The role of the euro in the Eastern Partnership Countries.
Date: 2021-02-19
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: Eastern Partnership, central bank, euro, exchange rate, international currency, monetary policy, public debt

6

ISSN 2443-8022 (online)

The Role 
of the Euro 
in the Eastern Partnership 
Countries

Radostin Neykov and Caroline Robert

DISCUSSION PAPER 138 | FEBRUARY 2021

EUROPEAN ECONOMY

EUROPEAN 
ECONOMY

Economic and 
Financial Affairs

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European Commission 
Directorate-General for Economic and Financial Affairs 

The Role of the Euro in the Eastern Partnership 
Countries 

Radostin Neykov and Caroline Robert 

Abstract  

This paper explores the role of the euro in a number of Eastern neighbours to the EU that are part of the 
Eastern Partnership (EaP) initiative: Armenia, Azerbaijan, Belarus, Georgia, the Republic of Moldova and 
Ukraine. Based on a survey conducted by the European Commission at the end of 2019 on the use of the 
euro and other currencies in these countries, as well as desk research, it looks into four dimensions: cross-
border trade transactions, foreign exchange reserves, external public debt and the commercial bank sector. 
It finds that most of the EaP countries are skewed towards using the US dollar. This reflects both historical 
developments and the efficiency of the US dollar financial market.  

However, the growing political ties and economic exchanges between these countries and the EU provide a 
rational  basis  for  a  greater  role  of  the  euro.  Since  2014,  the  euro  is  steadily  increasing  its  share  in  trade 
invoicing and debt stock in a number of countries. Overall, Moldova stands out by a large margin as it uses 
the  euro  in  more  than  half  of  its  total  international  transactions.  At  the  other  end  of  the  spectrum  are 
Georgia and Armenia, where the euro plays a more moderate role in most areas. Based on these findings, 
the paper highlights some areas where the EU could encourage the use of the euro in the region through 
enhanced  economic  diplomacy  and  policy  initiatives  that  would  increase  its  attractiveness  such  as 
development of instruments that create sufficient supply of safe euro assets or target niche segments where 
the EU could play a leading role (for example social bonds, green bonds). 

JEL Classification: E41, E42, E52, E58. 

Keywords:  Eastern  Partnership,  euro,  international  currency,  foreign  exchange  reserves,  exchange  rate, 
invoicing currency, external public debt, foreign deposits and loans. 

Acknowledgements:  We  would  like  to  thank  Heliodoro  Temprano-Arroyo,  Staffan  Linden  and  Luis 
Martinez  Reillo  for  reviewing  the  paper  and  providing  a  range  of  constructive  suggestions,  Pedro 
Carpintero for assistance with statistics as well as Elena Flores, Annika Eriksgaard-Melander, Jörn Griesse 
for their useful comments. We would also like to thank officials from the Eastern Partnership countries for 
their  kind  cooperation  with  regard  to  a  survey  we  carried  out  in  2019  on  the  role  of  the  euro  in  their 
international dealings. 

Contact:  Radostin  Neykov  and  Caroline  Robert,  European  Commission,  Directorate-General  for 
Economic and Financial Affairs, radostin.neykov@ec.europa.eu. 

EUROPEAN ECONOMY                                                                                      Discussion Paper 138 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ABBREVIATIONS 

AMD 

AZN 

BIS 

BYN 

CBA 

CBAZ   

DCFTA    

EBA 

EBRD 

ECB   

EMU 

EU 

EaP    

FDI 

Armenian dram 

Azerbaijani manat 

Bank for International Settlements 

Belarusian ruble 

Central Bank of Armenia 

Central Bank of the Republic of Azerbaijan 

Deep and Comprehensive Free Trade Area 

European Business Association 

European Bank for Construction and Development 

European Central Bank 

Economic and Monetary Union 

European Union 

Eastern Partnership 

Foreign Direct Investment 

GEL            

Georgian lari 

IFI      

IMF  

JRC        

MDL    

NBG       

SDR 

SOFAZ 

SWIFT 

UAH   

USD 

International Financial Institution 

International Monetary Fund 

Joint Research Centre 

Moldovan leu 

National Bank of Georgia 

Special Drawing Rights 

State Oil Fund of the Rebublic of Azerbaijan 

Society for Worldwide Interbank Financial Telecommunications 

Ukrainian hryvnia 

United States dollar 

 
 
 
                       
                              
                              
                                              
                      
                              
                            
                            
                             
                                                    
 
 
 
 
CONTENTS  

1. 

2. 

Introduction………………………………………………………………………………………..….5 

Setting the scene: drivers of foreign currency use in the Eastern partnership 
Countries………………………………………………………………………………………….……7 

2.1.  

Historical perspectives on the use of foreign currencies in the Eastern partnership 

countries…………………………………………………………………………………………….……..……....7 

2.1.1  

The dollar as a safe haven………………………………………………………………….……………………..7 

2.1.2 
economies………………………………………………………………………………………………………………………..9 

Currency crises following the break-up of the ruble’s monetary zone resulted in highly dollarised 

2.2. 

Exchange rate REGIMES, anchor role and Monetary policy frameworks…………...……10 

2.2.1 

Global currency zones analysis…………………………………………………………………..……….…….14 

3. 

Economic links between the Eastern Partnership countries and the EU…………………16 

3.1. 

Trade flows……………………………………………………………………………………………..17 

3.2. 

Financial flows: FDI, remittances, Banking sector………………………………………………18 

3.2.1 
3.2.2 
3.2.3 

FDI in the region…………………………………………………………………………………………18 
Inward remittances…………………………………………………………………………………….19 

Financial sector links……………………………………………………………………………………20 

4. 

Characteristis and determinants of the use of the euro in Eastern partnership 
countries…………………………………………………………………………………….………...21 

4.1. 

Results of the European Commission’s survey…………………………………………………..21 

4.1.1 
4.1.2 
4.1.3 

Overview…………………………………………………………………………………………………21 
Comparison with global use of euro……………………………………………………………….21 
Analysis by country…………………………………………………………………………………….22 

4.2. 

The Euro in trade invoicing………………………………………………………………………….23 
Literature review………………………………………………………………………………………..23 
4.2.1 
Trade denomination in the EaP countries…………………………………………………………25 
4.2.2 

4.3. 

The Euro in foreign exchange reserves……………..……………………………………………28 

4.3.1 
4.3.2 

Literature review………………………………………………………………………………………..28 
Foreign exchange reserves in the EaP countries………………………………………………...29 

4.4. 

The Euro in external public debt…………………………………………...……………………...30 

4.4.1 
4.4.2 

Literature review…………………………………………………………………………………….…..30 
External public debt in the EaP countries…………………………………………………….……32 

4.5. 

The Euro in foreign currency deposits and loans……………………...………………….…….34 

4.5.1 

Financial dollarisation in the EaP countries…………………………………………….……….….34 

4.5.2  The euro in foreign currency deposits and loans in the EaP countries…………………………………...36 

5. 

Concluding remarks………………………………………………………………………………….37 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIST OF GRAPHS 

1.1. 

2.1. 

2.2. 

2.3. 

2.4. 

2.5. 

2.6. 

2.7. 

2.8. 

2.9. 

Overview of the international monetary system ...................................................................................... 5 

US dollar index  ............................................................................................................................................... 8 

Global economic policy uncertainty index vs US dollar index  ............................................................. 8 

VIX vs US dollar index DX ............................................................................................................................... 8 

Armenia – exchange rate dynamics ........................................................................................................ 13 

Azerbaijan – exchange rate dynamics .................................................................................................... 13 

Belarus – exchange rate dynamics .......................................................................................................... 13 

Georgia – exchange rate dynamics ........................................................................................................ 13 

Moldova – exchange rate dynamics ....................................................................................................... 13 

Ukraine – exchange rate dynamics .......................................................................................................... 13 

2.10. 

Estimated co-movement with the US dollar ............................................................................................ 15 

2.11. 

Estimated co-movement with the euro ................................................................................................... 15 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

3.6. 

4.1. 

4.2. 

4.3. 

4.4. 

4.5. 

4.6. 

4.7. 

4.8. 

4.9. 

Trade turnover (weighted average) with goods with the EU, % of total ............................................ 17 

Trade with goods by destination, 2019  .................................................................................................... 17 

Inward FDI stock, end-2018  ....................................................................................................................... 19 

Inward EU FDI in EaP countries, % of total ................................................................................................ 19 

Remittances inflows, % GDP, 2004-2019  .................................................................................................. 20 

Money transfers from abroad in 2019, % .................................................................................................. 20 

Overview: International monetary system vs Eastern Partnership in 2018, %..................................... 21 

Composite index of the use of the euro across EaP countries ............................................................ 22 

Invoicing of exports of goods by currency, 2018 (%) ............................................................................. 25 

Euro invoicing in exports vs trade with EU ................................................................................................ 25 

Invoicing of Imports of goods by currency, 2018 (%) ............................................................................. 26 

Main exports partners, goods, 2019 (%) ................................................................................................... 27 

Main imports partners, goods, 2019 (%) ................................................................................................... 27 

Foreign exchange reserves by currency, end 2018 (%)  ....................................................................... 29 

Currency composition of foreign currency debt (%) ............................................................................. 31 

4.10. 

Interest rate differential: historical spread between 10-year US Treasury Bond and Bunds 
(%)………………….. ....................................................................................................................................... 31 

4.11. 

External public debt by currency, end-2019 ........................................................................................... 32 

4.12. 

Share of the euro in the foreign exchange-denominated public debt in selected EaP countries, 
% of the total ................................................................................................................................................. 33 

4.13. 

Ukraine, state debt by currency, %, end-year ........................................................................................ 34 

4.14. 

Total loans per currency in the EaP, end-2018 (%) ................................................................................. 35 

4.15. 

Total deposits per currency in the EaP, end-2018 (%) ........................................................................... 35 

4.16. 

Foreign currency deposits, by currency, end-2018 (%) ......................................................................... 36 

4.17. 

Foreign currency loans, by currency, end-2018 (%) .............................................................................. 36 

2 

 
 
 
 
LIST OF BOXES 

Box 1.  Anecdotal evidence: what do exchange rates bid-ask spreads reveal?.......................................16 

Box 2.  

Invoicing Currencies in International trade: Drivers and obstacles to the use of the Euro . …...…24 

Box 3.   Currency denomination of cross-border trade transactions in Moldova .......................................... 26 

Box 4.   Ukraine’s debt management strategy ..................................................................................................... 33 

LIST OF TABLES 

Table 1. Exchange rate arrangements and monetary policy frameworks in the EaP countries as per the 
IMF classification…………………………………………………………………….……………………..….. 10 

REFERENCES 

ANNEXES 

3 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4 

 
 
 
1.  INTRODUCTION  

This paper examines the role of the euro in the Eastern Partnership (EaP), which comprises six of the 
EU’s  Eastern  neighbours  (Armenia,  Azerbaijan,  Belarus,  Georgia,  the  Republic  of  Moldova  and 
Ukraine). In addition to a close political relation, the EU has developed strong economic and financial 
links with the EaP countries. For four of them, the EU is the largest trading partner. It is also a significant 
source of direct investment and remittances in the region.  

Discussions  around  currency  internationalisation  usually  start  with  the  functions  performed  by  an 
international  currency.  The  classic  three  functions  of  money  domestically  can  be  transferred  to  the 
international use: a global currency has to play the roles of a store of value, a medium of exchange and 
a unit of account for both residents and non-residents.  

The extent to which non-residents use one currency, as compared to others, shapes the international role 
of that currency. More specifically, this includes its use in official foreign exchange reserves, as vehicle 
currency  in  global  foreign  exchange  markets,  as  a  currency  in  which  international  bonds  are 
denominated, as a unit in which to invoice and settle trade transactions, and as an anchor currency for 
the exchange rates of other countries. On top of that, and this is particularly relevant for the Eastern 
Partnership (EaP) region, an international currency can be used to the extent it becomes a substitute to 
the domestic currency, including as a currency of denomination of bank assets and liabilities.1  

Graph 1.1  Overview of the international monetary system 

70

60

50

40

30

20

10

0

Foreign
exchange
reserves

International
debt

International
loans

Foreign
exchange
market
turnover

Global
payment
currency
(SWIFT)

EUR

USD

JPY

RMB

Note: Figures are provided for Q4 2019. 

Source:   ECB, The international role of the euro (2020) based on figures 
from the BIS, CLS Bank International, IMF and SWIFT. 

This  analytical  framework  can  be 
used  as  a  compass  for  assessing 
currency internationalisation. As of 
today, only the US dollar, the euro 
the  Japanese  yen  can  be 
and 
regarded 
displaying 
fully 
features  of  international  currencies 
(graph  1.1).  The  British  pound 
sterling  stands  as  the  third-most 
widely  held  reserve  currency  and 
the  fourth  most  traded  currency  in 
terms of turnover.  

as 

China  is  explicitly  aiming  at  the 
internationalisation 
renminbi's 
through 
the 
reform 
international  financial  architecture 
the  promotion  of  regional 
and 
financial cooperation.2  Yet,  setting 

the 

of 

1 The Eastern Partnership is a joint policy initiative that aims to deepen and strengthen relations between the EU, its Member 
States and six of its Eastern neighbours - Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine. 

2 Among the efforts made to internationalise the renminbi (RMB), the Chinese authorities signed currency swap agreements 
with more than 30 countries and regions to boost its use as a global reserve currency and the RMB joined the IMF’s Special 
Drawing Rights (SDR) reserve currency basket on 1 October 2016. China supported cross-border RMB trade settlement scheme 
and the use of the RMB as an invoicing currency in China’s free trade agreements. It also tried to develop the RMB in the 
offshore market in Hong-Kong: use of RMB in project and trade finance, expansion of RMB bond and derivative markets, 
support for the listing of Mainland companies and cooperation between securities markets of Hong-Kong and Shanghai.  

5 

 
                                                           
 
 
 
aside its reserve currency status, it appears the renminbi’s global role has stalled, given the lack of its 
convertibility and the still tight controls maintained by the authorities on its capital account. Since 2017, 
the political focus in China has shifted from currency internationalisation to preventing capital flight 
and bolstering currency stability.  Overall, China is not able to compete yet with the depth and efficiency 
of the capital markets of the US or Europe (EU and the UK). 

The euro has been the second most important international currency in all dimensions, whether in the 
private  or  in  the  official  domain,  since  its  launch  20  years  ago.  As  a  safe  store  of  value,  the  euro 
represented around 20% of international reserves of central banks at end-2019. It has become a widely 
accepted currency for international payments - about 35% of the value of global payments were invoiced 
or settled in euros in 2017 (ECB, 2018). Businesses and foreign governments use the euro for issuing 
debt - the share of the euro in outstanding amounts of international debt securities was about 22% at 
end-2019.  

However, whilst clearly the second most used currency in the world, the euro is still trailing well behind 
the US dollar. The international role of the euro was negatively affected by the 2008-09 global financial 
crisis and the euro area sovereign debt crisis that it unfolded. As a result, despite somewhat stabilising 
in recent years, the composite index of the euro’s international role compiled by the ECB remains close 
to its historical lows (ECB, 2020). This made Ilzetzki, Reinhart and Rogoff (2019) to suggest that the 
euro has yet to expand its role as an international currency, as by some measures, the euro plays no 
larger role than the Deutschemark and the French franc that it replaced. The authors emphasised that a 
number of structural factors limits the euro’s appeal such as the scarcity of high-quality marketable euro-
denominated assets, the lack of a high-calibre financial centre, the EU’s limited political outreach and 
Europe’s secondary role in technology research.  

