2016 regime [ii] following decades of administrative restrictions on the exchange operations and selective approach to the oversight until 2014, when the transition to IT commenced.

However, as of his appointment in 2020, Governor Kyrylo Shevchenko has been a “team-player”, softening the discount rate to the tune of the Cabinet of Ministries of Ukraine’s economic stimuli package amid lockout in lieu of the COVID-2019 pandemic. Since H1 2021, when the Russian forces started accumulating on the borders with Ukraine, the NBU has been staying on red alert but without significant moves to curb or loosen the payments balance and/or the primary rates, polishing, however, regulations on the emergency and war situations. The NBU was probably the best prepared state institution when the second phase of war started with a massive Russian-Belarusian aggression, along with the military and intelligence.


II. NBU´s monetary measures adopted amid the Russian invasion

On February 24, the NBU imposed rather drastic but mostly reasonable monetary measures to prevent runs on the banking sector and the deterioration of the balance of payments.

FX measures became the principal policy tools for the open economy of Ukraine, which has no liquid instruments to offer to domestic investors. NBU ordered: (i) the suspension of the foreign exchange interbank market, (ii) fixed UAH exchange rate to US Dollar, (iii) imposed harsh restrictions on the retail Forex transactions, namely, cash withdrawal, payments and sale of the currency to the bank customers and (iv) frozen transactions in rubles (RUB) and Belarusian rubles (BYN) and/or any service to the residents of aggressor states (Russia and Belarus), including companies having such residents as shareholders (regardless of its value [ix, Sections 12, 14, 15 and 16, respectively]).

It is worth noting, that the NBU had gross reserves of US$: amounting 29.1 bn (net US$19 bn) as at February 1, 2022, which justifiably decreased in March, grew back in April [iii] and slid to US$26.6 bn as at May 1 [iv]. In retrospect, the NBU was wise not to force Ukrainian exporters to sell FX revenues – a familiar measure for many years over several crises; it also let savings roam free (except for UAH 100 K cap on daily cash withdrawals). Besides, the NBU went mild on the grey market currency transactions that remained, for some time, the only indicator of the aggregate demand and supply. Moreover, the NBU overlooked any transactions for the banks’ own account.

With respect to the fixed UAH/USD cross-rate, the NBU Board´s revision was under consideration several times, but the benefits of updated cross-rate, according to the NBU official briefings, has not been outweighing, under February – April circumstances, the drawbacks. Thus, NBU is as likely to revise the fixed rate sporadically as to resume the floating rate based on the average interbank currency market; meanwhile, the transactions are mostly between the NBU and the licensees at the fixed rate of exchange – in March-April NBU had a negative balance of US$ 3.98 bn.

Other currencies can be traded at the current cross-rate to US Dollar on the international markets [v]. Notably, prior to February 24, NBU was tasked with principled interventions into the interbank currency market for the stability of the cross-rate. In this vein, during the 2016-2020 GDP growth, the NBU was primarily buying the currency and building reserves. Sporadically it spooked the bull market, e.g., in January 2022 NBU sold US$1.51 bn (net US$1.31 bn) amid intelligence reports on imminent attack by Russia and Belarus. On the reformist side, NBU encouraged offshore banks, especially in the EU, to offer UAH cash exchanges.

The retail transactions were subject to continuing and increasing liberalization. First exemption was introduced on February 24 –later on the same day the very restrictions were imposed. As at May 5, 21 exemptions on the import transactions and 13 exceptions on FX trade operations were put in place by the NBU. The exemptions were added hectically – and NBU never announced priorities or criteria. Nevertheless, most of them were familiar to the market actors and resembled the administrative measures adopted prior to the floating rate (i.e. until 2017). Most criticized exemption was the list of critical imports [vi]. This exemption was introduced by the Government on the premise of army and defence sector needs, which were supposed to be a sole major import to Ukraine.

The list has since been growing unpredictably and, although by mid-April 2022 it covered 88% worth of the goods imported in 2021, it has been told to deliberately discriminating some offshore producers [vii]. Besides, the critical imports list included only the goods and, while some works and services were added in late April, as at the beginning of May the list excluded most of the works and services that accounted for the large share of Ukrainian GDP. NBU made clear its goal to remove FX restrictions in the post-war period, and the phased tactics for that [xvi, page 4], with the rest of details, remain uncertain: thresholds, how often the situation will be assessed, priority areas etc.

Along with the pre-existing constraints on UAH cash transactions, the NBU basically flooded the economy with the money aggregates, so that by March 1 the monetary base jumped up 14.1% compared to February 1: and transferable FC deposits almost doubled. However, in March the situation calmed down a little [viii]. Although NBU restricted UAH cash withdrawals per day, it added UAH cash points by allowing cashback to all cashier desks in the retail shops. It also provided unlimited cash support to the commercial banks, ordered 24/7 access to individual vaults in the bank branches and, as already mentioned, unrestricted service on the mobilization plans [xv, Sections 10, 9 and 6, respectively] and other government expenses (even if only through direct purchase of treasury notes [xvii, page 2]). Non-governmental transfers experienced no change except for transactions in BYN and RUB, which remained banned from February 24 with minor exceptions [xv, Sections 15, 172]. The measures were quite successful on the backbone of the COVID-19-tested cashless economy. NBU, however, suspended capped e-money and moneys on the e-wallets, fearing anonymous and/or uncontrollable funding of the enemy.

