How Ukraine is Managing a War Economy
Ukraine’s central bank governor speaks to Country Focus about the challenges of maintaining economic and financial stability
Russia’s invasion has inflicted terrible human and economic suffering on Ukraine and the country faces a winter of air strikes and rocket attacks against critical infrastructure. This week the IMF’s management approved Ukraine’s request for Program Monitoring with Board Involvement—the first arrangement of its kind—to maintain economic stability and catalyze donor financing.
Andriy Pyshnyy, Governor of the National Bank of Ukraine (NBU), spoke to Country Focus in Washington about the economic impact of Russia’s invasion, the challenges of maintaining banking and financial stability at a time of war, his expectations for the IMF monitoring program, moves to revive local debt markets and relax crisis controls, and how impaired hearing has affected him.
It has been almost 10 months since Russia invaded Ukraine. What has been the impact on Ukraine’s economy and how has society remained resilient?
For the past 10 months, Ukraine has withstood the largest full-scale military aggression in Europe since World War II. Ukrainians have demonstrated fantastic resilience. The impact of the war is hard even to comprehend. According to our estimates, Ukraine will lose at least one-third of its GDP in 2022. During the first few weeks, the war was practically everywhere, either through active ground operations or air strikes. It was a very hard period. However, the Ukrainian people and businesses soon started to recover from the first shock of the full-scale war. Some displaced people came back. The Ukrainian economy adjusted to the war. New sectors of the economy were created that focused on supporting Ukraine’s armed forces.
The banking system was strong and operated with no functional limitations during the whole war, regardless of very big ground and air operations. We stopped the outflow of capital, implemented a fixed exchange rate, and took several other necessary anti-crisis measures. And almost all banks—not only systematically important banks—continued operations. This is a big advantage for Ukraine. Thanks to this, there is financing and payment support for the economy, which remains fully operational. We have income from taxes, we make social-security payments, we have international assistance, and we can fundraise billions of hryvnias to support the armed forces.
Ukrainians have demonstrated an unparalleled ability to withstand the enemy but also to adapt to a new environment.
You have been in your post as governor for 10 weeks. What were the challenges of taking over in the midst of war and how have you kept the banking and financial sectors functioning?
Since October, Ukraine has been under intensified energy terror. There were nine waves of rocket or missile attacks that destroyed our critical infrastructure—key facilities that generate and distribute electricity, heating, and water. This is conscious energy terror: to make Ukrainians suffer in cold and darkness. These waves of attack occurred during my period at the NBU. Our efforts are focused on making sure that the banking network continues to operate.
Right now, the most critical project is power banking. This includes the creation of one network of branches of systematically important banks in Ukraine. We are talking about over 1,000 branches in 200 cities and villages. These branches are expected to function as one network. We are developing operational solutions to support this network, even under blackout conditions, with backup electricity, connectivity, and cash. Nothing comparable has ever been implemented anywhere in the world.
At the same time, Ukraine has created special stations where Ukrainians can come when there is no electricity, to charge their phones, get warm and receive hot meals. We will provide banking systems, including ATMs, in these stations organized in government buildings and special shelters. We are working with a big network of stores and gas stations to make sure that the citizens of Ukraine have access to cash when they need it.
The next priority will be an assessment of banks in Ukraine through diagnostics and stress tests. The banking systems came into this war in a very good stance as a result of reforms implemented with technical assistance from the IMF and other international institutions. As the Ukrainian economy and banking system recovers, I believe it is important for us to review the restrictions that were implemented during the crisis period. Right now, the Ukrainian banking system is functioning with some administrative restrictions, for example on capital flows. This was something we had to do to ensure macroeconomic stability. As the economy recovers, we will review all these processes and go back to market mechanisms.
Ukraine and the IMF recently concluded a “Program Monitoring with Board Involvement” or PMB. How do you expect this to benefit Ukraine?
The monitoring program is an important step that allows Ukraine to demonstrate its aspiration and readiness for reforms, regardless of the war. This will be also an opportunity to coordinate fiscal, monetary, and other policies, and facilitate interactions between the NBU as the institution with the mandate to ensure price and financial stability, and the Ministry of Finance, which has the mandate to seek necessary financing of the war.
Ukraine understands how important it is to use all the potential of the domestic debt market and achieve the important strategic task of financing for the FY2023 budget. We have to finance colossal budget needs of at least $38 billion with external funds. We coordinated with the Ministry of Finance and agreed that the financing of next year’s deficit will not be done by the central bank, as this would create additional risks and challenges for macroeconomic stability. Even though we need a record amount of money, the Government of Ukraine, the Ministry of Finance, and the NBU plan to finance the budget through cooperation with the donor coalition and the domestic debt market as well as with assistance from the IMF.
We believe that the monitoring program will be one of the key elements that will allow Ukraine to attract financing from the coalition of international partners. They will look for a green light from the IMF. At the same time, we hope it will be the first step to an upper-credit tranche program that Ukraine is counting on next Spring.
We are grateful to the IMF team for their intense and professional work during these past two very challenging months. There was continuous communication, 24/7. The two parties held conferences night and day. We finalized our agreement during a missile attack. This added significance to each word that was spoken and each decision that was made.
Some years ago you started to lose your hearing and you have since become an advocate for the rights of people in Ukraine with impaired hearing. Have you been able to turn your loss of hearing into an advantage?
The loss of any ability cannot be considered an advantage, but at the same time, it can open some new parts of one’s personality. In my case, I think it has allowed me to strengthen my focus and concentration. I do not hear external or ambient noise—nothing distracts me literally or figuratively.
Central banks have a notion of monetary silence. The bank and its entire staff are quiet with external parties the week before the meeting of the monetary policy decision-making committee to listen to each other attentively, to concentrate on the most important issues, and not to make mistakes in key decisions. So, in my case, this absence of noise allows me to get into that regime of monetary silence when it is necessary and focus on the most important issue.
This interview has been edited for length and clarity.