Central Banking in Wartime: Lessons from Ukraine

Jul. 01, 2024

In times of conflict, central banks play a pivotal role in ensuring the stability of the financial system. The experience of the National Bank of Ukraine (NBU) during the ongoing war with Russia offers insights into how central banks can navigate and manage economic crises during periods of hostility.

During his recent visit to Stockholm, NBU Governor Andriy Pyshnyy engaged in a “Fireside Chat” with Sveriges Riksbank's Erik Thedéen to speak about the strategic shifts and key measures the NBU implemented to support Ukraine's economy through the full-scale invasion by Russia. Here is a summary of what was discussed: 

Ensuring Financial Stability 

One of the immediate tasks for the NBU was to safeguard the financial system against the chaos induced by the full-scale invasion by Russia that began on February 24, 2022, Pyshnyy said.

Acting swiftly to stabilize the economy, the NBU took key measures to ensure the liquidity of banks and the functionality of the payment systems. They provided substantial liquidity to the banking sector and ensured that all banking operations, including ATMs and online transactions, continued without interruption.

To prevent a financial meltdown, the NBU also imposed limits on cash withdrawals to prevent bank runs while ensuring that people had enough access to their funds for essential needs. This balance was crucial in calming public panic and maintaining trust in the banking system. 

"From the point of view of a central bank, it was a maximum concentration of the scariest nightmares and all troubles that could eventually occur in one moment of time," Pyshnyy said. 

Adaptive Monetary Policy 

The war necessitated a shift from the NBU's pre-war monetary strategies. Before the invasion, Ukraine employed a flexible exchange rate and inflation targeting regime. However, the war compelled the central bank to prioritize monetary financing of the budget deficit to support national defense efforts. This resulted in an inevitable rise in inflation, reaching 27% at its peak. 

The NBU had to innovate by introducing measures like the "Power Banking" project, which ensured that bank branches remained operational even during blackouts caused by missile attacks. This initiative, which equipped branches with independent power supplies and secure communication channels, allowed the banking system to function under severe conditions, ensuring that financial services remained accessible to the public. 

“We do not rise to the level of our expectations, but fall to the level of our training," Pyshnyy said, reiterating a guiding principle of the NBU. This mantra underscores NBU’s preparedness and rigorous training in effectively managing crises, Pyshnyy said, adding that the Ukrainian central bank had been preparing for hostile times for more than a decade, since the Russian invasion of Crimea in 2014.  

International Cooperation and Support 

International cooperation has been another critical pillar of the NBU's strategy. The NBU strengthened its ties with international financial institutions like the International Monetary Fund (IMF) and central banks of the EU. This collaboration ensured a steady inflow of financial aid and technical support. The IMF's Extended Fund Facility provided a financial cushion and a structured framework for economic stabilization and recovery. 

“The National Bank of Ukraine is in very active and strong communication with the International Monetary Fund," Pyshnyy said. 

The NBU also worked closely with other central banks to facilitate currency exchange for the millions of Ukrainians who fled abroad. Agreements with central banks in ten countries, including Sweden, ensured that Ukrainian refugees could exchange their currency and access financial services in their host countries, he added. 

Building Resilience for the Future 

Drawing lessons from the early days of the conflict, the NBU continuously updated its crisis management protocols. The central bank's approach evolved from immediate crisis stabilization to long-term resilience and recovery strategies, Pyshnyy said. This transition involved fostering economic recovery by easing some wartime restrictions and gradually resuming pre-war monetary policies as conditions allowed. 

"After the first anti-crisis package, Ukraine and the Central Bank of Ukraine had to shift to the next package: resilience provisions," Pyshnyy said. 

The NBU's role extended beyond traditional central banking, he added. It supported national security efforts and coordinated with the government to ensure that financial resources were directed efficiently towards defense and critical infrastructure projects. The central bank's involvement in national resilience efforts underscores the broader responsibilities that central banks can assume during national emergencies. 

Outcomes and Moving Forward 

The NBU's strategic measures yielded positive outcomes, including maintaining macrofinancial stability, a resilient FX market, and increased trust in the domestic currency and banking system. As Ukraine transitions to recovery, the NBU continues to face challenges such as securing sufficient domestic financing and reintegrating veterans into the workforce. 

"Now we can just call it the recovery process. It is ongoing and it is a combination of our internal efforts and macro financial stability we ensured, and also the support of our international partners," Pyshnyy said.