Is Ukraine Really Running Out of Money?

Journalists often make mistakes. As someone who dropped a bit of a clanger this week (I said there was a deal on the EU’s sanctions on Russian oligarchs 24 hours before there actually was one), I’m especially eager to avoid repeating one I made just a few months ago. Early this year I repeatedly wrote that Ukraine was set to run out of money in April, or – when I felt like being more specific – in “early” April. Nor was I alone: European Commission officials, Ukrainian officials, and many of my fellow journalists said the same thing.JOIN US ON TELEGRAMFollow our coverage of the war on the @Kyivpost_official. In retrospect, however, the claim never really made much sense. For one thing, it was never clear what it actually meant. (That Kyiv would default on its debt? If so, why not just say that? And if not, what?) For another, Ukraine’s behavior didn’t really fit that of a country that was on the brink of fiscal armageddon. On Feb. 20, Hungary shocked Ukraine and its European allies when it announced that it would veto a €90 billion loan to Kyiv, citing the latter’s failure to restart oil flows through a damaged pipeline that transits Ukraine on its way from Russia to Hungary. Rather than dropping to its knees and begging Budapest to back down – or asking Brussels to break the impasse or (the most obvious solution) repairing the pipeline – Kyiv simply shrugged. “What’s the point of rebuilding [it]?” Volodymyr Zelensky, Ukraine’s president, said five days later. Other Topics of Interest Why the Baltics Are Right to Worry About Putin’s Latest Reassurances Putin denied plans to attack Europe but revived Russian-speaker grievances in the Baltics, echoing rhetoric Moscow used before invading Ukraine. For a country on the brink of bankruptcy, this was (to put it mildly) a very weird thing to say. But for a country that wasn’t, it wasn’t. As it later transpired, Ukraine wasn’t close to “running out of money,” at least in any meaningful sense. (Moreover, even if some kind of a fiscal crunch were imminent, Kyiv could have issued bonds to state banks or forced its central bank to print money to remain temporarily afloat.) Ultimately, Kyiv’s actions were not driven by economics, but by politics. First, Ukraine was understandably reluctant to facilitate oil deliveries to a country (Hungary) whose pro-Moscow government had regularly sabotaged the EU’s Ukraine policy, and whose oil purchases would further enrich the country (Russia) that was attempting to destroy it. Second, and as Zelensky effectively admitted, blocking the crude transit was deemed an effective way of tilting Hungary’s parliamentary elections in mid-April in favor of Péter Magyar, the nemesis of then-premier Viktor Orbán. Magyar’s subsequent landslide victory suggests Zelensky was right. Not coincidentally, ten days after the elections, Kyiv finally allowed the oil to flow, causing Budapest to immediately lift its veto. Ukraine then spent the better part of two months haggling over the loan’s technical details with EU officials. Finally, on June 25, the first loan payout – €3.2 billion in budget support – was made. No other budget support from the loan has been disbursed since then (although €11.7 billion has been paid out for defense procurement). And, last time I checked, Ukraine still hasn’t run out of money. At least not yet. Kyiv, give me a break! Why do I tell this story? In part, because I have a penchant for public self-flagellation. More importantly, though, I think recalling this history is crucial to understanding what’s happening today. Last month, Zelensky stunned his European allies when he announced that Ukraine faced a “budget shortfall” this year of $27 billion (€24 billion) – a sum equivalent to more than 10% of the country’s GDP. Once again, however, the claims don’t add up. Literally. According to Zelenskyy, “$8-10 billion” is required to buy “weapons and everything necessary” to ensure a “normal start” to next year, while “nearly $20 billion” is needed to pay soldiers’ salaries, the families of fallen soldiers, and “other areas of funding.” Zelensky has never defined what he means by “necessary”, “normal”, or “other areas of funding”. Nor has he explained how “$8-10 billion” + “nearly $20 billion” = $27 billion. (Why not, say, $28 billion? Or $29 billion? Or “nearly” $30 billion?) Tellingly, neither the European Commission nor the International Monetary Fund has been able to confirm Zelensky’s figures, despite weeks of intensive discussions. Even more tellingly, Brussels has resisted calls from some EU countries to plug the gap by accelerating payouts this year from the €90 billion loan – a clear sign that it doesn’t think any “shortfall” is imminent. In an interview with me this week, Valdis Dombrovskis, the EU’s economy commissioner, strongly implied that Ukraine’s financing needs are less dire than Kyiv is suggesting. “By and large, [the] budgetary needs for Ukraine for this year seem to be broadly covered,” Dombrovskis said, adding that the country nevertheless requires additional military support. Kyiv’s demand for extra cash is especially puzzling when one recalls that so much funding for this year is still available. Maksym Samoiliuk, a senior economist at the Center for Economic Strategy, a Kyiv-based think tank, points out that around $29.5 billion in external financing (much of it from the EU) is currently being held up by the Ukrainian parliament’s failure to pass reforms. Why, then, demand more when you’re not taking what you can already get? Much like earlier this year, the key to this puzzle is to realize that politics, rather than economics, is driving Zelensky’s behavior. First, his demand plays well domestically. Calling for higher salaries for soldiers and bereaved families is always a sure-fire political winner. Asking foreigners to pay for this also exempts Zelenskyy from the awkward task of having to ask Ukrainians to pay for it themselves. Second, it is aimed at Ukraine’s allies – in particular, it is intended to make Western governments, media, and citizens recognize (and ideally address) Ukraine’s increasingly dire economic situation. Mind the gap Viewed in this light, Zelensky’s actions are also perfectly reasonable. After all, Russia’s naval blockade of the Black Sea has starved Kyiv’s economy of export revenue from wheat and other goods in recent months. Moscow’s drone and missile strikes have also devastated Ukraine’s critical infrastructure and destroyed numerous tax revenue-generating businesses. Financial support from Europe’s allies, particularly the US, has also dried up. In other words, Ukraine does need help. But it can also help itself. As Dmytro Andriienko and Viktoriia Klimchuk of the Kyiv School of Economics have noted, Ukraine could seek to harness domestic sources of revenue, namely by cutting or postponing non-critical government expenditure and broadening its own tax base. By a happy coincidence, these latter measures are precisely among those demanded by the EU and the IMF. Boosting domestic revenue, then, will help unlock foreign funding – a financial double blessing. Or as Dombrovskis put it: “When we are discussing additional funding gaps and possible additional funding sources, it [is] important that Ukraine actually uses the funding or receives the funding which is already available.” Ukraine’s failure to pass reforms, then, might prove to be the biggest mistake of all. It also risks being significantly more costly than mine – unless, of course, I’m very much mistaken. See this opinion piece for Euractiv by Thomas Moller-Nielsen here. The views expressed in this opinion article are the author’s and not necessarily those of Kyiv Post.