Ukraine’s economy will collapse without more help

In recent weeks, discussions among international and Ukrainian economists and policymakers have largely focused on a “Marshall Plan” for Ukraine focused on technical issues around reconstruction, from conditionalities on the fight against corruption to the green diary.

But, as one of my European friends, close to political circles, pointed out, Talking about the reconstruction of Ukraine is important to build confidence and give hope to Ukrainians. But it’s also cheap. »

The West makes generous promises, but actual delivery is disappointingly slow. In total, Ukraine has now been promised more than 31 billion euros in budget support by major donors, according to to the calculations of the Kiel Institute for the World Economy, which tracks promised financial aid to Ukraine. But only about 7.6 billion euros were actually disbursed between February and June 28. It was only at the end of June-beginning of July that admissions began to catch up. Now, total help is around 11 billion dollars, still an order of magnitude lower than the payments to Russia for its hydrocarbons over the same period.


A Ukrainian serviceman walks past the turret of a Russian tank next to a destroyed gas station near Kyiv, Ukraine.

A Ukrainian serviceman walks past the turret of a Russian tank next to a destroyed gas station in the village of Skybyn, northeast of Kyiv, Ukraine on May 2. SERGEI SUPINSKY/AFP via Getty Images

In recent weeks, discussions among international and Ukrainian economists and policymakers have largely focused on a “Marshall Plan” for Ukraine focused on technical issues around reconstruction, from conditionalities on the fight against corruption to the green diary.

But, as one of my European friends, close to political circles, pointed out, Talking about the reconstruction of Ukraine is important to build confidence and give hope to Ukrainians. But it’s also cheap. »

The West makes generous promises, but actual delivery is disappointingly slow. In total, Ukraine has now been promised more than 31 billion euros in budget support by major donors, according to to the calculations of the Kiel Institute for the World Economy, which tracks promised financial aid to Ukraine. But only about 7.6 billion euros were actually disbursed between February and June 28. It was only at the end of June-beginning of July that admissions began to catch up. Now, total help is around 11 billion dollars, still an order of magnitude lower than the payments to Russia for its hydrocarbons over the same period.

Meanwhile, the country’s foreign currency reserves are bleeding, and on July 20 Ukraine asked Eurobond holders for a standstill as servicing commercial debt becomes too much for the budget, as well as for the balance of payments.

The National Bank of Ukraine (NBU) was selling up to $1 billion a week to keep pace with foreign currency demand and defend the exchange rate peg. On July 20, the decision was made to move the parity upwards, to 36.60 hryvnias per dollar from 29.25 hryvnias per dollar.

Ukraine’s foreign exchange reserves stood at $23 billion at the end of June. The current rate of losses means that Ukraine will soon be on the verge of financial collapse if aid flows are not accelerated. There are several reasons for the rapid fall in foreign exchange reserves, all of which are beyond Ukraine’s control.

Russia’s invasion has destroyed the economy and foreign aid is not enough to fill the void. War-related spending has skyrocketed and all other spending is kept to a bare minimum.

The scarcity of foreign funding forces the National Bank of Ukraine to buy government bonds (effectively printing hryvnia) to cover the huge budget deficit, which reached $4 billion in May and nearly $6 billion dollars in June.

From March to May 2022, the government’s own revenues covered roughly 40% of the expenses needed to run the country and pay the bills. Another 40 percent was covered by the NBU. The rest is financed by grants (about 7% of spending during the three months of full-scale warfare), foreign loans and local bond issues. These funds, once in the market, could be channeled into currency purchases.

Russia has also stripped Ukraine of its resources and blocked most of its exports. Ukraine’s pre-war exports reached 40% of GDP, with the two main categories of grain and metal products. Two of Ukraine’s most important metallurgical plants have been destroyed in now-occupied Mariupol, and grain in occupied parts of southern Ukraine is being stolen by Russia. The remaining exports are sorely lacking in transport capacity. Goods were mainly shipped by sea, and the Black Sea ports are now blocked by Russian warships.