The euro is not only an asset used in the settlement of transactions, a store of value, or a standard of 
deferred payment, but also a political project, which requires visible support from public institutions 
and a set of political representations. International currency status does not simply follow from technical 
considerations, but also from the extent to which external relations can provide a framework on which 
its economic and commercial attractiveness could grow. 

Already in 2008, via its Communication on successes and challenges after 10 years of Economic and 
Monetary  Union3,  the  European  Commission  encouraged  the  euro  area  to  play  a  more  active  and 
assertive role both in multilateral fora and through its bilateral dialogues with strategic partners. In 2018, 
the European Commission launched an initiative to promote the international role of the euro and to this 
effect  issued  a  Communication  Towards  a  stronger  role  of  the  euro,  advocating  an  active  policy  to 
encourage its international use.4 Although the euro needs primarily to be supported by a deeper and 
more  complete  Economic  and  Monetary  Union  (EMU)  and  Banking  Union,  engaging  with  third 
countries was also highlighted as an important aspect to boost the attractiveness of the euro. 

The objective of this paper is twofold: to explore the foreign currency use in the EaP countries across 
several  dimensions  (trade  invoicing,  public  debt  issuance,  international reserves and  bank  loans and 
deposits) and identify areas and ways to strengthen the role of the euro. In section 2, we shed some light 

3  Communication  EMU@10:  successes  and  challenges  after  10  years  of  Economic  and  Monetary  Union  (7  May  2008): 
https://ec.europa.eu/transparency/regdoc/rep/1/2008/EN/1-2008-238-EN-F1-1.Pdf. 

4 Communication Towards a stronger international role of the euro: Commission contribution to the European Council and 
the 
https://ec.europa.eu/commission/sites/beta-political/files/communication_-
_towards_a_stronger_international_role_of_the_euro.pdf. 

(December 

Summit 

2018): 

Euro 

6 

 
                                                           
  
on currency substitution in the region and discuss the reasons for the prevailing dominance of the US 
dollar. In section 3, we highlight the economic links between the EU and the EaP partners as a potential 
catalyst for  a  greater role of the euro  in  the region.  Section  4 presents  the results  from  a  survey  the 
European Commission conducted in 2019 on the use of the euro and other currencies in international 
transactions of the EaP countries, which was complemented by desk research, and outlines a number of 
structural factors that may have limited the euro’s international reach in the region. Section 5 concludes 
by presenting a set of initiatives that could support a more prominent role of the euro in the region. 

2.  SETTING THE SCENE: DRIVERS OF FOREIGN CURRENCY 
USE IN THE EASTERN PARTNERSHIP COUNTRIES 

2.1. 

HISTORICAL PERSPECTIVES ON THE USE OF FOREIGN CURRENCIES IN THE 
EASTERN PARTNERSHIP COUNTRIES 

Money can be perceived both as a financial asset and as an institution (Aglietta and Orléan 1998, p.371). 
Doubts about the trustworthiness of money are sometimes able to throw out of balance a whole political 
system. According to Geoffrey Ingham, ‘through the buying and selling of currencies the global money 
markets deliver their verdicts on the credibility of the ‘working fictions’’ [i.e. in comparison to gold] 
(Ingham 2005, p.170).  

In the EaP, the historical narrative becomes an important factor for explaining the contemporary use of 
domestic  and  foreign  currencies.  The  multiple  financial  and  economic  crises  these  countries  went 
through  since  their  independence  in  the  early  1990s  altered  the  way  citizens  perceive  financial 
institutions  and  their  view  on  trust  in  public  institutions,  risk  and  profitability,  thereby  explaining 
variations in currency uses.  

2.1.1 

The dollar as a safe haven 

Although one may consider as a ‘safe haven’ any asset with high liquidity and low risk, we will refer to 
it as what investors buy in uncertain times. According to Baur and Lucey (2010), the role of an asset as 
a  safe  haven  with respect  to  another  asset depends  on  the link  between the  two in  times  of  extreme 
market volatility. If one asset is negatively related to another under extreme market stress, e.g. one that 
performs well when the reference portfolio suffers significant losses, then the safe haven property is 
verified.  

In the past decades, each episode of global economic uncertainty has renewed the appreciation of the 
US dollar as a safe haven currency (graph 2.1). Crises usually led to higher demand for US Treasury 
securities, especially bills. The US dollar index, which measures the strength of the US dollar against a 
basket of other hard currencies, soared whenever shocks to the global economy arose. The index has 
been  steadily  rising  since  the  beginning  of  2018  —  recently  hitting  a  three-year  high  following  the 
COVID-19  outbreak  in  early  2020  when  market  sentiment  worsened  driven  by  the  fear  of  a  global 
economic recession. With the  worldwide  coronavirus  lockdowns,  the  US  dollar  remained  one  of  the 
most appealing currencies as it capitalised on market demand for safe havens. Yet, against the backdrop 
of resurgence in cases in the US, the demand for the US dollar started to decline, questioning whether it 
should be traded at a safe-haven risk premium.  

7 

 
 
Graph 2.1.  US dollar index 

First Wave European
Sovereign Debt Crisis

Second Wave European
Sovereign Debt Crisis

Internet
bubble
Burst

Housing Bubble

Global Financial Crisis

Covid-19 crisis

Stock Market Crash
and Sudden
Deprection RMB

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Note:  The  US  Dollar  Index  (DXY)  is  a  measure  of  the  value  of  the  USD  relative  to  a  basket  of  foreign  currencies 
corresponding to US most significant trade partners’ currencies. The Index goes up when the US dollar gains "strength" 
(value) when compared to other currencies. 

Source: Investing. 

In  times  of  high  uncertainty,  the  US  dollar  tends  to  strengthen,  with  the  Global  Economic  Policy 
Uncertainty index leading on the US dollar index VX (graph 2.2). The correlation is also high with stress 
on the financial market as measured by the Chicago Board Options Exchange Volatility Index (VIX), 
which gauges expectations about future volatility in US equity markets: whenever the global markets 
are in “risk off mode”, the US dollar benefits from the flight to quality trade (graph 2.3). 

Graph 2.2.  Global economic policy uncertainty 
index vs US dollar index 

Graph 2.3.  VIX vs US dollar index DX 

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GEPU_current_normalised
DX_normalised

DX_normalised
VIX_normalised

Note:  The  chart  shows  the  two  series  in  standardised 
terms (i.e. feature scaling, data were re-scaled to have 
values between 0 and 1). 

Note:  The  chart  shows  the  two  series  in  standardised  terms 
(i.e.  feature  scaling,  data  were  re-scaled  to  have  values 
between 0 and 1). 

Source: Investing and GEPU Index.  

Source: Investing. 

8 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.1.2 

Currency crises following the break-up of the ruble’s monetary zone resulted 
in highly dollarised economies 

The EaP countries did not diverge in terms of foreign currency use patterns in times of hardship. The 
recurrent crises they went through since they gained independence in the early 1990s led all countries in 
the region to integrate a growing share of US dollars in their international and domestic dealings. Such 
a behaviour, also called currency substitution, is closely linked to the initial years of transition that were 
marked  by  a  collapse  of  the  command  economy  system  and  the  break-up  of  the  ruble-dominated 
monetary area that led to a prolonged period of hyperinflation.5 While new institutions (such as national 
central banks) and currencies gradually appeared by mid-1990s, the process of building up sufficient 
credibility in the way these function is still ongoing in some cases. 

Since the collapse of the Soviet Union in 1991, the EaP countries went through a succession of currency 
crises – defined as a substantial drop in confidence towards a specific currency reflected either by a 
sudden depreciation or by a decline in the country’s international reserves (Dabrowski, 2003a).  

Broadly speaking, we can distinguish four episodes of currency crises in the EaP region: (i) the collapse 
of the Soviet ruble and the ensuing hyperinflation in the established successor states (1992-1995), (ii) 
the financial crisis of 1998-1999, (iii) the fallout from the global financial crisis of 2008-2009, and (iv) 
the regional recession in 2014-2015 driven by the conflict between Ukraine and Russia and the slump 
in oil prices.  

In early 2020, national currencies in the EaP region were under heavy, but in some cases temporary, 
pressure due to the capital flight from emerging markets associated with the outbreak of the COVID-19 
pandemic. In addition to these exogenous shocks, some countries experienced their own policy-induced 
crises. A prime example is Belarus, whose lax monetary and fiscal policies amid significant structural 
weaknesses contributed to successive balance of payment crises (in 2011 and in 2013) that led to sharp 
currency depreciation and high inflation. 

Dollarisation in the EaP countries is high and comes in various forms: financial, as evidenced by the 
high  share  of  financial  assets  and  liabilities  in  foreign  currency,  as  well  as  in  the  real  economy,  as 
suggested by the ongoing quotation of prices (real estate; cars; some services) and indexation of wages 
in foreign currency.  

The prime example of the high level of dollarisation is the banking sector where both foreign currency 
deposits  and  savings  remain  much  higher  than  what  fundamentals  would  suggest  despite  concerted 
attempts of the authorities to incentivise the use of local currencies.  

In the absence of well-developed foreign exchange derivative markets, dollarisation serves as a main 
tool  for  hedging  against  sudden  sharp  volatility  (whether  depreciation  or  appreciation)  of  domestic 
currencies. Every crisis episode in the EaP region was signalled by a significant depreciation of the local 
currency, incentivising households to save in US dollars. This added to the mechanical impact of the 
currency depreciation, which boosted the share of foreign currency deposits and loans. In the aftermath 
of each crisis, the level of dollarisation of bank balance sheets gradually declined, as commercial banks 

5 The average annual consumer price inflation in the region (excluding Georgia for which data is unavailable) was 1,577% in 
1993-1995. It ranged from 383% in Moldova to 3,061% in Armenia. While the three Caucuses countries, Armenia, Azerbaijan 
and Georgia, were relatively successful in containing inflation in the years to follow, others had experienced a persistent high 
inflation  since  the  1990s.  This  is  the  case  in  particular  of  Belarus  and  Ukraine,  which  recorded  single-digit  inflation  only 
respectively 6 and 9 years in 1993-2019. 

9 

 
                                                           
 
restructured foreign currency debts and converted them into local currency. Yet, a significant degree of 
inertia, typical of currency substitution processes, can be observed.6 

2.2.  EXCHANGE RATE REGIMES, ANCHOR ROLE AND MONETARY POLICY 

FRAMEWORKS 

The use of an international currency in an economy is closely linked to the role such a currency plays in 
the exchange rate-setting mechanism of the country.  Ilzetzki, Reinhart and Rogoff (2019) argue that 
exchange rate arrangements reveal policymakers’ preferences over the use of a given currency. 

In the EaP region, the euro has been traditionally having a rather limited role as an exchange rate anchor. 
At the beginning of the transition in the early 1990s, most countries in the EaP used the US dollar as an 
anchor when national currencies were introduced in order to manage inflation expectations and achieve 
sustained price stability. The US dollar was targeted either directly, by pegging the local currency, or 
indirectly  through  the  Russian  ruble  that  was  also  used  as  a  policy  anchor  in  the  context  of  close 
historical, political and economic links. However, as capital flows gradually picked up, the EaP countries 
started to introduce exchange-rate flexibility. In fact, many central banks have followed a course from 
exchange-rate targeting to targeting monetary aggregates and then inflation.  

In  its  Annual  Report  on  Exchange  Arrangements  and  Exchange  Restrictions  (IMF,  2020),  the  IMF 
classifies national exchange rate arrangements in several formal categories according to the degree of 
flexibility, distinguishing between hard pegs, soft pegs, floating regimes (market-determined rates)  and 
residual  (other  managed  arrangement).  However,  exchange-rate  arrangements  can  be  re-classified 
according  both  their  degree  of  flexibility  and  the  existence  of  formal  or  informal  commitments  to 
exchange-rate paths.  

TABLE 1. Exchange rate arrangements and monetary policy frameworks in the EaP countries as per the 
IMF classification 

Exchange rate 
arrangement 

Monetary 
aggregate target  

Inflation targeting 
framework 

Other  

Stabilised arrangement 

Armenia 

Azerbaijan 

Floating 

Belarus 

Georgia; Moldova; 
Ukraine 

Source: Annual Report on Exchange Arrangements and Exchange Restrictions 2019 (IMF, August 2020). 

In 2020, all EaP countries have de jure floating exchange rate regimes, according to what they report to 
the IMF. However, in practice (de facto) the situation varies as some of them still continue to conduct 
their exchange-rate policies based on anchor currencies, and in particular the US dollar. For this reason, 

6 See, for example, “Dollarisation in the Former Soviet Union: from Hysteria to Hysteresis” by O. Havrylyshyn and C. H. 
Beddies,  Comparative  Economic  Studies,  Volume  45,  2003,  pp.  329-357.  On  the  inertia  or  hysteresis  that  characterises 
dollarisation, see also “Prospects for Monetary Integration in Latin America: A View from the EU” by H. Temprano, published 
in the same issue of that journal. 

10 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
the IMF classifies Azerbaijan and Armenia7 as having a stabilised arrangement. In both cases this is due 
to the limited fluctuations their currencies show against the US dollar (see Table 1).  

This discrepancy between de jure and de facto exchange-rate regimes was highlighted in a paper from 
Calvo and Reinhart (2002) where the authors show that “fear from floating” incentivised some countries 
to limit exchange-rates fluctuations. Indeed, the low variability of the nominal exchange rate does not 
arise from the absence of shocks to the economy, but stems from deliberate policy actions to stabilise 
the exchange rate. In return, reserve volatility, along with interest rate and monetary aggregate volatility, 
are high or at least higher than what it should be under full flexibility.  

Armenia  left  the  ruble  zone  at  the  end  of  1993  when  its  own  currency,  the  Armenia  dram,  was 
introduced.  Even  if  deciding  on  a  de  jure independent floating  exchange rate regime,  the  authorities 
followed a de facto crawling band to the USD dollar until early 2000. Sharp local currency appreciation 
at the start of the century prompted significant central bank interventions and led to a reclassification of 
the exchange rate regime by the IMF to a managed float in 2006. While the Central Bank of Armenia 
(CBA) adopted an inflation-targeting framework in 2006, it was only in early 2009 that it switched to a 
free float and abandoned the non-publicly communicated anchor to the US dollar. However, the country 
maintained significant stability in its AMD/USD exchange rate in recent years, which, as noted above, 
made the IMF reclassify retroactively as of 2017 the exchange rate regime as a stabilised arrangement. 

Azerbaijan opted for a managed floating exchange-rate policy vis-à-vis the US dollar after the collapse 
of the Soviet Union. As a hydrocarbon-intensive exporter, this policy had intuitive appeal given that 
international oil markets are priced in US dollar. In addition, public spending requires converting US 
dollar oil revenues in local currency. In January 2017, following two devaluations in 2015 as a result of 
a  banking  crisis  and  a  slump  in  global  oil  prices,  the  central  bank  decided  to  abandon  the  de  jure 
exchange-rate corridor and let the local currency, the manat, float freely. De facto, however, the free 
float was short-lived as the authorities continued to use the US dollar as a nominal anchor. 

In view of its fiscal and institutional weaknesses, Belarus opted in the early 1990s for a money-based 
stabilisation. However, this approach was soon abandoned for an exchange rate-based anchor (via a peg 
or a crawling band) that was centred around the US dollar and the Russian ruble. In 2009, the peg was 
modified to a currency basket that included the euro in addition to the two currencies. As of 2015, along 
with the switch to a monetary-targeting framework that uses growth in broad money as an intermediate 
monetary policy target, the central bank started allowing for more flexibility of the exchange rate by 
scaling down foreign exchange market interventions.  In the same year, the bank announced plans to 
introduce inflation targeting in the future. As of August 2018, the IMF reclassified the de facto exchange 
rate  arrangement  to  floating  from  ‘Other  managed  arrangements’  as  the  bank  stopped  following  the 
currency basket. 