III. Some NBU´s prudential measures adopted amid the Russian invasion

Despite the devastating blow to the GDP (the World Bank estimates the sinking roughly at 45.1% [ix, Table 1.4 on page 36]), there are some signs showing high trust in the stability of the financial sector under the NBU’s oversight.

First, no banking institution has been reported as troubled, except two banks indirectly controlled by the Russian government that were put for liquidation on February 25, 2022 -and intervened already since 2021. The foregoing must be compared to the 33 banks that went bust in 2014, when Russia direct and proxy war started, and to the 71 banks removed from the market between 2014-2021 [x]. Second, the administrators of the banking institutions that were put in bankruptcy before 2022, reported sale of the assets and collection of the receivables during February-April without significant disruption [xi]. Third, savings guaranteed by the deposit insurance scheme increased during the month of March 2022 by 8.1% and on April 1 were notably higher than on January 1, 2022 [xii]. Thus, the NBU has been building its measures on the significant public trust and on an institutionally resilient system. Consequently, the Cabinet of Ministers of Ukraine has successfully made several war bond placements (they call them publicly “military bonds”) in UAH and US Dollars [xiii]. Notoriously, NBU decided not to apply any penalties to banking institutions during the martial law [xiv, Sections 5-8] and had been officially referring to this loophole in response to the bank’s association complaints on the issues with compliance due to the business disruptions caused by the occupation, failures in the transport, mail, or telecommunications infrastructure [xv]. At the same time, NBU confirmed a two-year availability to the banks of the unsecured re-financing, as well as unlimited access to cash [xvi, Sections 11 and 10, respectively].

Some would say, this commentator including, that reliance on the self-regulation of the banking institutions is a short-sighted measure. One may recall that the banking system has been operating under a proper supervision only a couple of years, and major perpetrators that milked out Ukrainian banks in the recent history have never been sentenced or had their funds seized. Too many actors in the system can easily revert to the practices that abuse the system. It is worth mentioning that, although banks’ own transactions were held intact initially, the regulator had to impose quantitative restrictions on the “creative” schemes used to wash away the foreign currency: (i) the purchase of UAH in cash from foreign banks; (іі) using derivatives on UAH cross-rates or indices  (except swaps); (iii) deviating from fixed rates for retail transactions with customers; (iv) short and long FX positions [x, Sections 123 - 127]; and (v) FX-denominated savings certificates [x, Section 53].

The NBU self-restrained its decisions on the discount rate despite accelerating inflation – it was left at 10% p.a. on February 24, March 3 [xviii ] and April 14 [xiii]. As mentioned, NBU “temporarily” has been avoiding the inflation target of 5± 1% ever since the current governor was appointed amid pandemics in 2020. This February, the NBU had an easy choice to follow its policies of stimulating the spending and overlooking inflation despite the NBU’s statutory mandate to maintain stability of the prices and Hryvnia. Later on April 15, the NBU Board of Directors indulged NBU governor and management board to disregard the discount rate as a money market instrument entirely citing the martial law as an excuse and requiring to renew IT – discount rate interventions as soon as NBU will have “possibility with acceptable likelihood to forecast the effects […] on the policy horizon, and the monetary transmissions channels’ functioning will be restored”[xviii, page 3]. Such criteria can hardly be quantified, so the NBU boards will be tempted to stick to the Government’s playbook longer than justified. The inflation, therefore, is largely unrestrained and further fuelled by the unconditional macrofinancial support to the NBU. Although the NBU believes the inflation is still under control due to the tax liberalization and administrative restrictions [xix], the latter appear to be the paper dragon causing shortages of the goods and commodities and pushing up the shadow market share.

Quite unexpectedly, since the end of 2021 NBU has underpinned its effort to isolate Russian and Belarusian capital domestically and internationally, claiming such task an integral part of its monetary policy. NBU’s theory of choice, hence, is a zero-sum game in the international financial market, quite a turnaround from claimed “cooperation synergy” and public advocation of the foreign residents that are not directly involved in the aggression and/or proxy war since February 2014.

IV. Conclusion

In conclusion, NBU’s monetary play during hostilities by Russia and Belarus alliance has been a back vocal in the executive branch rock-band; such role, nevertheless, is a minor policy twist on the backdrop of power struggle in the NBU leadership: the legacy of institutional capacity built during 2014-2019 is being challenged by Keynesian followers on the board.


i - Law of Ukraine “On the National Bank of Ukraine” dated 20 May 1999 (as amended)

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vi - List of Goods for Critical Imports: Resolution of the Cabinet of Ministers of Ukraine no. 153 dated 24 February 2022 as amended (

vii - Based on industry associations information, including the online internal conferences and meetings with the officers of the NBU and the Ministry of Economy of Ukraine (use of records is restricted)

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xiv - On Certain Matters of Ukrainian Banks’ and Banking Groups’ Activities: NBU Board Resolution no. 23 dated 25 February 2022 as amended (

xv - “Information materials generalized based on the questions from representatives of the banking system” (in Ukrainian) - mailed by the NBU to the banking industry association, in author’s possession

xvi - On Banking System’s Operation during Martial Law: NBU Board Resolution no. 18 dated 24 February 2022 as amended (

xvii - <,>\
xviii - Fundamentals of the Monetary and Credit Policies during the Martial Law – adopted by NBU Board of Directors’ Decision dated 15 April 2022 (available in Ukrainian at

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Author of the Publication

Oleh Zahnitko

Partner, Ukraine