The Limitations of Sovereignty

An interesting piece by Adam Tooze ¹ lays out the challenge of payments for central banks faced with the mass exodus of Ukrainian refugees faced with Russian invasion. Money has a public and a private role touch on financial obligations, authority and credit. But what happens when bank accounts, credit and debit cards and even cash are disrupted by war?

When your country is invaded, what is the value of the cash you carry? Who will take it? According to the Financial Times, Ukraine has suspended most currency trading and frozen the official exchange rate at the pre-war level for the hryvnia. It has imposed a moratorium on foreign exchange payments other than those funding the war effort.

With Ukrainian payment cards no longer working while hryvnia can still be exchanged, the exchange rate is floating. Its value has fallen from 7 hryvnia to the zloty, to about 20.

European authorities are reluctant to hand out zloty or euros to the refugees since it implies that Europe does not have confidence in Ukraine’s currency. On 18 March the National Bank of Poland and Ukraine agreed to allow each adult refugee to exchange up to UAH10,000 using the 25 March official exchange rate, the equivalent of about 1,400 zloty or €300. In Poland this exchange takes place at branches of the Polish state-owned PKO BP bank.

The Romanian central bank allows lets Ukrainians convert about €400 worth of hryvnia. The Bulgarian central bank is working on a facility. But these one off conversions have a rather time limited benefit.

Christine Lagarde, head of the European Central Bank (ECB), has said the ECB is looking at how it can help starting with using existing products such as swap and repo lines, as well as new routes to help. Behind this answer lies the problem of who will carry the exchange rate related risk? Central banks don’t want to do this because it is, effectively, ‘monetary financing’, printing money to support national finances. Monetary financing is forbidden by the Maastricht Treaty. Only a cast iron guarantee by Europe’s national governments that they will fund the risk would allow the ECB to facilitate the transactions with commercial banks doing the actual currency conversions.

The exchange rate, a cap on how much can be converted, are the critical issues. All this was being discussed back on 11 March but still there appears to be no clear solution. As ever the independent countries, Poland, Bulgaria and Romania, have been more nimble in their response than the central banks of the EU.

1 - Chartbook #103 How refugees' need for cash exposes the limits of Euro sovereignty.