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38 I Cover story bne July 2024
Ukraine expects to receive from the West $37.8bn in 2025 as grants and credits, $25.7bn in 2026, but only $19.4bn in 2027.
If Trump wins re-election in November, he will very likely end the US support for Ukraine. Pledges already made are probably enough to get through 2024 and cover most of 2025, but after that where the funding will come from remains very unclear.
Ukraine can muddle through for the meantime. The international reserves were a healthy $42.4bn at the end of April – more than the minimum three months of import cover needed to keep the currency stable – but had fallen
to $39bn at the end of May, after the volume of international aid decreased compared to March.
The IMF published in July a pessimistic scenario for Ukraine's economy as the war becomes protracted. It assumes
a shock will start in the third quarter of 2024 that will affect business and household sentiment and the pace of migrant returns, accelerated by further damage to energy infrastructure from Russian attacks.
These factors would lead to a sharp decline in real GDP of 1.7% in 2024
in the pessimistic scenario against 2.5-3.5% in the baseline scenario, and a 1% drop in 2025.
High defence spending needs and
a decrease in economic activity will increase the budget deficit. Foreign exchange imbalances will resurface and persist for longer, given the deterioration in export performance, leading to higher devaluation in the coming years. The subsequent recovery will be more subdued than in the baseline scenario, given even greater damage to fixed assets, and output will remain below pre-war levels.
Funding package problems: the
West has promised a lot of money, but there are problems with almost all the packages. The most obvious example was the difficulty in getting the US $61bn package through Congress earlier
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this year, but the more recent EU four-year €50bn aid package that was approved in February has also faced problems, as Hungary, for one, refuses to participate, and now the pro-Russia block in the EU is growing, this package could encounter further difficulties.
Another $50bn loan deal, agreed on June 13, where the interest payments will be serviced by the profits made on the CBR’s frozen assets, was a landmark agreement, but the deal is being dogged by the details.
At the moment the loan is backed by the US, Canada and Japan, but Europe is refusing to participate, as it objects that most of the money will be spent
on US-made arms, so benefiting the
US economy, whereas the obligation to repay the loan if Ukraine defaults will fall on Europe, as that is where the bulk of the frozen CBR assets are housed. Washington still has not decided on how much it will contribute to this $50bn loan deal as the allies bicker over how to divide the burden up.
The US authorities must also obtain Congressional approval for such a
big loan, which is also hesitant about throwing good money after bad. Opposition from both Republicans and Democrats in the US Congress could drag out the process until the end of 2024.
The EU candidates are also hesitating over approving the loan. European Council President Charles Michel told a EC conference on June 28 that only five of the eight EU candidate countries had signed off on the deal. Serbia, Georgia and, surprisingly, Moldova, all refused
to sign. The EC insists that all candidate countries approve all EC sanctions measures. Serbia has been refusing to support sanctions on Russia from the start, and Georgia has rapidly drifted towards Russia in the last few years, thanks to booming mutual trade. But Moldova was a surprise, as it usually supports the EC; however, Moldova signed a new gas supply deal with Russia last year and may have its hands tied.
Finally, in the most recent sign that funding will get harder in the future,
Nato members were wrangling over who should contribute how much to a multi-year €40bn funding deal on July 3 proposed by Nato Secretary General Jens Stoltenberg earlier this year.
The deal was already a cut down version of the original €100bn proposal put forward by Stoltenberg to “Trump- proof” Ukraine’s funding, but that was too rich and was immediately reduced to the less ambitious €40bn. But even that amount seems to be too much
for the members. DPA reported that Nato members only agreed to provide approximately €40mn in aid to Kyiv for 2025 alone and want to reassess it each year. Nato members concurred that GDP would be factored into the calculations, but a consensus on individual contributions was also not reached at the July 3 meeting.
Trade deficit problems: Most of the money Ukraine is spending is coming from donors or domestic bond issues, but there is a third source: the export of grain and metals.
Ukraine is an agricultural powerhouse and a major metals producer, but Russia’s naval blockade has hobbled exports, and it is also cut off from the Russian market, formerly its biggest trade partner.
The export problems have been made worse by an acrimonious dispute
with Poland, which accused Ukraine of dumping grain and wrecking the Polish grain market last April. Warsaw responded by banning the transit of all Ukrainian agriculture goods, thus cutting Kyiv off from one of its major sources of foreign exchange.
Since then, a deal has been thrashed out that introduces an “emergency brake” mechanism that will limit trade if the volumes get too big, but the reduction in trade is a major blow to Ukraine’s budget.
That dispute was only made worse when Polish truckers took it on themselves to block the border and prevent Ukrainian trucks from transiting Poland to EU market, saying the Ukrainian haulers