Financial support to Ukraine during and after the war: what the EU strategy may look like

Ukraine is fighting an uphill battle against an enemy that is much larger and more powerful. With a GDP of $200 billion in 2021, Ukraine is overshadowed by Russia, whose GDP stood at $1.78 trillion, a difference of nine times in size. And the war deepened that difference to 14 times ($160 bn vs $2.2 trln). The population of Ukraine is 44 million, while Russia has a population of 143 million, three times larger.

However, we are not alone in this struggle. We owe a debt of gratitude to the European Union for your unwavering support.

Through the darkest days of the war, Ukraine received $31 billion in foreign financial aid. A significant portion of this aid came from the European Union institutions and member countries. This aid was instrumental in allowing Ukraine to provide basic needs to its citizens, such as pensions, salaries of teachers and doctors, and keeping the government running. But most importantly, your support gives us hope in this darkest of times.

The humanitarian support to refugees and those affected by the war was invaluable, especially during the early, most horrific months of the war.

The military aid was and is vital to survival of Ukraine and successful defence. It also accounted for billions of dollars. Germany, Poland, Netherlands, Sweden, Denmark, Lithuania, and our other friends. Tanks, artillery, antiaircraft weapons shielding our cities. No words would describe the gratitude of mothers whose children survived due to this support.

I would like to focus today on Ukraine’s financing needs and the possible role of the EU budget in this context.

Ukraine’s budgetary needs are significant and require continuous support from the international community, including the European Union. All the taxes collected from Ukrainian taxpayers are channelled towards supporting our defence efforts.

These efforts are expected to cost the country almost $3 billion per month in 2023 or $34 billion in total for the year 2023.

Before the war Ukraine was spending monthly $200-300 mln for the defence.

This accounts for 40% of Ukraine’s budget expenditures, and this is all we can squeeze out of our economy, which has been devastated by shelling of energy infrastructure, blocked sea routes, destroyed steel plants, and fertile lands polluted with mines and artillery shells. The country’s GDP dropped by 29% in 2022. This is how the economic disaster behind the fiscal needs looks like.

Before the war Ukraine followed a very conservative fiscal policy with the budget deficit not exceeding 3% of GDP, state debt was at 50% of GDP, well below the safe 60% level. And now the forecast of own budget revenue for 2023 is $38 billion, which is just enough to cover the $34 bn military effort. This leaves Ukraine with the biggest budget deficit and the largest financing gap in its history.

As verified by the International Monetary Fund and the World Bank, after debt redemption, Ukraine is left with a financing gap of $42 billion for 2023 and a total gap of $124 bn for the years 2023-2027.

For the year 2023 the situation is however under control. As per the latest report, firm financing commitments have been made by official lenders to cover external financing needs for the year 2023 aside from the rapid recovery needs. However, additional financing of $82 bn is required to bridge the remaining gaps through 2024-2027.

Ukraine is grateful for the promises made by our European friends and the G7, which the IMF has accounted for at $115 billion until 2027. But it is our sincere hope that part of this amount, preliminary pledged by the EU, will be included in the medium-term EU budget.

Not only will this provide us with the necessary financing, but it will also give us a sense of stability and an anchor of hope at a time when our world is undergoing significant turbulence.

Simultaneously, we acknowledge the problem of mounting indebtedness, connected with the budget deficit funding. One possible option to cover the gap is the use of Russian assets that have been arrested in Europe or at least make available proceeds from the investment income on them.

Based on the amount of $300 bln and 3.5% interest rate on U.S. treasury liabilities, this could become a viable solution that could cover approximately a quarter of the annual budgetary support needs, put less pressure for debt relief in the future as well as provide a relief for the EU and other partner countries’ budgets.

We are aware of the legal hurdles but hope very much that they could be overcome with the joint effort.

Another critical aspect of supporting Ukraine’s financing needs and the second point I was going to talk about today, is the rapid reconstruction support.

Почнемо із принципів, за якими така реконструкція має фінансуватися та відбуватися.

Let’s start by discussing the principles that we believe should guide the financing of reconstruction efforts in Ukraine, followed by priorities and funding requirements for the near future.

We believe that every dollar or euro of international aid should have a multiplier effect, enabling Ukraine to not only receive immediate assistance but also to become self-sustaining in the long run and eventually meet the Copenhagen criteria for EU membership.

