NewsUkraine faces critical financial crossroads amidst ongoing war

Ukraine faces critical financial crossroads amidst ongoing war

Volodymyr Zelenskyy is the President of Ukraine.
Volodymyr Zelenskyy is the President of Ukraine.
Images source: © Getty Images | KSENIA KULESHOVA
Mateusz Kaluga

1 July 2024 20:03

The British magazine "The Economist" claims that the war is exerting enormous pressure on Ukraine's economy. GDP is decreasing, and the National Bank of Ukraine is depleting its foreign exchange reserves. The country faces the possibility of a major financial crisis and insolvency.

The portal "Biełsat," quoting "The Economist," highlights the difficult financial situation of Ukraine. Creditors have agreed to defer debt servicing for two years. The moratorium expires on 1 August.

"The Economist" explains that Ukraine has a month to avoid insolvency. The International Monetary Fund is trying to persuade Ukraine to agree to a debt reduction, but reaching an agreement in the remaining time is unlikely. If Ukraine defaults, it would indicate a worrying lack of confidence by private investors in Western commitments. In the long term, this could spell disaster for the country's economic recovery.

The portal indicates that countries undergo restructuring during wartime to ensure access to financial markets. Quick restructuring takes months, and complex restructuring takes years. However, since the beginning of the war, Ukraine has been closed to capital markets, which means these procedures are not urgent.

Ukraine and Western aid

The Economist emphasizes that Ukraine desperately needs "fiscal space." Allies' aid comes from weapons, equipment, and targeted funds, not free cash.

The latest aid package from the USA will provide the Ukrainian government with £6.5 billion, a quarter of its annual social benefits spending and in the form of loans. The EU is to provide £31 billion over three years.

"Biełsat" reports that although the amount Ukraine wants to receive is quite modest - $12 billion in 2024–2027 - without aid, the country has no means to cover it. According to the IMF, with the radical restructuring proposed by Ukraine, the country will only be able to make ends meet. For their part, bondholders doubt whether the Fund can be so confident, especially as its analyses may already be outdated.

What are Ukraine's options?

Ukraine has to rely on creditors. One option for survival is to extend the moratorium. Another is the insolvency procedure, which would suspend Ukrainian payments.

"The Economist" claims that the restraint of private investors reflects not only Ukraine's financial prospects. In normal restructuring, creditors bet on the country's economic prospects. Lending to a country at war assumes its victory. Much depends on the degree of Western support. However, the magazine adds, bondholders are sceptical about Ukraine's long-term recovery plans in the event of its victory.

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