When a nation is fighting for its life, with its cities are under bombardment and approaching a fifth or more of its population in flight, what is its currency worth?
If money functions in a matrix of public and private relations of financial obligation, authority and credit, what happens when those relationships are violently attacked by an outside force?
It might seem a frivolous question. There are more important things in life than money. This is a moment at which life and death are at stake.
But the question cannot be dodged either at the public or private level.
Money is a defining instrument of state sovereignty. The capacity to tax, the circulation of currency are key functions of government. The means that the Ukrainian military have at their disposal to fight off the Russians are limited by Ukraine’s pre-war defense budget and its current ability to access new weapons and support.
And for the millions of Ukrainians fleeing the devastation the question poses itself in an urgent private form.
Having found a place of safety the next questions is: “How are we going to live? What are we going to live on? What is left of what we had?”
At that point money reenters the picture with a vengeance. And it does so not just for the refugees.
Refugees are defined by dispossession. They leave their homes and the vast majority of their property behind. What will survive is at the mercy of the war, looting by the occupiers, neglect, decay.
But what of their financial claims? What of bank accounts, credit cards, cash?
These are supposed to be the fungible, liquid, abstract forms of property. They are supposed to be the store of value, the means of exchange, the unit of account. Do those functions of a national currency survive, as a state fights for its existence?
For the millions of refugees flooding to the West this is a matter of acute material concern, but it is also more than that. It defines how much of their normal identity they are losing.
In market society if you can pay, if your credit is still good, you are not a charity case. If your cash is no good and your card no longer works, you become dependent.
“Crossing the border from Ukraine into Poland at Zosin, there was a lot of help on offer — free food, free diapers," one Ukrainian refugee told POLITICO. "But nobody willing to exchange cash."
The contrast is telling. Gifts are one way transactions. Exchange would involve reciprocation.
Poles are generously giving of their own. They are less interested in accepting dubious claims on Ukraine in exchange for valuable Polish currency.
The problem has arisen because Ukraine has suspended most currency trading and frozen the official exchange rate for the hryvnia at prewar levels. It has also imposed a moratorium on foreign exchange payments except for those supporting the country’s war effort.
This means that the actual exchange rate of the hryvnia is indeterminate.
The refugees are making forced sales. The exchange booths still willing to take their currency charge exorbitant premia effectively depreciating the Ukrainian currency from 7 hryvnia to the zloty to something closer to 20.
Ukrainian payments cards are, in many cases, no longer working outside Ukraine. ATM machines across Eastern Europe are swept bare of cash, both by refugees and locals rushing to withdraw means of payment.
The dash for cash has been contagious. As far away as Sweden, there has been a surge in demand for cash.
No one wants to say it out loud but the judgement of the exchange booths is harsh. Ukraine’s resistance may be heroic, one may wish the refugees well, but no one has much hope for their currency.
If one follows that thought to its conclusion, you might ask whether exchanging hryvnia for hard currency is not beside the point. As Politico remarks:
An alternative would be to only hand out cash (Polish zloty or euro) to refugees, a much simpler and legally straightforward operation. But authorities worry this could send a troubling signal to Ukrainians that Europe has no trust in the future of Ukraine’s currency.
So this is the dilemma: Europe is not giving up on Ukraine. It is determined as far as possible to preserve the belief in an unimpaired Ukrainian monetary sovereignty. And it clings to that idea even as millions of Ukrainians are desperately fleeing their country and in doing so fleeing its currency. They need out.
Presumably the hope is that at some point in the future Ukraine will be restored and normal financial and monetary relations can resume. In the mean time a painful tension must be bridged. This will require money, from Europe. And that is where the problem starts.
Since this is a question of cash, ATMs, payments cards, exchange booths and of banks, the central banks is the agency of government that matters in the first instance.
In the front line of the crisis, the National Bank of Poland (NBP) and its Ukrainian counterpart on March 18 signed an agreement that will enable each adult refugee to exchange up to UAH 10,000. The exchange will be possible at the official exchange rate as of March 25. It should result in c 1,400 złoty, or €300 per adult refugee. Given the number of refugees entering into Poland that is an obligation on the Polish central bank to the tune of hundreds of millions of euros. The exchanges will be done at branches of a Polish state-owned PKO BP bank.
