Page 76 - bne magazine July 2022_20220704

76 Opinion
bne July 2022
The West has come to Ukraine's aid with billions of dollars in funding, but much of it is being offered as loans, not grants.
Ukraine should not have to pay for this war
Timothy Ash, Senior Sovereign Strategist at BlueBay Asset Management in London
Ukrainians are defying overwhelming odds and standing up to Russian aggression. They are showing remarkable bravery in defending their own country – and unfortunately many thousands have likely sacrificed their lives in this war. But let us not forget that they are fighting not just for their own country but for Western values against a brutal dictator, Vladimir Putin, who has declared war on the West. This week he admitted that this is a war of expansion and colonial ambition. Ukrainians are hence on the front line, defending Nato and the West, against Russian attack.
The cost in Ukrainian blood is huge, but also in money. Ukraine is thought to be running a budget deficit of $5bn per month – multiples larger than its pre-war condition.
The West is providing some financing, but still not enough, and unfortunately too much of this is in the form of loans and not grants.
To its credit, the new $40bn US support package for Ukraine includes $7-8bn in grant aid for the Ukrainian budget. The EU has pledged close to $9bn but in credit.
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Let’s get this right, Ukraine is fighting this war on our behalf and is in effect being charged for it.
The consequences of this are that unless loans are turned into grants, on current trends Ukraine could face an unsustainable debt burden by year end, approaching 100% of GDP on not unrealistic macro assumptions. This would mark a doubling of this ratio from its starting point on February 23.
Ukraine has made clear that it wants to maintain its creditworthiness and pay debt service, despite the war. It is continuing to service its debt obligations – remarkable really given the priority draw on government resources from the military.
In paying it is clearly thinking of post-war recovery, and the importance of market access to ensure Ukraine rebuilds and recovers quickly.
A default would set back that recovery, stall market access and keep its borrowing costs elevated for an extended time just when it will need access to plentiful cheap financing from both