War keeps Ukraine from paying its debts – here’s how international powers can continue to support its recovery

Credit: Wikimedia Commons.

Ukraine is burning money fast. The Russian invasion cost the country dearly. According to the International Monetary Fund, Ukraine’s GDP could decrease by 35% because of the war. The country’s international grain exports have been severely hampered, with a recent deal to boost exports only expected to displace some of its current stocks. The country shipped US$27.8bn (£22.6bn) worth of agricultural products to other countries last year, or 41% of its total exports.

Bar chart showing Ukraine's monthly grain exports in tonnes
Monthly grain exports from Ukraine have fallen significantly since the Russian invasion. International Food Policy Research Institute (IFPRI)

It is therefore not surprising that the country’s public finances are in trouble. Ukraine’s finance ministry estimated that its public sector deficit fell from US$2 billion in March 2022 to US$7 billion in May.

If Ukraine runs out of money, it would not only affect the war effort, but could also prevent the country from paying nurses, teachers, and police officers, among other important workers. The negative implications of this situation for the Ukrainian population would be varied, ranging from the breakdown of important services to an inability for households to pay their bills and buy food. This is a significant concern of course, but the outlook is not as dire as some might think.

Ukraine has already received funding from allies, and more has been promised. The United States, for example, has committed about $5.3 billion in security assistance to Ukraine since the start of the Biden administration, including about $4.6 billion during the “invasion.” unprovoked from Russia,” according to the US Department of Defense.

And this is not the only aid received by Ukraine. The G7 and the EU have announced official funding commitments to Ukraine worth US$29.6 billion. EU leaders have also pledged additional support of up to €9bn (£7.6bn), on top of a previous emergency loan of €1.2bn. This money from international partners will move Ukraine forward in the short term. So paying the interest on this debt and managing its future bills will not be an immediate problem for Ukraine, although it remains a concern.

A more pressing challenge will be repaying its outstanding loans and obligations. With little money coming in, it will be difficult for Ukraine to meet these obligations. Indeed, the country has already requested authorization to freeze about 20 billion dollars of debt at the beginning of the month. This request was immediately approved by Western governments, notably Germany.

Another challenge for the Ukrainian economy at the moment is the continuation of the war – of course due to the continuous negative impact on its population, but also due to the financial consequences. A prolonged war will only bring more uncertainty to the country’s economy. Major Ukrainian cities are hit by Russian missiles and continued attacks have been launched against important infrastructure, including railways and ports. In addition to short-term concerns over this, it also leaves little incentive to invest in the country at this time, adding another long-term challenge to Ukraine’s economic outlook.

Avoid a payment default

There is always the danger of default, which is, in economists’ jargon, running out of money. And, in fact, Ukraine already defaulted on its loans in 2020. It wasn’t a catastrophic event, but it raised interest rates on all the new loans the country was looking for. Lenders are generally unwilling to lend money if there is a risk they won’t get it back, but the political situation and declarations of support from Western powers discussed above mean that Ukraine is more likely to receive cash to avoid another default. This type of very public engagement means that these governments are likely to be prepared to continue paying a considerable price to keep Ukraine afloat, both militarily and economically.

It should also be borne in mind that, as bad as Ukraine’s economic situation is, the Russian economy is also suffering, which could affect the duration and outcome of the war. Reports that Russia has resisted sanctions — that they “sting but don’t cripple” its economy — are inaccurate. That’s the story the Kremlin would have us believe, and maybe that’s why Russia has decided to stop releasing data on major economic indicators.

A recent report published by Jeffrey Sonnenfeld and his colleagues at the Yale School of Management, points out that due to corporate withdrawals: “Russia has lost companies representing 40% of its GDP, wiping out almost all of the three decades of foreign investment and reinforcing the unprecedented simultaneous flight of capital and population in a mass exodus from Russia’s economic base”. Add to this that the country’s foreign exchange reserves are shrinking at a startling rate – around US$75 billion have been lost since the war began – and we get a more nuanced perspective on the true situation.

The destruction, death and devastation suffered by Ukraine is only one part of this war, the loss of livelihoods is another. Governments that oppose such invasions must help both economically and militarily. So far Western countries have done this for Ukraine, but this support must continue if its economy is to survive.The conversation

Matt Qvortrup, Chair of Applied Political Science, Coventry University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


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