Since its independence in 1991 and until 1997, Georgia had a fixed exchange rate regime. The local 
currency, the lari, was pegged to the US dollar given the low level of trust in the new national currency. 
In 1997, however, with monetary credibility established after years of prudent policies, the central bank 
switched to a floating exchange rate regime. Since 2009, monetary policy has been based on a formal 

7 In Armenia, the de jure exchange rate arrangement is a free float. As the exchange rate has stabilised within a 2% band against 
the US dollar since early 2017, the de facto exchange arrangement was reclassified retroactively by the IMF to stabilised from 
floating, effective January 2, 2017. 

11 

 
                                                           
inflation-targeting  framework.  The  US  dollar  is  the  reference  currency  used  for  establishing  the 
exchange rate of the lari against other currencies. 

In the 1990s, Moldova opted for a managed float against the US dollar in order to ensure price stability. 
Active foreign exchange interventions (predominantly in US dollar) by the central bank continued until 
the de facto introduction of an inflation-targeting regime in 2009 (de jure the new regime was launched 
in 2010). As of 2008, the IMF classifies Moldova’s de facto exchange rate arrangement as ‘floating’.  

Following sustained hyperinflation in the early 1990s, Ukraine introduced its new currency, the hryvnia, 
in  1996.  In  order  to  anchor  the  high  inflationary  expectations,  the  country  pursued  exchange-rate 
targeting with the US dollar being the reference currency either in the form of a tight managed float or 
a conventional peg. The peg against the US dollar came under attack during the global financial crisis 
and again in 2013, with the outbreak of an armed conflict in the eastern part of the country. As Ukraine’s 
reserves  declined  rapidly  and  the  peg  became  unsustainable,  the  central  bank  switched  to  a  floating 
regime as of 2014. In 2016, the central bank introduced inflation targeting. 

Although, as seen above, most of the EaP countries have opted to abolish the US dollar as an outright 
anchor, the US currency remains key in setting official exchange-rate quotations. The exchange rates of 
the local currencies against other currencies are calculated as cross rates using the official exchange rate 
against the US dollar. As a result, the exchange rate against the US dollar is often used for accounting 
(as a reference rate by entities and banks) and statistical purposes, for Treasury operations connected 
with external debt service, as well as for issuing new external obligations.  

In  the  case  of  Georgia,  the  official  exchange  rate  for  the  US  dollar  may  be  even  used  (this  is  not 
mandatory)  for  state  budget  and  tax  accounting  and  for  payments  between  the  government  and 
businesses and other legal entities.8 For the above-mentioned reasons, central banks continue to conduct 
foreign exchange market interventions predominantly in US dollars even though the euro is also used in 
some cases (for example in Moldova). 

Graphs  2.4  to  2.9  plot  quarterly  changes  in  exchange  rates  of  the  euro  and  US  dollar  against  local 
currencies. As can be seen from the graphs, the local currencies display over time a lower degree of 
volatility against the US dollar than against the euro. This is consistent with the exchange rate regimes 
and the use of the US currency for establishing exchange-rate quotations against other currencies.  

8 https://www.elibrary-areaer.imf.org/Pages/Reports.aspx  

12 

 
 
 
 
                                                           
Graph 2.4.  Armenia – exchange rate dynamics 

12%

7%

2%

-3%

-8%

7
0
0
2
y
a
M

8
0
0
2
r
a
M

l

u
J

6
1
0
2

1
1
0
2

4
1
0
2
n
a
J

9
0
0
2
n
a
J

5
1
0
2
p
e
S

0
1
0
2
p
e
S

4
1
0
2
v
o
N

9
0
0
2
v
o
N

3
1
0
2
r
a
M

2
1
0
2
y
a
M
2 standard deviations USD/BYN
2 standard deviations EUR/BYN
3 per. Mov. Avg. (Monthly change % USD/AMD)
3 per. Mov. Avg. (Monthly change % EUR/AMD)

7
1
0
2
y
a
M

8
1
0
2
r
a
M

9
1
0
2
v
o
N

9
1
0
2
n
a
J

u
J

l

Graph 2.5.  Azerbaijan – exchange rate dynamics 
20%

15%

10%

5%

0%

-5%

-10%

-15%

7
0
0
2
y
a
M

8
0
0
2
r
a
M

9
0
0
2
n
a
J

l

u
J

6
1
0
2

1
1
0
2

4
1
0
2
n
a
J

0
1
0
2
p
e
S

5
1
0
2
p
e
S

4
1
0
2
v
o
N

3
1
0
2
r
a
M

2
1
0
2
y
a
M

9
0
0
2
v
o
N
2 standard deviations EUR/AZN
2 standard deviations USD/AZN
3 per. Mov. Avg. (Monthly change % USD/AZN)

7
1
0
2
y
a
M

8
1
0
2
r
a
M

9
1
0
2
n
a
J

u
J

l

9
1
0
2
v
o
N

Note: Quarterly changes in AMD/USD and AMD/EUR 
Source: Central Bank of Armenia. 

   Note: Quarterly changes in AZN/USD and AZN/EUR 
   Source: Central Bank of Azerbaijan. 

Graph 2.6.  Belarus – exchange rate dynamics 
25%

Graph 2.7.  Georgia – exchange rate dynamics 

7%

2%

-3%

-8%

5%

-15%

-35%

7
0
0
2
y
a
M

8
0
0
2
r
a
M

9
0
0
2
n
a
J

9
0
0
2
v
o
N

0
1
0
2
p
e
S

1
1
0
2

l

u
J

2
1
0
2
y
a
M

3
1
0
2
r
a
M

4
1
0
2
n
a
J

4
1
0
2
v
o
N

5
1
0
2
p
e
S

6
1
0
2

l

u
J

7
1
0
2
y
a
M

8
1
0
2
r
a
M

9
1
0
2
n
a
J

9
1
0
2
v
o
N

7
0
0
2
y
a
M

8
0
0
2
r
a
M

9
0
0
2
n
a
J

9
0
0
2
v
o
N

0
1
0
2
p
e
S

1
1
0
2

l

u
J

2
1
0
2
y
a
M

3
1
0
2
r
a
M

4
1
0
2
n
a
J

4
1
0
2
v
o
N

5
1
0
2
p
e
S

6
1
0
2

l

u
J

7
1
0
2
y
a
M

8
1
0
2
r
a
M

9
1
0
2
n
a
J

9
1
0
2
v
o
N

2 standard deviations USD/BYN
2 standard deviations EUR/BYN
3 per. Mov. Avg. (USD/BYN)
3 per. Mov. Avg. (EUR/BYN)

2 standard deviations USD/GEL
2 standard deviations EUR/GEL
3 per. Mov. Avg. (Monthly change % USD/GEL)
3 per. Mov. Avg. (Monthly change % EUR/GEL)

Note: Quarterly changes in BYN/USD and BYN/EUR 
Source: Central Bank of Belarus. 

Note: Quarterly changes in GEL/USD and GEL/EUR 
Source: National Bank of Georgia. 

Graph 2.8. Moldova – exchange rate dynamics 

Graph 2.9. Ukraine – exchange rate dynamics 

8%

3%

-2%

-7%

25%

15%

5%

-5%

-15%

0
0
0
2
n
a
J

1
0
0
2
b
e
F

2
0
0
2
r
a
M

3
0
0
2
r
p
A

4
0
0
2
y
a
M

5
0
0
2
n
u
J

6
0
0
2

l

u
J

7
0
0
2
g
u
A

8
0
0
2
p
e
S

9
0
0
2
t
c
O

0
1
0
2
v
o
N

1
1
0
2
c
e
D

3
1
0
2
n
a
J

4
1
0
2
b
e
F

5
1
0
2
r
a
M

6
1
0
2
r
p
A

7
1
0
2
y
a
M

8
1
0
2
n
u
J

9
1
0
2

l

u
J

2 standard deviations USD/MDL
2 standard deviations EUR/MDL
3 per. Mov. Avg. (Monthly change % USD/MDL)
3 per. Mov. Avg. (Monthly change % EUR/MDL)

0
0
0
2
n
a
J

1
0
0
2
b
e
F

2
0
0
2
r
a
M

3
0
0
2
r
p
A

4
0
0
2
y
a
M

5
0
0
2
n
u
J

6
0
0
2

l

u
J

7
0
0
2
g
u
A

8
0
0
2
p
e
S

9
0
0
2
t
c
O

0
1
0
2
v
o
N

1
1
0
2
c
e
D

3
1
0
2
n
a
J

4
1
0
2
b
e
F

5
1
0
2
r
a
M

6
1
0
2
r
p
A

7
1
0
2
y
a
M

8
1
0
2
n
u
J

9
1
0
2

l

u
J

2 standard deviations USD/UAH
2 standard deviations EUR/UAH
3 per. Mov. Avg. (Monthly change % USD/UAH)
3 per. Mov. Avg. (Monthly change % EUR/UAH)

Note: Quarterly changes in AMD/USD and AMD/EUR 
Source: National Bank of Moldova. 

Note: Quarterly changes in UAH/USD and UAH/EUR 
Source: National Bank of Ukraine. 

13 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.2.1  Global currency zones analysis 

The international role of a currency can also be measured by estimating how shocks to the currency in 
question propagate to other currencies. That is, the exchange rate regimes of most of these countries can 
be approximated well by a soft peg to a currency basket dominated by the euro or the US dollar. The 
degree to which an international currency acts as an anchor for the exchange rate of other countries can 
be  approximated  by  the  degree  to  which  its  exchange  rates  vis-à-vis  other  currencies  co-moves.  By 
estimating the degree of exchange rate co-movement one can effectively split the global economy into 
a few currency areas, i.e. group of countries with exchange rates co-moving strongly with the US dollar, 
the euro or other major currencies. 

In this section, we will refine the observations above and look at the extent to which each EaP country 
belongs  to  a  given  currency  zone  following  the  method  developed  by  Frankel  and  Wei  (1995).  The 
principle is the following: an economy belongs to a given currency zone if its currency varies less against 
this currency than against others. Co-movement can arise from exchange-rate regime itself, but also from 
underlying trade relations and the pursued monetary policy (McCauley and Shu, 2018). It is beyond the 
scope of this report to analyse the channels and their importance behind such co-movements in the EaP 
region. 

We  estimate  how  much  each  EaP  country  co-moves  with  the  US  dollar,  the  euro,  the  renminbi,  the 
Japanese yen, the British pound sterling and the Russian ruble over rolling windows of 36 months in 
2000-2019. The beta coefficients are allowed to vary over time at the monthly frequency. We use the 
dollar as numeraire9.  

We estimate the following regression: 

Where: 

• 

• 

𝑖𝑖/$

∆𝑒𝑒𝑡𝑡

=   𝛼𝛼𝑖𝑖 +   𝛽𝛽𝑖𝑖€𝑡𝑡∆𝑒𝑒𝑡𝑡

€/$

£/$

+   𝛽𝛽𝑖𝑖£𝑡𝑡∆𝑒𝑒𝑡𝑡

¥/$

+ 𝛽𝛽𝑖𝑖¥𝑡𝑡∆𝑒𝑒𝑡𝑡

₽/$

+   𝛽𝛽𝑖𝑖₽𝑡𝑡∆𝑒𝑒𝑡𝑡

+   𝜀𝜀𝑖𝑖,𝑡𝑡

 (1) 

 is the bilateral exchange rate of currency I, against the dollar  

 on the right-hand side of the equation is the exchange rate of the euro, the British pound 

𝒊𝒊/$
𝒆𝒆𝒕𝒕
𝒉𝒉/$
sterling, the Japanese yen and the Russian ruble against the dollar.  
𝒆𝒆𝒕𝒕

The  movements  of  each  local  currency  against  the  US  dollar  on  the  left-hand  side  are  reduced  to  a 
weighted average of the movements of the euro, the Japanese yen, the British pound sterling and the 
Russian ruble against the US dollar on the right-hand side, leaving a residual idiosyncratic movement. 
, the estimated coefficient on the rate of change in the exchange rate of key currency h vis-à-
Thus
vis the US dollar in period t, represents the weight of h in the behavioural basket.  

 𝛽𝛽𝑖𝑖ℎ𝑡𝑡

The  dollar’s  weight  is  calculated  as 
pegged to the US dollar, then 
of Europe. 

 so that 

𝛽𝛽̂𝑖𝑖$𝑡𝑡 = 1 − (𝛽𝛽̂𝑖𝑖€𝑡𝑡 + 𝛽𝛽̂𝑖𝑖£𝑡𝑡 + 𝛽𝛽̂𝑖𝑖¥𝑡𝑡 +   𝛽𝛽̂𝑖𝑖₽𝑡𝑡)

.  Hence,  if  a  currency  is 
. We have introduced the results on a map 

𝐻𝐻
ℎ=1

∑

𝛽𝛽𝚤𝚤ℎ�

= 0

𝛽𝛽̂𝑖𝑖$𝑡𝑡 = 1

9 Ma and McCauley (2011) demonstrate that the same Frankel-Wei results are obtained with the US dollar and the 
IMFs special drawing rights as numeraire. In principle, the currency anchoring and the degree of anchoring are 
two separate questions. 

14 

 
                                                           
Equation (1) was first estimated over the whole sample (2000-2019). The adjusted R2 is very low for all 
the countries, meaning that overall, variations in the exchange rates of local currency against the euro, 
the renminbi, the Japanese yen, the British pound and the Russian ruble largely fail to explain shocks to 
demand for the domestic currency. On the other hand, it suggests that the US dollar plays a dominant 
role as an anchor currency. Only the Russian ruble and the euro, and to a lesser extent the renminbi, 
demonstrate statistical significance.  

To see if and how their exchange rate regimes have evolved since 2016, when most countries applied 
floating regimes, we have extracted estimates from the last 36-month window regression and presented 
them in a map below. Our estimates show that the US dollar continues to play a dominant role in driving 
the exchange rates for all the EaP countries in 2016-2019. However, the adjusted R2 have improved, 
meaning that the independent variables have gained relevancy in explaining the variation in demand for 
the local currency.  

Countries where the US dollar plays a greater role as an anchor currency are Azerbaijan (which reflects 
the de facto peg of the local currency to the US dollar) and Armenia, while its influence is most limited 
in Moldova and Belarus (graph 2.10). At the same time, the euro plays its greatest role (but still lower 
than  the  US  dollar)  in  Moldova  and  Ukraine  (graph  2.11).  Its  role  is  very  limited  in  Armenia.  The 
Russian ruble has a significant influence in Belarus and in Georgia (more important than the euro). It 
plays a very limited role for the other countries though.  

Graph 2.10.  Estimated co-movement with the US dollar 

Graph 2.11.  Estimated co-movement with the euro 

 > 0.8 

 [0.4 ; 0.6] 

  ≈ 0.5 

 [0.2 ; 0.3] 

 ∈

Note:  Estimation  method  based  on  Frankel  and  Wei 
(1995). 

 > 0,1 
∈

Despite geographical proximity to the euro area, the findings confirm the dominant role of the US dollar 
in the EaP countries. This is partially due to historical inertia and the role of the US dollar as a safe 
haven. The multiple episodes of economic and financial crises led to currency substitution in favour of 
the US dollar and prompted central banks use the US dollar as a reference currency. Although most of 
the EaP countries have opted to abolish the US dollar as an outright anchor, the US currency remains 
key in setting official exchange-rate quotations. We have showed that not only the US dollar varies less 
against the different local currencies and displays a higher liquidity in comparison to the euro, but also 
that, by estimating the degree of exchange rate co-movement, it still acts as an informal anchor for the 
exchange rates of the EaP countries. 

