The Working Paper #1 of the Economic Policy Advisory Council proposes how to structure the “deal” between the partners and Ukraine in a way that would build trust, and that would be most effective in helping to win the war and make Ukraine a contributing partner of the EU.
There are four potential sources of financing to cover this gap: Russia, Ukraine, partner governments and the private sector.
During the war, given the risks, we expect the private sector will not play a major role. We believe Ukraine can and should make a contribution, but it cannot cover this gap.
We see use of Russian assets as a possibility, but it also depends on donors’ decisions, and for now, cannot be relied on.
This leaves donors as the critical source of finance for 2024, and likely for longer. And donors face other calls for their attention and resources.
If donor resolve falters and donor financing is not forthcoming, Ukraine’s defence and recovery will be at risk. To mitigate this risk and bolster Ukraine’s relationship with its partners, we propose a broad “financing democracy” deal.
The Ukrainian Ministry of Finance defined the external financing need for 2024 at $41bn. For comparison, in 2022 Ukraine received $31bn in external economic aid while seigniorage revenue from printing money amounted to almost $12bn; and in 2023 Ukraine expects to receive $43bn of aid while avoiding monetary financing/printing money.
Of the requested $41bn for 2024, $5.4bn is anticipated to come from the IMF, $8.5bn from the US and $18bn from the EU. However, the Minister of Finance admits that $29bn in financing for 2024 is not yet confirmed. While the war and Russia’s aggression continues, we do not think it is reasonable to expect Ukraine’s financial need to decline.
Our group welcomes the decision of the European Commission to launch the Ukraine Facility, a new €50bn financial instrument to provide predictable support to Ukraine over 2024-2027; it was announced that this would start providing funding at the beginning of January 2024.
However, we are concerned about the programme's timing and the lack of long-term commitments from other G7 partners. The US commitments are at risk due to delays in Congress.
At the same time, reportedly, the conditions attached to support have rapidly increased in a disorganised way. So far, there are structural benchmarks of the IMF, conditionality expected in the EU Ukraine’s Facility, requests from the US, on top of the plans that the government of Ukraine had presented in London.
Therefore, in this paper the Council members propose a “financing democracy” deal which could provide necessary guarantees to the partners, set a limited list of conditions for Ukraine that are co-ordinated and are realistic to implement in different periods of war, would improve overall co-ordination and thus reduce the workload on a government whose primary focus is on the war.
After almost two years of full-scale war, the outcome is not yet clear. On the one hand, Ukraine has preserved its statehood and retains a working government, regained a large part of the territory occupied in 2022, materially degraded the Russian navy in the Black Sea, and is operating the seaborne shipping corridor without Russia’s goodwill. Furthermore, Ukraine’s economy has been resilient: inflation is in single digits, the banking system operates normally, and many businesses have resumed operations. In addition, Ukrainians continue to be extraordinarily united in their desire to defeat Russian aggression. Without a doubt, Ukraine would not be able to resist for so long without the military, humanitarian and financial aid of other governments and international organisations. But while continued support is vital for Ukraine to prevail, it currently looks at risk.
We argue that supporting Ukraine is not charity, since Ukraine’s existential war for its own survival is also a war to defend the international rule of law, European democracy and security. In short, we see two critical reasons why democratic countries should support the defence and reconstruction of Ukraine.
First, values. Ukraine is a liberal democracy, which aims to embed these values – respect for human rights and freedom in a democratic society governed by the rule of law – in its institutions, in particular by becoming a member of the European Union. If Russia is not defeated, Putin and other autocrats and dictators will be emboldened, and the global threat to democracy – in retreat for the last 18 years, according to Freedom House – is likely to intensify.
