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Ukraine Devalues Hryvnya At Risky Time

A man stands next to a billboard in Kyiv showing the British , U.S., and Ukrainian banknotes.
The Ukrainian government is letting its national currency, the hryvnya, lose value in hopes a weaker currency will help kick-start the economy.

But the timing risks compounding ordinary Ukrainians' fears that their purchasing power is sliding just as the country slips deeper into unrest.

Ukrainians have watched their currency tumble by some 3 percent since early December to a low of 8.44 against the dollar on January 23. It is the lowest exchange rate since 2009, when the country was still in the throes of the global financial crisis.

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The drop in the hryvnya's value is being accelerated by unrest in the capital that has grown steadily more violent since it began two months ago. The violence turned deadly for the first time on January 22, with two antigovernment protesters shot dead in the streets and another abducted and left to die in a forest.

The chaos is convincing many people that economic turmoil is not far behind, driving them to sell off their hryvnyas and buy hard currency instead.

"If the hryvnya is losing value, it means that our market is also collapsing," a woman in Kyiv who did not want to give her name said. "You can feel it in your pocket."

Others want the protection of hard currency because they fear the falling hryvnya will bring higher inflation.

"It will have an influence on our economy," another woman told RFE/RL's Ukrainian Service. "Everything will be more expensive."

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But analysts say that while many people are putting pressure on the hryvnya by selling it for dollars, the larger reason the currency is falling is a change in Central Bank policy.

Tim Ash, an expert on emerging European states at Standard Bank in London, says that for years Ukraine's Central Bank has propped up the hryvnya's exchange rate against the dollar in order to keep the currency stable. Now it is easing its support to let the currency depreciate.

"The most recent weakness in the exchange rate probably has more to do with a change of stance by the Central Bank," Ash says. "With the Russian bailout money, they think they are in a stronger position to try to manage the currency to a level that is more sustainable. I think that most people would accept that a level of 8.20 [hryvnya to the U.S. dollar] when the country is running a current-account deficit of about 8 percent of GDP (gross domestic product] is simply not sustainable"

Moscow promised to lend Kyiv $15 billion as part of a reward package for Yanukovych just weeks after he rejected a landmark Association Agreement with the European Union in favor of closer ties with Russia.

But Ash says that in offering the money, Moscow also urged Kyiv to let its currency depreciate so as to reduce the state's cost in propping it up and to make Ukrainian export products -- particularly steel -- more competitive.

Both the International Monetary Fund (IMF) and the EU also have also frequently urged Ukraine to let its currency weaken as a step toward economic recovery.

Yet if depreciating the currency could strengthen Ukraine's economy in the long run, Kyiv's decision to do so now, rather than earlier, strikes many observers as risky timing.

"It is never an easy time to allow your currency to depreciate and accept it. But it does mean that their reserves will go a little bit further," Charles Robertson, global chief economist at Renaissance Capital in London, says. "They should have depreciated the currency a long time ago, the [size of the] current account deficit has been telling you there is a problem for a long time. This is part of what the IMF has been talking about for a long time. There were poor policy choices in Ukraine over the past year or two, and they have contributed to the situation."

On January 24, the government has to hope that depreciating the currency -- in tandem with blood in the streets -- does not create a panic effect that drives ever more citizens to sell off their hryvnya.

The danger of panic selling that pushes the hryvnya down yet further is not imaginary. The British daily "Financial Times" reports that in the tense run-up to the 2012 parliamentary elections, Ukrainians rushed to the bank to buy dollars -- $2 billion worth in the space of a month.

Still, the government appears to feel it has no choice but to clinch its teeth and hang on for the ride. Unless Yanukovych can improve the economy, there is little hope he can defuse the pro-Europe protests now racking the country.

The protesters are venting their fury on the president precisely because they feel he robbed the country of its best chance to get out of its economic mess -- through a closer association with the EU, market reforms, and tougher anticorruption regulations.

Instead, Yanukovych promised to achieve economic progress by sticking with Ukraine's traditional economic partners in the former Soviet Union. Now he is in the unenviable position of having to deliver.

RFE/RL's Ukrainian Service's Kyiv bureau contributed to this report