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NBU 2022 Annual Report: Safeguarding Macrofinancial Stability and Public Confidence despite Unprecedented Wartime Challenges

NBU 2022 Annual Report: Safeguarding Macrofinancial Stability and Public Confidence despite Unprecedented Wartime Challenges

The NBU has published its Annual Report for 2022, which describes the central bank’s efforts and summarizes changes that took place in Ukraine’s financial system and economy during a year marked by unprecedented trials and tribulations posed by the full-scale war.

Thanks to the NBU’s comprehensive efforts, the Ukrainian financial sector came into the year 2022 with performance indicators that laid the reliable groundwork for stable operation and further development:

  • a strong and well-capitalized banking system with all-time record profits of UAH 77.5 billion in 2021
  • a stable and highly liquid FX market due to the transition, since 2015, to floating exchange rates
  • almost USD 31 billion in international reserves
  • successful experience of inflation targeting, with price growth decelerating at the end of 2021 even as in most other countries it sped up
  • a competitively high level of digitalization of the Ukrainian financial sector with the development of the cashless economy and methods for remote identification and verification of financial institutions’ customers, in particular through the NBU BankID System.

At the same time, the NBU factored into its forecasts and requirements for the banks’ business continuity plans the risk of an escalation of the war with russia. Clear action algorithms were developed to ensure the reliable and stable operation of the banking system under various crisis conditions and to safeguard retail deposits and the continuity of payments.

Such a solid foundation of the financial system, as well as early efforts to prepare for worst-case scenarios, has played a decisive role since 24 February 2022.

The outbreak of the full-scale war

As russia launched the full-scale invasion, the NBU’s and Ukraine’s primary goal became to endure, to hold the lines of defense on every front, including the financial one. The NBU’s main objectives during this period:

  1. Ensuring the uninterrupted operation of the banking system, the electronic payment system, continuity of cashless payments, setting clear rules for the functioning of financial institutions in conditions of russian aggression:
  • The official exchange rate of the hryvnia against the U.S. dollar was fixed to prevent a destabilization of the FX market.
  • A number of temporary administrative restrictions on FX transactions and cross-border movement of capital were imposed to limit unproductive capital outflows and protect gold and FX reserves.
  • The procedure for uninterrupted operation of the banks was identified, and action was taken to maintain their liquidity through refinancing instruments.
  • The requirements for the work of the banks were eased as much as possible. Corrective actions for violations caused by the war were suspended. The introduction of new regulatory requirements was postponed.
  • The regulation of the market of nonbank financial institutions was relaxed.
  1. Quelling panic-driven demand from households for cash, and maintaining confidence in the banking system:
  • The unlimited resupply of ATMs with cash was organized. The possibility of getting cash back during checkout at retail chains was implemented, so that customers had free access to their funds.
  • Further full-fledged and reliable operation of the payment infrastructure and uninterrupted servicing of cashless payments without restrictions were ensured.
  • The banking system’s resilience to cyberattacks was reinforced. The use of cloud services by the banks was ensured, so that in the event of destruction of physical infrastructure, the banks would be able to quickly retrieve all necessary data and go back to business as usual.
  • To support Ukrainian citizens who were forced to go abroad as they fled the war, and to meet their emergency needs, the withdrawal of cash from Ukrainian-issued cards abroad was not prohibited, and the possibility of exchanging cash hryvnias for local currency was implemented in 10 partner countries.
  1. Ensuring Ukraine’s financial capacity to defend itself and shift the economy into military mode:
  • The central bank urgently transferred to the state budget almost UAH 19 billion, the entire amount of the NBU’s distributable profit for 2021.
  • Direct purchases of government bonds were launched to avoid a collapse of public finances and ensure the financing of critical government expenditures on security and social needs (UAH 400 billion in 2022).
  • Special accounts were opened to collect donations for the Armed Forces and humanitarian purposes.
  • Interaction with international partners to obtain financial assistance was intensified. In an unprecedented global effort to sustain Ukraine in 2022, the country received more than USD 32 billion in aid.

In the earliest months of the full-scale war, the Defense Forces of Ukraine showed the world that Ukraine was able not only to resist with dignity, but also to effectively liberate its land from the russian invaders. The Ukrainian people manifested an impressive strength of spirit and unity. All of this helped galvanize international support for Ukraine and gradually solidify the faith in Ukraine’s Victory. With these successes also came an understanding that the war would not end in a few months, and that the enemy would try to wear us down economically by targeting, among other things, the financial system.

A time of the “new normal”

Even as air raid sirens, missiles, and explosions tore the sky apart over Ukraine, the NBU laid the regulatory groundwork for a new financial sector architecture, one designed to withstand the challenges of a war of attrition, to support the economic recovery, and to seamlessly integrate with the European space after the war.

The NBU’s primary objectives during this period:

  1. Protecting exchange-rate and price stability, as well as households’ hryvnia savings:
  • The key policy rate was increased by 15 pp, to 25%, in June 2022, with the aim of making hryvnia-denominated instruments more attractive, easing the risk of a currency crisis, and preventing an inflationary spiral from unfolding.
  • The official exchange rate was adjusted from UAH 29.5  per dollar to UAH 36.6 per dollar to sharpen the competitive edge of Ukrainian manufacturers, make exchange rate conditions more uniform for different groups of businesses and households, and maintain the wartime sustainability of the economy.
  • Special deposit instruments were introduced to reduce the demand for FX cash and to shield households’ hryvnia savings from the risk of exchange rate volatility.
  1. Preventing speculations in the cash FX market, and combating payment card tourism:
  • FX restrictions were calibrated to strike a balance between promoting economic activity and preventing unproductive capital outflows.
  • The resupply of bank vaults with FX cash was ensured. 
  • The operation of currency exchange offices was regulated.
  1. Structuring the work of nonbank financial institutions and payment service providers:
  • Approaches to regulatory requirements were updated to make them meet the needs of the time and conditions of operation. The requirements were significantly simplified at the onset of the war.
  • The procedure for the oversight of the payment infrastructure in Ukraine was updated. The procedure for authorizing the activities of financial payment service providers was established to ensure the further reliable and uninterrupted functioning of the payment infrastructure in line with the Law of Ukraine On Payment Services.