15 

 
 
 
 
 
 
 
 
 
 
 
 
 
Box 1. ANECDOTAL EVIDENCE: WHAT DO EXCHANGE RATES BID-ASK SPREADS REVEAL? 

Bid-ask spreads of exchange rates (i.e. the difference between the amount a dealer is willing to sell a 
currency for versus how much (s)he is willing to buy it for) can reflect the role a respective currency 
plays in a given country. 

The bid-ask spread is a signal of the levels at which sellers are willing to sell, representing supply of a 
given  security  (ask),  and  at  which  the  buyers  are  willing  to  buy,  reflecting  the  demand  (bid).  An 
important  determinant  of  the  bid-ask  spread  is  liquidity.  A  tight  bid-ask  spread  usually  reflects  an 
actively traded security with high liquidity. If the volume is reduced, the spread will increase. As such, 
bid-ask  spreads  could  be  used  as  an  intuitive  proxy  for  the  popularity  of  a  particular  currency,  an 
indicator of its market liquidity in a country. 

To this end, we gathered anecdotal evidence on the use of selected currencies in the six EaP countries 
by collecting buy and sell currency quotations as advertised by random foreign exchange bureaus in the 
capital cities. We have asked EU Delegations in each country to collect the sell/buy prices for several 
most widely quoted currencies, including the euro and US dollar, in two to three exchange kiosks per 
capital.  

The  findings  from  this  exercise  confirm  the  dominance  of  the  US  dollar.  In  all  countries,  save  for 
Moldova and Belarus, the buy-sell spread is lowest for the US currency with the euro coming second. 
In Moldova, the euro enjoys a slight advantage against the US currency. In Belarus, the spreads of the 
two currencies are the same. According to the bid-ask spreads, the Russian ruble enjoys high popularity 
in Belarus and to a lower extent in Moldova and Ukraine. 

3.  ECONOMIC LINKS BETWEEN THE EASTERN 
PARTNERSHIP COUNTRIES AND THE EU 

The EaP countries share close political and economic links with the EU. These have strengthened in 
recent  years  with  the  upgrade  of  the  contractual  relations  through  a  new  generation  of  bilateral 
association or partnership agreements that provide for an enhanced political and trade integration over 
the medium-term.10  

The EU is now the largest trading partner for four of the six Eastern partners (second-biggest for the 
remaining two), while it is also a significant source of direct investment and remittances.11 Strong trade, 
financial and migration links with the EU could favour a more prominent role of the euro in the region. 
We show below that the growing economic links between the Eastern countries and the EU provides a 

10 The EU has concluded Deep and Comprehensive Free Trade Area agreements with Georgia, Moldova and Ukraine (in force 
as of 2016-2017) as well as a Comprehensive and Enhanced Partnership Agreement with Armenia (applied provisionally as of 
2019). 

11 The trade and other data used in this paper still include the UK in the definition of the EU. The exit of the UK from the EU 
in February 2020 will have significant applications for trade and investments statistics, as the UK is an important trade partner 
and foreign investor for some countries that trade heavily with oil and oil products (in particular Azerbaijan and Belarus). 

16 

 
 
 
 
                                                           
 
 
rational to push for greater role of the euro in the region, notably thanks to its growing importance as a 
trade invoicing and trade settlement currency. 

3.1. 

TRADE FLOWS 

While the global financial crisis somewhat disrupted trade between the EU and its Eastern neighbours, 
there has been a revival in recent years, partly supported by the ongoing upgrade in EU-EaP relations 
through the above-mentioned new set of bilateral agreements (graph 3.1). For three countries, Georgia, 
Moldova and Ukraine, these include detailed provisions for enhanced economic integration on the basis 
of the establishment of free trade areas that support intra-regional trade of goods and services.  

Armenia, Azerbaijan and Belarus have no preferential trade agreements and have chosen a different path 
for  regulating  their  trade  relations  with  the  EU.  Still,  some  of  them  have  either  recently  concluded 
(Armenia) or are in the process of upgrading (Azerbaijan) their political agreements with the EU, which 
could also help stimulate bilateral trade and investments in the future. 

While the  benefits  for the EaP  countries  with  Deep and  Comprehensive  Free Trade  Area (DCFTA), 
which entered into force only in 2016-17, will be best seen over the long term, once the tariff dismantling 
will be completed and the various non-tariff barriers further eased, the first results observed give room 
for optimism. They reveal an increasing number of companies trading within the free trade areas with 
the EU and new products traded.12 Trade flows with goods have increased significantly with Ukraine 
and Moldova (nearly 50% in the period from 2016 to 2019) but also Armenia, Azerbaijan and Belarus 
(30-40% in the same period).  

Graph 3.1.  Trade turnover (weighted average) with 
goods with the EU, % of total  
35

33,9

32,1

28,8

Graph 3.2.  Trade with goods by destination, 2019 

100%

80%

60%

40%

20%

0%

2008

2010

2019

Others
EU28
Regional weighted average

Source: Commission calculations based on IMF Direction 
of Trade Statistics. 

Source: 
Direction of Trade Statistics. 

  Commission  calculations  based  on 

IMF 

The  EU  stands  as  the  largest  trade  partner  for  the  three  DCFTA  countries  (Georgia,  Moldova  and 
Ukraine)  and  Azerbaijan  (graph  3.2.).  It  comfortably  holds  the  second  position,  as  noted,  for  the 
remaining two, Armenia and Belarus, where Russia is the most important trade partner. In 2019, the EU 
trade in goods with the EaP region amounted to nearly EUR 79 billion. The EU share of goods trade per 

12 The number of Ukrainian companies exporting to the EU market rose by 24% since 2015 to 14,500 in 2019. In the case of 
Moldova, a 6% annual increase in the number of exporting companies to the EU was recorded in 2019. 

17 

32

29

26

23

20

 
 
                                                           
 
 
 
 
country constituted 54% for Moldova, 40% for Ukraine, 37% for Azerbaijan, 23% for Georgia, 20% for 
Armenia and 18% for Belarus. 

For the DCFTA countries, food products represent a large share of their exports to the EU. Base metals 
are  important  export  items  for  Ukraine  and  Georgia.  Benefiting  from  integration  with  the  EU’s  car 
manufacturing  industry,  Moldova  has  a  significant  share  of  exports  of  automotive  components. 
Regarding imports, chemicals and related products as well as and machinery and transport equipment 
are a common denominator of the three countries: each of these sectors represent more than 10% of 
imports in Ukraine, Moldova and Georgia. 

Armenia, Azerbaijan and Belarus are exporters mainly of commodities to the EU. Azerbaijan's exports 
are strongly concentrated in the mineral products (oil and gas). Mineral products in the form of refined 
petroleum are the dominant export item to the EU for Belarus as well. Other important export sectors 
are base metals (Armenia), chemicals (Belarus), and precious metals and stones (Armenia).  

For  all  three  countries,  machinery  constitutes  a  crucial  import  sector  and  -  with  the  exception  of 
Azerbaijan - mineral products, likely fossil fuels, are also important. We will see this further down, but 
it explains partly why the shift towards euro invoicing could be improved, as oil and gas products, where 
the US dollar is the dominant currency, constitute an important share of commodities exports to the EU.  

In the wake of COVID-19 pandemic and disruption of global value chains, the process of nearshoring 
could further strengthen the trade links between the EaP countries and the EU. The crisis created serious 
disruptions  (e.g.  transport  suspension,  factory  closures)  in  product  inflows  which  exposed  the 
vulnerabilities of global value chains. This could serve as an incentive for EU companies to reallocate 
outsourced activities closer to its borders, the so-called nearshoring, and ultimately further boost trade 
with the EaP region.  

3.2. 

FINANCIAL FLOWS: FDI, REMITTANCES, BANKING SECTOR 

3.2.1 

FDI in the region 

The EU is by far the dominant foreign investor in the region. It accounted for some 50% of the foreign 
direct investment (FDI) stock in the EaP region at end-2018 in weighted terms (graph 3.3). In particular, 
EU companies commanded over 60% of the foreign investments in Moldova and 70% in Ukraine, which 
is the largest economy in the region with a share of approximately a half of the total six countries. The 
EU is a key investor in the remaining four EaP countries, with shares ranging from 35% (Armenia) to 
45% (Georgia).  

The above-mentioned figures should be treated with caution though, as they tend to over-estimate the 
actual  importance  of  the  EU  as  investor,  and  thus  the  potential  importance  of  the  euro  as  a 
financing/trade-settlement currency. FDI in some countries has been substantially inflated by the so-
called  round-tripping  –  domestic  investments  routed  through  a  foreign  country  for  reasons  like  tax 
optimisation or property rights protection (including concealing direct ownership).  

For example, such practices were widely used in Ukraine before the 2014 crisis. According to estimates 
of the National Bank of Ukraine, nearly 40% of the FDI inflows in 2010-2013 represented round-tripping 
transactions that were mainly implemented via Cyprus.13 The figure has dropped drastically by 2018 and 
partly  explains  the  much  lower  level  of  FDI  inflows  in  recent  years.  Cyprus  is  also  widely  used  by 

13 https://bank.gov.ua/en/files/rRSNvteXHvOavxA  

18 

 
                                                           
Russian  companies  for  investment  activity.  This  can  explain  the  high  share  of  the  country  in  the 
investment stock of Belarus and, to a lower extent, Armenia and Moldova. Finally, it should be also 
noted  that  Russian  companies  often  use  their  Netherlands-based  subsidiaries  for  implementing  their 
investment policies in the EaP region. This goes in particular for the oil and telecom sectors.  

A number of factors have challenged inward FDI lately, including from the EU. Political risks have been 
on the rise due to domestic instability that often results in changes of governments and delayed reform 
implementation but also recurrent regional military conflicts (e.g. Eastern Ukraine in 2013-14, Armenia 
and  Azerbaijan  over  the  Nagorno-Karabakh  enclave  in  the  autumn  of  2020).  This,  coupled  with  a 
structural  shift  of  FDI  from  goods  to  services,  largely  explains  the  decline  in  investment  inflows 
witnessed since 2008. Another impediment seems to be slow progress with the rule of law and institution 
building – key ingredients for attracting foreign investments. Unlike business environment and trade 
openness, progress with establishing independent and credible judicial systems in the region has been 
rather uneven.  

Finally, there was a significant change in risk patterns post-2008 as foreign investors assumed a much 
more risk-averse approach. This seems to be particularly the case for key investor partners such as the 
EU and Russia. The outward investment activity of Russia has been further affected by international 
sanctions following  the  annexation  of  Crimea.  In  fact,  Russian companies  not only  scaled  back  new 
investment in a number of EaP countries (namely Ukraine and Moldova) but also started withdrawing 
capital as the sanctions kicked in. 

Graph 3.3.  Inward FDI stock, end-2018 

Graph  3.4.    Inward  EU  FDI  in  EaP  countries,  %  of 
total 

100

80

60

40

20

0

Other, %
EU, %
Regional weighted average, %

Source:  Commission  calculations  based  on  IMF  FDI 
statistics database. 

3.2.2 

Inward remittances 

70

60

50

40

30

20

10

0

57,2

61,3

50,8

2009

2012

2018

Due  to  significant  levels  of  outward  migration  and  the  relatively  small  size  of  the  six  countries, 
remittances account for a sizeable part of these economies (graph 3.5). They are also an important source 
of foreign currency inflows. Moldova (16% of GDP in 2019), Georgia and Armenia (respectively, 13% 
and 11% of GDP), and Ukraine (11% of GDP) are particularly dependant on remittances. In nominal 
terms, Ukraine receives twice as much remittances as the five other partners combined.14 

14  The  role  of  remittances  in  Moldova  and  Armenia  has  declined  substantially  since  the  global  financial  crisis.  In  2007, 
remittances inflows stood at 29% and 17% of their respective GDP. However, high economic growth (denominator effect) and 
declining inflows brought these shares significantly down by 2019. By contrast, remittances more than doubled their weight in 

19 

 
 
 
                                                           
Since  2013,  the  share  of  the  EU  as  a  source  of  remittances  to  the  EaP  countries  has  significantly 
increased, in particular in the ones that opted for closer economic and political integration through the 
DCFTA agreements (graph 3.6). This also coincided with a continuous decline in the importance of 
Russia as a source of remittances, a reflection of the oil shock in 2014 and the trade and investment 
sanctions  imposed  by  Western  countries  on  this  country  following  its  annexation  of  the  Crimea 
peninsula. According to figures from national authorities on money transfers from abroad, which are a 
close proxy of the dynamics of remittances, the EU overtook Russia as the main source in Moldova (in 
2017) and in Georgia (in 2018).  

The re-orientation of Ukraine towards remittances from the EU was even faster. In 2019, nearly two-
thirds of all inflows came from the EU. The share of Russia, once a dominant source of remittances for 
the country, dwindled to 10.6%. Overall, in 2019 the EU was the main source of remittances for the 
three DCFTA countries, which comes as another confirmation for their growing dependence on the EU 
economic cycle. Furthermore, for each of these countries, the share of EU flows has been continuously 
on the rise. In Armenia, Russia remains the dominant source for remittances (nearly 54% of the total in 
2019) but, similar what has been observed in other countries, its share is rapidly decreasing - it stood at 
75% in 2013. 

Graph 3.5.  Remittances inflows, % GDP, 2004-2019 

Graph 3.6. Money transfers from abroad in 2019, % 

30

25

20

15

10

5

0

100

80

60

40

20

0

Georgia
Armenia

Azerbaijan
Moldova

Belarus
Ukraine

Ukraine

Moldova

Georgia

EU

Other

Source: Commission staff calculations based on figures 
from the national administrations; World Bank. 

Source: Commission staff calculations based on figures 
from the national administrations. 

3.2.3 

Financial sector links 

Financial integration between the EU and the EaP countries is limited with the exception of Moldova. 
This could be explained by a variety of factors such as a dominant position of the state in the banking 
sector in a number of countries (Azerbaijan, Belarus, Ukraine) or of domestic private actors (Georgia), 
which serves as an entry barrier. Weak interest from EU financial institutions in entering/expanding on 
these markets is also an important factor behind the modest presence of EU financial institutions in the 
region.  This  reflects  both  domestic  barriers,  in  particular  a  weak,  although  recently  improving, 
institutional framework, and growing risk-aversion by European investors. The latter was particularly 
evident following the global financial crisis when significant deleveraging led several EU banks to exit 
from the EaP market, and in particular from Ukraine. 

Ukraine as the 2014 crisis resulted in a significant migration to the EU (in particular Poland and more recently to Czechia) and 
a corresponding surge in remittances. 

20 

 
 
 
 
 
 
 
                                                           
As for the institutional weaknesses, they are best evidenced by the 2014-15 banking crises in Azerbaijan, 
Moldova and Ukraine that were all driven by weak oversight, which led to the proliferation of fraudulent 
practices by some of the biggest commercial banks of these countries. On the positive side, they all took 
steps to address the shortcomings and strengthen the banking sector, moves that are not only likely to 
increase  the  its  appeal  for  investors  but  also  improve  the  overall  macroeconomic  fundamentals  and 
support business activity. 

4.  CHARACTERISTIS AND DETERMINANTS OF THE USE OF 
THE EURO IN EASTERN PARTNERSHIP COUNTRIES 

4.1. 

