Photo/Illutration Kyrylo Shevchenko, the governor of the National Bank of Ukraine (Provided by the National Bank of Ukraine)

SINGAPORE--The damage to Ukraine's physical assets from Russian aggression, including infrastructure and buildings, has reached an estimated $100 billion (12.927 trillion yen), according to the head of the central bank of Ukraine.

Kyrylo Shevchenko, a long-time banker who is now serving as governor of the National Bank of Ukraine (NBU), called for international support as Ukraine does not hold sufficient domestic resources to replenish the vast capital loss, which is estimated at half of the country’s annual GDP.

Shevchenko said in an online interview with The Asahi Shimbun that he thinks the international community should make an urgent and even “unorthodox” decision to save lives in Ukraine.

Excerpts of the interview follow:

Question: How do you assess the impact of the war on your nation's economy?

Shevchenko: The economic losses are tremendous. By the NBU's latest estimates, Ukraine has lost about $100 billion in physical assets. Just for comparison, the total GDP in the pre-war year of 2021 was approximately $200 billion. Ukraine does not have domestic sources for replenishing such a significant amount of capital. That's why external sources of funding have truly a vital meaning for us.

By our estimates, the Ukrainian economy will keep gradually recovering. But real GDP could drop at least by one-third in 2022. The losses can be more significant if the greater hostilities drag on.

Inflation rose sharply to 15.9 percent in April due to supply chain disruptions, increasing costs, and a surge in prices in the temporarily occupied territories. We estimate that by the year-end of 2022, inflation might exceed 20 percent. But it will remain under control.

These forecasts are quite conditional, given that hostilities are still under way.

Q: How do you see current business activities in Ukraine?

A: Our flash polls are showing that the share of businesses that have shut down completely has declined to 17 percent in late April, from 32 percent in early March. SMEs (small and medium-size enterprises) are also resuming their work. According to a poll by the EBA (European Business Association), a local business association, only 26 percent of SMEs are not working, declining from 42 percent in March.

It gave us positive signals, and we are quite optimistic. We have to fight and we have to win. But as we are bankers, we are more conservative than others. We want to see how the military hostilities will develop.

Q: Roughly how much do you need to support the budget needs of the government?

A: According to the government, the needs amount to about $5 billion per month for the next three months.

At the beginning of the war, the National Bank of Ukraine made a really painful decision to finance budget gaps directly. But the financing from us shouldn't be the one and only source. Official financing, including natural sources like taxes and the support from our international partners, is more important.

Our position is unchanging. We understand that financing budget needs from the central bank is an exception only under martial law. And as soon as we win or financial sector risks are minimized, the central bank will immediately abandon this practice. We will come back to the floating exchange rate regime and our market-based tools, including the key policy rate that we normally operate.

Q: How is the financial system holding up in Ukraine during wartime?

A: It sounds like a miracle, but our banking system remains stable.

As of today, about 78 percent of the branches of the banks have resumed their operations. We have managed to stabilize the situation with banks' liquidity and to avoid deposit runs. Moreover, the amount of Ukrainian hryvnia retail deposits in the banking system has even increased by 19 percent since the beginning of the war.

In addition, banks keep lending. The banks have already granted approximately 609 million euros (82.22 billion yen, or $637.4 million) under the state financial support program initiated by President Volodymyr Zelenskyy to support the sowing campaign and SME economic recovery.

But we understand that more branches could be forced to close in case of further occupation or intensification of military actions.

In temporarily occupied territories, Russian invaders have been trying to introduce the Russian ruble. We see it as a gross violation of international law, in particular, the Hague Convention, Geneva Conventions (III) and (IV).

Q: Why is the system so resilient?

A: We attribute such resilience of the banking system to a mix of factors.

First, the NBU and commercial banks had developed business continuity plans in advance and implemented them immediately as the war started.

Second, Ukraine has managed to accumulate a significant margin of safety through prudent macroeconomic and financial policies, despite the hit from the pandemic crisis. To a large extent such an outcome was possible due to reforms implemented by the NBU.

I would like to emphasize that we remain committed to our strategic course to implement reforms in the Ukrainian financial sector. Despite the fact that some events have been put on hold, we intend to fulfill our plans when the war is over.

Third and crucially important, since the first day of war the NBU activated an emergency response, introduced a number of temporary administrative restrictions to avoid capital flight and liquidity support measures for the banks.

Q: Surprisingly, there's been no deposit run. What is the crucial factor?

A: It's quite difficult to separate only one factor.

But in the first three or four days of the war, we experienced massive demand for cash withdrawals. Even some supermarkets or gas stations refused to accept credit cards.

But we had managed the situation.

All cashless payments started to work normally and uninterruptedly. It's for sure that the cashless market and cashless payments is one of the crucial things to keep the cash market under control.

Q: We also didn't see a significant depreciation of the currency. How are you trying to keep it stable?

A: We did a number of actions to address this challenge. One is the fixed exchange rate. The decline of the market rate from the official rate is really tiny.

I would like to express that now we are considering easing some foreign exchange restrictions. We also are thinking about how to come back with the floating exchange regime. Such a step will bring more stability to the foreign exchange market.

Q: How are you trying to share this knowledge?

A: Unfortunately, we've got this experience. Let's hope that nobody else will ever need it. But we've got some requests to share our experience in terms of business continuity plans and how to support the banking system from one of the countries neighboring Russia. I would like to repeat that this is unfortunate, but we find a demand for such knowledge.

Q: A number of countries are trying to pressure Russia via financial sanctions. How do you see the impact of these?

A: Sanctions may have short-term costs for the global economy. But they will reduce the possibility of financing the aggressor's war activities.

I strongly believe that the weak reactions of the democratic world to the annexation of Crimea and military aggression by Russia against Ukraine in 2014-2015 determined the ongoing full-scale war.

If the global community had introduced an adequate mechanism of sanctions in 2015, this war would not have happened, and our current and future losses would not be so tremendous.

So by tightening the sanctions, the democratic world will have to stop financing Russia's war crimes in Ukraine.

Q: What do you think the other parts of the world can do to support Ukraine's economy?

A: It is vital for us to continue to receive international support from our partners in order to maintain an appropriate level of foreign exchange reserves.

The level remains sufficient, which is approximately $26.9 billion as of today, thanks to international support. We understand that without sufficient support, our reserves could be exhausted and go below the thresholds.

We are working with two channels of such support. The first one is financing through swap lines. I appreciate Narodowy Bank Polski, which is the central bank of Poland. We have signed an agreement with Narodowy Bank Polski for a UAH-USD currency swap of up to $1 billion.

The second route is channeling Special Drawing Rights (SDRs) to Ukraine. Last year, the IMF allocated 650 billion SDRs. We met with representatives of many countries to discuss financing through the channeling of SDRs to Ukraine.

I do hope that the Bank of Japan also joins using these channels. We had such a discussion, and we are ready to continue it.

We speak not only about the foreign exchange reserves or economic growth. We speak about lives--the lives of Ukrainians, Ukrainian children, and my friends and relatives in Donbas or Mariupol. I think the world now is getting to the tipping point. The international community should take some urgent and, I would say, "unorthodox" decisions because it's the decision for lives.

Q: What can Japanese people do?

A: On the first day of the war, the NBU opened a special account to raise funds for Ukraine's armed forces. We have already raised more than 15.8 billion hyrvnia, or $537.4 million, and it was already transferred for the needs of the military. I would really appreciate it if it could be known to the Japanese people.