Why the hryvnia stopped moving: the mechanics of a managed float

The hryvnia collapsed in 2008 and again in 2014, in each case after a period during which the rate had been held fixed against the dollar while the underlying position deteriorated. From 2015 onward it behaved differently, and the reason is a change of regime rather than a change of luck.

What was wrong with the old arrangement

A fixed exchange rate with an open capital account requires the central bank to defend the rate with reserves whenever the market disagrees with it. That is sustainable while reserves are large relative to the pressure, and not otherwise.

The deeper problem is what the fixed rate does to behaviour. If everyone believes the rate will hold, borrowing in foreign currency looks cheap and everyone does it. The build-up of unhedged foreign currency debt is not a side effect of a peg; it is the predictable consequence of one.

Both Ukrainian collapses followed that sequence exactly, and in both cases the damage came less from the devaluation itself than from the balance sheets it destroyed.

What replaced it

Three changes, adopted together from 2015 and 2016.

Inflation targeting. The central bank stopped targeting the exchange rate and started targeting consumer price inflation, with a published target, published forecasts and scheduled policy decisions. The exchange rate became an outcome rather than an objective.

A flexible rate with intervention limited to smoothing. The central bank intervenes to reduce volatility and to accumulate reserves, not to defend a level. The distinction sounds academic and is the whole thing: interventions that lean against a trend are affordable, interventions that reverse one are not.

And a prohibition on foreign currency lending to unhedged retail borrowers, which removed the mechanism that turned a currency move into a banking crisis.

Why it worked

The regime produced several years in which the currency moved in both directions in a narrow range, inflation fell into single digits, and reserves rose to the highest level in the country's history.

That outcome required more than the regime. It required an independent central bank with technically competent leadership, a banking system that had been cleaned of related-party lending, and a fiscal position that was not forcing monetary accommodation. Remove any one of those and the framework does not hold.

The wartime modification

The rate was fixed administratively at the outbreak of the full-scale invasion, which was the correct decision under the circumstances — in a genuine emergency a fixed rate provides a nominal anchor when nothing else does.

It was devalued once in 2022 and moved back to a managed flexibility in 2023. Capital controls remain in place and are the mechanism that makes the arrangement workable.

What a business should take from this

Three points.

Do not treat a stable rate as a permanent feature. Stability under a managed float reflects the balance of flows at a given moment, and the flows currently include very large external assistance. Model your exposure against a scenario in which that changes.

Match your currencies regardless. The lesson of 2008 and 2014 is not that devaluation is unpredictable; it is that unhedged balance sheets convert a manageable price change into an unmanageable solvency problem.

And watch the reserve position and the assistance calendar rather than the daily rate. Those two series contain almost all the information about where the currency goes next, and they are both published.

Related in this archive

• Ease of doing business: what the rankings measure, and what they miss
• The pandemic year: a milder contraction on a weaker base
• The 2015 reform record: what was actually achieved in the worst year
• Ukraine Annual Review 2018: growth against a rising wage floor

A currency becoming boring is a measurable gain in my line of work: if you update the price list once a year, the rate is predictable. In 2008 and in 2015 I had to do it monthly. The success of the managed float is not in holding a level but in making planning possible — and in industry that is the most valuable thing there is.