War in Ukraine: The financial defence | VOX, CEPR Policy Portal –

The economic commentary on the Russian invasion of Ukraine has largely focused on the costs of economic sanctions for Russia (Garicano 2022) and the impacts on the global economy of rising oil and gas prices (Vaitilingam 2022). Less visible has been the economic impact on Ukraine and the actions of the National Bank of Ukraine (NBU) and the international financial community to maintain liquidity and financial stability in the country. In this column, we fill this gap by exploring the impact of the war from a Ukrainian monetary economics perspective. We provide a brief monetary history of Ukraine, document the policy actions of the past few weeks, and explore the challenges ahead.

A brief monetary history of Ukraine

Since its independence in 1991, Ukraine has experienced a turbulent monetary history. In 1993, a hyperinflationary spiral peaked above 10,000%, setting the need for monetary reform in 1996 and a transition to a new currency (at a ratio of 100,000:1). 

In 2000, 2008, and 2014-15, three large devaluations of the currency followed, accompanied by further spikes in inflation (see Figure 1A). The last of these, during a period of political instability, followed an unsuccessful bid by the NBU to defend the currency, depleting its stock of international reserves (see Figure 3A). Because of these experiences, Ukrainian households hold large quantities of foreign currency and are quick to convert liquid savings out of the national currency in response to signs of economic or political instability.1

In 2015, the NBU became operationally independent to overcome the problems of fiscal dominance with a mandate to ensure price and financial stability. To achieve the former, the NBU has been operating an inflation-targeting regime, targeting 5% annual inflation. Thus, in the context of the Mundell-Flemming trilemma, it adopted independent monetary policy and free capital movements while allowing the exchange rate to float freely. 

By 2021, the NBU was the image of a typical modern central bank in the middle of a steady policy tightening cycle (see Figure 1B), balancing the need to support the economy through the Covid pandemic and preventing inflationary pressures arising from covid-induced global supply chain disruptions. The build-up to and the subsequent Russian invasion of Ukraine, however, has dramatically changed the monetary landscape and forced the NBU to rapidly change its operations to prevent a financial collapse.

Figure 1 Inflation and the key policy rate

A) CPI inflation

B) NBU key policy rate

Source: NBU

Build-up to war and the first few days of the Russian invasion

Ever since November, when satellite imagery of new Russian troops near the border emerged, financial pressures on Ukraine were building with every escalation of geopolitical tensions. The first sign of this pressure was turbulence in the foreign exchange market and a slide in the value of the hryvnia (UAH) – the national currency (see Figure 2). In terms of quantities, the volume of Ukrainian government bonds held by non-residents shrank by almost 20% in January-February and Ukrainian households were rapidly acquiring more foreign currency (see Figure 4B). As a result, the NBU began intervening in the foreign exchange market, with sales of net foreign assets in January, to smooth exchange rate fluctuations and control the depreciation of the currency (see Figure 3B).2

Figure 2 Official hryvnia exchange rate

Source: NBU

On 23 February, on the eve of war and with the currency sliding again, the NBU attempted to calm the market by stating that it “has a sufficient amount of international reserves” and there is “no shortage of cash in the banking system”.3 But, on 24 February, with Russia invading, the NBU acted decisively by imposing capital controls (preventing the purchase of foreign currency), restricting withdrawals from foreign currency deposit accounts, and switching from a flexible to a fixed exchange rate regime (at UAH/USD = 29.25).4,5,6 On the same day, to help build international reserves and the capacity to ensure financial stability, the National Bank of Poland granted a PLN4 billion ($0.95 billion) swap to the NBU.7

On 25 February, the NBU provided the banking system with access to unlimited refinancing loans in national currency, with a maturity up to one year. Unprecedented, these loans were unsecured. Over 11 days, banks took UAH62 billion through this tool.8,9,10 

These actions, in the space of two days, most likely prevented a sharp depreciation of the currency, a rapid outflow of international reserves, and a liquidity crisis that could have prompted a financial collapse. However, these actions are not without their potential risks, to which we turn next.

