Ukraine’s Central Bank At War

Deputy Governor of the National Bank of Ukraine, Sergiy Nikolaychuk, talks to Global Finance magazine about how the central bank is keeping the lights on and the economy moving amid a brutal war.

When he is not busy safeguarding Ukraine’s financial stability, which is a difficult job these days, the Deputy Governor of the National Bank of Ukraine (NBU), Sergiy Nikolaychuk, and his colleagues—many of whom work from shelters, vans, and basements in their homes since the Russian invasion began—spend their time lobbying the international financial community to impose further sanctions and restrictions on Russia.

“Since the beginning of the war, we’ve had a lot of calls with colleagues from other central banks,” says Nikolaychuk, speaking from an undisclosed location in Ukraine to protect his safety. “Everybody wants to support us. Last week we requested the BIS [Bank for International Settlements] suspend all operations with the Russian central bank. We are very grateful for our colleagues who did that. Nowadays, the global central banking community does not want to do any business with the Russian central bank.”

The NBU had a relationship with the Russian central bank before the 2014 annexation of Crimea. But since then, relations have soured to the point where they are now non-existent. Nikolaychuk says the NBU is determined to close any loopholes to decrease the possibility for Russia to continue financing its invasion of Ukraine. Although Visa and Mastercard have suspended operations with Russian banks, the deputy governor says there are still concerns relating to card transactions that use the Russian payment system, MIR.

The NBU has appealed to the leadership of the central banks of Armenia, Kazakhstan, Tajikistan, Vietnam, Turkey, and the Kyrgyz Republic to suspend any transactions with payment cards of the MIR payment system in their countries. It has also asked China’s bank-card service provider, UnionPay, to adopt similar measures taken by Visa and Mastercard to stop servicing operations with payment cards issued by Russian banks.

“We have not received an official response yet,” says Nikolaychuk. “But what we see from the behavior of many companies in the West is that it has started to be very toxic to continue their operations in Russia because nobody wants to be associated with killing civilians, including children, in Ukraine.”

The NBU has also called on global insurance market participants not to insure risks from Russia and Belarus and for the world’s largest trading, news and financial data platform providers, Bloomberg and Refinitiv, to terminate access to Russian and Belarussian institutions.

 “There is a huge effort of all staff in the central bank to counteract this aggression on the financial front,” explains the deputy governor, adding that the NBU has been on a war footing for the past eight years since Russia annexed Crimea. “We had a lot of different plans of what to do in different circumstances. Not many people expected we would need to realize these plans, but we seriously prepared them. So, when the war hit us, we were ready.”

Nikolaychuk is thankful for the international community’s support for his war-torn country. “But I would like to ask for more support,” he says. “We don’t consider this only as a Russia-versus-Ukraine war. For us, the war is a threat to democratic values and the whole civilized world. We have to survive and win this war, but it is only possible with your support.”

It’s not every day that a central banker directly pleads to the international community for financial support. Still, with more than 10 regions of the country coming under attack from Russian forces, including the capital Kyiv, the International Monetary Fund (IMF) predicts a “deep recession” this year for the Ukrainian economy, which could contract by as much as 35%, as the ongoing conflict causes domestic demand and exports and imports to contract sharply.

Central bank estimates suggest that most of the military hostilities are occurring in the south, the north and the east of the country, which produce approximately 55% of the country’s GDP. “Approximately half of Ukraine’s businesses are suspending operations completely or quite sizably,” says Nikolaychuk. “The other half shrank their activities, but they remain on solid ground. In the western region, manufacturing continues to operate, more or less as normal, but that is not the case in the south and eastern parts of the country where the major military hostilities are taking place.”

The cost to rebuild Ukraine’s economy and infrastructure will be substantial, says Nikolaychuk. “We will not have enough resources inside the country and will need sizeable external support.”

Ukraine has already received $1.4 billion in financial assistance from the IMF under the Rapid Financing Instrument and additional funding from the World Bank and the European Commission.

In addition to Western support, the NBU wants to use the assets of Russian oligarchs and the Russian central bank, which have been frozen by Western countries, to help rebuild the country once the war is over. “For us, using these assets is a reasonable way of financing the rebuilding of our economy and infrastructure, taking into account the cause of the inquired damage,” says Nikolaychuk.

As the fighting inside Ukraine intensifies, the deputy governor insists he is safe for now but says it is becoming increasingly difficult to find a safe haven within Ukraine. “During the last week, Russian forces started to actively bomb not only military locations but also places where civilians live and work,” he says.

Being a central banker in the middle of a war means he spends less time focused on pure monetary policy—inflation targeting or adjusting the key policy rate. At its last meeting, the NBU kept its key policy rate at 10% despite inflation rising to almost 11% in February.

“We didn’t even try to do some window dressing or pretend to do monetary policy, the normal way,” says Nikolaychuk. “We will return to orthodox monetary policy when the war is over, and we don’t have any invaders on our land.”

As the country is operating under martial law, the focus has shifted to safeguarding financial stability and ensuring the proper functioning of payments in Ukraine, which Nikolaychuk says is a critical element in defending the country against the Russian invaders. “We also try to minimize the panic behavior of the population and businesses and keep our coffers as full as possible, with the support of international partners, and finance all the critical needs of the army and the government,” he explains.

The NBU set up fund-raising accounts on its website to accept donations for the Ukrainian Army and humanitarian purposes. More than $400 million has been raised so far. It has also bought war bonds to finance necessary government expenses and limited cash withdrawals from the banking system to 100,000 Ukraine hryvnias (approximately $3,300). There were some pressures on the banking system on the first day of the war, but Nikolaychuk says these actions and the solid financial stance of the country’s banks helped stabilize the situation. “Every day, we adjust our response and reaction to new circumstances. But so far, it seems we were better prepared, compared with the Russian financial system, for such new realities,” he adds.