Narodowy Bank Polski (NBP) and the National Bank of Ukraine (NBU) agreed to establish a zloty/hryvnia currency swap line on Dec. 22. The deal, worth 1 billion euros, has been signed for six months, with the possibility of an extension.
Under the agreement, the Polish central bank will give its Ukrainian counterpart 4 billion zlotys and receive the equivalent in hryvnias in return.
But why would one of the best-performing economies in Europe voluntarily exchange its money for the third worst-performing currency in the world as of 2015?
Even in its mother country, the hryvnia is not a favorite asset for storing wealth. Over the past two years, the currency has lost nearly 200 percent of its value against the U.S. dollar. During this period, the volume of hryvnia deposits in Ukrainian banks dropped by 44 percent.
‘Goodwill gesture’ to support Kyiv
The recent swap line definitely benefits Ukraine, however.
The operation will increase the foreign currency reserves of the country’s central bank. That’s crucial for the country’s economy, which is hungry for hard currency as export volumes are fall.
The swap will enable Ukrainian businesses to pay for Polish imports or loans in zlotys. Experts say that will reduce risks from exchange rate fluctuations, which can occur when prices are fixed in U.S. dollars or euros.
“This is a correct and potentially effective move,” Volodymyr Sidenko , an economic research consultant from Razumkov center think tank, told the Kyiv Post. “It temporarily increases room for maneuver in balancing foreign trade relations.”
At the same time, analysts point to the reputational gains Ukraine will reap.
“Few investors even consider the possibility of investing in Ukraine,” Oleksandr Talavera, Reader in Finance from Sheffield University Management School, told the Kyiv Post. “If governments of certain countries view Ukraine as a financial partner, then this is good news.”
Talavera called the swap deal a unique experiment.
“Poland “exports stability,” because the Polish zloty is likely to be much more stable in the short term (than the Ukrainian hryvnia),” he said. “However, there are also certain financial risks linked to the return exchange of hryvnias for Polish currency. Given the (respective) advantages and disadvantages, the swap looks like a ‘goodwill gesture’ to support Ukraine.”
Markijan Żelak, head of the Kyiv office of the Solidarity Fund PL, in a comment to the Kyiv Post, said there was a political ingredient to the swap.
“It’s important to underline that the central banks signed the swap line agreement during the first meeting of the Polish and Ukrainian presidents,” Żelak said. “The readiness of Poland to deepen cooperation in the economic sector is a good sign. It’s also important that Warsaw used financial instruments for this purpose.”
Delayed benefits for Warsaw
On the other hand, Poland is getting benefits too – although they’re not so direct.
“The more stable Ukraine is, the more stable Poland is,” Ryszard Piasecki, head of the Department of Development Economics at Lodz University told the Kyiv Post. “One billion dollars matters a lot for Ukraine. For Poland, it means comparatively less.”
Experts say that this operation should increase trade between the countries in the long term.
“The move (of opening the swap line) looks logical for Poland, as supporting the payment capacity of an important trade partner works for the development of the Polish economy, which is especially critical when the anti-Russian sanctions are extended,” Sidenko from Razumkov center think tank told the Kyiv Post.
In the first half of 2015, trade with Poland accounted for 5 percent of Ukraine’s exports ($929.4 million) and 6.2 percent of the state’s imports ($1,065.5 billion).
Other cases of ‘importing stability’ by the central bank
This is not the first time the Ukrainian central bank has signed a foreign currency swap deal with bigger economies. On May 15, 2015, the Ukrainian central bank opened a swap line worth 15 billion Chinese yuan ($2.44 billion) with China for a period of three years.
Experts say that Beijing was seeking to popularize the Chinese yuan as a reserve currency. Though China’s goals were more pragmatic than those of Poland’s, the deal improved the shape of Ukraine’s foreign currency reserves. In a comment to the Kyiv Post, the National Bank of Ukraine said the swap line with the People’s Bank of China helped the NBU fulfill its program of extended financing with the IMF.
Since the beginning of the year, Ukraine’s foreign reserves have grown by 75 percent, to $13.147 billion.
Kyiv Post writer Olena Savchuk can be reached at [email protected]
