Last week the Central Bank of Ukraine was forced to devalue the Ukrainian hryvnia by 25% to a rate of 1 USD = 36.5 UAH. However, within a few days, exchange rate signs were seen around the Kyiv advertising rates of USD 1 = 39.25.
Tymofiy Mylovanov, the former economy minister, commented on the central bank’s decision, saying that he had not foreseen that the Ukrainian hryvnia could return to its pre-war level of less than 29 per dollar.
USAID previously estimated that the war was costing Ukraine nearly $5-7 billion a month. In May, additional military costs were estimated at nearly $3.3 billion. With plans now to further expand Ukraine’s military to the size of one million soldiers, the costs will continue to rise. The cost of defending a 1,000+ km front at war, stretching from the coast in the south to the locations in the east where most of the active fighting is taking place, along the northern borders with Russia and Belarus, just nearby Western Transnistria, occupied Moldova, is an expense that has drained the coffers of the Ukrainian government.
Although Ukraine was promised about $38 billion in budget support from the international community, less than $13 billion had arrived in Kyiv by earlier this month. The European Union, which had pledged 9 billion euros, is expected to send just 1 billion euros in aid later this month due to bureaucratic delays in Germany.
Even with this additional financial aid from Europe, economists warn, it will not be enough to bring Kyiv back to profitability.
Moody’s, the international credit rating agency, has revised its forecast for Ukraine and now expects the government to run a deficit of almost 5 billion GDP.
The solutions aren’t easy, as economists have warned that Ukraine needs to be careful with its monetary policy lest it print hryvnia to get out of debt – something that would trigger inflation.
Current inflation has caused prices to skyrocket across Ukraine at a time when many citizens are unemployed and struggling to make ends meet.
Looking ahead, economists fear that maintaining basic government services like hospitals and pensions will pose a challenge as Kyiv seeks funds to meet the war’s huge additional costs.
Throughout this turmoil, economists have routinely observed that Ukraine cannot pull itself out of this situation on its own and will need significant Western help to weather its current economic peril.
However, more and more economists, public leaders and governments are trying to use some of the billions of dollars that have been frozen from Russia’s national reserves and kept abroad.
Based on publicly available data from the Russian government, as of Jan. 1, the Central Bank of Russia held nearly $316 billion in reserves abroad, including in the US, Japan, Germany, France, Canada, the UK and others. Should these funds be nationalized and handed over to Ukraine, it would quickly change the economic situation in Kyiv and likely change the course of the war.
Some have written, like Anders Aslund for the Kyiv Post, that Ukraine must make seizing Russia’s assets a top priority. Aslund went on to say that the “Ukrainian government should make it a top diplomatic priority to persuade its Western partners to seize the Russian central bank’s international currency reserves and use them in Ukraine as Russian war reparations.”
With few options left for Ukraine to pay its bills, the likelihood that former Russian reserves will be channeled to Ukraine is increasing.
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