During this period, the adverse effects of the monetary financing of the state budget deficit began to manifest themselves with increasingly clarity, prompting the NBU to take proactive steps to launch alternative mechanisms that would enable the gradual shift away from this instrument.

Transitioning to a strategy of gaining strength

In October 2022, the NBU and the Ministry of Finance joined forces to revitalize the domestic debt market with the aim of abandoning the monetary financing of the budget in 2023. The central bank stepped up efforts to clamp down on gambling businesses’ unlawful tax evasion schemes, which involved the banks. In the months that followed, these measures contributed to a significant increase in tax revenues. International financial assistance to Ukraine picked up. Specifically, the IMF on 7 October allocated USD 1.3 billion in a second tranche of emergency financing.

In response to the pressing challenges of the new period, the NBU updated its organizational chart and added another deputy governor to the NBU Board. Specifically, to make the regulation of the banking and nonbank financial markets more effective, the NBU decided to combine its banking and nonbank regulation methodology functions into the Financial Stability reporting line, which also includes the Financial Stability Department.

russia’s missile attacks against Ukraine’s energy infrastructure posed a new challenge for our country. The free world was in equal measure appalled by this terror and amazed at how Ukrainians responded to it: with indomitability, unity, and mutual assistance.

At the NBU’s initiative, the banking sector’s response to russian-perpetrated missile barrages was to create POWER BANKING, a network of bank branches designed to operate and provide banking services to clients throughout Ukraine even in emergencies and protracted power outages.

“The joint bank network is an unprecedented example of consolidation and partnership between Ukrainian banks, which chose daily coordination and exchange of experience over competition so that together they could effectively meet the challenges of the full-scale war,” NBU Governor Andriy Pyshnyy said.

POWER BANKING laid the foundation for a deeper and closer communication between the central bank and the banking sector. Later on, this project became one of the key factors in strengthening monetary transmission, implementing a new operational design of monetary policy, and increasing the attractiveness of hryvnia deposits.

Joint efforts by the NBU, financial institutions, and state leadership in 2022 resulted in:

  • preserving macrofinancial stability, preventing destabilization of the financial system by the enemy
  • ensuring emergency financing of public defense expenditures and creating conditions for a transition to monetary-financing-free funding of state budget needs in 2023
  • securing exchange rate stability, maintaining control over the FX market
  • slowing inflation already at the end of 2022, despite massive missile attacks, problems with the energy supply, the occupation of part of Ukraine, and the continuation of the active phase of hostilities
  • increasing the NBU’s international reserves primarily due to the active deepening of cooperation with international partners and because of Ukraine’s ability to adequately overcome wartime challenges to macrofinancial stability
  • introducing a new model of cooperation with the IMF, which became key to successful implementation of the Program Monitoring with Board Involvement in 2023 and the launch of a new four-year IMF-supported program of financing, which made it possible to provide Ukraine with an unprecedented package of assistance worth a total of more than USD 115 billion
  • collecting and allocating, from the NBU’s designated accounts, UAH 22.3 billion for the needs of the Defense Forces of Ukraine, and UAH 920 million for humanitarian purposes
  • safeguarding trust in the banking system and the central bank at the most critical moment in the history of independent Ukraine.

International financial frontline

In addition to doing everything in its power to raise international financial aid and support in vital matters, including the protection of displaced persons, the NBU at the onset of the war began to put efforts into something that is not typical of peacetime central banks: the search for ways to exert financial pressure on the aggressor countries in order to thwart their financial capability to wage war on Ukraine.

The focus was placed on conveying to international partners the importance of imposing sanctions on the aggressor state’s financial system, as well as identifying vulnerabilities that could significantly disrupt the enemy’s ability to bankroll its war machine’s assault on Ukraine. Restraining any and all financial activities of russian-affiliated entities in Ukraine became another area of focus for the NBU.

The results of these efforts, including the NBU’s push at the international level to subvert the aggressor’s financial capacity to wage war on Ukraine, were as follows:

  • The FATF suspended russia’s membership.
  • As part of a broader package of sanctions against russia, the EU decided to disconnect from SWIFT the russian banks involved in financing the war against Ukraine.
  • The global financial community introduced restrictions on the use of russian-issued “mir” cards outside russia.
  • International payment systems Visa and Mastercard completely halted their operations in russia.
  • The Bank for International Settlements suspended the russian central bank’s access to BIS services.
  • Bloomberg L.P. and London Stock Exchange Group (LSEG), which includes the Refinitiv platform, deprived russia of access to their products and services.

“Looking back at 2022 and its legacy, the National Bank of Ukraine expresses its gratitude to every Ukrainian, to employees of financial institutions and public authorities, to international partners, for the unity and trust that helped overcome this year. But most of all, we express our respect and gratitude to the defenders of Ukraine, because without their heroic struggle, this year may not have happened at all,” said Andriy Pyshnyy.

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