To Release the Currency parking Brake: Proper management of currency risks

At the beginning of 2014 Ukraine has made a very important step – it moved away from a fixed exchange rate regime. The importance of this decision is difficult to overestimate, but it was only the first step towards a modern system of currency risk management.

Then there were during the war and occupation several waves of devaluations, later it was also caused by active issue of the Hryvnia. Thus, one has for a while (it was ‘out of season’) forgotten about the system of currency risk management, which should be brought to its logical conclusion. So, today every few million dollars that come in and go out from Ukraine – it is the whole story.

The ‘manual’ system of currency flows and currency risks management started, frankly speaking, to hinder economic development.

National Bank of Ukraine (NBU) gets foreign exchange market liberalization right. Until autumn currency swing has not yet begun, NBU even did some moderate steps in this direction.

What should we do?

The core system of currency risk management is the ability to predict the currency inflow and outflow. Thus, the task is to understand whether this particular Hryvnia jump is temporary or system-related one. If it is temporary, one should conduct interventions to smooth out fluctuations. If it is a system-related correction, people should just relax and allow the exchange course to find a new balance. To ‘forecast’ inflows of currency in advance, many restrictions, which so annoy business (contracts with rubber stamps, compulsory currency import within 120 days, 65% mandatory sale of currency, etc.), exist.

What is the alternative? In the developed world, currency futures perform a predictive function. It is your right to buy/sell currency in a month, or even three months on a predetermined rate. Why is it so convenient? Because an importer, who has currency futures in his pocket, will not feel nervous on every news of another currency collapse and will not take part in a national pastime named ‘buy the currency at a higher price’.

An exporter will not hold foreign exchange earnings to wait for a more favorable exchange rate, because his currency sales will be tied to commitments on futures. CFOs and treasurers will not play sweepstakes trying to guess the date and time when better to buy or sell currency. The NBU will for its part consider market expectations and could safely predict the flow of currency to control the situation.

There is the same case with the currency futures: to control something, you must first let it go.