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.

National Journal
Marina Koren
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Marina Koren
May 6, 2014, 4:39 a.m.

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.

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.

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