In what could be a huge move, now reports are rife that the Volodymyr Zelensky-led Ukraine is contemplating a significant shift in its currency policy, moving away from a U.S. dollar system to a euro-based system. This potential change reflects the country’s evolving geopolitical landscape and its aspirations for deeper integration with nations it feels are more viable to be its partners.
Central Bank Governor Andriy Pyshnyy has highlighted several factors influencing this consideration:
EU Accession: With EU membership discussions underway, aligning with the euro could facilitate smoother economic integration.
Increased EU Support: Growing defense and economic assistance from the EU necessitate alignment with its currency for efficient transactions.
Global Market Volatility: Fluctuations in global markets and trade fragmentation prompt a reevaluation of currency stability.
Since the Russian invasion in 2022, Ukraine has maintained a managed exchange-rate regime, moving away from a strict dollar peg in 2023. Despite the dollar’s dominance in global transactions, there has been a gradual increase in euro-denominated activities within Ukraine.
Implications for Ukraine
The transition to the euro is expected to be gradual, spanning 5 to 10 years. This timeline aims to minimize disruption to the domestic economy and public perception. The shift is primarily targeted at foreign trade and business transactions.
First Deputy Governor of the National Bank of Ukraine, Kateryna Rozhkova, emphasized that such a transition aligns with Ukraine’s European integration goals. She noted that as the EU becomes a more significant trading partner, adopting the euro would be a logical step.
Ukraine’s potential move mirrors a broader global trend of de-dollarization. Countries like China and India have increasingly conducted trade in local currencies, reducing reliance on the U.S. dollar. This shift is partly in response to the weaponization of the dollar through sanctions and the desire for greater financial autonomy.
The establishment of the BRICS+ group, comprising nations such as Russia, India, China, and Brazil, which are major economies on their own, further exemplifies this trend. These countries are exploring alternative financial systems and promoting trade in local currencies to diminish the dollar’s dominance.
Ukraine’s consideration to transition from the dollar to the euro is a strategic move reflecting its geopolitical realignments and economic aspirations. While the process will be gradual, it shows how Zelensky is looking at alternatives to manage Ukraine’s prospects which he feels are better served integrating with Europe and the Euro than the US dollar.