The National Bank of Ukraine is considering abandoning the dollar pegging mechanism.

Against the backdrop of fragmented global trade patterns and intensified geopolitical rivalries, Ukrainian central bank governor Andriy Pyshnyi stated on Wednesday that the country is actively considering reducing its dependence on the US dollar, seeking to establish a closer link between the national currency, the hryvnia, and the euro. This marks the first time that Ukrainian leadership has made such a clear statement regarding a possible major adjustment to the exchange rate regime.

Ukrainian Central Bank Signals De-Dollarization

In a statement released via email, Pyshnyi noted, "With the EU's increasing role in Ukraine's defense, coupled with heightened global market volatility and rising risks of trade fragmentation, the National Bank of Ukraine is reassessing whether the euro should replace the dollar as the main reference currency for the hryvnia."

He also stated that this process is "extremely complex" and requires "high-quality, multi-dimensional technical preparation," highlighting the long-term nature and institutional challenges of this transformation.

Dollar's Position Challenged, Ukraine Seeks European Anchor

For long, the US dollar has been the dominant currency for international trade and foreign exchange reserves, with numerous countries' currencies (such as the Saudi Riyal and Hong Kong Dollar) pegged to it. However, in recent years, especially due to the tariff wars led by the Trump administration, aid policy fluctuations, and its strategic wavering with allies, some countries have begun seeking diversified currency anchoring mechanisms.

After the outbreak of the Russia-Ukraine war, US military aid to Ukraine faced delays and uncertainties, while the EU has increasingly expressed clear support for Kyiv. Pyshnyi noted that although the dollar still dominates transactions in various fields of the foreign exchange market, "the share of euro transactions is steadily increasing in most areas."

From Dollar Peg to Euro Peg: The Institutional Transition Path

Since the introduction of the hryvnia in 1996, Ukraine has used the US dollar as its main reference currency. Following the outbreak of the Russia-Ukraine war in 2022, to stabilize market sentiment, the National Bank of Ukraine implemented strict capital controls and set a fixed exchange rate mechanism, pegging the hryvnia at 29 to 1 US dollar.

By October 2023, Ukraine officially moved to a "managed float exchange rate regime," although its operations still rely on the dollar exchange rate as an intervention benchmark.

It is noteworthy that Moldova proactively completed a transition from a dollar-peg to a euro-peg exchange rate system by January 2024, becoming a frontrunner in monetary policy adjustments in the region. Ukraine's current signals are seen by the market as a key step towards converging with EU systems.

EU Prospects and Economic Recovery Expectations

Ukraine and Moldova initiated EU accession talks in 2023. European Commission President Ursula von der Leyen has pointed out that as long as Ukraine maintains its current pace of reforms, it could complete its accession process as early as 2030. As part of the preparatory work, the Europeanization of monetary policy and exchange rate systems will be crucial.

Pyshnyi predicts that with deeper ties with Europe and the investment and consumption recovery driven by economic normalization, Ukraine's GDP growth rate could reach 3.7% to 3.9% annually in the coming two years. However, he also emphasized that this outlook heavily depends on the course of the Russia-Ukraine conflict and the continuity of external assistance.

Currently, Ukraine still requires substantial external financing to support its wartime expenditures. Pyshnyi stated that an estimated 55 billion USD is expected to become available by 2025, which will not only cover the fiscal deficit but also provide reserves for future public spending, preparing for the potential gradual decline of international aid.

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