Figure 3 International reserves and the NBU’s purchase of foreign currency 

A) NBU international reserves

B) NBU net purchases of foreign currency

Source: NBU

Liquidity and stability in the Ukrainian financial system

We begin by providing a little more background on the (pre-conflict) Ukrainian financial system. First, concentration in the banking system is relatively low, with 71 banks (of which 33 are either part or fully foreign owned).11 Second, 36% of the banking system’s liabilities are in foreign currency, signalling the sensitivity of short-term funding to the exchange rate and international funding markets. Third, for many years, the banking system has had surplus liquidity, with short-term liquidity largely held as NBU deposit certificates. As a result, interbank market rates have hovered close to the NBU’s deposit facility rate.12  

Figure 4 Remittances and households’ foreign exchange transactions

A) Remittances

B) Household foreign excange transactions 

Source: NBU.
Note: Non-cash are transactions between bank accounts in national and foreign currencies. Cash are physical cash transactions.

The liquidity injections on 25 February have ensured that the interbank credit market continues to function without visible signs of market stress (see Figure 1B). Yet, the additional liquidity (see Figure 5, orange and grey bars) has already been offset by the additional demands for cash (yellow bars).  

The Russian invasion has so far caused about three million Ukrainians to find refuge in neighbouring countries. This prompted scenes of long queues at ATM machines as citizens sought physical cash.13 While the NBU can readily provide national currency cash, demand for foreign currency cash is more problematic.

In normal times, Ukrainian workers abroad are an essential source of foreign currency for the country. Remittances by Ukrainian abroad peaked at $15 billion in 2021, close to 10% of Ukrainian GDP (see Figure 4A). However, the currrent demand for foreign currency in the face of foreign exchange restrictions on official markets has triggered the emergence of shadow foreign exchange markets. As of 15 March, the exchange rate is around 31-33 UAH/USD in one of these markets, significantly above the official rate.14 A widening of the gap between the official and shadow exchange rate is a proxy for the amount of pressure on the fixed exchange rate.

The provision of liquidity in national currency to ease financial conditions also comes with risks. Ukraine is highly reliant on imports and the invasion is having a significant impact on the productive capacity of its economy. As a result, excess liquidity is likely to put further pressure on the currency. Of course, any devaluation of the currency is then likely to transmit into inflationary pressures, first through the price of fuel and other imported goods, and then into the price of local goods because of higher intermediate goods prices.15

Prior to the invasion, the NBU had been scheduled to decide on its key policy rate (currently at 10%) on 3 March and was set to impose increased reserve requirements on 11 March, although both were promptly cancelled at the onset of the invasion. But, with inflation at 10% in January, above the 5% inflation target, the anticipation had been that interest rates would continue to rise in 2022. Greater uncertainty now encircles whether policy rates will need to fall in future (to ease financial conditions) or rise (to defend the currency and mitigate inflationary pressures).

Figure 5 Banks’ current accounts at the NBU

Source: NBU.
Note: Total is the cumulative change in banks’ current accounts at the NBU since 1 November. These changes split by three factors: two types of NBU monetary policy operations (Standing facilities and Tenders) and Cash, the effect of changes in the volume of cash in circulation. On 25 February, the tenders included unsecured funding with maturity up to one year.