To achieve this, we believe in the following principles:

1. Ukrainian ownership. Ukraine should determine its own priorities and decide which efforts are necessary with the help of its foreign allies, rather than the other way around. Building capacity, promoting good governance, and ensuring accountability in Ukraine is just as important as rebuilding homes or hospitals. Transparency, oversight, and guidance from partner countries in accordance with EU principles are essential.
2. People-oriented. Decentralization, capacity-building at the local level, and development of self-governance and democratic institutions at the community level may seem like a trade-off, given the slower speed and less centralized control over the usage of funds.
   However, in the longer run, this will bring Ukraine closer to developing democratic governance principles that are widely shared by the EU and give a start to many fruitful grass-roots developments in the future. Some degree of centralization, is, however, unavoidable, especially on the rapid recovery phase. Centralized re-building of bigger-scale infrastructure or strategically important facilities could be done via the governmental agency.
3. Private sector participation. This is crucial given the significant amount of funds needed for the recovery which night be sources not only from seized russian assets or the EU taxpayers’ money, but, first and foremost, from private investors on market terms. War risk insurance is needed to attract foreign investors to Ukraine.

Local private sector involvement is essential to ensure Ukraine’s ability to sustain post-war economic development and repay its debt.

All aid initiatives should be subject to a check procedure for private sector involvement, including, e.g., providing ready-made prosthetic hands vs building a prosthetics production plant in Ukraine, purchasing bottled water from a local supplier vs relying on charity shipments; using demining services of foreign suppliers vs developing local capacities to deal with it, and more.

Coming from principles to the figures, the World Bank estimates that the damage to hard assets in Ukraine has amounted to $135 billion to date, with a replacement cost of $411 billion, and reconstruction efforts that will take years.

Immediate needs for 2023 account for $14 bn and cover restoration of energy infrastructure ($3.3 bn), humanitarian demining ($0.4 bn), critical and social infrastructure, including transport, administrative buildings, hospitals, schools and others ($5.8 bn) as well as private sector needs ($2.7 bn).

It is clear that Ukraine for its reconstruction requires significant support in a wide range of areas, both financial and in-kind. As the EU continues to provide this support, it is essential that the principles that I have mentioned earlier are maintained.

However, 2023 is certainly not the end of the story. It is important to plan for the future and ensure that Ukraine continues to receive the support it needs, also keeping in mind the war affects not only Ukraine but the whole Europe.

As we have seen with NextGenerationEU, the EU has the capacity to respond to crises with ambitious and effective programs.

Therefore, what could be proposed is a creation of a new medium-term EU program aimed at fighting the consequences of war in Europe.

This program could offer a war-time and post-war economic recovery financing facility, directing funds not only to Ukraine’s reconstruction but also to several important EU internal developments.

We see several potential important directions for such program, including:

• Cross-border infrastructure for trade facilitation and the movement of goods; technical aid; support for EU agricultural producers, and other actions needed to ensure a smooth transition for Ukraine from a third country with the significant agricultural potential to a member of a single market area without harmful value chains disruptions.
• Support for Ukrainian refugees in EU countries while their homes are being rebuilt.
• Erasmus+ or analogous educational twinning programs with European cities for building the capacities in Ukrainian municipalities and communities for reconstruction according to the EU standards.
• Building military capacities in EU countries. It is in the EU’s common interest that Ukraine becomes part of the EU (not Russian) security architecture, this is a very new development as several years ago hardly anybody predicted such a war and rear logistics supply chains are far from ready. So financial support for the production of military supplies and logistics is essential for the EU countries as well.
• Specific funds allocation to guarantee war-related risks insurance, attracting private capital to the reconstruction of Ukraine and maintaining the Ukrainian economy during war times. Now Germany has the guarantee provided to German investors and Poland regards this possibility. But the other countries’ businesses would benefit from mutual fund, covering this risk and enabling them to participate in Ukraine’s reconstruction from the early stages.

While we understand the limitations associated with pre-accession funds, Ukraine as a candidate state would appreciate technical aid for reforms needed to align its legislation with the EU acquis. This would be valuable for both Ukraine and Moldova, which are both striving to become new EU members.

In conclusion, it is crucial that the EU continues to provide regular aid. Therefore, I urge the EU to ensure its share of fiscal support for Ukraine in the 2023-2027 budget.

Furthermore, it is necessary to act swiftly to provide rapid recovery financing for the rebuilding of housing, infrastructure, and other essential needs through 2027. This can be accomplished through a special facility for European post-war recovery, with the umbrella including not only the EU countries but also Moldova and Ukraine.

eurointegration.com.ua