The following is a speech by National Bank of Ukraine (NBU) Governor Andriy Pyshnyy at the conference “Central Bank Independence in a Changing World.” The conference was organized for the governors of the International Monetary Fund (IMF) constituency by the National Bank of Belgium (NBB) in Brussels, Belgium, on Feb. 9. 2024.
First and foremost, I would like to thank Pierre (Wunsch, the NBB governor) and his wonderful team for the opportunity to participate in this conference and share the experience of Ukraine’s central bank. I want to present for your professional judgment some conclusions made by myself and the National Bank of Ukraine (NBU) team over the past two years. These insights have been shaped during the 716 days of Russia’s full-scale war against Ukraine, which is taking place in our country but influences the entire world.
On Feb. 24, 2022, as Ukrainians were jolted awake by explosions, the global order changed forever. This made us look at many things differently, including the central bank’s mandate and how we implement it. I could say a lot about the NBU’s experiences and our mandate at times of war. However, due to constraints on time, I will only focus on key issues.
First, we have faced security issues in a broad sense.
Our usual peaceful environment transformed into that of martial law overnight. As our armed forces defended our borders on land and in the sky, the NBU’s foremost task was safeguarding the national currency, guaranteeing uninterrupted payments, and alleviating panic. In the first hours of the full-scale war, the central bank initiated its action plan, which it had prepared in advance.
The NBU immediately fixed the exchange rate, imposed the necessary restrictions, and activated protocols for the banking system’s uninterrupted functioning. Even amid the Battle of Kyiv, people could use their payment cards at shops, to withdraw cash, and to make transfers.
This is the first conclusion or insight I would like to share: In crises, we are not rising to the level of the opportunities; we are falling to the level of our preparedness. And our preparedness level ultimately determines our ability to fulfill our mandate.
Second, we have faced the challenge of terror attacks against our energy infrastructure and massive cyber attacks.
Between October 2022 and March 2023, Russia launched 875 missiles and hundreds of drones targeting critical energy infrastructure. Cities and villages suffered many hours – and even days – without electricity or means of communication, and the looming threat of weeks-long blackouts became a reality. What did this mean for us as a central bank? A new task emerged: to ensure the banking system’s seamless operation and uninterrupted access to banking services under any conditions.
A wide-scale project, Power Banking, implemented in cooperation with Ukrainian banks, provided a solution. It consolidated over 2,000 branches across different banks into a single network. These branches were equipped with alternative power sources, backup communication channels, enhanced cash collection capacity, additional staff, and a shared system of continuous operation protocols. Even during the darkest and coldest winter days, people could conduct cash transactions, charge their phones, and seek warmth at these branches.
Power Banking is a response to more than just the missile attacks. Once again, we adopted a broader perspective, as a blackout may also be caused by a cyber attack or a natural disaster. Our Power Banking protocols comprehensively addressed these scenarios, which can happen anywhere.
This is, therefore, my second insight: A central bank must execute its mandate under any conditions. The NBU has ingrained this principle into its DNA. In May 2023, we updated the NBU Strategy, broadening our mission statement. As before, the NBU should ensure price and financial stability. However, we have now made a commitment to fulfill this mandate under all conditions.
Third, highlighting the role of sanctions has become one of our conditions for survival.
Opportunities are essentially a matter of resources. For Ukraine, resources signify the ability to endure and eventually win. For Russia, they represent a means to continue its aggression and the destruction of the global order. Sanctions help change the balance of power and deprive Russia of resources. Therefore, their enhancement and ongoing monitoring have been added to our list of tasks, as the financial sector is a part of this “supply chain.”
We have taken all the necessary steps domestically, severing our financial sector's connections with Russia. We successfully nationalized Russian banking assets to ensure financial stability. These actions mitigated the risks related to Russia’s terrorist attempts against our financial system and to undermine our defense.
We also cooperate with our partners to strengthen the pressure of international sanctions. It is unacceptable to turn a blind eye to the global impact of Russia’s war against Ukraine. The global economic and political landscape will depend on how soon Ukraine wins.
