What awaits the citizens and businesses on the peninsula, and why does the Russian Central Bank need the Ukrainian national currency?
Starting the beginning of the summer, the Hryvnia will become a foreign currency in Crimea. Earlier the occupational government had planned its circulation in parallel with the Russian rouble until January 1st, 2016; yet according to the amendments to the law regarding Crimea’s accession to the Russian Federation this term has been shortened by 1,5 years.
Why Crimea is getting rid of the Hryvnia preemptively
Crimea’s swift refusal of the Ukrainian currency is most likely not grounded in economics. “This decision was made by the Russian Federation and the Crimean government long ago and it is wholly reasonable politically, and not economically,” supposes the treasurer of the bank “National Credit” Oleg Zorenko. “If this process had been extended over a period of 1-2 years, the discomfort to the people and business would have been minimal. And in such short terms the transition can be very painful.”
The head of the financial sphere rating department of PA IBI-Rating Anna Apostolova names the desire of the Russian government to break economical ties of Crimea with Ukraine in order to speed up its integration with Russia as one of the motives for the suspension of the Hryvnia. “This decision benefits representative of the Russian business, which gets direct access to the Crimean markets. As the choice of alternatives for the Crimean establishments is limited, they will have to cooperate with Russian parters on low-benefit conditions,” the LIGABusinessInform interviewee comments.
To be fair, it should be noted that the circulation of two currencies is a difficult deal from the technical perspective. “The suspension of the parallel circulation of two currencies will solve the problem of the double price creation, when goods had two prices, and the cross exchange rate could have been very different,” commented the director of the investment banking department of Pro Capital Investment Igor Lizogub. “Depending on the rate chosen by the seller, the buyer benefited from paying for goods in one currency or the other, which made the calculations significantly more difficult.” However, the interlocutor of LIGABusinessInform notes, there is a shortage of roubles in Crimea, especially change, which will not allow to fully suspend the Hryvnia in the appointed term.
The currency Anschluss
The extraction of the Hryvnia from circulation is one of the stages of the painful adaptation process of the region to the Russian economy. According to the head of the analytical department of the group Investment Capital of Ukraine (ICU) Olexandr Valchyshen, a convergence of revenues of the citizens of the region and the prices on the peninsula with the overall Russian level is underway. At the first glance, the Crimean pensioners and budget workers have to celebrate the pensions and salaries, which are higher than in Ukraine. But this bonus from Putin is completely negated by the price increase on goods and service, which are significantly more expensive in Russia.
Other shocks may also be in store for the Crimeans. “Serious macro economical challenges face the Russian Federation, one of which is the increase of competitiveness, which has been lowered due to the higher inflation in the Russian Federation in comparison to the main trading partners – the EU, China and others,” says Olexandr Valchyshen. “The government of the Russian Federation will try to rectify the situation with the least painful methods for the citizens. However, because of the high level of corruption and wasting, these means will not lead to the necessary result.” According to the analyst, the Russian economy will continue stagnating and having fiscal and monetary difficulties.
What will happen to the banks and their clients
On orders of the National Bank of Ukraine, the Ukrainian banks are to close their chains on the peninsula before June 6th. “Regardless of this, the Ukrainian banks retain the loans given to the Crimean loaners,” says Anna Apostolova. “Their payback will become more difficult with the transition to the Russian currency in Crimea. Therefore the majority of such loans may become problematic.”
“Only small Russian banks, which are not afraid of economical sanctions due to business on the peninsula from international organisations and parters, are establishing work in Crimea,” says advisor to the general director of RA “Credit-Rating” Olexiy Kapustinskiy. “And the temptation to expand to Crimea is not great enough for the big players to risk their reputation and lose contact.”
How banks and citizens are to adapt
The problems the occupation of the peninsula has brought about will become even more severe for the Crimean businesses. “Ukrainian business will be unable to work in Crimea under Ukrainian law and will be forced to create new juridical persons, which would work under the rules of the Russian Federation in the rouble zone,” comments Oleg Zorianko from National Credit Bank. “So the issue of currency become secondary.”
Anna Apostolova predicts that the Crimean producers which have consumer markets in continental Ukraine will come face-to-face with currency risks because of the suspension of the circulation of the Hryvnia in Crimea. Their Ukrainian business partners, unwilling to take the currency risks, will try to minimise the operation volume with the counteragents from Crimea.
After June 1st the Hryvnia will become a foreign currency for the Crimeans, just like the Dollar and the Euro. “They will be able to keep their savings in Hryvnias, open deposit accounts, but it will have to be exchanged in banks or exchange points in order to buy goods and services,” says Igor Lizogub from Pro Capital Investment. According to Oleg Zorenko, problems may arise with the exchange of significant sums. “It is possible to exchange Hryvnias for roubles in Crimea on a fixed rate,” explains LIGABusinessInform’s interlocutor. “Now it is established at three-to-one. So far it is more beneficial than in Ukrainian banks, but it is not clear whether this ratio will be preserved even in the short-term perspective.”
Where the Hryvnia will go from Crimea
The volume of the Crimean Hryvnia can only be evaluated approximately. According to Oleg Zorenko, the treasury of the main headquarters of the National Bank of Ukraine in Crimea, as of the annexation, held about 4 billion Hryvnia in cash, the cash in the hands of the population may constitute another 2-3 billion UAH. There is also non-cash Hryvnia. Part of this mass may be transferred to continental Ukraine. However, according to Anna Apostolova, it is improbable that its volume will be significant enough to cause a weakening of the national currency.
Part of the Crimean Hryvnia will end up in the Russian Central Bak – the Russian regulator has received orders to buy it. “De facto, the Central Bank of Russia does not need the Hryvnia. However in the scope of the Central Bank of the Russian Federation, the sum which they will be forced to purchase is insignificantly small and will not influence its activities in any way,” comments Oleg Zorianko. And, more importantly, such an insignificant volume of Hryvnia purchased will not allow the Russian Federation to somehow influence the monetary and credit markets of Ukraine, says Anna Apostopolova.
“These funds cannot be included in the international reserves of the Central Bank. However, with their help, they can support the interests of the Russian business in Ukraine, by loaning them to the according Russian establishment,” thinks Olexiy Kapustinskiy from RA Credit-Rating.
Translated by Mariya Shcherbinina
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