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Can Ukraine Pay for War?      12/03 06:51


   FRANKFURT, Germany (AP) -- Even as Ukraine celebrates recent battlefield 
victories, its government faces a looming challenge on the financial front: how 
to pay the enormous cost of the war effort without triggering out-of-control 
price spikes for ordinary people or piling up debt that could hamper postwar 

   The struggle is finding loans or donations to cover a massive budget deficit 
for next year -- and do it without using central bank bailouts that risk 
wrecking Ukraine's currency, the hryvnia.

   Economists working with the government say that if Ukraine can shore up its 
finances through the end of next year, it is Russia that could find itself in 
financial trouble if a proposed oil price cap by the U.S., European Union and 
allies saps Moscow's earnings.

   Here are key facts about Ukraine's economic battle against Russia:


   In the first days of Russia's invasion, the Ukrainian government turned to 
foreign help that came at irregular intervals. When it didn't have enough, the 
central bank bought government bonds using newly printed money. The alternative 
would have been to stop paying people's pensions and state salaries.

   Economists say printing money -- while a badly needed stop-gap measure at 
the time -- risks letting inflation get out of control and collapsing the value 
of the country's currency if it continues.

   Ukraine has painful memories of hyperinflation from the early 1990s, 
economist Nataliia Shapoval said. As a child, she watched her parents use large 
bundles of bills for everyday purchases as the currency lost value day by day, 
before being replaced by today's hryvnia.

   "Ukraine has been through this, so we know what inflation that is out of 
control looks like, and we don't want this again," said Shapoval, vice 
president for policy research at the Kyiv School of Economics. "The government 
and the central bank are already on the slippery slope by printing so much."

   Price stability and the ability to pay pensions have enormous impact on 
ordinary people and society at a time when Russia is trying to demoralize the 
population by knocking out power and water heading into winter.

   With inflation already high at 27%, price hikes have made it hard for 
lower-income people to afford food.

   Bread that used to cost the equivalent of 50 U.S. cents has doubled, said 
Halyna Morozova, a resident of Kherson, a recently liberated southern city.

   "It is very depressing, and we are nervous. We were living on old stocks (of 
food), but now the light is turned off, the refrigerator doesn't work and we 
have to throw away the food," the 80-year-old said recently.

   She said the Russians kept paying her Ukrainian pension in rubles but since 
they started to withdraw in October, she has received nothing. She's counting 
on the government to return any pension money that was lost, she said.

   Tetiana Vainshtein, also in Kherson, says natural gas is too expensive to 
keep her home heated. "I am cold. I like warmth, and I'm terribly cold," the 
68-year-old said.

   Bank closures during the Russian occupation kept her from getting her 
pension cash, forcing her to carefully ration every hryvnia for food, she said.


   President Volodymyr Zelenskyy says Ukraine needs $38 billion in outright aid 
from Western allies like the U.S and 27-nation EU, plus $17 billion for a 
reconstruction fund for war damage.

   Economists associated with the Kyiv School of Economics say a lower overall 
total of $50 billion from donors would be enough to get Ukraine through the 

   Defense spending is six times higher in the 2023 budget recently passed by 
the Ukrainian parliament compared to last year. Military and security spending 
will total 43% of the budget, or an enormous 18.2% of annual economic output.

   The 2.6-trillion-hryvnia budget has a yawning 1.3 trillion hryvnia deficit, 
meaning the government needs to find $3 billion to $5 billion a month to cover 
the gap. Recent attacks on energy infrastructure since the budget passed will 
only increase the financing need because repairs can't wait for postwar 
reconstruction and will hit this year's budget.


   Despite Western sanctions, Russia's economy has fared better than Ukraine's 
because high oil and natural gas prices have bolstered the Kremlin's budget.

   Plans by the EU and allies in the Group of Seven democracies to place a 
price cap on Russian oil sales aim to change that.

   The Kyiv school economists say "by the middle of next year, we believe that 
the economic situation will shift strongly in Ukraine's favor, making strong 
partner support particularly important over the period until that point."


   The U.S. has been the leading donor, giving $15.2 billion in financial 
assistance and $52 billion in overall aid, including humanitarian and military 
assistance, through Oct. 3, according to the latest available data compiled by 
the Ukraine Support Tracker at the Kiel Institute for the World Economy.

   EU institutions and member countries have committed $29.2 billion, though 
"many of their pledges are arriving in Ukraine with long delays," said 
Christoph Trebesch, who heads the tracker team.

   The European Commission, the EU's executive arm, has proposed 18 billion 
euros in no-interest, long-term loans for next year, which still need approval 
from member governments. The U.S. will likely contribute more as well.

   Ukraine, however, is appealing for grants over loans. If all the financing 
comes as loans, debt would rise to over 100% of annual economic output from 
around 83% now and 69% before the war. That burden could hold back spending on 
the war recovery.

   The $85 billion in total global assistance to Ukraine, according to the 
Ukraine Support Tracker, is less than 15% of the support European governments 
have pledged to shield consumers from high energy costs resulting from Russia's 
natural gas cutbacks.

   To get loans, the commission proposed requiring Ukraine to improve its 
record on corruption. Since 2014, Ukraine has raised its score on Transparency 
International's corruption perceptions index from 26 to 32 out of 100 -- not 
great, but improving.

   U.S. officials have praised Ukraine's online procurement platform for 
introducing transparency in government contracts -- one big source of corrupt 
dealings and collusion -- and saving $6 billion.

   The prospect of EU membership also gives Ukraine incentive to clean up 


   The IMF has given Ukraine $1.4 billion in emergency aid and $1.3 billion to 
cushion the shock from lost food exports.

   IMF Managing Director Kristalina Georgieva told The Associated Press that 
the Washington-based fund is working on more assistance in cooperation with the 
Group of 7 wealthy democracies, chaired this year by Germany.

   "We are on the way to come up with a sound and sizable program for Ukraine," 
she said, "with the support specifically of the G-7 and the German leadership."

   However, for a larger loan program of $15 billion to $20 billion, it goes 
against IMF practices to lend money where the debts are not sustainable, and 
the war raises questions about that. The organization has been reluctant to 
lend to countries that don't control their territory, a condition Ukraine does 
not yet meet.

   The IMF "would have to seriously twist its existing framework or change it 
to provide substantial 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 assistance package, the IMF is holding a 
four-month period of consultation and enhanced monitoring of Ukrainian economic 
policies to help Kyiv establish a track record of good practice. That could 
build confidence for other donors to step in.

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