The EU is struggling to establish a mechanism to permit Ukrainian refugees to exchange their hryvnia savings into euros or other European currencies, a measure that would ease the plight of the millions of refugees entering the bloc.
The European Commission is locked in discussions with the European Central Bank over the creation of a facility to permit a certain amount of savings in Ukraine’s currency to be swapped into euros, but the scheme will require guarantees from EU member states to cover potential losses on the hryvnia’s value.
Officials say EU capitals are willing to provide the backstop needed, which could be worth billions of euros, but that creating the mechanism rapidly is proving to be a complex legal and technical challenge.
Nearly 3.5mn refugees have entered the EU from Ukraine since Russia’s invasion, and a lack of ready cash is one of the most urgent difficulties they face as they seek to pay for food, clothes and housing. Many crossed the borders carrying cash savings, but their desperate situation has been exacerbated by an inability to easily convert the money into euros or other EU currencies.
“The biggest problem people are having is that they are arriving with hryvnia and they cannot change them . . . because the exchange rate is wild,” said Olga, a Ukrainian volunteer helping refugees arriving at Warsaw’s main train station earlier this month.
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.
Banks and bureaux de change are reluctant to accept hryvnia when they have little idea what its value is — and officials say if exchange rates can be obtained they are often at vast discounts to prewar levels or subject to prohibitive fees. The hryvnia was worth €0.03 on February 23.
In Poland, which has received more than 2.1mn refugees from Ukraine, the problem has been particularly acute. Olga, who did not give her last name, said refugees trying to change hryvnia had been quoted exchange rates of 20 per zloty. In Ukraine, before the war, the exchange rate was about 7 hryvnia per zloty.
Poland’s central bank said on Monday that it had signed an agreement with its Ukrainian counterpart which would allow adult refugees to convert up to 10,000 hryvnia per person “at a rounded, official” rate from Friday.
Christine Lagarde, ECB president, said on Monday that 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 ECB sent a proposal to the commission on Monday outlining how a scheme to convert hryvnia into euros would work, using an EU guarantee to cover the risk of foreign exchange losses at the central bank.
The ECB has decided that it is unable to exchange hryvnia for euros without a state guarantee because of the risk that it would be considered monetary financing of governments, which is barred under the EU treaty.
The worry for the ECB is it will be left holding a large amount of hryvnia that could lose much of its value and cannot be swapped back into euros with the Ukrainian central bank — at least until the war is over and stability returns.
The commission needs to establish a mechanism for EU member states to fund the guarantee, because the EU does not have the cash required in its existing budget. An internal commission note seen by the Financial Times suggests that the guarantee might need to be between €1bn and €3bn, assuming a cap of €300 for each refugee.
Non-euro EU member states are also interested in the guarantee scheme, in the hopes that a harmonised approach can be found that covers exchange rates for the whole union.
The commission said: “We welcome all these efforts. The commission is in contact with the ECB and other central banks to encourage them to find solutions, in order to show solidarity with Ukrainian refugees.”
Many refugees are being forced to accept exchange rates that “make such transactions worthless”, according to the National Bank of Ukraine. The central bank urged those leaving the country to leave cash on deposit at Ukraine banks and use payment cards to withdraw cash or pay for items outside the country.
“In cashless payments, conversion rates are much better than the black market exchange rate for cash,” said Oleksii Shaban, deputy governor of the NBU.
One EU official said it was no surprise that Ukraine had been forced to resort to some forms of restrictions on capital exports. While it was possible to exchange currency via credit cards, “we are aware that they are experiencing difficulties in exchanging cash, and indeed many crossed borders with cash only”.
Since Russia invaded Ukraine on February 24 there has been a dash for cash in many neighbouring countries as refugees withdrew money from banks, and locals also sought the security of hard currency.
The Polish central bank said cash in circulation rose 11 per cent because of “unprecedented withdrawals” in the first week after the war that caused “problems with availability of cash in ATMs”. But it said those problems were resolved after cash outflows had “begun to stabilise”.
The number of cash withdrawals doubled in Lithuania after the invasion of Ukraine, causing some ATMs to run empty, but have fallen since then. The central banks of Estonia, Latvia, Finland, Slovakia and Hungary also reported higher demand for cash.
Swedbank, the oldest lender in Sweden, reported that cash withdrawals had reached the highest proportion of overall cash turnover for three years. “I think it is a hoarding behaviour we’re also seeing in Sweden,” said Andreas Wallstrom, Swedbank’s head of forecasting.
Additional reporting by Richard Milne
The article has been republished to correct the hryvnia-to-euro rate
Source: Financial Times