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2021 is coming to an end. For many countries, it has become a year of recovery from the coronavirus crisis. But not for us: at year-end, Ukraine’s GDP, despite the announced “record” dollar GDP, will not reach its pre-pandemic level in real terms.

Ukrainian economy is stagnating: GDP growth in the third quarter of 2021 (2.7%) was significantly lower than the rate of decline in the third quarter of 2020 (3.5%).

The decline in basic economic activities such as manufacturing, trade, state administration and defense, compulsory social security has even deepened.

However, all this has nothing to do with the financial sector. In the recently published Financial Stability Report, the NBU in all modesty states that “the financial sector is perfectly sound: it is resilient and profitable”.

Net profit of banks for 11 months amounted to a record UAH 65.7 billion, which is one and a half times higher than it was in the previous year (UAH 43.4 billion).

Among the factors slowing economic growth, the NBU names the escalation of the conflict by Russia, a jump in energy prices, spread of new COVID variants. 

In addition, attention is focused on the phasing-out of monetary stimuli by leading countries and higher yields on risk-free instruments, which complicates Ukraine’s access to resources in global financial markets. 

However, the National Bank of Ukraine says almost nothing about the impact of its own monetary policy on economic activity. Significantly, the tightening monetary policy cycle has been going on since the beginning of March 2021: the key policy rate has been raised from 6% to 9% (the refinancing rate – up to 10%), anti-crisis monetary measures (long-term refinancing and interest rate swaps) have been suspended. 

Moreover, from the discussion of the members of the Monetary Policy Committee (from December 8, 2021) we have learned that “the majority of Monetary Policy Committee members supported further increase of the key policy rate at the next NBU Board meetings on monetary policy issues”.

That is, the National Bank of Ukraine, under the pretext of fighting inflation, has finally returned to its comfortable matrix of inflation targeting, the key features of which are maintaining high interest rates and limiting the money supply.

And no one cares that the high key policy rate can affect the dynamics of world food and energy prices (in fact, the main factors of the current inflation surge) only in the imagination of Monetary Policy Committee members.

Instead, it may increase banks’ interest income and limit demand. This is partly the reason for the fundamentally different results of the development of the financial and real sectors of the economy, which we could observe over the past few years: not everything that is good for banks is good for other sectors of the economy.

The authors of the above-mentioned Financial Stability Report rightly point out that investment is needed to accelerate economic growth.

However, according to the State Statistics Service, in January-September 2021 capital investments increased by only 9.7% compared to January-September 2020, while last year it fell by 35.4%. In other words, investment is deeply negative compared to the pre-pandemic level.

 The foreign direct investment (FDI) “inflow” to Ukraine, which is about USD 6 billion in January-October 2021, is almost entirely generated by foreign investors’ reinvested earnings (retainedearnings).

The new FDI for 10 months was only USD 819 million, which is less than the corresponding figures for 2015-2019. The inflow of new FDI was even smaller only in January-October 2020 (USD 660 million).

Obviously, there are big problems with investments in Ukraine. And in the near future the task of mobilization (attraction) of investment resources will only become more complicated.

This is the so-called “green” transition and implementation of sustainable financing standards, which, in fact, will divide investments into “good”, i.e. “green”, and “bad”, i.e. those that do not meet the criteria of sustainable economic activity.

A Paris Agreement under the United Nations Framework Convention on Climate Change was signed in 2015, which succeeds the Kyoto Protocol and from January 1, 2021 regulates the obligations of countries to reduce or limit greenhouse gas emissions.

The Paris Agreement gives each country the right to determine its contribution to the reduction of greenhouse gas emissions, based on its own national context. 

Six years ago, Ukraine committed itself not to exceed 60% of 1990 emissions level in 2030, and in 2018, a process of preparing the second Nationally Defined Contribution (NDC2) began. 

The coronavirus crisis has, in fact, additionally pushed the process of “green” transition.  

