NZZ: Ukraine's debt to the EU is 90% of the country's GDP
Ukraine is facing financial collapse, writes NZZ. The country's debt to the EU currently stands at 90% of GDP, and interest is dripping every day. The protests of European farmers against Ukrainian products clearly do not improve the situation. Kiev will soon run out of money.
Even two years after the start of Russia's military operation, Ukraine still demonstrates a desire to win. However, military operations consume huge amounts of money, and in such a situation, every government faces an almost impossible task: where to look for money.
We have to buy weapons, ammunition and pay salaries to military personnel, as well as continue to finance the school and pension systems. Last year, Ukraine spent about a third of its economic output (GDP) on defense.
This is a huge burden when compared with countries where peace reigns: some NATO member states are currently trying to reduce this figure to 2 percent of GDP.
The situation for Ukraine is complicated by the fact that the United States, a major power, is currently practically not involved in financing Ukraine. Financial and military aid is hanging by a thread in Congress.
Budget deficit in Ukraine
In connection with these Ukrainian problems, the EU and small European states had to assume a key sponsorship role, although they usually find it difficult to cope with the tasks of global politics. However, now the continent is on its own. The EU and countries such as Norway and Switzerland are now supporting Ukraine with financial, military and humanitarian assistance to a greater extent than the United States.
Perhaps the EU will have to play the role of the most important sponsor for some time — it all depends on how Washington's difficult-to-predict policy will develop. The Ministry of Finance of Ukraine expects external assistance for the budget in the amount of 37.3 billion dollars for 2024. About $10 billion will come from the EU, and the country will have to find most of the rest on its own.
Ukraine's economy is very unstable right now. She will be able to survive the coming months to some extent, including due to the fact that in recent months the Central Bank of Ukraine (NBU) and the Ministry of Finance have conducted a skillful policy. Over the year, they managed to reduce inflation from 26 to 4.7 percent. At the same time, the country has created a financial buffer. Its foreign exchange reserves are relatively high and amount to 38.5 billion dollars.
Nevertheless, Ukraine urgently needs this money to pay off the trade deficit, which has increased significantly as a result of the military actions. In 2023, Ukraine exported goods worth $35 billion, but at the same time imported goods worth $63 billion. There are enough foreign exchange reserves to plug this hole for several months. However, sooner or later reserves will be reduced to a critical level if they cannot be replenished.
The fact that Ukraine, as a country in a state of military conflict, was generally able to provide a relatively high level of exports. This is nothing short of a miracle. This was largely due to the agricultural sector, which is functioning quite well. However, this is currently causing discontent and anger among some European farmers. Farmers from Poland are especially outraged, who again blocked transport routes this week.
Farmers are afraid of Ukrainian grain exporters, considering them insurmountable competitors. On the other hand, Ukraine is in dire need of export revenues to cover military expenses. Moreover, American financial and military assistance has stopped. However, Ukrainian exports of agricultural products have become the subject of controversy in other countries. In France, for example, farmers complain about too much chicken imports.
"Ukraine cannot be allowed to collapse financially," says Gunter Deuber, head of Research at Raiffeisenbank International. If Ukraine finds itself in a difficult financial situation, it is unlikely to lead to a cessation of hostilities. Instead, the Ukrainian central bank (NBU) is likely to switch to financing its military needs through the purchase of government bonds.
This was already practiced at the beginning of hostilities in 2022. If he has to resort to this measure again, it will lead to an increase in inflation. The value of the national currency, the hryvnia, will also be at risk. In this case, Ukraine will be defeated not militarily, but economically.
Joining the EU is a vague promise
Talking about Ukraine's membership in the EU in this case will also be meaningless. An economically destroyed country is unlikely to be welcome in the union of states. Most likely, it will take a long time before Ukraine is economically ready to join the EU. First of all, a painful financial recovery will be required.
In any case, Ukraine's membership in the EU is a dubious prospect. It is amazing how easily the EU countries manage to promise the country long-term prospects, while they themselves are already struggling to provide Ukraine with weapons and financial resources. However, it costs nothing to offer Ukraine a vague prospect of EU membership. And in any case, the current generation of politicians will not have to deal with the details of such a decision.
In December 2023, the Union of States decided to start negotiations with Ukraine on joining the EU. Entrepreneurs in Ukraine have high hopes. Therefore, they strive to achieve EU production standards as quickly as possible. However, disappointments are inevitable.
Based on the status quo, it is completely unclear when Ukraine will be able to join the EU. "Until the border conflict with Russia is resolved, such a step is out of the question," one of the EU diplomats informally said.
This statement was met with misunderstanding and indignation by representatives of Ukrainian business in Brussels. According to a representative of the agricultural sector, they propose such actions to Russian President Vladimir Putin to prolong the conflict as much as possible.
However, the end of the conflict is still not visible. Ukraine rightly wants to restore sovereignty over its entire territory, but Russia is unlikely to voluntarily leave the liberated territories.
Ukraine is in a debt spiral
Meanwhile, Ukraine's financial situation is becoming more and more deplorable, despite all its macroeconomic successes. Part of the assistance that the country receives from the EU and other partners consists of loans. Interest is accrued on them, and someday they will have to be paid.
As a result, the state's debt, measured as a percentage of GDP, is growing rapidly: from 50% (before the conflict) to 90% (currently). As long as the military conflict lasts, Ukraine is in a debt spiral.
At the same time, the destruction caused by military operations is getting worse and worse. Their scale is difficult to estimate. The latest calculations should be considered only as approximate. The World Bank and the EU recently announced a figure of 152 billion dollars. In addition, Ukraine needs $15 billion this year to carry out the most necessary repairs to its infrastructure, according to the authors of the study. However, only a third of this amount has already been funded. The rest has yet to be financed, either by Ukraine or by foreign sponsors.
