Wonkblog: Ukraines currency just collapsed 50 percent in two days
Source: Bloomberg
Ukraine, to use a technical term, is broke. That's what you call a country whose currency has lost half its value in just twodays.
The problem is simple: Ukraine has no money and barely any economy. It's already talking to the IMF about a $15 billion bailout and what's euphemistically being called a debt "restructuring"i.e., defaultas its reserves have dwindled down to $6.42 billion, only enough to cover five weeks of imports. (Three months worth is considered the absolute least you can get by with).
So it was more than a bit belated for Ukraine to stop spending the few dollars it does have on propping up its currency, the hryvnia. It took until Thursday for it to do that, though, and, when it did, the reaction was swift and it was violent. The hyrvnia fell from 16.8 to 24.4 per dollar, and then again to 25.3 on Friday, on this news that the government wouldn't intervene it in anymore. In all, it was a 50 percent decline in 48 hours. And this was despite the fact that its central bank simultaneously jacked up interest rates from 14 to 19.5 percent to try to get people to hold their money in hyrvinia that would pay them a lot instead of dollars that wouldn't. That, as you can see, didn't exactly work.
Now let's back up a minute. Why is Ukraine so doomed? Well, it's been mismanaged on a world-historical scale by oligarchs who, for decades, have skimmed billions off the country's nonexistent growth. That last part's not hyperbole. It seems almost impossible, but Ukraine's economy has actually shrunk since communism ended in 1991. Or since 1992. Or even 1993. And now its not-so-cold war with Russia is destroying the little that's left. It's not just that the rebel strongholds in the factory-heavy east have deprived Ukraine of a quarter of its industrial capacity. It's that it can't afford to fight against what's still it's biggest trading partnerRussia. Think about that. You don't usually trade a lot with the country you're going to battle against, but Ukraine's economy is so dependent on Russia's that it still trades more with it than any other. That means anything that hurts Russia, like lower oil prices or sanctions, just redounds onto Ukraine, and puts it in an even bigger financial hole.
Ukraine, in other words, doesn't have a lot of foreign currency, and doesn't have a lot of ways to earn more of it. Not when it didn't have much of an economy to begin with, it's fighting its biggest trading partner, and separatists have taken away its industrial heartland. The only questions are how big the bailout will be, and how far the hrvynia will fall in the meantime.
Ukraine's currency is weak, and that's not a game.
Matt O'Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at The Atlantic.
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Wonkblog: Ukraines currency just collapsed 50 percent in two days