[By Guancha Observer Network, Ruan Jiaqi]

According to a report by Reuters on the 7th local time, Andriy Pyshnyi, Governor of the National Bank of Ukraine, said that against the background of global trade fragmentation and the increasingly close relations between Ukraine and Europe, Ukraine is considering abandoning the US dollar as a reference currency and instead more closely linking its national currency, the hryvnia, to the euro.

In an email, Pyshnyi stated that Ukraine's potential "European integration" prospects, the growing role of the EU in strengthening Ukraine's defense capabilities, the drastic fluctuations in global markets, and the trend of global trade fragmentation have forced the National Bank of Ukraine to re-examine whether it should replace the US dollar with the euro in its monetary system.

He further revealed that in the foreign exchange market, although the US dollar still dominates in all fields, the share of transactions denominated in euros is gradually increasing in most areas, but "so far the increase has not been significant."

"This work (transitioning to the euro) is very complex and requires high-quality and comprehensive preparation," Pyshnyi added. Reuters pointed out that Pyshnyi's remarks are the "most direct" comments made by Ukrainian officials regarding the possibility of transitioning to the euro.

On August 4, 2023, in Kyiv, Ukraine, Andriy Pyshnyi, Governor of the National Bank of Ukraine, attended the ceremony for the issuance of Air Force Day commemorative coins held by the National Bank of Ukraine. Visual China.

The report pointed out that for a long time, the US dollar has dominated international trade and the global reserve system, including major economies such as Saudi Arabia and Hong Kong, which have pegged their currencies to the US dollar. However, after Trump's administration, the uncertainty of US economic policies has impacted the stable status of the US dollar, triggering questions about its future role as a global reserve currency.

Since Trump returned to the White House in January this year, the US dollar index (DXY) has fallen more than 9% against major currency baskets, investor confidence in US assets has declined, and large amounts of capital have withdrawn.

Reuters reported that although some experts believe that the strength of the US dollar should not be simply linked to its status as a reserve currency, historical experience shows that the amount of dollars held by countries is closely related to their security alliances and military ties with the United States.

Ukraine introduced its national currency, the hryvnia, in 1996, and has used the US dollar as a reference currency for decades. After the outbreak of the conflict between Russia and Ukraine in February 2022, the National Bank of Ukraine quickly implemented capital controls, fixing the exchange rate of the hryvnia to the US dollar at approximately 1:29. However, due to fiscal imbalances, Ukraine was forced to devalue its currency to alleviate economic pressure.

In October 2023, the National Bank of Ukraine adjusted its exchange rate regime, shifting from a strict fixed exchange rate to a managed floating exchange rate, still using the US dollar as a reference currency to measure foreign exchange intervention measures and stabilize exchange rate fluctuations.

According to media reports by Ukraine's "Apostrophe," the National Bank of Ukraine reported in late February that it had conducted its first regular review of foreign exchange market indicators, including the official exchange rate of domestic currency against foreign currencies, the book value of precious metals, and the reference value of the hryvnia against the US dollar.

At that time, the National Bank of Ukraine stated that "although the structure of trading currencies in Ukraine's foreign exchange market has established the US dollar as the key exchange rate currency, since before the war, the number of transactions in euros between financial institutions and customers has been increasing. The proportion of euro transactions in customer non-cash currency purchases has approached 50%. Considering Ukraine's vision of European integration, if this trend continues, it may raise the question of whether the main reference currency for the exchange rate should be shifted from the US dollar to the euro."

Financial analyst Andriy Shevchyshyn told "Apostrophe" that Ukraine's strategic tilt toward Europe and its urgent desire to join the EU are the core drivers of this change. From the fact that the scale of euro transactions increased significantly before the war, it can be seen that the idea of incorporating the euro into Ukraine's exchange rate system has been long-standing.

Shevchyshyn analyzed that binding to the euro will significantly reduce transaction costs and exchange rate risks when Ukraine promotes European integration projects, signs European trade contracts, and conducts cross-border business.

However, during the initial transformation, Ukraine's banking sector may face considerable challenges. He noted that "the redistribution of cash flow, adjustments to national financial statements, and updates to interbank transaction rules may cause disruptions."

"Now Ukraine is moving towards the euro in line with economic logic and is also a key step in the process of European integration," Shevchyshyn added, stating that the pegging of the hryvnia to the euro will not have a significant impact on the daily lives of Ukrainian people. "In the long run, the euro will be more widely accepted as a savings and exchange currency in Ukraine."

Vitaliy Shapran, an economist and former member of the board of directors of the National Bank of Ukraine, also agreed, saying that theoretically, the euro should become a more popular currency in Ukraine.

He also reminded that "this conversion process of the currency anchor depends not only on Ukraine's pace of integration into Europe but also on the expansion steps of the eurozone and is closely related to the extent of EU assistance in Ukraine's economic recovery. All these processes are long-term and will take more than a year."

According to Ukraine's 112 TV channel, quoting financial expert Oleksiy Kozyrev, Ukraine may link the hryvnia to the euro as early as the end of 2026 or early 2027. When transitioning to the euro, Ukraine must also consider economic feasibility and military risks.

According to a Reuters report, after the EU officially launched accession negotiations with Ukraine and Moldova last year, both countries accelerated their "Europeanization" process and actively sought to align their currencies with the euro in the monetary field.

On January 2nd this year, Moldova announced that it would change its reference currency from the US dollar to the euro, preparing in advance for integration into the European economic system. President Maya Sandu of Moldova said that over 60% of the country's trade and 70% of remittances are settled in euros, and this move will strengthen economic ties with the EU, bringing greater stability and predictability to all Moldovans.

For Ukraine, switching to the euro as a reference currency means aligning itself with Europe in international trade settlement, foreign exchange reserve allocation, financial market transactions, and other aspects. This will further strengthen economic ties between Ukraine and EU countries, reduce trade costs, attract more European investment, and help Ukraine's economic recovery and development.

Pyshnyi also mentioned in the email that as Ukraine's economic ties with Europe grow closer, investment and consumption activities will gradually recover, and the economy is expected to achieve moderate growth over the next two years, with a growth rate in the range of 3.7% to 3.9%.

However, Pyshnyi also pointed out that the outcome of the Russia-Ukraine conflict remains the key variable affecting Ukraine's economic trajectory. He wrote, "If security guarantees can be provided for Ukraine, ending the war quickly would obviously be a positive solution that would bring good economic benefits."

"However, it must be acknowledged that the economic benefits brought by the end of the war may take some time to fully materialize," he added.

Currently, the cost of the war in Ukraine is enormous, and the country heavily relies on external financing. Pyshnyi stated that this year Ukraine will receive approximately $55 billion in external funding support. This money can not only be used to fill the fiscal deficit but also reserve part of it as future public financial reserves to cope with the situation of reduced aid in the future. According to his predictions, Ukraine will receive approximately $17 billion in aid in 2026 and $15 billion in 2027.

This article is an exclusive contribution from the Guancha Observer Network and cannot be reproduced without permission.

Original source: https://www.toutiao.com/article/750188759732787/

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