RESULTS OF THE EUROPEAN COMMISSION’S SURVEY 

4.1.1  Overview 

At  the  end  of  2019,  the  European  Commission  conducted  a  survey  with  the  help  of  central  banks, 
ministries of finance and other state institutions on the use of the euro and other currencies in the Eastern 
Partnership.  The  data  gathered  for  2018  covered  five  dimensions:  cross-border  trade  transactions, 
remittances, foreign exchange reserves and swap lines, public debt and banking sector. 

4.1.2 

Comparison with global use of euro 

In spite of increasing political and economic links with the EU, the euro still plays a relatively limited 
role in the EaP region. Except for Moldova, the use of the euro remains below the global average. Across 
several dimensions – debt issuance, reserve assets and bank deposits – the countries in the EaP continue 
to exhibit a relatively high dependence on the US dollar, i.e. they use it, in relative terms, more than the 
rest of the world (graph 4.1). The use of the euro is, however, at par when it comes to trade invoicing 
and bank lending.  

To explain why the share of the euro in 
trade invoicing  matches global averages 
in  the  EaP,  it  is  useful  to  recall  the 
importance of the EU as a trade partner in 
the  region,  along  with  the  increasing 
capacity  of  European  importers  and 
exporters  to  process  payments  in  their 
own currency. As for bank loans, related 
trade financing needs and the low interest 
environment  have  boosted  demand  for 
euro-denominated loans. 

When it comes to debt stock, it should be 
noted that while the share of euro is still 
relatively modest when compared to the 
one  of the  US  dollar,  the euro  has  been 
rapidly  gaining  weight  in  recent  years. 
For  example,  all  new  debt  signed  by 
Georgia  in  2019  was  denominated  in 

Graph  4.1.    Overview:  International  monetary  system  vs 
Eastern Partnership in 2018, % 
80

80,00

60

40

20

0

70,00

60,00

50,00

40,00

30,00

20,00

10,00

0,00

External
public
debt

Foreign
exchange
reserves
USD EaP
EUR EaP

Total
trade
invoicing

Banks
deposits

Banks
loans

USD World
EUR World

Note: When reading the graph, keep in mind it is a clustered and stacked 
column chart – it clusters EaP vs World for each dimension and stacks USD 
and EUR. 

Source:   Survey 2019 DG ECFIN; ECB (2019, 2020) The international role of 
the euro; Gopinath, G., The International Price System, NBER Working Paper, 
No 21646, 2015. 

21 

 
 
 
euro. At the same time, Ukraine tapped the euro-denominated market for the first time in 15 years.  

Despite a gradually increasing role of the euro in some dimensions, the US dollar remains by far the 
dominant foreign currency used by the EaP countries. On (weighted) average, at the end of 2018 they 
denominated around 75% of their foreign exchange reserves in US dollars. Furthermore, the US dollar 
accounts for 47% of their trade invoicing; 72% of the external public debt; 76% of the foreign currency 
deposits and 72% of loans to households and non-financial corporations. On average, 60% of the assets 
and 58% of the liabilities of the banking sector are denominated in US dollars, as well as nearly 28% of 
remittances inflow (without Belarus and Azerbaijan). 

4.1.3 

Analysis by country 

Although  consistent  with  what  one 
could have expected given the depth of 
economic  links  with  the  EU,  these 
average 
rather 
diversified use of the euro among the 
EaP countries, with some using it more 
than global averages while others only 
at the margin. 

figures 

hide 

a 

Graph 4.2. Composite index of the use of the euro across EaP 
countries 

80

60

40

20

0

Ukraine

Moldova

Based  on  the  survey’s  results,  we 
constructed  a  composite  index  of  the 
use of  the  euro  for each  country. The 
index 
is  based  on  the  arithmetic 
average  of  the  shares  of  the  euro  in 
stocks of external public debt, foreign-
exchange  reserves,  domestic  bank 
loans  and  deposits  denominated  in 
foreign currency, and gross foreign assets and liabilities of the banking sector, inward remittances and 
exports and imports of goods (graph 4.2).  

Note:  Azerbaijan’s  overall  position  could  not  be  determined  due  to 
lack of data. 

Source:  Commission  staff  calculations  based  on  Commission  2019 
survey, data from official national sources. 

Armenia

Georgia

Belarus

USD

EUR

Moldova  stands  out  by  a  large  margin  –  it  uses  the  euro  in  more  than  half  of  the  above-mentioned 
dimensions on average. Ukraine and Belarus follow with a bit less than 30% of all their stocks and flows 
in foreign-currency transactions denominated in euro. Georgia and Armenia display the lowest share of 
exposure to the euro in the region. While there is not sufficient data across all dimensions to evaluate 
the use of different foreign currencies in Azerbaijan, the importance of the oil sector for the economy 
suggest a relatively modest role for the euro. 

It should be also noted that Moldova is the only country in the region where the euro outweighs the use 
of the US dollar. This corresponds to the much closer economic ties this country enjoys with the EU. 
Another  explanatory  factor  seems  to  be  Moldova’s  lower  reliance  on  commodities  in  its  trade  as 
compared to the other EaP countries. Commodities are usually traded in US dollars in global markets. 
Belarus is the only other country where the US dollar enjoys less than a 50% share. This reflects the 
country’s relatively high exposure to the Russian ruble, in particular in trade invoicing. Overall, we see 
that the more highly dollarised an economy, the less euroised it is. This confirms the substitutability of 
the two currencies in their global role.   

22 

 
 
 
We  explore  in  more  details  below  four  dimensions  of  foreign  currency  usage  -  cross-border  trade 
transactions, foreign exchange reserves, external public debt and the commercial banking sector. To this 
end, following a short review of the relevant economic literature, we present the results of the survey 
across the various dimensions. 

4.2. 

THE EURO IN TRADE INVOICING 

4.2.1 

Literature review  

The euro is a major invoicing currency, reflecting the fact that the EU is the world’s largest trading 
block. Since its introduction in 1999, most euro-area countries expanded their use of the euro in the trade 
of goods and services with countries outside the euro area. The share of the euro in the invoicing of euro-
area international trade transactions in goods fluctuated around 50-60% over the last decade (ECB 2019). 
In 2019, over 61% of extra-euro area exports and 51% of extra-euro area imports of goods were invoiced 
in euro. Developments in some markets (in particular energy, where the role of the US dollar remains 
very important) may explain some of the variations in the share of the euro as an invoice/settlement 
currency,  along  with  ‘economic  size,  global  value  chain  integration  and  strategic  pricing 
complementarities in world export markets’ (ECB, 2020). 

However, unlike the US dollar, whose role as an invoicing and settlement currency exceeds significantly the 
weight of the US in global trade, the use of the euro for the invoicing of international transactions among 
third countries is rather limited. The ECB estimates that non-European countries use the euro proportionately 
no more than predicted by their exports to the euro area, except for the EU Member States in Central and 
Eastern Europe and Turkey. Ito and Chinn (2014), expanding a dataset constructed by Goldberg and Tille 
(2008) and Kamps (2006) covering 50 countries, found that overall around 40%  of exports and  50% of 
imports of countries other than the US were invoiced in US dollar between 2010 and 2012.  

A variety of factors defines the choice of a currency in international trade invoicing and settlement. They 
include,  among  others,  (i)  transaction  costs  and  industry  characteristics  (market/bargaining  power, 
homogeneous  goods);  (ii)  inertia  and  market  externalities;  (iii)  exchange  rate  and  macroeconomic 
volatility; (iv) country size and monetary union; and (v) financial issues.15  

Cost  considerations  are  central  when  exporters/importers  decide  in  what  unit  to  invoice  and  settle 
transactions.  Swoboda  (1968)  emphasised  that  currencies  with  low  transaction  costs  are  likely  to  be 
chosen as medium of exchange. McKinnon (1979) took this hypothesis and extended it to homogenous 
goods and primary commodities. He believed these types of goods were more likely to be invoiced in a 
vehicle  currency  that  offered  low  transaction  costs  and  increased  international  comparability  and 
transparency. Indeed, using a similar invoicing currency enables potential buyers to compare prices and 
eases entry costs for international markets. This is particularly important for the pricing of international 
commodities (i.e. numéraire function). 

McKinnon  also  emphasised  the  role  of  market  and  bargaining  power.  Goldberg  and  Tille  (2005) 
introduced the “herding” characteristic, where producers follow their competitor’s invoicing strategy, 
and  emphasised  the  role  of  industry  specific  features  together  with  the  degree  of  competition  and 
elasticity of demand. Network externalities are also deemed to play an important role (Rey, 2001 and 
Chinn and Frankel, 2008), with the wide use of a currency of exchange being self-reinforcing. In fact, it 

15 For a detailed overview of the factors influencing the currency choice in international trade invoicing, please see JRC report 
‘Invoicing Currencies in International Trade - Drivers and Obstacles to the Use of the Euro’ 

23 

 
                                                           
goes beyond the invoicing role. For instance, knowing that the cost of credit is likely to be the lowest in 
the most liquid and deepest financial markets, exporters and importers are theoretically more likely to 
invoice and settle their trade transactions in a given currency with developed financial markets, meaning 
that network and scale effects could play a significant role for the choice of the trade invoicing currency. 

Recent  research  (Gopinath  et  all,  2020)  focuses  on  the  so-called  dominant  currency  paradigm  that 
attributes the extensive use by companies of an international currency (the US dollar) in price setting for 
international trade and funding to, among others, the growing importance of global value chains. The 
use of imported intermediate inputs in exports favours the adherence to a single, dominant currency in 
international trade and results in a high degree of stickiness of trade prices in this currency. 

At  an  empirical  level,  few  studies  have  focused  on  what  determines  the  use  of  a  currency,  and  in 
particular the euro, in the invoicing of international trade. A 2016 study by the Joint Research Centre 
(JRC) emphasised the role of transaction costs, bargaining power, herding, as well as product and market 
characteristics when using the euro in international trade invoicing in selected industries (see Box 2).  

A panel data analysis conducted by Ito and Chinn (2014) found that the larger the share of its exports 
that goes to the US or the euro area, the more likely it is for a country to invoice in dollars or euros, 
respectively. In addition, if a country exports more commodities, it tends to invoice in US dollar, while 
alternatively, the more differentiated products it exports, the more likely it is to invoice in the home 
currency. A country with higher inflation and exchange rate volatility is more likely to invoice in US 
dollars. Finally, they find that the deeper and larger a country financial market is, the less likely it is to 
invoice its exports in US dollar compared to other currencies, including its home currency. 

The question here is how these theoretical considerations square up with the habits of exporters and 
importers in the EaP countries. In what follows, descriptive data on trade invoicing are provided for 
every country, except Azerbaijan. Additional insights are presented for Moldova, where the European 
Business  Association  in  the  country  conducted  a  flash  survey  of  exporters  and  importers’  currency 
invoicing patterns.16 It turns out that, in the absence of developed financial market infrastructure, the 
main determinants of the trade invoicing patterns in the EaP countries are market characteristics and 
bargaining power, along with inertia and network externalities. 

Box 2. INVOICING CURRENCIES IN INTERNATIONAL TRADE: DRIVERS AND OBSTACLES TO THE USE OF THE EURO 

A JRC (2016) study explores determinants and obstacles to the use of the euro in international trade 
invoicing  across  industries  by  looking  at  legal,  regulatory,  accounting  and  international  payment 
infrastructure restrictions, and/or trade practices. 

It examines five sectors – (i) aircraft, (ii) energy, (iii) financial services, (iv) electrical engineering, and 
(v) mechanical engineering. The survey consists of a quantitative and a qualitative part. The quantitative 
survey  covers  industrial  firms  in  Germany,  France  and  Italy,  and  financial  services  in  the  UK.  The 
percentage of exports of euro-area firms to countries outside the euro area invoiced in euro ranges from 
60% to 75% (depending on the methodology used). 

For the industrial sectors, the survey finds out that:  

16 The European Business Association in Moldova is a non-governmental association promoting private business between the 
EU and Moldova. 

24 

 
 
 
 
                                                           
•  Euro-area firms mainly invoice in euro when exporting; 
•  Firms tend to adopt the invoicing currency of their main competitors; 
•  Firms in large countries tend to invoice more in their own currency than in other currencies; 
•  Large firms (in terms of turnover and total exports) invoice less in euro than in other currencies; 
•  More homogeneous goods tend to be invoiced in dollars (rather than in euros) in absolute terms; 
•  Availability of trade credit increases the likelihood of not invoicing in euros; 
•  Transaction costs in foreign-exchange markets are lower for the US dollar compared to the euro. 

Source: Langedijk, Karagiannis & Papanagiotou, Invoicing Currencies in International Trade – Drivers and Obstacles to 
the Use of the Euro, JRC Science for Policy Report, 2016. 

4.2.2 

Trade denomination in the EaP countries  

We report figures for cross-border transactions of goods only, as statistics for invoicing of trade with 
services are not available for the region.17 The US dollar is the dominant invoice currency for most of 
the countries, save for Moldova and Belarus, where the euro and the Russian ruble play, respectively, a 
more important role.  

As for the euro, on average, 29% of exports in goods of the EaP countries in 2018 was denominated in 
euros.  The  figure  varies  considerably,  however,  ranging  from  11%  in  Georgia  to  63%  in  Moldova. 
Overall, the greater the importance of trade flows with the EU, the greater the share of trade exports 
denominated in euro (graphs 4.3 and 4.4).  

Graph  4.3. 
currency, 2018 (%)   

Invoicing  of  exports  of  goods  by 

Graph 4.4. Euro invoicing in exports vs trade with 
EU 

100

80

60

40

20

0

Armenia Belarus Georgia Moldova Ukraine

Other
USD
EUR
EaP weighted average, EUR

Source: Commission 2019 survey, national administrations. 

8
1
0
2

,

U
E
e
h
t
h
t
i

w
e
d
a
r
t

f
o
e
r
a
h
S

60%

50%

40%

Moldova

y = 0,0049x + 0,1708
R² = 0,6272

Ukraine

30%

Georgia

Armenia

Belarus

20%

10%

0%

0

20

40

60

80

Share of exports denominated in euro, 2018

While overall export invoicing in euros largely corresponds to the share of trade with the EU, there are 
significant  mismatches  per  countries.  In  Ukraine,  only  slightly  more  than  20%  of  the  exports  are 
invoiced in euro, whereas the EU accounts for approximately 35% of the country’s exports. The euro 

17 Trade in services plays an important role for a number of EaP countries, in particular ones with a well-developed tourist 
sector. For example, in 2019, trade in services accounted for nearly 50% of total trade in Georgia and for 43% in Armenia. 
Services represented around 27% of the trade turnover of Ukraine and 21% of Belarus in the same year. In this case, they were 
mainly focused in transport and IT and communication, with the latter seeing strong growth across the countries in recent years.  

25 

 
 
 
 
 
 
                                                           
 
 
 
 
 
 
 
seems  to  be  under-represented  (when  compared  to  the  trade  turnover)  in  the  case  of  Georgia  and 
Armenia  as  well.  This  could  be  explained  by  the  important  share  of  commodity  trade  in  these  two 
countries.18 We know that the US dollar is widely used as a vehicle currency – currency that is neither 
the exporter’s currency nor the local currency – for homogeneous goods such as oil and other energy 
products. As an example, around 85% of extra-EU oil imports are invoiced in US dollar according to 
Eurostat.   

When it comes to merchandise imports in the EaP countries, the euro enjoys a slightly higher share (a 
weighted average of 32%). This could reflect the lower weight of commodities, save for energy, for 
some of the countries compensated by a greater importance of machinery and equipment as well as by 
the stronger position of EU exporting companies in the choice of invoicing currency. While Moldova is 
again  a  comfortable  frontrunner,  Ukraine  stands  second,  with  nearly  40%  of  its  imports  being 
denominated in euro. This is nearly twice higher than the share of euro-invoiced exports of goods, a 
likely  reflection  of  the  lower  prominence  of  commodities  in  this  case.  Another  interesting  case  is 
Belarus, where the Russian ruble is the dominant invoice currency. 

