Page 6 - UKRRptAug22

$1bn a month, the numbers still don’t add up. Kyiv got some relief as the Paris Club of sovereign creditors agreed to delay all payments on sovereign debt for at least one year, but the private investors are less enthusiastic. The holders of Naftogaz’s bond were advised to reject the company’s request to delay redemptions and coupon payments as the company is “still a going concern” and had the cash to pay on its balance sheet.
The government is in a very difficult place now. With much of its manufacturing industry and infrastructure damaged or destroyed and with insufficient income to cover the budget, it is in a poor position to sustain what increasingly looks like it might be a long fight. Kyiv is now entirely dependent on the West supplies, especially materiel, but the West is running down its stocks of ammunition and its manufacturing sector is not able to quickly produce more. The US in particular have compensated by sending more powerful weapons, such as the US M142 High Mobility Artillery Rocket Systems (HIMARS), that have had a devastating effect on Russian forces, but these are not gamechangers as the Russian military machine keeps grinding on.
In two ominous signs in July the Kremlin cancelled the second Russia-Africa Summit, due to be held in November, and at the end of July Kyiv ordered the evacuation of the parts of the Donetsk region it still controls, nominally to avoid problems in the winter. Both suggest that the fighting will continue into November and possibility beyond and that Russia continues to make steady, albeit very slow, progress in its campaign to take control over the whole of the greater Donbas region.
The government has limited capacity to raise resources to cover its funding gap via taxes (the economy is weak) or debt (international capital markets are closed for Ukraine; at the internal capital market, the Ministry of Finance is unwilling to sell debt at new higher interest rates which distorts monetary transmission).
This situation is not sustainable. Although the NBU can provide direct support to the government, this comes at a cost of burning foreign exchange reserves at a fast pace. In June alone, the central bank sold approximately $4bn of its reserves to support the hryvnia and the NBU predicts a decrease in international reserves in the second half of 2022 by 8.6% - from $22.8bn to $20.8bn by the end of the year.
With limited resources and instruments, the central bank is stuck on the horn of a dilemma, but cannot simultaneously defend the exchange rate, print money (UAH225bn or $6.1bn since the beginning of the war) to cover fiscal deficits, and support the stability of the financial system. Something will have to give – and the value of the currency is probably the first thing that will go. In
6 UKRAINE Country Report XXXX 2018 www.intellinews.com