Second, security. Russia under Putin poses the main security threat to Europe, with a revisionist doctrine justifying aggression, a proven willingness to subvert and attack its neighbours and no respect for the norms of diplomacy or war. Ukraine is holding this threat at bay and has materially weakened Russia’s capabilities, at the modest cost of 3% of total Nato defence expenditure. But the risk remains acute. If Russia is not defeated and the war drags on or becomes frozen, Europe faces the prospect of a zone of instability in the East. The occupied territories will be exploited by Russians and various malicious actors to fuel ongoing inflows of refugees, arms and contraband, and drive higher security and defence spending. Further, Russia’s influence over critical resources, notably global food supply, would be enhanced, giving it additional leverage which it might seek to weaponise.
Defending and rebuilding Ukraine demands an outsized military and a large reconstruction programme – which requires large-scale support from partners for an extended period.
On Ukraine’s side, we believe that its tasks should include:
Drawing up a deliverable reconstruction plan. Building on the programme proposed for the EU’s Ukraine Finance Facility, Ukraine’s government should set the priorities and timeline for defence and reconstruction, consistent with the available resources, including economic and fiscal capacity, and take into account the views and input of donors.
Effective implementation. Ukraine should implement the reconstruction plan, including structural measures to improve the competitiveness and capability of the economy. The focus in reconstruction should be i) on rapid action to minimise scarring, and ii) on effective use of resources through procurement which builds capacity and a competitive supply chain.
Transparency and accountability. Ukraine should provide accountable reporting on the use of resources to ensure transparency and allow Ukrainian society and partners to hold the government to account for the delivery of the plan, including through a partner-led supervisory board. Ukraine should demonstrate steady progress in fighting corruption.
On the partner side, these should include:
Delivery of committed resources. Partners should provide financial support as agreed in amount and timing, including facilitating the provision of financial support from Russian sources.
Agreement on appropriate conditionality. While partners will require certain actions in return for funding, this conditionality should meet criteria. We propose that the conditions be aligned with delivery of the agreed reconstruction plan, be appropriate for the stage of reconstruction, and avoid making competing or contradictory demands. Further, we propose that adequate warning should be provided and due process followed when adjustments in conditionality are proposed.
Partner coordination and oversight. Partners should coordinate their activity, and establish mechanisms to streamline discussions with the Ukrainian authorities, to report on the use of aid, and ensure efficient co-operation between donors and with their Ukrainian counterparts at the working level.
Grant-centred funding. Until recovery has been completed, Ukraine’s ability to service debt is limited. It has already agreed a debt standstill with debtors, and we believe that a substantial debt write-off will be appropriate. Given Ukraine’s major needs and limited financing and debt capacity, we believe that partners should commit to immediate post-war funding in the form of grants. Over time, as Ukraine’s financial position improves, loans can play a larger role.
Front-loaded funding. Allow Ukraine to borrow against future tranches of aid. The arrangement could be similar to the International Finance Facility for Immunisation that was used to raise funds to pay for COVID-19 vaccines,
A full version of the Economic Policy Advisory Council working paper is here.
The Economic Policy Advisory Council provides recommendations to the Ministry of Economy in support of Ukraine`s rapid recovery and development.
We extend our sincere appreciation to Jacob Nell, the leading author of this paper, for his valuable contributions and leadership throughout the research process. Please see the full list of signed authors at the end of the paper.
The Economic Policy Advisory Council – a group of Ukrainian and international economists functions as an advisory body under the Ministry of Economy – highlights that the conditions attached to support for Ukraine have rapidly increased and in a disorganised way, even as financing for Ukraine`s critical needs remains uncertain. To improve this relationship, the paper proposes a broad “financing democracy” deal between Ukraine and its partners where Ukraine commits to key outcomes on democracy, defence and fiscal self-reliance when the war and reconstruction are over in return for sustained support until then. This would build trust, and be most effective in helping to win the war and supporting Ukraine to become a full member of the European Union.
The Kyiv School of Economics (KSE) is a bne IntelliNews media partner and a leading source of economic analysis and information on Ukraine. This content originally appeared on the KSE website.