IMF support and the challenges ahead

On 9 March, the IMF stepped in and approved $1.4 billion of funding for Ukraine via the Rapid Financing Instrument to help meet urgent financing needs.16 Ukraine already had a Stand-By Arrangement – the standard IMF tool used to overcome balance of payments problems – but this is accompanied by a macroeconomic programme, including obligations and restrictions for the recipient country to ensure macroeconomic stability. This Stand-By Arrangement has now been cancelled, with a new programme to be agreed in the future. What the IMF will oblige in a new programme, with regards monetary, fiscal and exchange rate policies, remains uncertain.17 

The economic outlook ahead for Ukraine is mired with uncertainty, and will largely be determined by the length and scale of the war. Huge damage is being done to the productive capacity of the economy and there will be need for substantial external funding to help reconstruct the country and the economy after the war. Even with the support of the IMF and the international community, the post-conflict path back for the NBU to being an operationally independent inflation-targeting central bank with an open foreign exchange market and flexible exchange rate will undoubtedly be a delicate trade-off of supporting the economy and preventing the collapse of the currency and spiralling inflation.


Bahaj, S and R Reis (2022), “The Workings of Liquidity Lines between Central Banks”, forthcoming in the Research Handbook of Financial Markets.

Garicano, L (2022), “Raising the pressure on Putin”,, 5 March.

Kwon, O, C Syropoulos, and Y Yotov (2022), “Extraterritorial sanctions: A stick and a carrot”,, 4 March.

Roland, G and Y Gorodnichenko (2014), “Ukraine: What emergency measures and what long-term changes are needed?”,, 27 February.

Vaitilingam, R (2022), “Economic consequences of Russia’s invasion of Ukraine: Views of leading economists”,, 10 March.


1 As of February, 30% of household deposits are in US dollars, 7% in euros, and 62% in national currency, despite a large interest rate differentials (7.1% on national currency deposits vs. 0.5% on foreign currency deposits).

2 Since 2015, the NBU has intervened in the foreign exchange market in order to rebuild its stock of international reserve (see Figure 3A). 

3 (quotes translated using Google Translate) 


5 The swift reaction of the NBU is in large part because the NBU had, since the annexation of Crimea in 2014, developed procedures aimed at ensuring financial stability in response to a further escalation of military conflict.

6 On 1 March, the NBU eased some foreign exchange restrictions, allowing customers to withdraw up to about $1,000 per day.

7 For an analysis of central bank swap lines and the role they play, see Bahaj and Reis (2022).

8 For comparison, prior to this, the total amount in national currency at banks’ current accounts in the NBU was UAH58 billion.

9 On 24 February, the NBU also supported the liquidity of the government by transferring UAH19 billion of its 2021 profits to the state budget (which amounts to around 1.3% of government expenditure or 10% of the consolidated budget deficit in 2021). On 8 March, the NBU announced that it may support the state budget through the purchase of Ukrainian government securities in the primary market and subsequently purchased UAH20bn in war bonds.

10 The NBU enacted several additional changes to support the financial system. It simplified the rules for commercial banks (including regulations and statistical reporting).

11 The NBU revoked licences and liquidated banks controlled by Russia operating in Ukraine. 

12 In February, on average around 70% of commercial banks held NBU overnight deposits certificates.

13 At the beginning of February, the share of household deposits that could be withdraw immediately was 58% (38% of which is in foreign currency) of total deposits.


15 These dynamics took hold in Ukraine during the 2008 global financial crisis. The NBU supported the financial system with liquidity to prevent bank runs. While this prevented a collapse of the banking system, the build-up in excess liquidity fed into higher demand for foreign currency and eventually forced the NBU to devalue the currency.

16 In addition, the World Bank are preparing a $3 billion package of support that Ukraine can receive in the coming months and the US has approved $13.6 billion of spending for the war in Ukraine, around half of which is for humanitarian and economic aid. Preliminary NBU estimates suggest that around $5 billion of total financial support will go directly to the state budget, which is the equivalent to about 18% of international reserves ($27.5 billion at the beginning of March 2022) or a little over one month of pre-conflict imports.

17 Some of the challenges facing Ukraine highlighted by Roland and Gorodnichenko (2014), such as fiscal imbalances and unsustainable current-account deficits, remain relevant now. The indirect effects of Russian will also impact Ukraine indirectly (Kwon et al. 2022).

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