Under many plausible scenarios, the tens of billions of hryvnia that Poland will acquire in exchange for the billions of zloty it dispense, will turn out to be worthless. The Polish tax payer, or some other multinational facility will have to absorb the loss.
This is a laudable commitment by Poland and it begs the question of what the rest of Europe is willing to do.
The Bulgarian central bank has said it is working on a facility while in Romania, the local unit of Erste Bank lets Ukrainians convert around 400 euros worth of hryvnia.
These are commendable initiatives, but they only go so far. 300-400 euros per adult is not going to last long.
What can Europe as a whole and specifically the ECB do?
When Christine Lagarde was asked about the response of the ECB at a recent press conference, she gave the following answer.
The second question is: what would the ECB's reaction be if the Ukraine Central Bank was to request a swap line from the ECB?
I will start with the second one. We are actually exploring together with other European authorities and in particular with the Commission how we can deploy tools in order to support the Ukrainian people and the Ukrainian authorities. So clearly looking at how support can be structured, whether under an existing product - you mentioned swap line, repo line, or other products - because clearly, we have conditions under which we can extend swap lines and repo lines. If those conditions are not satisfied, we need to find alternative ways of providing support. That is what we are doing both in relation to the authorities, but also in relation to the people of Ukraine who, when they become refugees, unfortunately past the border need to access alternative currencies to theirs, which as a result of the decision that was made is not convertible as it used to be. So we are really working hard. I hope that in the next few days we'll be able to provide tools and means to extend support to both the people and to the authorities together with the Commission and sometimes in some cases national authorities within the Eurosystem.
As one anonymous central banker remarked: "The simple question is: Who will carry exchange rate-related risk? It cannot be the central bank."
Why not, you might ask? Don’t they print the money? But that, as far as the ECB is concerned, is precisely the problem.
Absorbing the losses on the transactions with Ukrainian refugees could be seen as tantamount to “monetary financing” i.e. printing money to support national finances, which was regarded with horror by the original architects of monetary union. And as a result it is strictly forbidden by the Maastricht Treaty.
Fear of monetary sovereignty is, once again, the problem.
As another ECB source remarked to Balazs Koranyi and Jan Strupczewski of Reuters: remarked: "This would be a humanitarian, goodwill effort, rather than a regular policy instrument, but we are still bound by laws so it's not like we could just say, come, we'll covert it for you."
Within its legal charter, the ECB cannot act, unless it is provided with a cast iron loss guarantee by Europe’s national governments. And they, unlike Poland, have yet to come up with a formula.
As Christine Lagarde, ECB president, told the FT on Monday,
the central bank had spent the weekend seeking a solution permitting it to convert refugees’ hryvnia into euros. “It’s complicated,” she said. “We need a guarantee on the conversion. Sometimes our legal frameworks show their limits in crisis times.”
The obvious need is for a jointly guaranteed European facility with the ECB as the facilitator of transactions.
Actual conversion would be left up to commercial banks.
Part of the solution might include allowing Ukrainians to open bank accounts and spend hryvnia electronically.
But the critical question is what exchange rate to set for the conversion. If the refugees are to be assisted, the exchange rate must be better than that currently on offer on the black market. That implies larger eventual losses and will mean that European governments will likely impose an upper limit to the amounts that can be converted. The exchange rate and the cap are the critical issues.
As one source remarked to Reuters: “we have days, not weeks to figure it out."
That was on March 11th. As of this morning, March 22, as reported by the FT, there is still no clear solution in sight.
In Europe since the Ukraine crisis began, the talk about sovereignty has reached a clamorous pitch. But sovereignty has preconditions. And one of them is a central bank that is not hobbled, but is able to perform the full functions of a sovereign monetary actor. Ought it not to be a matter of shame that it is central banks of EU members not yet in the Euro - Poland, Bulgaria, Romania - that are able to respond promptly to the needs of Ukraine’s refugees, whereas the far-richer eurozone members are paralyzed?
In this crisis, it is not just Ukraine’s monetary sovereignty that is being put to the test.