Ukraine’s international partners are sounding the alarm over growing pressure on Kyiv’s public finances as the invasion of Russia lowers tax revenues and its allies struggle to rapidly advance financial support.
The U.S. Treasury warned that emergency measures, such as printing money that Kyiv uses to prop up its public finances, run the risk of damaging its ability to provide critical public services over time, stressing the need for allies to meet commitments to provide tens of billions of dollars in grants and cheap loans as soon as possible.
EU finance ministers meeting in Brussels on Tuesday agreed on a new € 1 billion emergency loan for Ukraine, but are struggling to reach an agreement on a wider package for the country.
Valdis Dombrovskis, executive vice president of the European Commission, said Ukraine was facing “massive short-term financing needs” and more work was needed to meet them. He urged EU member states to provide sufficient financial guarantees so that the commission can advance a planned package of 9 billion euros in Kyiv.
Ukraine’s budget crisis has worsened due to a drop in tax revenues and customs duties since the invasion began almost five months ago, along with rising war spending.
The halt in grain and steel exports has deprived Kyiv of foreign currency gains. Ukraine is forced to burn its foreign exchange reserves at an accelerated pace, as the central bank buys government bonds to cover its funding gap.
The G7 and the EU have announced official funding commitments with Ukraine of $ 29.6 billion. According to Dragon Capital, an investment bank based in Kyiv, Ukraine’s allies and international financial institutions have so far disbursed $ 12.7 billion in the country.
EU leaders promised additional support of up to € 9 billion in May, in addition to an emergency loan of € 1.2 billion; they are still negotiating how to structure this financial support. Officials warn that the full EU assistance package is unlikely to be resolved before the August break.
Germany, in particular, has been questioning the idea of providing all assistance in the form of loans, diplomats say. Berlin has already provided € 1bn in bilateral support to Ukraine and on Tuesday backed an additional € 1bn EU loan.
The German finance ministry said the commission will present another proposal to reach 9 billion euros and that as soon as it is available, it would be evaluated by member states. “Together with our international partners we are on the side of Ukraine,” he added.
Oleg Ustenko, economic adviser to Ukrainian President Volodymyr Zelenskyy, said that now the country needs $ 9 billion a month from its Western sponsors to cover the budget deficit, almost double its previous request.
The finance ministry said its estimate of the gap was still $ 5 billion a month, but even that was much more than Western capitals had provided so far. “For the next few months, we will have to receive $ 9 billion a month instead of $ 5 billion,” Ustenko said.
“We will try to survive in any case, but without the financial support of our allies, it will not only be difficult to do so, but almost impossible.”
Fiscal tensions are shown more broadly. Naftogaz, the state-owned energy company, on Tuesday asked holders of $ 1.5 billion in its bonds to accept late payments as it seeks to conserve cash to buy gas. It would be the first breach of a Ukrainian state entity since the war began.
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Naftogaz’s move may indicate a shift in the Ukrainian government’s approach to its foreign bonds. So far, Kyiv has refused to reschedule the payment of its debt, saying it was important to maintain the confidence of international investors.
Ukraine’s central bank said last week that in June alone it had depleted $ 2.3 billion or 9.3% of its international reserves, in part because it is monetizing the deficit at an increasing rate.
The National Bank of Ukraine bought government bonds worth $ 3.6 billion last month, more than double the $ 1.7 billion in April and May. The central bank still has enough reserves to cover three months of imports.
The United States on Tuesday announced an additional $ 1.7 billion in direct economic assistance to the Ukrainian government. “This aid will help the democratic government of Ukraine to provide essential services to the people of Ukraine,” Treasury Secretary Janet Yellen said while announcing support.
The U.S. International Development Agency, USAID, and the Treasury have provided $ 4 billion in direct budget support to the Ukrainian government, meaning they are half of the total commitments made under bipartisan legislation. .
Additional report by Guy Chazan in Berlin