By far, the most important success of Ukraine in the economic sphere in 1996 was the September currency reform. President Kuchma announced on August 24, 1996 the long-awaited introduction of Ukraine's permanent national currency, the hryvnia.[15] Coming on the fifth anniversary of Ukraine's independence, the announcement was greeted with much fanfare. Indeed, it seems that the timing could not have been better.[16] While it is true that the June 1996 Constitution of Ukraine designated the hryvnia as the national currency, in addition to the legal requirement, there were many practical reasons for replacing the karbovanets. Even simple transactions could require millions of karbovantsi, making huge wads of cash necessary, and rendering record-keeping difficult, time-consuming and error-prone. In order to ensure a stable transition, and not to disadvantage anyone in the reform, currency conversion had to come at a time of relative monetary and price stability. The low levels of inflation throughout the summer months created a nearly ideal opportunity for currency conversion, with monthly inflation rates of a mere 0.1 percent in June and July. With independence day celebrations planned for August, the time seemed ripe to introduce the hryvnia.
According to the decree signed by President Kuchma, the hryvnia would be introduced on September 2, 1996, at an initial rate of conversion of 100,000 karbovantsi to 1 hryvnia, effectively lopping off 5 digits from all shop prices. Ukrainians and foreigners were afforded two weeks, until September 16, to exchange their karbovantsi for hryvniy in unlimited quantities at some 20,000 exchange counters across Ukraine. Exchange of more than 100 million KBV (about $600) were to be placed into special bank accounts, in order to conserve quantities of banknotes. No restrictions on depositors' accounts were imposed, making the conversion truly non-confiscatory in nature.[17] During the conversion period, both karbovantsi and hryvniy would circulate as legal tender.
Ukrainian National Bank Governor Viktor Yushchenko estimated that the stock of cash karbovanets was 337.3 trillion KBV (approximately $1.8 billion) at the beginning of the reform, including 23.6 trillion in bank vaults.[18] The preliminary data indicated that, during the period from September 2-16, approximately 95.5 percent of cash in circulation on September 1 had been converted. During the same two-week period, the NBU issued 3,995 million HRV in fresh notes. Cash collected by banks from the retail trade sector amounted to 826 million HRV (20.7 percent of that which had been issued), bringing the total amount of hryvniy in circulation on September 16 to 3,168 million HRV.
Conversion went so smoothly after September 2, that the period of conversion was extended until mid-October.[19] Prices increased by 5.7 percent in August; however, this increase resulted from previously-scheduled administrative increases in rents and communal services (i.e., utility) charges. More valid indicators of success were the modest increases in consumer prices of just 2 percent in both September and October, which were in line with Ukraine's agreement with the IMF. Another indicator of the conversion's success is the relative stability of the hryvnia-to-dollar exchange rate in the period following the reform. The NBU initially set its exchange rate at 1.76 HRV per dollar, 1.18 to the D-Mark, and 3,000 Russian rubles per hryvnia. At the Ukrainian Interbank Currency Exchange, the hryvnia started trading at 1.76 to the dollar. It held this value through October, climbing to 1.82 per dollar by November 1, and 1.88 at December 1st. This amounted to a cumulative devaluation of approximately 6.5 percent over three months, a modest fall in light of recent history. A further indicator of success was the increase in savings deposits at Ukrainian banks during the reform. Household time deposits climbed by 3 percent in the first two weeks of September alone. Enterprise time deposits rose by 6 percent. Deposits of one year's duration rose by 30 percent during the same period.[20] The liquidity of Ukrainian banks, and the financial sector generally, therefore improved as a direct result of the reform. We consider next the process of monetary stabilization in Ukraine, and the important question of whether or not stabilization was inevitable.