Graph 4.5. Invoicing of imports of goods by currency, 2018 (%) 

100

80

60

40

20

0

Armenia Belarus Georgia Moldova Ukraine

Other
RUB
USD
EUR
EaP Weighted Average EUR

Source: Commission 2019 survey, national administrations. 

Box 3. CURRENCY DENOMINATION OF CROSS-BORDER TRADE TRANSACTIONS IN MOLDOVA 

In February 2020, the European Business Association (EBA) in Moldova conducted a flash survey 
with  some  of  its  members on  the invoicing  practices of  export/import  companies.  In  2018,  goods 
invoiced in euros represented 64% of Moldova’s exports and 51% of its imports. This mirrors the 
country’s share of exports and imports to the EU (see graphs 4.6. and 4.7. for 2019 trade with goods). 
The rest was mainly in US dollars and, marginally, in Russian rubles. Exports denominated in euros 
consisted mainly of agricultural and food products, machinery and mechanical appliances, electrical 
equipment, and textiles. Imports also involved chemical products and transportation means. As for 
services, the euro share was around 57% of imports and 49% for exports. Within the EU, Moldova’s 
main trading partners are first Romania, then Italy and Germany.  

18 The main export item for both Georgia and Armenia is copper ore. Armenia also has a high share of exports of unpolished 
diamonds. On the import side, both countries are heavily dependent on hydrocarbon. 

26 

 
 
 
 
 
 
                                                           
Graph 4.6. Main export partners, goods, 2019  

Graph 4.7. Main import partners, goods, 2019 

Ukraine
3%

Others
10%

Belarus
3%

Switzerland
3%

Turkey
6%

Russia
9%

Others
9%

Belarus
2%

Turkey
7%

Ukraine
10%

China
10%

Russia
12%

EU 
66%

EU
50%

Source: EBA Moldova. 

Overall determinants of currency choice 

In view of Moldova’s relative small domestic market, local companies are usually “currency-takers”. 
Given the low nominal value of imports and exports, they are rarely in a position to decide on the 
currency in which transactions should take place. Hence, the lack of bargaining power often implies 
using the trade partner’s national currency or a vehicle currency. 

Factors supporting the use of the euro 

The  EBA’s  survey  revealed  a  number  of  factors  favouring  trade  invoicing  in  euros.  The  most 
important  one  seems  to  be  the  strong  and  growing  economic  links  with  the  EU.  Following  the 
signature of the DCFTA in 2014, trade flows between the EU and Moldova rose considerably. As a 
result, the share of the EU in the trade turnover of the country surged by nearly 10 percentage points 
to 55% in 2019. This resulted in an automatic increase in the share of traded goods denominated in 
euro. Companies also highlighted the rising share of EU investments in Moldova as a key driver for 
the  increased  use  of  the  euro  in  trade  settlement  transactions.  Some  companies  noted  the  lack  of 
financial derivative products to hedge against local market fluctuations as a barrier for an even wider 
use of the euro. 

Factors supporting the use of the US dollar 

The  US  dollar  is  the  reference  currency  in  Moldova’s  exchange  rate  regime.  This  means  that  the 
MDL/USD  exchange  rate  is  less  volatile  than  other  currency  pairs,  including  the  MDL/EUR. 
Although  Moldova  has  become  increasingly  “euroised”  and  its  monetary  policy  framework  is 
classified as an inflation-targeting regime, it has been tracking the US dollar to smoothen domestic 
price developments.  

Furthermore, a high level of foreign exchange reserves denominated in US dollar ensures a greater 
level of stability to the MDL against the US currency. This point is rather important as Moldova’s 
financial  infrastructure  is  not  sufficiently  well  developed  and  very  few  exporters/importers  hedge 
foreign currency risk, meaning that they would rather opt for the currency with the lowest exchange-
rate movements.  

27 

 
 
 
 
 
 
 
4.3. 

THE EURO IN FOREIGN EXCHANGE RESERVES 

4.3.1 

Literature review 

The currency composition of official foreign exchange reserves is affected by each country’s exchange-
rate arrangements and co-movements of the domestic currency with main international currencies, and 
the  currency  composition  of  trade  invoicing,  financial  liabilities  and  investment  flows  (Ito  and 
McCauley, 2019). Other factors, although difficult to quantify, include the level of development of the 
financial sector as well as geopolitical role of a particular country (group of countries). Last but not least, 
as  for  other  international  currency  functions, inertia seems  to  play  an  important  part  in  the  currency 
composition of foreign exchange reserves. 

According to the ECB (2020), the shares of the US dollar and the euro in global holdings of foreign 
exchange reserves19 remained relatively steady from 1999 to 2019, with roughly 20% being in EUR-
dominated assets, compared to approximately 60% in ones in US dollars. It means that the euro’s share 
is no substantially higher than the combined weight of the currencies that were part of the European 
Exchange Rate Mechanism before the euro was launched in 1999.  

After  bottoming  out  at  19.2%  at  end-2017,  the  share  of  the  euro  in  global  official  reserve  holdings 
gradually increased to 20.5% at constant exchange rates at the end of 2019. While in 2018, the increase 
resulted  from  a  mechanical  effect  as  emerging  economies  sold  USD-denominated  reserves  due  to 
tensions  in financial  conditions, reversals  in cross-border  capital  flows (local currency  stabilisation), 
international trade tensions and unilateral sanctions, motives underlying the purchase of euro assets in 
2019 were less clear. We can note the diversification strategies pursued by some countries.20 The already 
mentioned geopolitical considerations incentivised China and Russia to sell a combined USD 204 billion 
worth of US Treasury debt securities in 2018 and another USD 58 billion in 2019.  

Although the US dollar remains the global reserve currency, the share of USD-denominated reserves 
declined by more than 8 percentage relative to its peak before the global financial crisis to 60.9% at end-
2019. While some countries such as Japan and euro area countries increased their exposure to the US 
dollar, it is worth noting that others are increasingly seeking to diversify their reserve portfolios away 
from the two leading international currencies, including in the search of higher yields as the amount of 
reserves keeps on growing at a rapid pace.  

As a result, the share of reserves held in currencies other than US dollar or the euro has nearly doubled 
(from 10% to 18%) since the global financial crisis. This was mostly due to rising holdings in Japanese 
yen  (also  considered  as  a  safe  haven  currency)  but  also  British  pound  sterling.  More  recently, 
diversification extended to other currencies such as the renminbi, the Australian dollar, and the Canadian 
dollar, among others. 

19  In  addition  to  the  official  reserve  assets,  the  international  reserves  statistics  include  the  foreign  currency  liquidity  of  the 
monetary authorities of a country, as well as other balance-sheet and off-balance sheet activities such as forwards, futures and 
other financial derivatives, undrawn credit lines and loans guarantees. 

20 In response to US sanctions in 2018, Russia decided to halve its US dollar holdings by more than USD 100 billion in the 
final quarter of 2018 (sell-off of long-term US treasuries), boosting the share of euro- and renminbi-denominated reserves by 
USD 44 billion each, and by USD 21 billion for the Japanese yen. As of early 2020, the Russian central bank kept 32% of its 
USD 485 billion reserves in euros, as opposed to 22% in US dollars. 

28 

 
                                                           
 
 
4.3.2 

Foreign exchange reserves in the EaP countries 

Central banks in the EaP countries hold a much lower share of their reserves in euro when compared to 
the global average. At end-2018, the share ranged from 5-6% in Georgia and Azerbaijan to 20% for 
Moldova, with the weighted average being around 13% (graph 4.8.).21 Hence, in spite of the ‘dominant 
currency paradigm’ which states that central banks tend to hold their reserves in the same currency in 
which resident firms invoice their imports and exports, so as to be in a position to provide that currency 
in case needed, the euro seems to be punching well its weight in all EaP countries given the intensity of 
trade relations between the two regions.  

For Azerbaijan, it is worth noting that these calculations do not cover the assets of the sovereign wealth 
fund of the country, SOFAZ. At USD 43.4 billion at the end of 2019, these were close to the central 
bank reserves of the six EaP countries combined. In the case of SOFAZ, the euro plays a more prominent 
role - at end-2019 some 31% of the reserves were in euro-denominated instruments as compared to 56% 
in US dollars, which also includes a sizeable part in gold. If the assets of the sovereign wealth fund were 
included in the CBAZ reserves, the share of euro-denominated assets in Azerbaijan’s total international 
reserves would reach 28% and the weighted average for the region would correspond to nearly 23%, or 
above the global average. 

As for the EaP region, several factors, both external and internal, influence the level of euro-denominated 
reserves. The use of the US dollar as a vehicle currency for foreign exchange intervention by central 
banks and in some cases, in particular Azerbaijan, as a de facto anchor currency tends to undermine the 
role of the euro in the international reserves.  

Highly-dollarised banking systems (see section 4.5) and the still dominant, although declining, share of 
US  dollar-denominated  debt  further  reinforce  the  argument  for  relatively  low  holdings  of  euro-
denominated reserve assets. Moreover, low yields also tend to drag down the attractiveness of holdings 
in euro at the expense of other currencies, whose instruments offer a higher return. 

Graph 4.8. Foreign exchange reserves by currency, end-2018 (%) 

100

80

60

40

20

0

Azerbaijan

Belarus

Georgia

Moldova

Ukraine

EUR
GBP
EaP weighted average, EUR

USD
Other

Source: Commission staff calculations based on Commission 2019 survey, national administrations. 

21  In 2019,  there  were  considerable  changes  in  the  currency  distribution of  foreign  exchange  reserves  for  some  of  the  EaP 
countries. In Georgia, the share of euro-denominated reserves jumped by 8 percentage points in one year, while in Moldova by 
3  percentage  points.  In  contrast,  the  share  of  euro-denominated  reserves  declined  in  Ukraine  in  2019  and  continued  its 
downward trend in the first nine months of 2020 (to less than 11% at the end of September). 

29 

 
 
 
                                                           
The limited supply of euro safe assets also seem to impede a greater role of the euro in foreign exchange 
reserves. In 2018, the supply of marketable US government debt, at over USD 14 trillion, overshadowed 
by far the combined availability of German and French marketable government debt, at just over USD 
3 trillion (USD 4 trillion if we include the marketable debt of euro area sovereigns). With volatile spreads 
throughout the crisis, the debts of Italy, Spain, Portugal, and Greece have not been widely included in 
official  reserve  portfolios  outside  the  euro  area.  Similarly,  the  stock  of  non-financial  corporate  debt 
securities differs significantly. At end-2018, the US stock was about five times bigger than the one of 
euro area corporate issues. The gap reflects the high reliance of the EU on bank financing as compared 
with capital market financing that is prevalent in the US.  

It is also interesting to note that supply of US government debt has been growing much faster than the 
one of euro assets since the global financial crisis. Eichengreen and Gros (2020) estimate that the stock 
of US government bonds more than doubled since the global financial crisis until end-2019. At the same 
time, the stock of safe euro assets (excluding supranational issuance) rose by mere 10% when adjusted 
for the exchange rate fluctuations. However, this situation might change as in a response to the COVID-
19 pandemic EU Member States tasked the European Commission to borrow on international markets 
sizeable amounts on their behalf. This move will increase significantly the supply of safe euro assets 
and thus serve as an incentive for increased holdings of euro-denominated assets by central banks (as 
well as institutional investors and fund managers).22  

With regard to the euro, there are a number of factors that would justify its more prominent role in the 
official reserves of the EaP countries. Rising trade flows, inward remittances and, in recent years, debt 
issuance in euro, all speak in favour of a higher share of euro-denominated holdings by the respective 
central banks. In the context of closer political and economic relations between the EU and the EaP 
region with the various political and trade agreements inked by the two sides, it could be expected that 
trade and investment with the EU will continue growing in the years to come.  

In  addition,  rising  inflows  of  direct  EU  financial  support  (in  the  form  of  grants  or  macro-financial 
assistance) could also contribute to euro-denominated reserve accumulation. Finally, it should be noted 
that most of the EaP countries have either adopted (or plan to do so) an inflation targeting regime. Thus, 
the incentive for accumulating US dollar reserves in order to intervene in the foreign exchange markets 
could decline. However, this might also just reduce the need for holding large reserve cushions, without 
affecting the incentives determining the currency composition of reserves. 

4.4. 

THE EURO IN EXTERNAL PUBLIC DEBT  

4.4.1 

Literature review 

This section discusses the structural determinants of the choice between issuing in local currency and in 
foreign currency as well as how governments choose the preferred currency composition of their foreign 
currency portfolio. 

According  to  the  “original  sin”  theory  (Eichengreen  and  Hausmann,  1999),  the  ability  of  emerging 
economies to issue in domestic currency in the international capital markets is restrained. Debt managers 
tend to set a target on foreign-currency debt that corresponds to the supply of government securities that 
the  domestic  debt  market  cannot  absorb.  Otonello  and  Perez  (2016)  found  that  the  share  of  foreign 
currency in the total debt of emerging economies moves in a pro-cyclical manner: it tends to be higher 
during economic booms than during recessions, with a positive correlation between output and the share 

22 The first issue of supranational bonds by the Commission, of EUR 17 billion in October, was perceived very well by 
investors whose demand came at more than 13 times above the offer - 
https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1954.  

30 

 
                                                           
of debt denominated in local currency. In recessions, emerging markets often lose access to international 
capital markets, pushing up the local-currency share. By contrast, in good times, risk aversion and the 
demand by foreign investors for emerging-market assets tends to increase, boosting the share of debt 
issued by these countries in foreign currency, which tends to carry lower interest rates.  

The literature distinguishes at least four variables influencing the currency choice in sovereign bond 
issues. First, assets denominated in widely used international currency benefit from network externalities 
and economies of scale, which tends to increase the market liquidity of assets denominated in it, making 
them attractive as a funding vehicle. The second factor is the size of the issuing country. The larger the 
share of a country in global output, the more likely it is that it will issue debt in its domestic currency 
(Chinn and Frankel, 2007). The third factor is the confidence put in a given currency – that is whether it 
can steadily store value. Finally, the borrower aims at  minimising costs and risks when issuing debt 
(interest, foreign exchange and transaction costs). In the case of a public borrower, strategic aspects may 
also enter such as economic and political ties with the country whose currency is to be used as a funding 
vehicle (see Box 4). 

The US dollar is the most common currency for debt contracts worldwide. At end-2019, the proportion 
of  outstanding  euro-denominated  international  debt  securities  was  around  22%  at  constant  exchange 
rates, while the US dollar accounted for 64% (compared with less than 50% ahead of the global financial 
crisis).  

Graph 4.9. Currency composition of foreign 
currency debt (%) 

Graph 4.10. Interest rate differential: historical 
spread between 10-year US Treasury Bond and 
Bunds (%)

70

60

50

40

30

20

10

0

3

2,5

2

1,5

1

0,5

0

-0,5

-1

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

9
0
0
2

0
1
0
2

1
1
0
2

2
1
0
2

3
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

9
1
0
2

EUR

USD

JPY

Other

7
0
g
u
A

8
0

l

u
J

9
0
n
u
J

0
1
y
a
M

1
1
r
p
A

2
1
-
s
r
a
m

3
1
b
e
F

4
1
-
v
n
a

j

4
1
c
e
D

5
1
-
v
o
n

6
1
-
t
c
o

7
1
-
t
p
e
s

8
1
g
u
A

9
1

l

u
J

0
2
n
u
J

Source: Dialogic and ECB, 2019. 

