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Marco Rubio's Plan to Save Ukraine's Crumbling Economy Marco Rubio's Plan to Save Ukraine's Crumbling Economy

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Marco Rubio's Plan to Save Ukraine's Crumbling Economy

A U.S.-backed financial strategy could help—and could hit a nerve with Russia.

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(Win McNamee/Getty Images)

The Ukrainian economy is in free fall. To slow inflation rates and protect the value of the country's currency, which has hit a five-year low, Ukraine's central bank has been hiking interest rates.

So far, the prognosis is not good.

 

But the United States can offer a remedy for the cash-strapped nation, according to Sen. Marco Rubio: strengthening Ukraine's currency, the hryvnia. In a Wall Street Journal op-ed published Monday night, the Republican from Florida proposed that the U.S. encourage the establishment of a Ukrainian currency board, a type of arrangement that pegs the value of a troubled currency to a more stable one—such as the dollar or the euro.

Here's how it works, as explained recently by economist Judy Shelton in the same paper:

A currency board is an exchange-rate arrangement whereby the monetary authority is required to exchange local currency for the foreign anchor currency at a fixed exchange rate. Absolute, unlimited convertibility must be maintained to ensure that all holders of the nation's notes and coins can convert them into the anchor currency on demand; this is best achieved by holding reserves equal to 100% of the nation's monetary base or slightly more.

Under a currency board, there is no central bank to intervene in foreign-exchange markets or manipulate interest rates.

 

A currency board, Rubio wrote, would help stabilize the hryvnia. The positive effects of that would then trickle down to the rest of the economy.

"Foreign investors could have confidence that the hryvnia is not in a death spiral, and Ukrainians would know that [Russian President Vladimir] Putin cannot annihilate the value of their personal savings," the senator said. "Such stability would encourage the nation under siege to maintain its faith in free people and free markets."

Under Rubio's proposal, the Treasury Department and the International Monetary Fund would work together to create the currency board. Ukrainian officials would run the system, but the IMF would provide "technical experience" to make sure it operates smoothly.

To near-bankrupt Ukraine, the idea of a currency board may not sound unreasonable. Its national bank has previously looked to the dollar in its attempts to manage the exchange-rate value of the hryvnia. And establishing a board would mean the hryvnia would be, for a time, immune to currency woes. The move also coincides with the interim Ukrainian government's main message: preserving the nation's sovereignty. "If Ukraine were to willingly embrace the discipline and accountability inherent in a currency board," Shelton wrote, "it would send a signal of economic self-assurance and underlying faith in the productive potential of its people."

 

Handing over some of the reins, however, means Ukraine will have less control over its domestic monetary policy, which could become problematic as its leaders try to navigate a crisis.

Currency boards have a proven track record in Eastern Europe. Estonia owes much of its economic success to its currency boards. Between 1992 and 1999, the Estonian kroon was fixed to the deutsche mark, and then became pegged to the euro until 2011. Bulgaria, Lithuania, and Bosnia-Herzegovina also maintain currency boards, anchoring their currency to the euro.

"This is where America and our European allies can throw a wrench into Mr. Putin's designs, rather than standing idly by as the hryvnia collapses under physical and psychological intimidation from Russia," Rubio wrote.

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He's right, at least in part. Giving Ukraine some financial advice won't stop Putin from watering the seeds of destabilization in eastern Ukraine. But Western involvement could annoy the Russian president, as it usually does, which risks retaliation from Moscow. Estonia eventually switched its currency over to the euro in 2011, and Lithuania plans to do the same next year. Setting up a currency board in Ukraine, whether it's anchored to the dollar or the euro, invites Western influence into Putin's backyard, something that he has always wanted to prevent.

This article appears in the May 7, 2014 edition of NJ Daily.

Don't Miss Today's Top Stories

Chock full of usable information on today's issues."

Michael, Executive Director

Concise coverage of everything I wish I had hours to read about."

Chuck, Graduate Student

The day's action in one quick read."

Stacy, Director of Communications

Great way to keep up with Washington"

Ray, Professor of Economics

Sign up form for the newsletter
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