Chelsey Dulaney
Ukraine will run out of money within months and be forced to take painful economic measures to keep the government running if aid from the U.S. or Europe doesn’t come through, according to economists and Ukrainian officials.
The U.S. and the European Union, Ukraine’s largest financial backers, have promised Kyiv billions of dollars in new financial and military aid. But pledges from both have been upended by infighting in Washington and in Brussels. While political leaders insist those aid packages will pass eventually, timing is critical for Ukraine.
The country faces a $40 billion-plus financial shortfall this year, slightly smaller than 2023’s gap. Funding from the U.S. and EU was expected to cover some $30 billion of that. The money is needed to keep the government running and is used to fund salaries, pensions and subsidies to the population.
After meeting with President Biden, Senate Majority Leader Chuck Schumer expressed optimism about legislation that would combine border security with aid for Ukraine. House Speaker Mike Johnson called the meeting “productive.” Photo: Will Oliver/Shutterstock
Ukraine has introduced a windfall tax on banks, reallocated some tax revenues and ramped up domestic borrowing, which should cover budget spending through February, according to the Ukrainian Ministry of Finance.
“These measures are limited in their effect,” said Olga Zykova, Ukraine’s deputy finance minister. “All our partners share the sense of urgency” for further funding, she said.
The government could be forced to take additional steps to preserve cash if aid doesn’t come quickly. Delays to military aid packages would also deal a blow to Ukraine’s battlefield effort, which has stalled out after a failed counteroffensive.
Kyiv could then buy itself a few more months by delaying salaries or borrowing even more from its own banks and domestic investors. Ultimately, Kyiv could be forced into printing money, a strategy that has fueled economic implosions in countries such as Venezuela.
Ukrainians fear that the recent setbacks signal more trouble ahead. Discussions with international partners have begun to focus on how Ukraine can attain financial self-sufficiency as the war drags into a third year.
Keeping the economy stable underpins Ukraine’s ability to keep fighting. Russia’s far-larger economy was battered by Western sanctions but has since rebounded, after Moscow found new buyers for its oil and focused domestic resources on military production.
Without economic stability, “fighting a country that is bigger than Ukraine and has much more manpower will be very tough,” said Olena Bilan, chief economist at Dragon Capital, a Ukrainian investment bank. “If the budget is not sufficient just to pay pensions and salaries, where will it get the money to buy munitions?”
Some Ukrainian economists hesitate to forecast how long Ukraine could continue without foreign aid, fearing it could further undercut urgency among Western partners.
“From where we sit in Ukraine, we have to avoid building nice scenarios of how Ukraine can survive, or we will not eat for three months,” said Nataliia Shapoval, head of KSE Institute, a think tank at the Kyiv School of Economics.
Concerns over Ukraine’s financial stability have weighed on the national currency, the hryvnia. The central bank spent a net $3.6 billion in December propping up the currency, the biggest monthly intervention since the early days of the war.
Since Russia’s invasion in February 2022, the U.S. and EU together have been responsible for about 70% of the financial aid Ukraine has received. Ukraine thought it would receive new financing from those two partners early this year.
Instead, the EU’s aid package, worth 50 billion euros or the equivalent of about $55 billion over four years, was blocked by Hungarian Prime Minister Viktor Orban, who maintains close ties with Russia. EU politicians hope a Feb. 1 summit in Brussels will bring a breakthrough. If that fails, European Commission President Ursula von der Leyen has said the bloc is prepared to go around Hungary to keep providing financing.
EU officials separately will begin working this week on a new plan to unlock tens of billions of dollars in military assistance for Ukraine.
Meanwhile, Republicans seeking changes to U.S. border policy have blocked the U.S.’s $60 billion aid package. The White House last week signaled it was willing to make concessions on immigration to unlock aid for Ukraine and Israel. But a deal being crafted in the Senate continues to face steep odds on Capitol Hill, with House Republicans making tougher demands.
Ukrainian President Volodymyr Zelensky made his case for continued financial support at the annual World Economic Forum in Davos, Switzerland, last week, saying: “Strengthen our economy and we will strengthen your security.”
Ukraine can pull together $8 billion and balance its budget for the first three months of the year by tapping leftover funding from 2023, delaying salaries and other noncritical spending, and increasing domestic borrowing, estimated Bilan, the Dragon Capital economist.
Japan is expected to disburse $1.5 billion in budget aid this month and €4.5 billion is expected from the EU in March as a bridge facility, according to the KSE Institute.
Kyiv is spending nearly all of the revenue it collects on defense, an outlay that is likely to get even larger as it seeks to mobilize hundreds of thousands of new troops this year. Sending a single soldier to the front line costs Ukraine 1 million hryvnia a year, equivalent to about $26,000, said Shapoval of KSE Institute.
Shapoval expects Ukraine will be forced to return to money printing—putting both economic stability and support from lenders such as the International Monetary Fund at risk.
Ukraine in the first year of the war relied heavily on so-called monetary financing as it waited for Western aid, which was often delayed. The central bank bought bonds from the finance ministry, providing the government with cash. Economists generally frown upon doing that. It can fuel inflation, erode the value of the currency and cause citizens and investors to lose faith in the economy.
Ukraine’s other options carry potentially heavy political costs for Zelensky. Delaying pension payouts or cutting subsidies for expenses such as energy bills would exacerbate pain among Ukraine’s poor, while restraining import spending could fuel discontent among wealthier Ukrainians who still buy things such as foreign cars and cosmetics.
“Economically, money printing is the measure of the last resort. Politically it’s a measure of first resort,” said Shapoval. “It’s so attractive politically. Just easy-peasy.”
In the longer term, Ukraine and its partners are discussing how the war effort can become self-sustaining, through measures including boosting tax collection and building up domestic military production.
“We recognize that we need to increase our capabilities, financial and military,” said Zykova, the deputy finance minister. She said the government is increasing funding for the production of weapons and drones.
The U.S. and its partners are also exploring using some of the $300 billion in frozen Russian central-bank reserves to back loans to Ukraine.
Economists warn that those efforts could take years to bear fruit. Meanwhile, Ukraine’s economic progress is being undercut by unstable Western aid, said Matteo Patrone, head of the European Bank for Reconstruction and Development’s operations in Ukraine.
The Ukrainian economy likely grew about 5% in 2023, according to the central bank. The annual rate of consumer inflation rose 5.1% in December, down sharply from 26% at the start of 2023.
“The bitter irony is that the macroeconomic situation of Ukraine is very good given the circumstances and this goes entirely to the credit of Ukrainian authorities,” said Patrone. “Wasting all that work would add insult to injury.”
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