Note:  Figures  were  retrieved  prior  to  the  Coronavirus 
outbreak and Fed’s decision to cut interest rates. 

Source: Bloomberg.  

Emerging markets have shown lately a greater interest in issuing debt in euros, suggesting that they are 
seeking to diversify their foreign debt portfolio but also to benefit from the low borrowing cost. The 
decline  of  US  dollar’s  popularity  as  a  borrowing  currency  was  due  to  weaker  global  growth,  the 
expectation of a downward correction of the US dollar exchange rate amid concerns about increasing 
debt-servicing costs, and an increased interest-rate differential with the euro. However, the latter was 
largely erased with the COVID-19 pandemic in early 2020, which is likely to revert the trend and renew 
the attractiveness of the US dollar as a borrowing currency. 

31 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.4.2 

External public debt in the EaP countries 

The  US  dollar  plays  a  dominant  role  in  sovereign-debt  issuance  in  the  EaP  countries.  Overall,  it 
accounted for nearly 72% (weighted average) of the foreign-currency public debt in the region at the 
end of 2019, or substantially above its global share (63%). The euro was accounting for approximately 
20%  of  the  debt  stock,  which  is  a  tad  below  its  global  weight  as  a  debt  currency  (graph  4.11).  The 
Japanese yen and the renminbi come well behind, mainly as a result of their shares in the SDR basket 
that is used for IMF loans but also as a unit of account for lending by some other international financial 
institutions (IFIs) such as the World Bank and the Asian Development Bank.  

A large part of the sovereign debt of the region reflects bilateral and multilateral financing. Bilateral 
debt,  in  particular,  comes  almost  exclusively  in  US  dollars  when  provided  by  non-EU  countries. 
However, more recently there have been attempts for diversify the currency composition of debt stock.23 
Bonded debt plays a relatively limited role apart from Ukraine and, to a lesser extent, Belarus. This is 
explained by the relatively small size of the markets but also the ongoing easy access to official financing 
that comes at preferential terms. 

When looking at disaggregated figures, Moldova and Georgia rank first and second for external debt 
stocks  denominated in euro.  While for  Moldova  a  relatively  high  share  of the  euro in public  debt is 
consistent with the euro’s strong showing also in other areas (trade invoicing, official reserves), it is 
more surprising for Georgia. In this case, however, strong activity by Europe-based IFIs (in particular 
the EIB, but also the EBRD) as well as high, and rising, bilateral financing from France and Germany 
help explain the relatively high share of the euro in the country’s external debt.  

It should be noted that European IFIs are demand-driven when it comes to the currency for denomination 
of loans. Thus, Georgia’s increased recourse to such lending could be partly explained by the low euro 
funding  cost  in  recent  years.  As  of  2017,  the  EUR  has  been  the  dominant  currency  in  sovereign 
borrowing  by  Georgia.  In  2019,  all  new  external  loan  commitments,  including  ones  from  the  Asian 
Development Bank and the World Bank, were in euro. As a result, the share of the euro-denominated 
debt in the total stock surged by more than 10 percentage points since the end of 2016 to nearly 41% at 
the end of 2019.   

Graph 4.11. External public debt by currency, end-2019 

100%

80%

60%

40%

20%

0%

100

80

60

40

20

0

AM

AZ

BY

GE

MD

UA

Other
EUR

USD
EaP weighted av., euro

Source: Commission staff calculations based on data from national administrations;  
Debt in SDR calculated according to the weight of the respective currency. 

23 At the end of 2019, Belarus borrowed RMB 3.5 billion (approximately USD 500 million) from China Development Bank. It 
also tapped the Russian ruble debt market in 2019 and 2020. Moldova was considering a EUR 200 million loan from Russia. 

32 

 
 
 
 
                                                           
Favourable financing terms and a desire to diversify the investor base have also made Ukraine increase 
its exposure to EUR-denominated debt in 2019 and early 2020. This trend also reflects closer economic 
links  with  the  EU  as  part  of  the  DCFTA  agreement  (see  Box  4).  Attractive  borrowing  costs  made 
Moldova  select  the  euro  (rather  than  the  US  dollar)  when  negotiating  a  EUR  200  million  loan  with 
Russia in 2020.24 Belarus is another country that attempts to diversify the foreign currency base of its 
debt, which is highly skewed towards the US dollar. In this context, Belarus placed ruble-denominated 
debt on the Russian market in 2019 and 2020 and announced plans for offering euro-denominated debt 
in early 2020. However, these changed with the market turmoil associated with the COVID-19 pandemic 
and the country ultimately borrowed in US dollar in June 2020.  

Graph 4.12. Share of the euro in the foreign 
exchange-denominated public debt in selected 
EaP countries, % of total 

While  the  stock  of  sovereign  debt  of  the  EaP 
countries remains heavily skewed in favour of 
the US dollar, there is a clear, continuous trend 
for a rising share of euro-denominated debt in 
the region. This is most evident in the case of 
Georgia and Moldova, where the share of the 
euro in the country’s debt rose by nearly by 12 
percentage points in less than five years. A less 
significant,  but  a  steady  upward  trend  can  be 
also seen in the case of Ukraine and Armenia 
(see graph 4.12).  

Apart  from  low  borrowing  costs,  this  trend 
seems  to  be  driven  by  increased  trade  and 
Source: Authors’ calculations based on data from  
economic relations, which is also supported by 
national administrations. 
the expanding operations of Europe-based international financial institutions such as the EIB and the 
EBRD. Bilateral assistance is another main channel for expanding the share of euro in debt issuance. 
Assistance, in the forms of preferential credits, provided by Germany and France and by Romania were 
important  factors  behind  the  rapid  expansion  of  euro-denominated  debt  in  respectively  Georgia  and 
Moldova. 

Box 4. UKRAINE’S DEBT MANAGEMENT STRATEGY 

In  its  medium-term  State  Debt  Management  Strategy  for  2019-2022,  the  Ukrainian  Ministry  of 
Finance outlines four main objectives for public debt management: to increase the share of UAH-
denominated debt, to lengthen average debt maturity, to attract long-term concessional funding and 
to develop strong investor relationships. To contain the foreign exchange risk, Ukraine seeks both to 
increase local currency issuance and to diversify the foreign currencies within its debt portfolio.  

With regard to the latter, Ukraine has been focusing on increasing its debt exposure in euro. To this 
end, the Ministry of Finance returned after a 15-year pause to the euro Eurobond debt market in 2019 
by placing EUR 1 billion with 7-year maturity. This was followed by EUR 1.25 billion of 10-year 
papers placed in January 2020. Seeing an oversubscription of six times, the issue yielded record low 
4.375%. Both placements were in line with the plan of the authorities to construct a EUR-denominated 
yield curve for its Eurobonds. 

24 In early May, however, the Constitutional Court of Moldova ruled that the procedures with which the loan agreement had 
been conducted was breaching the country’s constitution. 

33 

 
 
 
                                                           
 
 
 
Graph 4.13. Ukraine, state debt by currency, %, end-year 

100

80

60

40

20

0

2017

2018

2019

UAH

USD

EUR

SDR

JPY

CAD

Source: Ministry of Finance of Ukraine.  

Ukraine’s attempts to diversify its debt in favour of the euro reflect a number of factors such as a high 
and growing trade integration with the EU. Other factors that favoured increased borrowing in euro 
include the low interest-rate environment and the need to capitalise on lower funding costs, along with 
the  wish  to  broaden  the investor  base.  Finally, it  should be noted that the  euro still  plays  a  rather 
limited role as a debt currency in the case of Ukraine, which also serves as a reason for diversification 
away from the dominance of the USD in a move to reduce foreign exchange risks. 

4.5. 

THE EURO IN FOREIGN CURRENCY DEPOSITS AND LOANS  

4.5.1 

 Financial dollarisation in the EaP countries 

The share of the euro in cross-border loans stood around 21% at constant exchange rates at end-2019. 
Having declined between 2006 and 2014, this trend has reversed in the past few years, in part because 
of the ECB’s accommodative monetary policy (ECB, 2019). Thanks to credit easing programmes, euro 
area banks operating internationally have started to re-allocate funds abroad, supporting cross-border 
lending (Gräb and Zochowski, 2017), which in turn boosted euro lending from banks outside the euro 
area.  

Their  findings  suggest  that  bank-specific  supply  effects,  stemming  from  increased  ability  to  lend 
following the expansion of central banks’ balance sheets, are a major driver of trends in the currency of 
denomination of cross-border loans. Following developments in international loan markets, the share of 
the  euro  in  outstanding  international  deposits  also  increased,  standing  around  19%  at  end-2019  at 
constant exchange rates. 

The banking sector of the EaP countries is highly dollarised. As mentioned, this is largely a legacy from 
the hyperinflation in the 1990s and recurrent currency crises, which led to a currency substitution and a 
permanent hysteresis effect. Other factors that contribute to the high level of financial dollarisation in 
the region include (i) macroeconomic instability (in recent years driven by a combination of external 
shocks, regional conflicts and high domestic political instability), and (ii) institutional weaknesses and 
low governance quality, (iii) monetary policy regimes (while de jure floating a number of countries in 
practice continue to track the US dollar to a varying extent), (iv) underdeveloped domestic financing 
markets that serve as an impediment for absorbing local-currency savings, (v) high remittance inflows. 

34 

 
 
 
 
Last but not least, the high level of real dollarisation (wage indexation; use of the US dollar as a unit of 
account for certain transactions - real estate, cars) also supports financial dollarisation.  

Graph 4.14. Total loans per currency in the EaP, 
end 2018 (%) 

Graph 4.15. Total deposits per currency in the EaP, 
end 2018 (%) 

100

80

60

40

20

0

100

80

60

40

20

0

Local currency
Foreign currency
Weighted average foreign currency loans

Local currency
Foreign currency
Weighted average  foreign currency deposits

Source:  Commission  staff  calculations  based  on  data 
from the national administrations. 

Source: Commission staff calculations based on data from 
the national administrations. 

At the end of 2018, nearly 50% of the stock of loans (weighted for the size of the economies) in the EaP 
countries  was  in  foreign  currency  (graph  4.14.).  This  ratio  was  somewhat  lower  for  deposits  –  40% 
(graph 4.15.). However, this was mainly due to the lower share of forex deposits in Ukraine. In contrast, 
the  figure  was  above  60%  in  Azerbaijan,  Belarus  and  Georgia.  These  levels  seem  excessive  when 
compared to the fundamentals of the economies based on their level of trade openness and institutional 
development.  

Khvedchuk,  Sinichenko  and  Topf  (2019)  estimate  the  natural  (consistent  with  the  structure  of  the 
economy) level of dollarisation in Ukraine at 20%. Even when accounting for the hysteresis effect, they 
estimate that the actual financial dollarisation (around 40%) exceeds considerably the optimal level of 
30%. Their  estimates  also show  excess  dollarisation in  Armenia  and  in  particular  in  Georgia,  where 
regulatory quality, a key element for supporting de-dollarisation, is considered rather good.25  

While dollarisation remains high in the EaP region, it has been on a gradual downward trend reflecting 
concerted policies by the local authorities to incentivise the use of local currencies in domestic financial 
intermediation. These include various macro-prudential measures such as limitations (or an even outright 
ban) on foreign currency lending, differentiated reserve requirements for deposits, higher provisioning 
on  foreign  currency  lending  as  well  as  restrictions  on  the  regulatory  capital  on  banks’  open  foreign 
currency positions.  

Coupled with improved macroeconomic stability since 2016 and efforts by international partners (such 
as the EU, the EBRD) to encourage the use of local currencies, these measures seem to have boosted the 

25 To reduce the high dollarisation of the banking sector, the government and the National Bank of Georgia (NBG) adopted a 
10-point de-dollarisation plan in 2016. It envisaged to increase access to long-term GEL loans, provide adequate sharing of 
foreign exchange risks and quote prices in GEL. The plan also included regulatory incentives for issuance of corporate loans 
in local currency, bans on foreign currency lending for small loans, subsidises conversion of dollar denominated loans secured 
by real estate into local currency, and ensured preferential treatment of local currency under the NBG’s prudential regulations. 

35 

 
 
 
 
 
 
 
                                                           
credibility in local currencies. This is most evident in the fact that the COVID-19 shock in early 2020 
did not result in a significant dollarisation as was the case in previous crisis episodes. 

4.5.2 

The euro in foreign currency deposits and loans in the EaP countries 

The dominance of the US dollar in the EaP region is probably most visible in the banking sector. When 
accounting for the size of the countries, nearly 75% of loans and 80% of deposits denominated in foreign 
currency are in US dollar (see graphs 4.16. and 4.17.). As usual, Moldova stands out as having a very 
high exposure to the euro – nearly 70%. However, due to the small size of the country, high levels of 
euroisation do not significantly affect the overall figure for the region. In Belarus, lending in euros is 
also sizeable and is split equally between households and corporates.  

The figures for Moldova and Belarus are consistent with trade flows dynamics as these two countries 
are the ones trading the most in euro. Furthermore, it should be noted that Moldova is the EaP country 
that is most reliant on remittances, which mainly come from the EU. The share of the EU in the money 
transfers to Moldova rose from 28% in 2015 to 47% in 2019. In the meantime, Russia’s share declined 
from 43% to 21% (and further down to 14% in the third quarter of 2020). A growing part of the money 
transfers is coming in euro. As a result, the euro accounted to nearly two-thirds of all the transfers in the 
third quarter of 2020 compared to one-third in 2015. 

Graph  4.16.  Foreign  currency  deposits,  by 
currency, end-2018 (%) 

100

80

60

40

20

0

Graph  4.17.  Foreign  currency  loans,  by  currency, 
end-2018 (%) 
100

80

60

40

20

0

Armenia Belarus Georgia Moldova Ukraine

Armenia Belarus Georgia Moldova Ukraine

Other
USD
EUR
EaP Weighted Average EUR

Other
USD
EUR
EaP Weighted Average EUR

Source: Commission staff calculations based on data from national administrations. 

The share of corporate lending in euro in Armenia and Ukraine is well below their trade exposure. As 
far as deposits are concerned, their share is also significantly below what one could have expected in 
view of the importance of the EU as a source of remittances for the region, in particular for Ukraine. 
The EU accounts for nearly two-thirds of the remittances inflows in the country.  

However, the main source of EU remittances are two non-euro area countries, Poland and Czechia. The 
high share of dollar deposits suggests that financial inflows from these countries to Ukraine (usually in 
euro) are largely converted into US dollars when deposited with commercial banks. The low use of euro 
in the banking sector could be explained by the inertia arising from the historical bias towards the US 
dollar as well as the high real dollarisation of the EaP economies. Another reason could be desire of 
banks to match the currency structure of their assets and liabilities. 

36 

 
 
 
 
 
5.  CONCLUDING REMARKS 

Despite close, and deepening, political and economic links with the EU, the role that the euro plays in 
the EaP countries is still limited. Across several dimensions, in particular central bank reserve assets 
and bank deposits, the EaP neighbours exhibit a relatively high dependence on the US dollar. For debt 
issuance and trade invoicing, they use the euro at par with the rest of the world. Still, taking into account 
the fact that the EU is the biggest trade partner, investor and source of remittances for the region, the 
euro seems to be punching below its weight in all dimensions.  

Moldova is the only country in the region where the euro outweighs the use of the US dollar, according 
to the composite index we calculated across the various functions an international currency can play. 
This is consistent with the close economic ties this country enjoys with the EU but also reflecting its 
structure with a lower reliance on commodities in its trade as compared to the others.  

