Today's currency devaluation in Ukraine: What does it mean?

A Ukrainian government holding its wealth in US dollars just arrogated more purchasing to itself. It finances that arrogation by immiserating everyone else at home.

Very short note.

This news just rolled in:

Ukraine devalues hryvnia currency by 25% against U.S. dollar

Reuters, July 21, 2022

What does this mean?

A few months ago, the Ukrainian government had pegged the Hryvnia (UAH) to about 29.25 Hryvnia to the dollar (USD).  Today the government changed the peg to about 36.57 UAH to the USD.  That amounts to a devaluation of nearly 24%.

The Ukrainians are effectively using the US dollar as a unit of account the same way the Romans had used gold as a unit of account.  (Indeed, just about everyone had used gold as a unit account, on and off, since forever.)  The Ukrainian government may be sitting on top of a lot of dollars.  It might also anticipate getting a hold of more dollars from the United States going forward.  We had, for example, recently given them $40 billion.  That $40 billion would have secured nearly 1.18 trillion old UAH.  That same $40 billion would now secure more than 1.46 trillion new UAH. 

Going forward, the government can use its dollars to pay off obligations that had been enumerated in Hryvnia pre-depreciation with new, depreciated Hryvnia.  Basically, the government affords itself a favorable USD to UAH exchange rate.  It gives itself a 24% discount on obligations that had been fixed pre-devaluation.

And what might those obligations be?  Supply contracts?  Government salaries?  Whoever holds on to those obligations effectively ends up bearing a 24% cut in their receipts. 

Going forward, of course, everyone will know to enumerate transactions in the new, depreciated Hryvnia.  Anyone who owns real assets can know to bump up their valuations by as much as 24%.  The people who manage the grocery stores will know to bump up prices.  Anyone negotiating new contracts will know to demand higher rates. 

So far, so good, but there is a cost to the devaluation. Everyone at home sitting on their modest stashes of Hryvnia will know that their store of wealth will have been diminished by 24%.  Anyone holding on to a lot of dollars will thus find their buying power vastly enhanced, but that enhanced buying power has to come at the expense of others.  It comes at the expense of others who are mostly holding Hryvnia. 

The government has passed off its devaluation as a measure to enhance the competitiveness of Ukrainian exports.  (Is anyone exporting anything these days?)  But, really the government is just socializing the costs of its spending.  It arrogates to itself more buying power in the economy, but that buying power has to come from somewhere.  It comes from immiserating everyone else.  That immiseration manifests itself as inflation.

One can imagine that, to protect themselves from further immiseration going forward, people of modest means might themselves start doing some volume of business in dollars.  During the “transition” in the 1990’s for example, people might have preferred to do business with visitors in dollars or Deutsche Marks.  “Bundes, Bundes,” they might have demanded, meaning Deutsche Marks put out by the German central bank, the Deutsche Bundesbank. They would do this, because they had more confidence that the stewards of these other currencies were less likely to impose big shots of depreciation.

Various Roman emperors were famous for pulling off such stunts.  Some of them imposed one-off devaluations of the currency, the denarius.  The Roman authorities could do this, because they knew that they could turn around and convert gold or silver into new, depreciated denarii.  So, yes, devaluation would induce instant inflation.  And, yes, anyone holding on to real assets would have seen their nominal valuations rise with that same inflation.  But everyone holding on to obligations that had been fixed pre-devaluation would find themselves effectively financing the authorities’ grab for buying power.  So, why would anyone have ever done business in a currency susceptible to manipulation when they could have resorted to gold and silver themselves?  Had the authorities required exchange in denarii?