Running a macroeconomy under fire

In February 2022 Ukraine's macroeconomic authorities faced simultaneous capital flight, a collapse in exports, a hole in revenue, an enormous spending requirement and a population converting savings into cash and foreign currency.

What was done immediately

The exchange rate was fixed and comprehensive currency controls imposed. Both are orthodox emergency measures and both carry known costs — a fixed rate drains reserves, and controls create a parallel market.

The banking system stayed open. That decision, taken in the first days, mattered enormously: a functioning payment system meant salaries, pensions and commerce continued, and a population that can access its money does not panic in the way one that cannot does.

The financing problem

Initially the central bank financed the deficit directly, which is monetary financing and produces inflation. It did, and inflation rose sharply. The authorities said plainly that this was a temporary emergency measure, then stopped doing it as external financing became predictable — which is the discipline that distinguishes a managed emergency from a monetary spiral.

The return towards normality

Once reserves were stabilised by external support, the fixed rate was adjusted and then replaced by managed flexibility, and controls were relaxed selectively. Inflation was brought down through conventional tightening.

Why it worked

Predictable external financing, an independent central bank that was allowed to act technically, and a willingness to state unpopular things publicly rather than pretend. The institutional independence built in the preceding years was the asset that made the rest possible.

In those weeks our only question was whether we would be able to pay tomorrow. Capital controls and a fixed rate contradicted the textbook and kept the payment system running — and for a business the payment system comes first and the theory second. Returning to normal gradually afterwards mattered as much as the first decisions and was discussed far less.