Can Ukraine pay for defense without wrecking economy?
FRANKFURT, Germany — Even as Ukraine celebrates recent battlefield victories, its government faces a looming challenge on the financial front: how to pay the enormous cost of the war effort without triggering out-of-control price spikes for ordinary people or piling up debt that could hamper postwar reconstruction.
The struggle is finding loans or donations to cover a massive budget deficit for next year — and do it without using central bank bailouts that risk wrecking Ukraine’s currency, the hryvnia.
Here are key facts about Ukraine’s economic battle against Russia:
How has Ukraine been paying for its defense so far?
In the first days of Russia’s invasion, the Ukrainian government turned to foreign help that came at irregular intervals. When it didn’t have enough, the central bank bought government bonds using newly printed money. The alternative would have been to stop paying people’s pensions and state salaries.
Economists say printing money — while a badly needed stop-gap measure at the time — risks letting inflation get out of control and collapsing the value of the country’s currency if it continues.
How much support does Ukraine need?
President Volodymyr Zelenskyy says Ukraine needs $38 billion in outright aid from Western allies like the U.S and 27-nation EU, plus $17 billion for a reconstruction fund for war damage.
Economists associated with the Kyiv School of Economics say a lower overall total of $50 billion from donors would be enough to get Ukraine through the year.
How could finances affect the outcome of the war?
Despite Western sanctions, Russia’s economy has fared better than Ukraine’s because high oil and natural gas prices have bolstered the Kremlin’s budget.
Plans by the EU and allies in the Group of Seven democracies to place a price cap on Russian oil sales aim to change that.
The Kyiv school economists say “by the middle of next year, we believe that the economic situation will shift strongly in Ukraine’s favor, making strong partner support particularly important over the period until that point.”