Belarus is the only other country where the US dollar enjoys less than a 50% share. This reflects its 
relatively high exposure to the Russian ruble, in particular with respect to trade invoicing. Similar to 
Belarus, some 30% of Ukraine’s overall stocks and flows in foreign currency dealings are denominated 
in euro. Georgia and Armenia display a lower share of exposure to the euro with the US dollar having a 
high prevalence. While we do not possess sufficient data across all dimensions to evaluate the use of 
different foreign currencies in Azerbaijan, the importance of the oil sector for the economy suggest a 
relatively modest role for the euro. 

A number of factors could explain the dominance of the dollar in the region. One of the most important 
is the historical predilection for the US currency. Its roots can be traced back to the early 1990s, when 
all EaP countries went through long periods of hyperinflation following the break-up for the former 
Soviet Union and the launch of independent institutions. At the time, the euro did not yet exist and the 
US dollar was unchallenged as the world’s dominant currency. Recurrent currency crises as of 2000 
revived these memories and further eroded the confidence in the local currencies, while favouring a 
widespread  dollarisation  of  the  economies  and  financial  systems.  This  has  been  reinforced  by  the 
exchange rate regimes, some of which – despite being de jure floating regimes – remain linked to the 
US dollar. Close links with Russia, where the US currency has played a key role since the 1990s, that 
many of these countries continue to enjoy could also be an explanatory factor for the dominance of the 
US dollar plays in the region. 

Prevalence of the US dollar could be largely explained by its importance as a vehicle currency. Most of 
the EaP countries are still heavily dependent on commodity trade (energy, metals, agricultural products), 
with many of these being internationally quoted in US dollars. Thus, despite the fact the US has weak 
trade relations with the region, the US currency has a dominant position in trade invoicing. In this case, 
it should be also noted that the EaP countries are term-takers because of their small size.  

On the supply side, a key factor hindering a wider use of the euro is the more fractured and shallow EU 
financial market (as compared to the one in the US). The lack of a sufficient pool of debt instruments 
and  their  limited  liquidity  seems  to  be  a  key  factor  for  preference  for  US  dollar-denominated  debt 
instruments. However, it should be noted the instruments being developed to support the EU’s response 
to the COVID-19 pandemic will increase considerably the availability of euro-denominated assets and 
thus increase the appeal of the euro. 

37 

 
Another reason is the rather conservative profile of the EU investors, who have so far been relatively 
risk averse and thus avoided high-yielding emerging markets such as the one in the EaP. Still, favourable 
borrowing terms in euro in recent years, in line with the considerable interest rate differential between 
the EU and the US before the COVID-19 outbreak, had made a number of countries (notably Ukraine 
and  Georgia)  opt  increasingly  for  euro-denominated  debt  when  borrowing  on  the  market  or  third 
counterparts (IFIs, bilaterals).  

Low yields are a double-edged sword. While they may push governments to borrow more in euros in an 
attempt to reduce borrowing costs, they also make central banks reluctant to allocate their reserves in 
such low-yield instruments. This seems to be an important factor for the significant US dollar bias when 
it comes to reserve management.  

While the role of the euro in the EaP countries is firmly growing, further steps could be taken to intensify 
this process. The size of EU’s foreign trade flows with the Eastern partners are paramount to promoting 
the international use of the euro by increasing economies of scale and network externalities. Hence, 
continuous efforts to deepen trade links, including through the facilitation of the free trade agreements, 
will be an important step to ensure liquidity and foster the role of the euro in the region.  

This may be further supported by ongoing changes to global value chains and the sought-after process 
of nearshoring in the wake of the pandemic. Deviating from the status quo, i.e. the US dollar as the 
incumbent  standard  for  some  commodity  trade,  will  require  a  careful  sectoral  examination  of  the 
advantages and drawbacks of using the euro versus the US dollar. While a change of the current practices 
might appear costly in the short-run, it could be balanced by the benefits of currency diversification over 
the long run.  

An additional point is that financial-market developments in the EaP region – in particular the use of 
hedging products to cover for exchange-rate fluctuations – are still at an early stage. Reflections around 
how to decrease the costs of trading exotic currencies versus the euro and establish additional forms of 
settlements and hedging tools in euro will need to be pursued. 

In  contrast  with  the  trade  dimension,  which  might  require  a  positive  involvement  from  both  trade 
partners, the share of the euro in foreign-exchange reserves is closely linked to the internal situation 
within  the  euro  area.  A  greater  role  of  the  euro  will  be  primarily  supported  by  a  deeper  and  more 
complete European Economic and Monetary Union, including a fully-fledged Banking Union and the 
Capital Markets Union, and sound economic and fiscal policies in the euro area. 26  

In particular, as central banks hold a large part of their reserves in government securities, an earlier lack 
of  supply  of  safe  euro-denominated  assets  hampered  the  growth  of  euro-denominated  reserves.  An 
important  step  to  remedy  the  situation  could  be  provided  by  the  ‘Next  Generation  EU’  instrument 
proposed by the European Commission as part of the EU’s plan to recover from the COVID-19 crisis.27 
It will trigger the issuance of up to EUR 750 billion in euro-denominated bonds by the EU, which will 
complement  smaller  issuances  under  other  new  instruments.  The  EU’s  leading  role  in  niche  bond 

26 For recent initiatives to strengthen the EU’s financial market infrastructure see ‘The European economic and financial system: 
https://eur-lex.europa.eu/legal-
fostering 
strength 
content/EN/TXT/PDF/?uri=CELEX:52021DC0032&from=EN 

resilience’ 

openness, 

January 

2021, 

from 

and 

27 https://ec.europa.eu/commission/presscorner/detail/en/ip_20_940 

38 

 
                                                           
   
  
markets (for example green and social bonds) could be also used to promote a greater role of the euro 
in the EaP region and beyond.28  

However, while an important step in the right direction, the impact of these issuances on increasing the 
supply and liquidity of euro safe assets, and hence increasing the attractiveness of the euro as a funding 
and  reserve  currency,  should  not  be  overestimated.  Eichengreen  and  Gros  (2020)  calculate  that  a 
considerable part of the new supranational EU issuance will be absorbed by the ECB under its pandemic 
emergency purchase programme. As a result, the supply of euro safe assets available to other investors 
will remain well below the one of US securities. To remedy this situation, they propose a more active 
role  by  the  ECB  in  increasing  the  menu  of  investable  euro  assets  available  to  international  reserve 
holders, for example issuing short- and medium-term ECB certificates of deposit. 

Another  option  that  could  be  explored  is  fostering  financial  market  integration,  for  example  by 
establishing common payment infrastructures that could help boost the role of the euro in the financial 
sector of the EaP countries. In addition, reducing exchange rate fluctuations of the euro against EaP 
currencies will be important, either through hedging products or by increasing support to economic and 
political stability in the region.  

Improving the availability of financial market products could also help create euro benchmarks. This is 
particularly important for commodity markets (mainly oil and metals, but to some extent agricultural 
products) where the US dollar is dominant in its role of a vehicle currency. 

28 In Ukraine, legislation regulating the issuance of so-called green bonds entered into force in August 2020. In November the 
same year, Ameriabank, Armenia’s leading financial institution, made the first issuance of a green bond in the country, placing 
securities of approximately EUR 42 million.   

39 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
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42 

 
 
 
 
ANNEXES 

I. 

Regression results for the 6 Eastern Partnership countries, 2000-2020 

(1) 

AR 

(2) 

AZ 

(3) 

BY 

(4) 

GE 

(5) 

MD 

(6) 

UA 

Constant 

-0,05 

0,37 

1,76*** 

0,19 

0,14 

0,80* 

(0,14) 

(0,26) 

(0,41) 

(0,15) 

(0,14) 

(-0,37) 

Median 

0,16 

Β1 EUR.USD 

-0,15* 

-0,13 

0,18 

0,01 

0,25*** 

-0,01 

-0,01 

(0,07) 

(0,12) 

(0,20) 

(0,07) 

(0,07) 

(0,18) 

Β2 CNY.USD 

0,27 

0,83* 

0,41 

0,59** 

0,37* 

0,88 

(0,18) 

(0,35) 

(0,55) 

(0,20) 

(0,18) 

(0,49) 

Β3 GBP.USD 

0,06 

0,00 

0,01 

0,02 

-0,01 

0,11 

(0,05) 

(0,10) 

(0,16) 

(0,06) 

(0,05) 

(0,18) 

Β4 JPY.USD 

0,13 

0,04 

-0,15 

0,18* 

-0,06 

0,01 

0,41 

0,02 

0,01 

(0,07) 

(0,13) 

(0,21) 

(0,08) 

(0,07) 

(0,14) 

Β5 RUB.USD 

0,07 

0,04 

0,43*** 

0,04 

0,13*** 

-0,03 

0,04 

(0,04) 

(0,07) 

(0,12) 

(0,04) 

(0,04) 

(0,10) 

Observations 

Adjusted R² 

239 

0,05 

239 

0,03 

239 

0,09 

239 

0,12 

239 

0,21 

239 

0,02 

The dependent variable is the percentage change in the country’s exchange rate against the US dollar. 
βi EUR.USD is the percentage change in the euro’s exchange rate against the US dollar. The remaining 
independent variables are defined similarly for the renminbi, the British pound sterling, the Japanese 
yen  and  the  Russian  ruble.  Standard  errors  are  reported  in  parentheses.  ***,  **,  *  denote  statistical 
significance at the 1%, 5%, 10% level, respectively. 

II. 

Regression results for the 6 Eastern Partnership countries for the last window, 2016-2020 

(1) 

AR 

(2) 

AZ 

(3) 

BY 

Constant 

-0,01 

-0,08 

0,21 

(4) 

GE 

0,41 

(5) 

MD 

(6) 

UA 

-0,41* 

-0,20 

Median 

-0,04 

(0,08) 

(0,34) 

(0,21) 

(0,45) 

(0,22) 

(0,42) 

Β1 EUR.USD 

0,17* 

-0,34 

0,07 

0,06 

0,60** 

-0,15 

0,07 

(0,08) 

(0,31) 

(0,20) 

(0,41) 

(0,20) 

(0,38) 

Β2 CNY.USD 

-0,04 

0,14 

-0,01 

0,27 

0,11 

0,41 

0,12 

(0,07) 

(0,28) 

(0,18) 

(0,38) 

(0,18) 

(0,35) 

Β3 GBP.USD 

0,02 

-0,07 

0,14 

0,14 

-0,23 

-0,10 

-0,02 

(0,05) 

(0,22) 

(0,14) 

(0,29) 

(0,14) 

(0,28) 

Β4 JPY.USD 

-0,07 

0,09 

-0,13 

0,11 

-0,14 

0,14 

0,01 

(0,06) 

(0,23) 

(0,14) 

(0,30) 

(0,15) 

(0,27) 

Β5 RUB.USD 

0,02 

0,00 

0,36*** 

0,13 

0,05 

0,01 

0,04 

(0,03) 

(0,11) 

(0,07) 

(0,15) 

(0,07) 

(0,14) 

Observations 

Adjusted R² 

37 

0,20 

37 

0,06 

37 

0,49 

37 

0,13 

37 

0,36 

37 

0,06 

43 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
III.  Median regression results from rolling 36-month regressions for the six EaP countries 

The X-axis indicates the starting date of the 36-month window rolling regression. The data points on 
the far left corner in each figure correspond to the 36-month period from July 2002 to July 2005. To 
avoid clutter, the graph below reports only the median weights on the euro (or the dollar) and the median 
adjusted R2 for each 36-month period. 

1
0,8
0,6
0,4
0,2
0
-0,2
-0,4
-0,6
-0,8
-1

2
0
-
l
i

u

j

3
0
-
r
v
é
f

3
0
-
t
p
e
s

4
0
-
r
v
a

4
0
-
v
o
n

5
0
-
n
u

i

j

6
0
-
v
n
a

j

6
0
-
t
û
o
a

7
0
-
s
r
a
m

7
0
-
t
c
o

8
0
-
i
a
m

8
0
-
c
é
d

9
0
-
l
i

u

j

0
1
-
r
v
é
f

0
1
-
t
p
e
s

1
1
-
r
v
a

1
1
-
v
o
n

2
1
-
n
u

i

j

3
1
-
v
n
a

j

3
1
-
t
û
o
a

4
1
-
s
r
a
m

4
1
-
t
c
o

5
1
-
i
a
m

5
1
-
c
é
d

6
1
-
l
i

u

j

Median weight EUR

Median weights RUB

Median weight USD

Median R_squared

IV.  Weights on the US dollar from rolling 36-month regressions for the six Eastern countries 

4

2

0

-2

-4

-6

-8

-10

-12

2
0
-
l
i

u

j

3
0
-
r
v
é
f

3
0
-
t
p
e
s

4
0
-
r
v
a

4
0
-
v
o
n

5
0
-
n
u

i

j

6
0
-
v
n
a

j

6
0
-
t
û
o
a

7
0
-
s
r
a
m

7
0
-
t
c
o

8
0
-
i
a
m

8
0
-
c
é
d

9
0
-
l
i

u

j

0
1
-
r
v
é
f

0
1
-
t
p
e
s

1
1
-
r
v
a

1
1
-
v
o
n

2
1
-
n
u

i

j

3
1
-
v
n
a

j

3
1
-
t
û
o
a

4
1
-
s
r
a
m

4
1
-
t
c
o

5
1
-
i
a
m

5
1
-
c
é
d

6
1
-
l
i

u

j

AR

AZ

BY

GE

MD

UA

44 

 
 
 
 
 
 
 
V.  Weights on the euro from rolling 36-month regressions for the six Eastern countries 

2

1,5

1

0,5

0

-0,5

-1

-1,5

-2

-2,5

2
0
-
r
v
a

2
0
-
v
o
n

3
0
-
n
u

i

j

4
0
-
v
n
a

j

4
0
-
t
û
o
a

5
0
-
s
r
a
m

5
0
-
t
c
o

6
0
-
i
a
m

6
0
-
c
é
d

7
0
-
l
i

u

j

8
0
-
r
v
é
f

8
0
-
t
p
e
s

9
0
-
r
v
a

9
0
-
v
o
n

0
1
-
n
u

i

j

1
1
-
v
n
a

j

1
1
-
t
û
o
a

2
1
-
s
r
a
m

2
1
-
t
c
o

3
1
-
i
a
m

3
1
-
c
é
d

4
1
-
l
i

u

j

5
1
-
r
v
é
f

5
1
-
t
p
e
s

6
1
-
r
v
a

6
1
-
v
o
n

AR

AZ

BY

GE

MD

UA

VI.  Weights on the Russian ruble from rolling 36-month regressions for the 6 Eastern countries 

2,5

2

1,5

1

0,5

0

-0,5

-1

-1,5

2
0
-
l
i

u

j

3
0
-
r
v
é
f

3
0
-
t
p
e
s

4
0
-
r
v
a

4
0
-
v
o
n

5
0
-
n
u

i

j

6
0
-
v
n
a

j

6
0
-
t
û
o
a

7
0
-
s
r
a
m

7
0
-
t
c
o

8
0
-
i
a
m

8
0
-
c
é
d

9
0
-
l
i

u

j

0
1
-
r
v
é
f

0
1
-
t
p
e
s

1
1
-
r
v
a

1
1
-
v
o
n

2
1
-
n
u

i

j

3
1
-
v
n
a

j

3
1
-
t
û
o
a

4
1
-
s
r
a
m

4
1
-
t
c
o

5
1
-
i
a
m

5
1
-
c
é
d

6
1
-
l
i

u

j

AR

AZ

BY

GE

MD

UA

45 

 
 
 
 
EUROPEAN ECONOMY DISCUSSION PAPERS 

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