NBU sold a record $6 billion on the market, but the dollar still rose in price. Why?

In October on Ukraine’s foreign exchange market the following situation arose: the National Bank injected a record amount of foreign currency into the market — almost $6 billion. However, this did not stop the hryvnia from falling. The official dollar rate at the start of November set a new record: 45,67. And that’s not to mention how much it costs on the cash market. More than 46 UAH.

The question arises: if the NBU sold a record amount of dollars, why did the hryvnia still weaken? The answer depends more on who was buying the currency and for what purpose than on the exchange rate itself. Dilo explains how this market works in general.

There’s more hryvnia in the economy, but not more dollars from exporters

Usually budget funds move like this: Ukraine receives foreign currency aid from international partners. The government, through the NBU, exchanges part of that aid for hryvnia and spends it on defense, salaries, procurement, and other needs. Those hryvnias then circulate in the economy. Companies pay suppliers, workers receive wages, businesses buy equipment, fuel, or components. Part of that money eventually turns into demand for dollars or euros, because imports are paid in foreign currency.

Not all budget money immediately goes to the interbank market. When the state spends more, currency demand has more reasons to rise. The NBU noted that the increase in budget expenditures was one of the main causes of pressure on the hryvnia in October. On the other hand, agricultural and metallurgical companies sold less currency. Foreign currency proceeds fell due to Russian strikes on infrastructure and export logistics difficulties. This was explained by NBU Deputy Governor Yurii Heletii.

As a result, a double pressure emerged. Demand for currency rose while supply lagged behind. According to the NBU, at the end of October the average daily net demand for noncash foreign currency grew to $230 million. That’s more than the monthly average, which was about $182 million. Record interventions do not always mean the NBU is weak. They mainly show how much currency is lacking in the market.

Why the NBU didn’t hold the rate

It’s important that the NBU no longer promises to keep the dollar at a specific level. Ukraine uses managed flexibility. The rate moves up or down depending on supply and demand. The NBU intervenes in the interbank market when private participants lack currency and tries to prevent sharp jumps that could destabilize the market. But it does not guarantee selling enough dollars to keep the rate at the previous day’s level.

The NBU explained this principle when transitioning to a more flexible exchange rate: interventions cover structural currency deficits and reduce strong volatility, while the market determines the direction of the rate.

Tension increased further at the end of October. In the last trading week of the month the NBU sold $1,82 billion, a weekly record. But even that amount did not return the dollar to September’s level. The rate could have been higher without interventions, but that is uncertain because no one observed that scenario. Calling dollar sales useless solely because the hryvnia weakened is incorrect.

If the NBU tried to defend an unchanged rate at any cost, it would most likely have to spend even more currency.

They sold $6 billion, and reserves rose

After the record currency sales, Ukraine’s international reserves did not fall but increased. At the start of October the amount was about $47,1 billion. By 1 November, according to preliminary NBU data, it was already $49,1 billion. That’s almost $2 billion more.

How is that possible? Reserves are not simply a place from which the NBU takes dollars. Currency comes into the country, is spent, then returns to the regulator’s accounts, and the price of some reserve assets changes.

In October about $3,7 billion arrived to the government’s foreign currency accounts at the NBU. The government also exchanged $4,6 billion of EU defense financing for hryvnia. While these funds had a special purpose and sat in separate accounts, they were not counted as part of international reserves. After being exchanged through the NBU, they were credited to reserves. Currency inflows and other factors exceeded the record sales and debt payments. The phrase “the NBU spent $6 billion of reserves” shows only one side of operations and gives a misleading impression of the outcome.

This creates a closed loop. International partners give Ukraine currency. The state converts it to hryvnia and covers expenditures. Part of that hryvnia then goes to purchasing imported goods, and demand for currency reappears. The NBU sells dollars on the interbank market to meet that demand.

So, external aid supports reserves and affects the formation of currency demand. There is no contradiction here, although at first it may seem almost ideal.

What this means for the hryvnia and business

When the hryvnia weakens, importers pay more for purchases in foreign currency. Exporters receive more hryvnia for the same dollars or euros, but costs for imported materials can partially reduce that benefit. For other economic participants, exchange rate changes gradually affect prices of goods with an imported component.

The October story does not allow us to predict what the dollar will cost next month. It shows that market stability depends on budget spending, export proceeds, import demand, NBU policy, and the regularity of external financing. In October the NBU sold a record amount of dollars because the market needed currency. The hryvnia weakened because demand exceeded supply. Reserves grew because international inflows exceeded outflows. The foreign exchange market showed a curious situation: dollars can be sold in large quantities, but that does not guarantee they will be sufficient at the previous rate. The foundation of this system is now determined not only by decisions in Kyiv. It also depends on when partners press the “transfer” button.