How Europe’s dithering leaves Ukraine fighting Russia and high inflation
- While Ukraine’s military is succeeding on the battlefield, its economy is struggling as the financial support flowing to Kyiv is well short of what was promised
- Europe has been the biggest laggard in making good on its pledges, forcing Ukraine’s government to print money to stay afloat
Earlier this year, the International Monetary Fund determined the Ukrainian government would need US$5 billion per month in external support to finance government salaries, pensions, healthcare, schools and some social benefits. These are basic expenditures to keep the government functioning.
Unfortunately, only half of the necessary funds have been made available. According to Ukrainian brokerage Dragon Capital, US$35 billion was pledged to Ukraine as of September 30 but only US$20 billion was disbursed.
The dominant donor is the United States, which has already provided US$8.5 billion with commitments for another US$1.5 billion per month for the rest of 2022.
In the absence of external financing, the Ukrainian government has no choice but to turn to printing money, which inevitably drives up inflation. Ukraine’s inflation rate reached 24.4 per cent in September and most likely will continue to rise because the government received only US$2.5 billion – half of what it needed – in September. Obviously, this is not sustainable.
As historian Niall Ferguson notes in a recent Bloomberg commentary, Ukraine’s army might be winning, but its economy is losing, owing largely to the EU’s failure to provide sufficient financial support. Ferguson is worried about hyperinflation – when inflation is at least 50 per cent per month – and so am I.
Ukraine makes gains as thousands of mobilised Russians sent home
In the short term, greater Western contributions to the Ukrainian budget are the only way to meet this objective. While it is reasonable to anticipate the need for other reforms and alternative financial mechanisms, that work needs to wait until the war has ended.
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Russia bombs Kyiv and several other cities across Ukraine, killing civilians
Moreover, with Ukraine’s public debt skyrocketing – from 50 per cent of GDP at the end of 2020 to an estimated 85 per cent of GDP by the end of this year – it is vital that Ukraine receives grants rather than credits. While the US seems to understand this, the EU clearly does not. Its macro-financial assistance comprises only credits, though most EU members’ bilateral assistance has primarily taken the form of grants.
This must change. We cannot allow Ukraine to fail financially through no fault of its own, simply because the EU is too preoccupied with its own bureaucratic rules. The best solution is to confiscate the roughly US$400 billion of frozen Russian reserves held across seven Western countries and send them to Ukraine as reparations. Canada has already adopted a law allowing for this, though it has not yet seized any Russian funds.
