Ukrainians are stashing away 70 billion dollars

Ukrainians are keeping almost 70 billion dollars outside the banking system, Olena Shcherbakova, Director of the National Bank of Ukraine’s Monetary Policy Department, says. In other words, the populace is keeping at home a very sizable financial reserve which the economy badly needs today. Businesses, banks, and the state itself need free credit money to carry out a number of investment projects. But the owners of this reserve prefer to have the money at hand. Twenty years of independence seems to be a sufficient period of time for the populace to learn how to manage their finances. Yet there still remains some mistrust in the economic system and its components. Why do the Ukrainians go on keeping money at home? How can these billions be channeled into the economy and fetch a profit to its owners and the country as a whole? The Day addressed these questions to some experts. These experts say there are several causes of this mistrust.

“Firstly, very little time has passed since the 2008 crisis which essentially affected the interests of every bank depositor,” Viacheslav Yutkin, First Deputy Chairman of the Prominvestbank Board of Governors, says. And the frequent media reports that quote governmental officials as saying that a moratorium may be imposed on the withdrawal of call deposits and other savings of individuals do not exactly encourage banks to acquire money, he continues.

Secondly, the populace is still showing a low level of trust in the banking system. “This level is growing at a slow pace,” Svitlana Cherkai, Deputy Chairperson of the Erste Bank Board of Go-vernors, says.

Thirdly, people keep their money at home because most of them do not know how to rationally manage it, Platinum Bank General Manager Greg Krasnov adds. In his words, the fact that millions of Ukrainians do not have a banking account only confirms their financial illiteracy.

The fourth cause is that people do not believe in the hryvnia’s stability, says Oleksandr Okhrimenko, president of the Ukrainian Analytical Center. Yet, in his view, the economic results are showing that the risk of hryvnia devaluation will not increase until after the parliamentary elections in the fall of 2012.

Oleksandr Valchyshen, Investment Capital of Ukraine (ICU) chief analyst, thinks that stashing away money was caused by a high level of mistrust in the government’s economic policies. In his opinion, high inflation in Ukraine and, hence, high discount rates (higher than hard-currency loan rates), the instances of major devaluation, and all-embracing dollarization of the economy are the cornerstone of this mistrust.

By contrast, Roman Shpek, a se-nior advisor at Alfa Bank (Ukraine), does not quite believe that 70 billion dollars are being stashed away. In his view, this money is outside the banking circulation. In other words, the Ukrainians use a part of this currency to vacation abroad or to do some business. Besides, he adds, this cash (in dollars and in hryvnias) is used for illegal import and cross-boarder trade payments. According to Shpek, the main cause of this is the shadow eco-nomy. “While Ukraine’s budget deficit is 30-35 billion hryvnias, the illegal market is about 500 billion. So if at least 10 percent of this money came into Ukraine’s budget, we would have a deficit-free budget,” he says.

The experts do not believe that any painstaking efforts are needed to channel individual savings into the banking system.

Shpek suggests pursuing a pragmatic and predictable macroeconomic policy, reducing inflation and the budget deficit, developing the export potential, and building a predictable and stable system of taxation, instead of continuously changing the laws of economic development. “Unfortunately, the president’s efforts to reform the economy and make it competitive, as well as to build an affluent society (and, hence, a strong state), have not yet produced the expected effect. The executive branch continues to ‘manually’ manage the economy and introduce non-market-style restrictions (for example, about the export of grain). The government has not yet focused on structural reforms, and the macroeconomic stability is all too fragile,” he further explains.

Yutkin has calculated that individuals have returned over 10 billion dollars to banks since the post-crisis recovery began. But he does not think all the 70 billion will be returned. Yet he believes banks can acquire up to

50 percent of these savings within two or three years provided the go-vernment and the NBU make a concerted effort. Yutkin says 35 billion dollars will lead to an additional annual GDP growth rate of 5-6 percent.

Okhrimenko continues that the right policy is saying “no” to excessive restrictions on banking deposits. What is not conducive to the return of money to the banking system is the National Bank’s latest innovation (exchanging currency on production of internal passports only), he says. In Okhrimenko’s view, this will further liven up the black market of currency. “A part of the individual hard-currency savings will go right there,” he says.

It will be recalled that the NBU at first decreed that a photocopy of the passport’s first page would be enough for exchanging currency worth 50,000 hryvnias at most. Prime Minister Mykola Azarov of Ukraine backed this initiative but then said it should be modified in order not to infringe the freedom of individuals too much. Then the National Bank announced that the restriction would be eased and small amounts of money could be exchanged without a passport. Experts think the banking regulator is thus trying to keep the hryvnia from a likely pressure caused by people’s expectations of devaluation, for in August 2011 the Ukrainians bought much more hard currency from banks than they sold it to them. On the whole, the purchases of hard currency surpassed the sales of it by 7.83 billion dollars in the eight months of 2011 against 9.73 billion dollars throughout 2010.