Frankfurt, Germany — Even as Ukraine celebrates recent victories on the battlefield, its government faces a looming challenge on the financial front: how to pay the huge costs of the war effort without triggering runaway price spikes for ordinary people or piling on debt that will hamper reconstruction could hinder after the war? .
The struggle is to find loans or donations to cover a massive budget deficit for next year without bailouts from central banks that risk ruining Ukraine’s currency, the hryvnia.
Economists working with the government say if Ukraine can shore up its finances by the end of next year, Russia could find itself in financial trouble if an oil price cap proposed by the US, European Union and allies hurts Moscow’s revenues.
Here are the key facts about Ukraine’s economic struggle against Russia:
HOW HAS UKRAINE PAYED FOR THEIR DEFENSE SO FAR?
In the early days of the Russian invasion, the Ukrainian government turned to foreign aid at irregular intervals. When it didn’t have enough, the central bank bought government bonds with newly printed money. The alternative would have been to stop paying pensions and government salaries.
Economists say that printing money — although it was a much-needed stopgap measure at the time — carries the risk of inflation spiraling out of control and the value of the country’s currency collapsing if it continues.
Ukraine has painful memories of the hyperinflation of the early 1990s, said economist Nataliia Shapoval. As a child, she watched her parents use large wads of money for everyday purchases as the currency depreciated by the day before being replaced by today’s hryvnia.
“Ukraine went through that, so we know what runaway inflation looks like, and we don’t want that again,” said Shapoval, vice president of policy research at the Kyiv School of Economics. “The government and the central bank are already on the wrong track because they are printing so much.”
Price stability and the ability to pay pensions are having a huge impact on ordinary people and society at a time when Russia is trying to demoralize the populace by shutting off electricity and water ahead of winter.
With inflation already high at 27%, price increases make it difficult for low-income people to afford groceries.
Bread that used to cost the equivalent of 50 US cents has doubled, said Halyna Morozova, a resident of Kherson, a recently liberated southern city.
“It’s very depressing and we’re nervous. We lived on old (food) supplies, but now the lights are off, the fridge doesn’t work and we have to throw away the groceries,” the 80-year-old said recently.
She said the Russians continued to pay her Ukrainian pension in rubles, but she has received nothing since they started withdrawing in October. She is counting on the government to refund lost pension money, she said.
Tetiana Vainshtein, also in Kherson, says natural gas is too expensive to heat her home. “I’m cold. I like warmth and I’m terribly cold,” said the 68-year-old.
Bank closures during the Russian occupation prevented them from receiving their pension money and forced them to carefully ration each hryvnia for food, she said.
HOW MUCH SUPPORT DOES UKRAINE NEED?
President Volodymyr Zelenskyy says Ukraine needs $38 billion in direct aid from Western allies like the US and the 27-nation EU, plus $17 billion for a war-damage recovery fund.
Economists at the Kyiv School of Economics say a smaller total of $50 billion from donors would be enough to get Ukraine through the year.
Defense spending is six times higher than last year in the 2023 budget recently approved by the Ukrainian parliament. Military and security spending accounts for 43% of the budget, or a whopping 18.2% of annual economic output.
The budget of 2.6 trillion hryvnia shows a yawning deficit of 1.3 trillion hryvnia, which means that the government has to find 3-5 billion US dollars a month to fill the gap. Recent attacks on energy infrastructure since the budget was passed will only increase funding needs as repairs cannot wait for post-war reconstruction and will weigh on this year’s budget.
HOW COULD FINANCES AFFECT THE OUTCOME OF THE WAR?
Despite Western sanctions, Russia’s economy has outperformed Ukraine’s because high oil and natural gas prices have bolstered the Kremlin’s budget.
Plans by the EU and its allies in the Group of Seven democracies to impose a price cap on Russian oil sales aim to change that.
The Kiev School economists say: “By the middle of next year, we believe that the economic situation will shift strongly in favor of Ukraine, which is why strong partner support in the period up to that point is particularly important.”
HOW MUCH FUNDING DOES UKRAINE ALREADY HAVE?
The U.S. was the top donor, providing $15.2 billion in financial assistance and $52 billion in total assistance as of Oct. 3, including humanitarian and military assistance, according to the latest available data provided by Ukraine Support Trackers were compiled at the Kiel Institute for the Ukraine world economy.
EU institutions and member countries have pledged $29.2 billion, although “many of their pledges are arriving in Ukraine with a long delay,” said Christoph Trebesch, who leads the tracker team.
The European Commission, the EU’s executive branch, has proposed 18 billion euros in interest-free, long-term loans for next year, which still have to be approved by member governments. The US is also likely to contribute more.
However, Ukraine is attractive for grants over loans. If all financing came from loans, the debt would rise to over 100% of annual GDP, from about 83% now and 69% before the war. This burden could hold back wartime recovery spending.
Total global aid totaling $85 billion to Ukraine is less than 15% of the support European governments have pledged to protect consumers from high energy costs stemming from Russia’s natural gas cuts, according to Ukraine Support Tracker result.
In order to obtain credit, the commission proposed requiring Ukraine to improve its corruption record. Since 2014, Ukraine has increased its score on Transparency International’s Corruption Perceptions Index from 26 to 32 out of 100 – not great, but on the way up.
US officials have praised Ukraine’s online procurement platform for introducing transparency into government contracts – a major source of corrupt deals and collusion – and saving $6 billion.
The prospect of EU membership also gives Ukraine an incentive to clean up corruption.
CAN THE INTERNATIONAL MONETARY FUND HELP?
The IMF has provided Ukraine with $1.4 billion in emergency aid and $1.3 billion to cushion the shock of lost food exports.
IMF Managing Director Kristalina Georgieva told The Associated Press that the Washington-based fund is working in partnership with the Group of 7 Prosperous Democracies, which Germany is leading this year.
“We are on track to develop a solid and respectable program for Ukraine,” she said, “with special support from the G-7 and the German leadership.”
However, with a major lending program of $15-20 billion, it is against IMF practice to lend money when the debt is unsustainable, and the war raises questions about that. The organization is reluctant to lend to countries that do not control its territory, a condition Ukraine has yet to meet.
The IMF “would have to seriously twist or change its existing framework to provide significant sums,” said Adnan Mazarei, senior fellow at the Peterson Institute for International Economics and former deputy director of the IMF’s Middle East and Central Asia Department.
As a prelude to a possible bailout package, the IMF is holding a four-month consultation period and increased surveillance of Ukraine’s economic policies to help Kyiv build a track record of best practices. This could create trust for other donors to step in.
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Associated Press writer Sam Mednick contributed from Kherson, Ukraine.
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