Ukraine must be properly financed by Europe or unthinkable consequences will follow. Decision-time is fast approaching.
A crisis is drawing ever closer. It will break in Ukraine, but it won’t begin on the frontlines, where the country’s battle-weary brigades continue to impose a cost on the Russian invader. The coming crisis is brewing in the West, where the US pullback and European hesitation now threaten a financial disaster.
The International Monetary Fund (IMF) has just completed its latest review mission to Kyiv, under its Extended Financing Facility (EFF). IMF messaging suggests that its prior conclusions that Ukraine’s gross budget and balance of payments financing needs over the four-year period to 2027 was just $150bn were way too optimistic.
The financing currently available is inadequate to meet Ukraine’s impending needs. A swift change of course is needed if a financial cataclysm is to be averted.
Underpinning the Fund’s macro and financing framework was the assumption that the war would begin to wind down this year, and hence, Ukraine’s financing needs would also significantly reduce.
Since the full-scale invasion, Ukraine has been running budget deficits equivalent to $3bn-$4bn a month, most of which has been covered by IMF and Western financing. On the assumption that the war would essentially end in 2025, the Fund had presumed the budget deficit and financing needs would more or less halve in 2026, and then fall to a fraction of this in 2027.
It was a heroic assumption, and it was wrong.
The Kremlin shows no interest in peace talks, and so expectations are now moving towards a long war, which implies much higher long-run financing needs. On September 11, EU foreign affairs chief Kaja Kallas indicated that she expected the war to continue for at least another 2 years.
In fairness, the IMF has acknowledged that its previous estimate was wrong. It now says that an anticipated additional $10bn- 20bn will be needed by the EFF to the end of 2027. Ukraine’s Finance Ministry put the number at $37bn. Both could prove significant underestimates.
It should be noted that the IMF takes a very partial, even blinkered, approach to estimating Ukraine’s financing needs, focusing only on budget and balance of payments requirements. It excludes broader, but essential, military support.