| May 06 2014
Ukraine's future as a sovereign nation is under threat as Russia continues to behave aggressively in the region. President Obama and European leaders are considering imposing broader economic sanctions to punish Vladimir Putin for unlawfully annexing Crimea. They should do it quickly.
This would make it clear to the Kremlin, which is deeply involved in managing Russia's economy and military, that belligerent behavior has consequences. But in addition to hurting Russia with sanctions, the U.S. should strengthen Ukraine economically. This will help the country withstand Mr. Putin's attempted takeover.
One way to increase the chances of a prosperous future in Ukraine is to strengthen the nation's currency, the hryvnia—for a stable monetary foundation is necessary for economic growth. Even as the value of the Russian ruble has fallen almost 9% against the dollar in 2014, Mr. Putin takes comfort in knowing that the hryvnia is doing worse: It has plummeted 35% against the dollar since January. The currency's weakness is part of his plan to bring Ukraine to its knees.
This is where America and our European allies can throw a wrench into Mr. Putin's designs, rather than standing idly by as the hryvnia collapses under physical and psychological intimidation from Russia. We should encourage the establishment of a Ukrainian currency board, an institutional arrangement that anchors the value of national money to a more stable currency. Under a currency board, the hryvnia would be convertible into the dollar or the euro at a fixed rate, and backed by Ukraine's own hard currency reserves. The International Monetary Fund would supplement the reserves with a special-purpose loan arrangement.
A currency board would help Ukraine's money become as reliable and stable as the world's dominant reserve currencies. The effects would ripple throughout the economy: Foreign investors could have confidence that the hryvnia is not in a death spiral, and Ukrainians would know that Mr. Putin cannot annihilate the value of their personal savings. Such stability would encourage the nation under siege to maintain its faith in free people and free markets.
Equally important: Moscow would immediately face the dismaying reality that Ukraine's money is suddenly far more dependable than its own. Russia is already on a spending blowout to save the ruble as economic conditions deteriorate: Russia's central bank has spent more than $23 billion intervening in foreign exchange markets since January. On April 25, the bank raised its key interest rate by 50 basis points to 7.5%, a desperate attempt to tamp down the inflationary effects of a weakening ruble. Monetary policy is not Russia's forte in global affairs, and so the U.S. and Europe should use their advantage strategically to hurt a vulnerable adversary.
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