Ukraine: What if financial aid doesn’t come?

Ukraine is dependent on international military aid – and financial support. What consequences would it have if the country’s partners significantly reduced their donations?

Andrij Stepanenko has already come under fire at his work. Thank God he was unhurt, he says, as he races towards the front near Kupyansk in his white police car. Here, just a few kilometers from the Russian positions, there are still civilians who Stepanenko and his colleagues have to take care of at the risk of their lives.

“If not us, then who?” asks Stepanenko. He wipes a tear from his face as he remembers having to bring his own mother to safety from one of those villages. “People need help,” he says.

pensions and social benefits thanks to western money

The police officer earns the equivalent of around 660 euros in the eastern Ukrainian frontline area. The fact that he and his colleagues can still maintain state order even in these regions is thanks to billions in aid from the West. They allow Ukraine to use most of its own state revenues to finance the military. Government spending on pensions, social benefits and civil servant salaries is currently covered by Western financial aid.

“Without the police there would be complete chaos here,” says Dmytro Tolstoho, village leader in Kindrashivka, about five kilometers from the front in eastern Ukraine. He stands in front of a destroyed house and puffs on his cigarette. It was once a good village, says Tolstoho. But out of around 1,000 residents, only around 250 remained. “Today the situation is rather calm,” he adds, while artillery thunders in the background.

Will the EU agree on further aid?

In Brussels today, EU member states are discussing $50 billion in macro-financial aid. It is money that Ukraine urgently needs and that should have come at the beginning of the year. If the aid doesn’t come in time, Ukraine would at least not be facing national bankruptcy, reassures Hlib Vyshlinsky, director of the Center for Economic Strategy.

“Ukraine would then be unable to pay civil servants’ salaries or wages,” explains Vyshlinsky. If the help from the West is not enough or comes too late, the National Bank must start printing money. “It always ends badly,” says financial analyst Serhij Fursa. The consequences would be a devaluation of the currency and a high increase in inflation.

But it shouldn’t even come to that. Ukraine can bridge the gap for a few more weeks until money has to come from abroad again, says Deputy Finance Minister Oleksandr Kawa. He is confident that the billions from the EU will be approved – despite the initial blockade by Hungarian Prime Minister Viktor Orban. “We are also working in parallel with the IMF, the World Bank and other Western countries that support Ukraine. We are convinced that the situation will be resolved,” says Kawa.

Help from the EU alone is not enough

Ukraine’s budget deficit this year is $37 billion – a sum that cannot be financed from the EU alone. Ukraine is therefore also negotiating with other partner countries about further financial aid. Around eleven billion dollars are expected to come from the USA. But politicians there are also arguing about further support for Ukraine.

“We have a much bigger problem with the US than with the EU,” says Vyshlinsky of the Center for Economic Strategy. “In the EU, the majority of member states understand our situation. In the USA, Ukraine has been drawn into the maelstrom of domestic politics.” While this year can still be bridged, the problems could worsen next year, says Vyshlinsky.

Dependent on help

Ukraine has few options. Printing money or selling bonds – neither would solve the country’s problems. “The war is expensive,” says Serhiy Fursa. This year the country will have to recruit, train and equip thousands of soldiers in order to continue to resist Russian attacks. It is currently not possible to predict how much the mobilization will cost.

At the same time, Russia is deliberately destroying industrial and production facilities. The Ministry of Finance says that Ukrainian gross domestic product has fallen by a third since the beginning of the Russian war of aggression. To prevent the collapse of the state, Ukraine could theoretically spend less money on defense. Deputy Finance Minister Oleksandr Kawa disagrees: “Defense is a priority.”

As long as the war continues, Ukraine will be dependent on Western financial aid, says financial expert Fursa. “We may be able to reduce this dependency a little, but that doesn’t change the overall situation.”

This makes support from Brussels all the more important for Ukraine. Andrij Stepanenko in eastern Ukraine trusts the Ukrainian state and hopes for further Western support. Even if the state can’t pay out his salary on time, the police officer wants to continue working: “Every life is important. We work so that there is life in the city.”