Back in March 2020, Antonio Guterres, Secretary-General of the United Nations made a seemingly strange statement that the recovery from the COVID-19 crisis had to result in building a more equal, inclusive and sustainable economies and societies that are more resilient in the face of pandemics. climate change and the many other global challenges.

Obviously, at a high international level, it was decided to use force majeure to solve complex problems that saw resistance under “normal” circumstances.

In summer of 2020, Ukraine officially supported the European Green Deal, or EGD, which is designed to make the European continent climate-neutral by 2050. 

In March 2021, the Government of Ukraine approved the National Economic Strategy until 2030, through which climate neutrality is to be achieved no later than by 2060.             

On July 30, 2021, the Cabinet of Ministers of Ukraine approved the Updated Nationally Determined Contribution of Ukraine to the Paris Agreement (NDC2), which stipulates that by 2030, greenhouse gas emissions should not exceed 35% of their level in 1990 (or that by 2030, greenhouse gas emissions should fall by 65% of their level in 1990). In order to achieve NDC2 target by 2030, Ukraine needs to raise about EUR 102 billion capital investment, or around EUR 10 billion per year (volumes need to be recalculated due to changing emission ambitions).          

However, according to the IFC estimates, USD 23 trillion in climate-smart investment opportunities exists in the emerging markets globally by 2030, while in Ukraine the estimate is USD 73 billion.              

Given significant amount of necessary investment, as well as the risks that climate and environmental challenges may cause the next global financial crisis, (according to the Bank for International Settlements), it is not surprising that central banks may be at the forefront of the green transition.          

The ECB has already included climate considerations into its updated monetary policy strategy and has developed an action plan to address them in the areas of disclosure, risk assessment, collateral framework and corporate sector asset purchases.

In fairness, the National Bank of Ukraine has not stayed away from this global process either. For the first time a section on climate change and policy on sustainable financing has appeared in the text of the Monetary Policy Guidelines for 2022.

However, one nuance is striking: the NBU Council proposes to take into account climate considerations only when forecasting, modeling and implementing macroprudential policy, thus sidestepping the monetary policy.

In late November, the NBU presented its Sustainable Finance Development Policy 2025, which is a rather informative document developed in cooperation with International Finance Corporation (IFC).

The aim of the document is, in fact, to implement environmental, social and governance (ESG) criteria in the activities of financial institutions.

In particular, the Sustainable Finance Policy implementation roadmap envisages evaluation and selection of projects for funding, depending on their role in sustainable development by the end of 2023 for banks, and by late 2024 for non-banking financial institutions.

In other words, in a few years, those borrowers whose projects will meet the environmental goals and principles of sustainable economic activity will have access to resources.

This is “painful”, but it is generally reasonable given the EU’s intention to introduce a Carbon Border Adjustment Mechanism (CBAM), which envisages additional tax on imports of goods into the EU due to less stringent emission requirements in exporting countries.

From 2023, CBAM is expected to cover imports of steel, aluminum, cement and electricity, and from 2026 – the entire range of goods.

However, it seems unfortunate that the NBU currently sees its involvement in the development of sustainable finance only in developing and implementing new requirements for banks and NFIs, which will ultimately affect the real sector of the economy.

At this point, an association with NBU Resolution No. 351 arises, which, due to strict requirements for banks to assess reserves provisioning related to the credit risks, blocked access to financial resources for a large number of potential borrowers.

Nevertheless, nothing prevents the National Bank of Ukraine from taking a proactive position and (apart from the implementation of ESG criteria) developing and implementing tools to stimulate “green” investments lending.

As an option, long-term refinancing of banks at lower interest rates could be resumed for lending to borrowers that meet the criteria of sustainable economic activity.

It only depends on the good will of the NBU leaders whether the regulator will take part of the responsibility for mitigating the “green” transition by stimulating climate investment, or will limit itself to the use of another “whip” for the economy. There is not much time for thinking.

Mykhailo Dzhus, Head of Money Markets Department of the Growford Institute for Business.Censor.