Geopolitical rearrangement: Ukraine is considering moving from dollar to euro

Ukraine is beginning to consider deviating from the US dollar, possibly binding its currency more closely to the euro against the backdrop of the fragmentation of world trade and the growing ties with Europe, Central Bank Governor Andri Pishni told Reuters.

« This work is complex and requires high quality, multifaceted preparation, » he added in the most direct comment of a Ukrainian employee about a possible change.

The potential accession to the European Union, « enhancing the role of the EU in providing our defense capabilities, greater instability in the world markets, and the likelihood of world trade fragmentation » forces the central bank to review whether the euro should be the reference currency for Ukrainian bracelet instead of the dollar, Pistya said.

The dollar dominates international trade and represents most of the world reserves. Large economies, including Saudi Arabia and Hong Kong, bind their currencies to the dollar.

But with President Donald Trump, the United States has unfolded a trade war, introducing what may be the highest duties of a century, a move that made some observers question the future role of the dollar as a global reserve currency.

Now, in the fourth year of fighting Russia’s invasion, Ukraine also saw Trump temporarily terminated some of his military assistance to the country.

European leaders, including the EU, have promised to strengthen Kiev’s army to ensure that it can be the cornerstone of future security in Ukraine, but progress is difficult.

In the meantime, Ukraine has concluded an agreement that gives the United States preferential access to new Ukrainian mineral deals and funding investments in the restoration of the country.

Reuters

After Trump’s return to the White House, the dollar dropped by more than 9% to a basket of basic currencies as investors withdraw from possession of US assets. Some experts have warned not to associate the dollar power to its status as a reserve currency. Yet historically speaking, dollar assets have been related to alliances of security and military ties with Washington.

The US dollar transactions continue to dominate all segments of the currency market, Pishni said, but the proportion of transactions, denominated in euros, is increasing in most segments, albeit « for now moderate ». He did not give details.

Immediately after the Russian invasion of February 2022, the Central Bank imposed capital control and fixed the bracelet on an official course of about 29 for a US dollar. Ukraine was forced to devalue later due to the accumulation of fiscal imbalances.

In October 2023, the Central Bank moved from a solid fixed course to a managed currency course that uses the US dollar as a starting point – a tool for measuring currency interventions and for smoothing out fluctuations in the exchange rate.

The EU has launched membership negotiations with Ukraine and Moldova nearly a year ago, although a long and difficult road is coming before it can join the block. EU President Ursula von der Layen said in February that Ukraine could join 2030, provided that he continued to apply reforms to his political and judicial system at the current pace.

The revival of investment and consumer activity, thanks to the narrower ties with Europe and economic normalization, would help economic growth slightly accelerate over the next two years to 3.7-3.9%, Pishni said, although much of the economic trajectory depends on how the conflict will develop.

« The quick end of the war would obviously be a positive scenario with good economic results if it includes security guarantees for Ukraine, » Pishni said. It is still extremely important to admit that the economic benefits of ending war will probably take time to materialize completely. « 

Ukraine relies on external funding to help financing military efforts. Pishni said he expects $ 55 billion this year, which will not only cover the budget deficit, but also be used to allocate a public finance reserve for the coming years, when the aid volume is likely to start.

« We predict that Ukraine will receive about $ 17 billion in 2026 and $ 15 billion in 2027, » Pishni said.