Ukraine's currency is crumbling.
No one should be surprised, given the relentless pressure from Russia aimed at fomenting economic uncertainty and political instability. Foreign investors and Ukrainian citizens alike are compelled to flee a currency that is deemed to be failing. Since the beginning of this year, the exchange rate value of the hryvnia has steadily declined in terms of the dollar as people sought to convert their holdings of Ukraine's weakening currency into a more solid global reserve currency. In the last few days, this trend has become a full-scale panic with the hryvnia plunging to record lows.
For Ukraine, signing the agreement was "economic suicide," according to Sergei Glazyev, an economic aide to Putin whose pronouncements would be considered ludicrous if they weren’t being substantiated through Moscow-directed actions. Glazyev forewarned ominously in late June: "There is no doubt that by signing this agreement it will result in an acute devaluation of the hryvnia, an inflation surge turning into hyperinflation, and a drop in living standards."
Putin seems bent on turning that threat into a reality. But a mitigating factor is that Russia's own currency, the ruble, is hardly a solid performer. According to data compiled by Bloomberg, the ruble's volatility in foreign exchange markets ranks highest among 24 developing countries. Russia's central bank has sought to weather the storm of currency chaos by raising its benchmark interest rate three times this year, stifling domestic economic growth in the process.
Russian officials have also been forced to utilize their formidable stockpile of hard currency reserves to intimidate global currency markets by intervening heavily, buying up unwanted rubles with dollars and euros. The gambit has cost Russia dearly; since January 1, its international reserves, comprised of foreign exchange and gold, have declined some $41 billion.
All of which suggests a way to help Ukraine while highlighting Russia's own currency shortcomings. When the International Monetary Fund (IMF) convenes on August 26 to consider whether to release a $1.4 billion tranche of aid to Ukraine, its executive board should focus on the extenuating circumstances that are wreaking havoc with Kiev's earlier commitment to allow the value of the hryvnia to freely float. The economic logic of devaluation to make Ukrainian exports more competitive in the future has been overtaken by the real-time psychological imperative of preventing currency collapse. To allow the hryvnia to succumb to market hysteria choreographed by Kremlin schemers is to play into Putin's hands.
Instead of hectoring Ukraine's central bank governor, Valeria Gontareva, over her decision to dip into Ukraine's own dwindling reserves on three occasions in recent days to fight the currency slide — a violation of the IMF's program for Ukraine — Christine Lagarde, who heads the international organization, should take to heart the concerns of Kiev's leaders over their nation's teetering economy. Gontareva fears that the crashing hryvnia means Ukraine's foreign debt burdens are becoming even heavier. And Poroshenko himself has been predicting for months that if the hryvnia's value were to decline beyond a 13-to-the-dollar exchange rate, it would be "devastating" for Ukraine – unleashing runaway inflation and causing widespread social protest.
Alarmingly, the hryvnia has now dropped beyond that threshold, slumping to a record low of 13.715 per dollar last Tuesday.
What can be done? No one wants to see Ukraine waste precious hard currency resources in a doomed contest to sustain a viable currency. Fortunately, two Republican senators have already proposed an alternative monetary regime for Ukraine. In a letter sent to Treasury Secretary Jack Lew in April, Marco RubioMarco RubioHaley to meet with senators during Washington trip Senate GOP to Obama: Stop issuing new rules Juan Williams: McConnell won big by blocking Obama MORE (Fla.) and Ted CruzTed CruzPentagon's suppressed waste report only tip of the inefficient machine Markos Moulitsas: Kill the filibuster Ark., Texas senators put cheese dip vs. queso to the test MORE (Texas) suggested the formation of a currency board anchored to global reserve currencies that would ensure the hryvnia's convertibility into the dollar or the euro at a fixed rate.
Noting the success of Estonia and Lithuania, former Soviet republics that adopted currency boards to stabilize their monetary base, the two lawmakers warned that a floating hryvnia permits Putin to cynically exploit Ukraine's monetary vulnerability. "Instead of debasing the hryvnia, we should empower it."
Taking its cue from this good faith recommendation, the IMF should move quickly to consider the option of a currency board for Ukraine. It would not only resolve the dilemma of policy differences with Kiev over allowing the hrvynia to disintegrate — it would put the Kremlin on notice that its plot to crash Ukraine's currency will not stand.
Shelton, author of Money Meltdown, is co-director of the Sound Money Project for the Atlas Network.