Increasingly dire prospects for Ukraine

Depressing prospects for Ukraine: a bankrupt state, an economy in free fall, and debts doubled.

Since the beginning of the year, the international media has been keeping a wary eye on Russian economic and financial indicators. This heightened attention is obviously due in part to the Russian attacks launched against Ukraine in February; many believe that if the Russian economy breaks, then the war will come to an end as well. However, global interest in Russian is also fueled by something else: economic indicators will reveal how effective the Western sanctions against Russia are. This question is essential to Europe and especially the West. After all, it will be difficult to justify maintaining sanctions if they only hurt Europeans rather than Russians and do not even really impact the aggressor.

Compared to the fact that even the most insignificant Russian economic data give rise to lengthy explanations, surprisingly little is said about Ukraine’s economic and financial situation. However, the general economic condition of Ukraine is rather dire.

Bankruptcy? Essentially.

Ukraine, as any other debtor, previously tried to maintain creditor trust by foregoing even the mention of possibly rescheduling payments. The war however forced changes here as well, as with so many other things. So much so, that according to market information, Ukraine made a deal with three quarters of their creditors at the beginning of August to freeze debt services for certain cases for up to two years. Two credit rating agencies classified the move as practically bankruptcy.

No money for their own accounts

But how is Ukraine doing financially? There is an answer to this question, provided in large part by official government statements. It is no surprise that war costs money; efforts to inhibit and push back against the Russian forces have a horrifying material and – due to the nature of war – human cost. According to certain Ukrainian sources, the armed resistance and occasional counter-attacks cost Ukraine five billion dollars every month. Other government statements said Ukraine was in need of nine billion dollars a month to eliminate the deficit. That amount should naturally be collected by the international community opposing Russia.

Shocking numbers

It is also worth taking a look at some of the most important statistics on Ukraine: according to international estimates, Ukraine suffered a 35-45 percent economic decline this year and their budget deficit could reach 50 billion dollars by the end of the year. The situation is so hopeless that between March and May, Ukrainian state revenues covered only 40 percent of operating and other expenses. Not in the least because the war prevented nearly all Ukrainian exports.

The local central bank covered another 40 percent of the expenditure coverage, in part by printing money. The remaining 20 percent was made up of international grants and loans, among other things.

Is the West driven by money?

One big question is connected to the latter – that is, to international aid. Based on various statements, it can often be concluded that the West is approaching this war on an ideological basis by selflessly providing aid to Ukraine in its fight against the tyrant’s aggression. Their actions are purely driven by an effort to preserve freedom and not at all to earn a profit. However, the reality is that Ukraine’s public debt may jump from 50 percent of GDP (before the war) to 100 percent. In evaluating this indicator, it must be noted that not only does the debt increase, but GDP decreases. In addition, it is telling that only 18 percent, or about one fifth, of aid does not have to be paid back – the rest is nothing more than long-term loans.

Pressing questions

These numbers raise even more questions. On the one hand, who will provide the resources for Ukraine to stay alive financially? Certainly not the same European Union whose citizens will be paying astronomical gas and

electricity bills as a result of Brussels’ sanctions. On the other hand, how will Ukraine repay its enormous loans? There is no doubt that following the devastation of this war, certain creditors will demand the remaining Ukrainian national resources in exchange for the loans provided for war expenses.

Cover image: A damaged building of an industrial facility in Kharkiv on July 31, 2022, after a Russian missile attack hit the eastern Ukrainian city overnight (Photo: MTI/EPA/Sergey Kozlov)