Ukraine will join the euro payment area: will the hryvnia be replaced by the EU currency

Ukraine's accession to the Single Euro Payments Area (SEPA) will not happen overnight – it will take some time. The fact is that the country is currently in the process of implementing legislation to comply with European laws governing the banking sector, including interstate transfers. However, one way or another, Ukraine's transition to the euro is out of the question – only bank payments.

At the same time, banking sector sources told OBOZ.UA that joining SEPA will affect the rates for transfers to the EU. Especially for banks that do not have correspondent accounts with international banks.

In addition, the speed of transfers will change, as they will be faster. According to an optimistic forecast, instead of 1-2 days, the transfer of funds may take several hours.

"Also, the speed of contract settlements will be a very attractive argument for European counterparties: money from Ukrainian companies will be received much faster," explained Svitlana Strutynska, Head of Financial Institutions at Globus Bank.

She emphasized that the importance of Ukraine's accession to SEPA lies in the fact that it is another "link on the way to unifying the Ukrainian banking system and EU standards." In her words, this clearly shows the country's clear vector for joining the EU.

Earlier, National Bank of Ukraine (NBU) Governor Andrii Pyshnyi said that the issue of joining the Euro payment area was actively discussed during his visit to Lithuania. However, he did not name any projected dates for Ukraine's accession to SEPA.

Meanwhile, promises to make our country a member of the euro payment area have been made for several years. In particular, Prime Minister Denys Shmyhal spoke about this back in May 2022. At that time, the head of the Cabinet of Ministers assumed that Ukraine would become a member of SEPA in the summer of that year, which never happened.

As a reminder, the SEPA area provides for unified approaches to bank payments in euros, in particular, it completely eliminates the difference between internal and external transactions in euros. This mainly concerns ordinary bank transfers and the use of payment products on smart devices.

Thus, SEPA was established in 2007 following a relevant decision of the European Parliament. The system allows payments to be made using a single bank account in all EU countries.

It is assumed that joining the SEPA zone will allow Ukraine to intensify its European integration. Among other things, it may reduce the cost of money transfers between Ukraine and EU countries, simplify the entry of Ukrainian businesses into EU markets, and allow financial companies to reduce the number of technical solutions for operating in European markets.

Ukraine will not switch to the euro

At the same time, the NBU is considering pegging the hryvnia to the euro instead of the dollar. The main reason for this is the growing share of foreign exchange transactions in the country in euros.

However, this will not happen in the near future. Although the transition of the Ukrainian economy to the euro is promising, it remains at the level of strategic plans. And it is difficult to determine the actual timing.

There are several reasons for this, the banking sector told OBOZ.UA. In particular:

• A full-scale war.

"It is unlikely that such a decision will be made during active hostilities," the bankers said.

• Dependence of import-export relations on the dollar as the main world currency.

70% of such payments are made in dollars.

• Traditional attachment of the budget and macroeconomic forecasts to the dollar.
• The dollar's status as the world's main currency.

"Therefore, in my opinion, the transition to the euro is a long-term strategy. The implementation of which will depend on a number of important circumstances," said Taras Lesovyi, Head of Treasury at Globus Bank.

At the same time, he noted, integration into the EU will indeed involve some changes in monetary policy. And, perhaps, joining the EU "will be the starting point for a possible 'peg' to the European currency."

"However, again, everything will depend on the volume of trade with the EU. If the European markets become the main ones for Ukrainian exports, such a transition will be logical and economically motivated," the banker summarized.

At the same time, analysts at the Ministry of Finance noted that despite the National Bank's intention to untie the hryvnia from the dollar and start calculating its exchange rate against the euro, there are no plans to switch to the euro. Neither in the near nor in the distant future. This is because, among other things, Ukraine would lose the ability to conduct its own interest rate policy. In addition, the abandonment of the hryvnia will make it impossible to implement an independent exchange rate policy.

It is also noted that there is still no consensus on how effective such a step is for countries with unstable democracies and underdeveloped markets. This includes Ukraine.

"Crises [in such countries] often have an internal political nature. And the standard method of absorbing currency and financial shocks caused by the crisis is to devalue the national currency, which cannot be done after joining the euro zone," the authors explain.

As reported by OBOZ.UA, the National Bank of Moldova will use the euro as the base currency for setting the official exchange rate of the Moldovan leu starting from January 2, 2025. This means that the Moldovan currency will be untied from the US dollar.

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