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Tuesday, December 07, 2004

Ukraine’s Money Lock-Down

Americans may take their ability to load up on cash from an ATM and initiate wire transfers from banks for granted, but this simple economic right is a crucial underpinning of their liberty. The unfettered flow of money is the bane of despots and corrupt governments the world over. When money is allowed to exchange hands unimpeded, it decentralizes decision-making and empowers a society’s citizens by giving them a store of value and medium of exchange that they can employ for their own private use. This weakens the state’s central authority by affording individuals throughout the country direct control over their own destiny.

But if the free flow of money is a critical component of Western liberty, it should come as no surprise that earlier this week the Ukraine’s retrograde government took steps to curtail its citizens’ access to their savings. These newly imposed limits on bank account withdrawals and currency exchange—levied in the name of exchange rate stability—came as the populace began to rebel against the disputed results of their November 21 presidential election.

Going into the election, Viktor Yushchenko—a reformer who seeks to bring Ukraine into the West—held a comfortable lead, a lead which was later confirmed by exit polls. But his opponent, Viktor Yanukovych, a yes-man to Russia’s Vladimir Putin, ended up garnering 870,000 more votes on election day. A Ukrainian comeback kid? Not likely. Regions in the Yanukovych-leaning eastern part of the country barred international poll watchers, and many precincts there notched voter turnout in excess of 100 percent. Although the United States and European Union have condemned this transparent act of electoral fraud, Ukraine’s out-going President Leonid Kuchma has dragged his feet while Czar Putin—looking to ensnare another satellite state into his orbit—rushed to hail Yanukovych as the winner.

In recent years the Ukraine has been following Belarus into Russia’s sphere of influence, a slide which Yushchenko pledged to halt. And his message appears to have resonated with a majority of the country; in spite of a hostile state-run media and a poisoning attempt this past summer, the plucky Yushchenko has defied the old guard’s attempts to cow him while they return the Ukraine to its Russo-dominated past.

But now that Ukrainians are protesting the stolen election in the streets of Kiev, the government has responded by clamping down on their finances. Earlier this week Agence France Presse (AFP) reported that Ukraine’s central bank initiated a lockdown on citizens’ financial freedom, capping bank account withdrawals at just 1,500 Hryvna (about $285 USD) per day while at the same time limiting currency exchanges to the equivalent of $1,000 USD. Private businesses were also hit with similarly restrictive withdrawal and exchange limits.

The claim that this move was necessary to prop up the Hryvna rings hollow. Why lock down citizens’ savings when their wealth is a pittance compared to the daily activity on the international currency markets? Open market intervention—like the Bank of Japan does to prevent the Yen from over-appreciating against the dollar—could be done without trampling upon the rights of citizens. The central bank is sitting on over $10.5 billion in hard currency reserves, so it could certainly do this if it desired.

Moreover, intervening with the currency at all ignores the fact that with fair elections and the installation of a pro-Western government, the Hryvna would not be facing selling pressure. Correct the underlying problem (a stolen election) and the exchange rate issue goes away. Instead the Ukraine’s central bank, with the blessing of President Kuchma, is interested in helping the government avoid the economic consequences of its own corruption by placing harsh limits on economic liberty.

At some point in the future a combination of the spread of global markets and advances in technology will make this kind of economic chicanery more difficult. No doubt there are entrepreneurs plotting ways to help capital elude the restrictions of heavy-handed regimes at this very moment. As I detail in my book, The PayPal Wars, the online payment service PayPal was created with this very goal in mind. PayPal’s founders envisioned their company empowering people from around the world with the ability to move money with the click of a mouse. Unfortunately an onslaught by regulators, lawyers, and lobbyists forced them to sell their company to the auction service eBay, prematurely ending their dreams of revolutionizing global currency markets.

But oppressive regimes should still beware—it’s only a matter of time until some similarly bold entrepreneurs will find a way to help citizens get their money out of despotic control. Until then, the West needs to pressure corrupt governments like the Ukraine not only to hold fair elections, but also to uphold the basic principles of economic liberty.


Eric M. Jackson is the president of World Ahead Publishing and the former head of PayPal’s marketing department. His book, The PayPal Wars: Battles with eBay, the Media, the Mafia, and Rest of Planet Earth, is on sale now.