This is my third insight: Sanctions are a crucial element of global policy. Central banks are inextricably linked to their implementation and face the associated challenges.
Fourth, supporting the defense effort has become integral to our mandate in times of war.
We made difficult yet necessary steps in 2022 to provide short-term assistance to the government’s financing for defense. The war has caused an unprecedented increase in Ukraine’s budget needs. The war cannot be put on hold. It is impossible to find a means of budget financing in a couple of days, so the NBU had to make the swift and sensible decision to resort to monetary financing.
Simultaneously, it had to develop a remediation plan to avoid monetary financing in the future. Cooperation between fiscal and monetary authorities is an integral element of such a plan. This matter is frequently discussed at global conferences – I’ve heard it emphasized by our IMF and ECB (European Central Bank) colleagues.
We have gained extraordinary experience.
The reboot of our relations amid the full-scale invasion allowed us to revive the domestic debt market and avoid monetary financing in 2023. We successfully restored confidence in the local currency, easing pressure on the exchange rate and prices. As a result, we effectively mitigated the risks of forced monetary financing. The NBU’s independence played a crucial role in this.
As a result, the inflation that peaked at 27% in 2022 decreased to the pre-war inflation target of 5%. We successfully halted the decline in economic activity and transitioned to gradual recovery. Last year, the GDP grew by more than 5% after a nearly one-third slump in 2022.
Ukrainian authorities' unity and mutual respect for each other’s mandates allowed us to prove our capability and raise the required finances. I want to thank Ms. Kristalina Georgieva (the managing director of the IMF) for the International Monetary Fund’s trust, support, and leadership, which consolidated the donor coalition around Ukraine. I hope that this collaboration will persist. This year, the significance of international support and the consolidation of efforts will not diminish; they will only intensify. The war continues.
Thus, my fourth insight: Efficient cooperation with fiscal authorities and international partners not only provides resources for implementing the central bank’s mandate but also serves as a source of capacity.
And finally, my fifth point: It’s crucial to develop and implement measures to ensure steady recovery and post-war reconstruction.
This was clearly manifested through internal policy and cooperation agreements with our partners. While the first stage of our program with the IMF defined the key task as to “maintain macroeconomic, external, and financial stability, in order to strengthen Ukraine’s capacity on its war to victory,” the second stage focuses on recovery and reconstruction. This is mentioned in Ukraine’s Memorandum with the IMF over 80 times.
To achieve (these goals), it’s important to switch from anti-crisis measures to forward-looking and balanced policies. For this purpose, we moved from the fixed rate to ER-managed flexibility. We are cutting our policy rate. We are gradually easing FX market restrictions and moving toward our strategic objective: a return to inflation targeting. We are returning to normality, and I remain hopeful that we will continue on this path, despite the ongoing war. Strong economic recovery requires the revival of lending. This is why we have prepared our Lending Revival Strategy, which considers the realities of war, including the need to boost the country’s defense.
In conclusion, I would like to emphasize that Ukraine’s experience shows that, despite the central bank’s mandate being clearly defined, new challenges have allowed us to look for new ways to fulfill (our mandate), and these ways vary.
The most important insight from two years of the full-scale war is that we, as central bankers, should learn to take a broader perspective.
Today is the 716th day of (Russia’s) war in Ukraine. During this time, there have been 978 air raid alerts in Kyiv alone. The number and magnitude of our challenges have grown, and their impact extends far beyond Ukraine. I am convinced that everyone present at this conference agrees.
Russia’s full-scale, cruel, and destructive war against Ukraine has aggravated the risks of global war, geopolitical fragmentation, and de-globalization. It has disrupted the financial system’s “metabolism.” This challenge is global. Today, central banks have a compelling reason to acknowledge that Ukraine’s victory does not contradict their mandates but is an important element in fulfilling them. This is a matter of global security and global macro-financial stability, both now and in the future.
Editor’s Note: The opinions expressed in the op-ed section are those of the authors and do not purport to reflect the views of the Kyiv Independent.