Alarm bells are ringing over Ukraine’s public finances as the cost of the war grows and fighting prevents Kyiv from maintaining normal commerce. In the past week, Ukraine has had to devalue its currency by 25% against the dollar; it has had to ask foreign creditors for more time to make good on debt payments. The state-controlled energy major, Naftogaz, has missed one already. That has fueled speculation about the state of the country’s public finances. The collapse of Ukraine’s economy — symbolized by a national default — would hand Russia a huge propaganda victory and cripple morale for Ukrainians. The Kremlin will spin this as a humiliating defeat while arguing that the Russian economy has prevailed despite Western sanctions.
It is a scenario that must be avoided.
And that’s exactly what finance ministers of the G-7 agreed to avoid in May when they gathered in Germany for their annual meeting. Indeed, the German finance chief, Christian Lindner, who had assumed the rotating presidency of the group, declared there would be no funding problems for Ukraine as a result of a support package of about 18 billion euros ($18.4 billion), of which, the The EU would provide 9 billion.
However, since then, the EU has only authorized the disbursement of a small fraction — with 8 billion euros still to be paid out. The deficit is in limbo because Brussels and EU national governments have yet to settle on how it will be funded. The delay not only risks exacerbating an already difficult situation for Ukraine, but also goes against a tacit agreement between Europe and the US in which the Americans would provide the bulk of heavy weapons while the Europeans would take care of financial assistance. The EU cannot expect Washington to do the heavy lifting on both.
Brussels has to come up with a resolution to the blocked tranche of EU money before it is too late for Ukraine. Kyiv has signaled that it wants to comply with its international obligations, but cannot do so without support. All the while, Kyiv has been a reliable partner for the EU — maintaining Russian gas flows passing through Ukrainian infrastructure even as Vladimir Putin waged war. The EU must recognize that.
The summer break, which usually sees Brussels go into sleep mode in August, should be no excuse for inaction. This isn’t a usual summer: The war doesn’t take a break, neither do financial markets. Meanwhile, Ukraine is burning reserves. According to research by Fitch Ratings, Ukraine has been running a monthly deficit of about $4 billion to keep up the war effort, and could see it spiral to 29% of gross domestic product by the end of the year. Fitch alongside S&P Global Ratings have both warned of a default-like scenario for Ukraine.
The severity of the situation should serve as a warning to European authorities dragging their feet over a package that looks like a drop in the ocean against the war’s broader costs. Ukraine’s needs will become more acute the longer the war drags on. Even though Russia seems to have downgraded some of its objectives to focus mostly on the east, Putin shows no intention of wanting anything less than a land grab and Kyiv’s capitulation.
The outlook is further complicated by the fact that Europe will soon have an energy crisis unleashed by Putin in retaliation for sanctions. Ukrainians have witnessed such weaponizing first hand with grain.
Brussels may have its own set of problems, but that does not mean it should drop the ball on Ukraine. Its credibility on the world stage depends on following through. If Europe means business, it must contribute financially to the war effort.
If Ukraine loses the economic war, it will lose militarily too. Wars can rarely, if ever, be won on the cheap. The battle for Ukraine is no exception.
More From This Writer and Others at Bloomberg Opinion:
• The Days of ‘Germany Knows Best’ Are Over: Maria Tadeo
• Europe Is Faking Solidarity, and Putin Knows It: Andreas Kluth
• Putin Won’t Use a Nuke. Chemical Weapons, Maybe: James Stavridis
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Maria Tadeo is the European correspondent for Bloomberg Television based in Brussels where she covers European politics, economics and NATO.
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