Jan Strupczewski and Balazs Koranyi

FRANKFURT/VERSAILLES – Three people with direct knowledge stated that the European Central Bank is currently working on a financial arrangement to enable millions of Ukrainian refugees to exchange their savings for hard currency. It will allow them to start a new life in Europe, as they flee conflict at home.

Since Russia invaded Ukraine last month, more than two million have fled the country. Their numbers are expected to rise rapidly to five million in the coming weeks.

They are finding it difficult to purchase even the most basic needs as their savings of hryvnia is not convertible across Europe so they cannot exchange them for reasonable rates. They are then vulnerable to untrustworthy traders who offer extremely low exchange rates.

Several ECB policymakers, mainly from the east of the bloc, reached out to Christine Lagarde, chief of the ECB, on Thursday in search for a solution. The bank now has to work with the design team.

Sources said, “This would not be a humanitarian, goodwill effort rather than a policy instrument regular, but we still have to obey laws so it’s no way we can just say, Come, we’ll covert that for you.”

It takes us days to find the right solution, and not weeks.

According to sources, EU leaders also pressed the bank for action and requested that the ECB accelerate its efforts.

A spokesperson for the ECB declined to comment. Lagarde stated that the bank is still exploring options, and that it hoped to be able to provide tools within the next few days for “supporting the Ukrainian people” and the Ukrainian authorities.

Problem is, any major conversion will likely result in financial losses. This raises the question: who is responsible for the loss?

Normaly, the ECB would establish a connection with Ukraine’s central bank by opening a repo or swap line.

However, such instruments need collateral which the central bank of Ukraine is not in a position or able to provide. Sources said that without collateral, legality for an ECB facility might be questionable.

At their summit in Versailles, European Union leaders are considering the possibility that the EU could guarantee this facility and allow the ECB to facilitate the transactions.

Conversions will be made by commercial banks, but they would still take place under the supervision of the central bank of the Euro zone and supported by common rules.

The solution might include letting Ukrainians open European bank accounts, allowing them electronic spending of their hryvnia to an agreed limit.

The pressure on policymakers is to establish an acceptable exchange rate to support such a scheme. This will likely increase losses. The sources stated that the limits for individual members are still being debated, along with the facility’s size.

DESPERATE

Because desperate refugees fall prey to the handful of vendors who will take their money, this problem has become urgent.

Last week, the Polish Human Rights Ombudsman stated that some traders offered a highly unfavorable exchange rate. This could be considered a form of usury.

Poland is the country that has experienced the greatest influx from refugees outside of the Euro zone. Its central bank already announced the establishment of a currency conversion facility.

Adam Glapinski, Polish central bank governor, stated Wednesday that a new system will allow Ukrainians to buy hryvnias. There are two options.

The option of the Polish central bank buying the currency, and then selling it to Ukraine’s central bank or other commercial banks is more likely.

A facility is being developed by the Bulgarian central bank. In Romania, Erste Bank’s local unit allows Ukrainians to convert approximately 400 euro worth of hryvnia.