Wherever exchange takes place, the law of supply and demand operates. This is, in general, an obvious pattern of human activity that even the ancient Xenophon formulated as: “Things given to us in excess are valued less.” It is understood that “excess,” just like “shortage,” is a subjective matter. When these subjective evaluations appear on the market, prices form.
Of course, it hardly needs stating that money is also a commodity, bought and sold like any other, and therefore its price is determined by supply and demand. Any schemes, diversions, or manipulations—including the alleged desire of authorities to “inflate away debts”—all operate through supply and demand. In other words, we can influence price only by influencing supply or demand.
So, for example, yesterday the NBU was selling dollars to itself and got a rate of 22 hryvnias per dollar. After that, it closed trading and, satisfied, stepped away for a few days. Why did this happen? Because the NBU was selling money to itself. Of course, this is also a method—similar, say, to directive price-setting straight from the office, bypassing any trading or its imitation—but it cannot do anything with the law of supply and demand. People persistently value more highly what is given to them in shortage. And so, instead of an open market, the black market begins to operate—we went through all this in the USSR and in the 1990s.
However, we are not concerned with the black market, but with what will happen to the hryvnia and what this means for us. To find out, we need to take at least the most cursory look at supply and demand.
Supply of dollars. New dollars come to us from exporters. At the same time, exporters in the broadest sense—meaning all those who sell anything for dollars, such as migrant workers and IT specialists—also fall into this category. It is understood that the greater the supply of dollars, the lower their price in hryvnias, all else being equal. What do we have on this front? Ah, yes: the obligation for exporters to sell a portion of their foreign currency earnings. Numerous restrictions on earning income in foreign currency and withdrawing currency from deposits for individuals and businesses. That is, you want to and can earn in dollars, but then the state appears and says: “Aha, what a clever one! We also want dollars. We won’t give you your dollars, and we’ll give you hryvnias at the exchange rate we’ve painted.” What will you do? Not someone else, but you personally? Correct. And so they do the same. For example, one option that comes onto the agenda is: “It’s time to get out of this country.” In general, the state has built effective barriers on the path to growing dollar supply in the market.
Supply of hryvnias. But on this front, we are more than fine. It is understood, again, that all else being equal, the more hryvnias in circulation, the higher the value of dollars in hryvnias. Well, that’s precisely what we are achieving. Of course, no official figures can be trusted, but they can illustrate the order of magnitude. And these very figures say that the banking system produced over 200 billion new hryvnias last year, and in just two months of this year—already 70 billion. That is, the dollar exchange rate would have risen even if everything was fine. But everything is far from fine.
Demand for dollars. It is understood that in conditions of instability, demand for dollars is constantly growing, and the greater the instability, the higher this demand. Of course, the dollar is the same piece of paper as the hryvnia, and the American Fed prints it on an industrial scale, but there is one “but”—namely, the “sizes of the economies” in which the dollar and hryvnia operate. The hryvnia economy is microscopic and practically indistinguishable against the backdrop of the dollar economy, and this means that hryvnia inflation has a much more obvious and noticeable effect on us than dollar inflation. Therefore, a Ukrainian traditionally prefers the dollar—and is right to do so. War increases the uncertainty of the future for a Ukrainian, and therefore he converts any excess hryvnias into dollars or goods, and, again, is right to do so.
Demand for hryvnia. Demand for fiat currency is an interesting and, as they say, “brain-bending” topic—in our case, it can be said that it is falling. Inflation and general uncertainty make the public get rid of hryvnias. So here is the “objective” (of course, greatly simplified) picture: demand for dollars is rising, dollar supply is falling, hryvnia supply is rising, demand for hryvnia is falling. What will happen when all these circumstances converge? Correct: a rise in the dollar exchange rate.
Let us note that if we understand that the main problem for the “economy as a whole” is not the magnitude of the ratio between the hryvnia and the dollar, but the realism of this ratio (roughly speaking, the situation when there are always dollars for sale at exchange bureaus), then in the previous paragraph there is also an answer to the question “what to do,” if it is addressed to the state. The state is powerless to directly influence demand for dollars and demand for hryvnia—that is, it is powerless in the fight against the uncertainty of the future. But it can influence the supply of dollars by removing idiotic restrictions, and the supply of hryvnias by stopping the printing presses. Of course, it will not do this, because that’s not why it sits there, and I wrote about this simply to remind everyone who is to blame for everything. And, by the way, in the debate about what “hits the exchange rate” more—the budget deficit or Hontareva with her refinancing and other open and hidden emission—the winners are both sides.
In conclusion, a few words about two popular topics related to the dollar exchange rate—speculators and prices. We are all speculators. Everyone seeks to sell at a higher price and buy at a lower price, and this is normal. Speculators work with the same uncertainty of the future—it is their bread. For example, someone transferred a deposit from dollars to hryvnias. What was this person doing? Speculating. He believed that the hryvnia deposit would be more profitable. I think that in most such cases, the future showed this assumption was wrong. Speculators do not create the dollar exchange rate. That is the work of supply and demand. Speculators earn (or lose) on their forecasts of its changes. Of course, in the short term, large speculations can greatly influence the exchange rate, but they cannot form it. Again, if this is considered an illness, the treatment is well known—more speculators and less regulation.
Now about prices. The devaluation of 1998 taught Ukrainians that the dollar exchange rate is not “automatically” linked to prices. Prices are supply and demand. Therefore, panicking at the sight of a rapid rise in the exchange rate is possible but not necessary. Prices will change, mainly in the direction of growth, but not all, not immediately, and not in the same proportion. In a crisis, the public reduces consumption, demand in many markets falls, which allows prices not to change much. One should also remember that competition always pushes toward lower prices—that is, neither the producer nor the trader is interested in price increases, and therefore they will do everything to keep prices unchanged.