. Ukraine's affair with the dollar stretches back at least 21 years. Ukrainians learned to covet the U.S. currency during the hyperinflation of the early 1990s, and never quite kicked the habit to the extent that their neighbors in Russia did, according to an article "Ukraine's Costly Addiction to the Dollar," which was posted by Bloomberg.
"What European country has more U.S. dollars in circulation than it does its own currency? What capitalist democracy is home to a thriving black market in foreign exchange? Unlikely as either may seem, there is an answer: Ukraine," the author of the article said.
According to economist Oleksandr Okhrimenko, the supply of the national currency, the hryvnia, is equivalent to USD 25 billion today, while about USD 80 billion in U.S. cash circulates in the Ukrainian economy, reads the article.
"The slightest concern can send Ukrainians running to exchange offices to stock up on U.S. currency. Ahead of the Oct. 28 parliamentary elections, Ukrainians bought some USD 3.34 billion amid fears that the government would stop propping up the hryvnia once the vote was over. The panic buying, the greatest since the financial crisis of 2008, forced the central bank to spend some USD 2.4 billion in currency reserves in an effort to keep the hryvnia stable," the author said.
The high interest rates required to keep money in hryvnias -- 25 to 28 percent for bank deposits, which translates into similarly elevated lending rates -- are strangling investment, according to the article.
The author gives some economic forecasts for Ukraine, including zero economic growth in 2012 (citing a statement by Prime Minister Mykola Azarov), and the current account deficit at 5.6% of GDP this year, compared with 2.2% in 2010 (according to IMF estimates).
"The government, however, is still unwilling to let the hryvnia drop from the 8-per-dollar perch where it has sat since 2009. Instead, officials have found all sorts of creative ways to prop up the currency. The central bank has required exporters to sell half of their foreign-currency earnings for hryvnias. Parliament has considered imposing a 15-percent tax on purchases of dollars, and set up a committee to combat illicit currency trading. The committee's head, central bank official Yuriy Horshkov, went so far as to warn that black marketers could face criminal punishment," reads the article.
Commentators in Ukraine were quick to point out that repressive moves would only strengthen the black market, the author said. He also recalls statements made by "two wealthy capitalists who [held] ministerial positions in Yanukovych's government, Petro Poroshenko and Serhiy Tihipko." Former acting Finance Minister Ihor Umansky called the proposal on a 15-percent tax on purchases of dollars a ruse to cheat Ukrainians out of the dollars under their mattresses.
"Of all the economic indicators Ukrainians may read about in the news, a stable exchange rate is what they value most. That's the way they have been conditioned since Soviet times. So if the government wants to find solutions to the country's economic woes, it will probably have to look elsewhere. Twenty-year-old addictions are hard to cure," reads the article.