As the Ukrainian army forced the Russians back from Snake Island, a partial solution to this problem is possible. Recent negotiations moderated by Turkey and the United Nations paved the way for the export of Ukrainian grain from Odessa. But the outcome is uncertain: Russia, after signing the contract, sent missiles to Odessa, and the general has not yet abandoned his “Novorossia” idea to capture the region and cut Ukraine off from the sea Black. Meanwhile, imports are rising, fueled by the fixed exchange rate regime, the recovery in consumer demand after the first shock of the war, and rising energy prices.

Ukraine has done its best to counter this. While on the first day of the Russian invasion, to support the hryvnia, the NBU introduced restrictions on payments abroad, with a list of allowed “critical imports”, which was later expanded. At the beginning of April, to avoid shortages of goods, VAT and customs fees were abolished for most imports.

On July 1, pre-war VAT and customs duty rules were reinstated. This will ease the pressure on public finances, make Ukrainian products more competitive and improve the trade balance.

Meanwhile, refugees from the country are spending money in Ukrainian accounts around the world. Number of the people who left Ukraine is estimated at more than 5 million in June. Not all are poor, living on welfare or in shelters. Many continue to work remotely for Ukrainian organizations, and Ukrainian women and children receive financial support from their husbands and fathers who remain in Ukraine. In total, Ukrainians abroad spend nearly $1.5 billion a month via card payments from their hryvnia bank cards. This money supports the economies of recipient countries but also depletes the reserves of the NBU.

So far, the NBU and the Ministry of Finance of Ukraine have done a great job in maintaining the country’s economy and the resilience of the financial sector. Banks are functional, pensions and social benefits are paid and salaries are paid. But there is a limit to what the institutions of a country at war can do to combat the effects of a severe economic downturn and the continued destruction of infrastructure, housing and productive assets.

If Ukraine loses its economic and financial stability, the front line will also burst. The rear has to work for the soldiers to do their job, which will not be the case if the promises of arms remain on paper and the financial assistance is not turned into real money. A group of Ukrainian economists formulated the following principles for Western support of Ukraine to safeguard its economic stability:

Act quickly so that Ukraine does not lose the war economically. Timing is crucial here. The scope for tax increases or spending cuts in Ukraine is very limited. Rapid and stable financial flows are necessary. The amount should cover the budget shortfall, including early recovery needs in disoccupied areas. It is not necessary to wait for the end of the war to launch the reconstruction effort. The inhabitants of the towns and villages damaged by the Russian army need a place to live, the infrastructures must be repaired before winter, the children must go to school and the elderly and sick must have access to medical services.

Beyond infrastructure and physical assets, Ukraine needs the immediate reconstruction (or creation) of strong institutions. The mechanisms of transparency and accountability foreign aid can lay the foundations for some of these institutions. These mechanisms must be implemented at all stages, guaranteeing public access to data on financing agreements, possible public-private partnerships and concessions, public procurement and the use of funds, as well as mechanisms for accessible complaints and stakeholder follow-up mechanisms. Whenever physical or institutional infrastructure is rebuilt, it must take into account Ukraine’s increased integration into the EU in terms of social, ecological and governance standards.

Subsidies are better than loans. By even attracting long-term and concessional loans, the Ukrainian government is accumulating a debt burden, which will be devastating for the post-war economy. Under current conditions, the debt-to-GDP ratio could rise from a pre-war level of 50% to 100%. Yet only 18% of aid takes the form of grants, with long-term loans making up the rest.

The aggressor must pay. While voluntary contributions from the international community and the Ukrainian government will play a role, reconstruction is expected to be funded primarily by the assets of the Russian state and complicit oligarchs. This requires some legislative work from the states where the Russians keep their assets. However, the choice between their own taxpayers and the aggressor state must be obvious to the legislators of these countries.

Finally, financial support and reconstruction efforts must be inclusive and non-discriminatory both in the participation of civil society, representatives of the victims and affected stakeholders, and in the determination of the beneficiaries, by favoring decision-making and implementation as close as possible to the affected populations at the community and regional level .

The military, humanitarian and financial assistance to Ukraine is commendable. But at present there is still a lack of sense of urgency, lulled by talk of long-term recovery and a European future for Ukraine. But the war is not yet won and Ukraine needs support now.

Christi C. Elwood