Mon. Feb 17th, 2025



By previously agreeing on debt restructuring and devaluing the hryvnia, the Ukrainian authorities gained some time. But they will have to make more difficult decisions next to find funds to cover the monthly budget deficit of $5 billion.

Last week, Kyiv reached initial agreements with bondholders and a group of Western countries to postpone payments on external debts for two years, starting on August 1. This way, the government will free up about $6 billion. At the same time, the Central Bank stopped supporting the hryvnia exchange rate, lowering it by 25%.

According to some experts, the new situation better reflects the financial circumstances in which the war-torn country found itself. “Some investors were wondering why Ukraine didn’t do this sooner,” a foreign banker said last week after the debt restructuring was announced.

The sharp depreciation of the hryvnia is intended to slow the rapid depletion of Ukraine’s foreign exchange reserves. By using bank cards abroad, refugees actually withdrew $1.5 billion a month from the country at an artificially high hryvnia exchange rate, says Maria Repko from the Kyiv Center for Economic Strategy.

Still, Ukraine remains in dire financial straits as the war forced Kyiv to increase monthly military spending from $250 million in February to $3.3 billion in May. To cover them, the government has already reduced other expenses and may be forced to take even more radical measures.

“Something needs to be done on the domestic front: raise taxes or cut non-critical spending,” says Yuri Gorodnichenko, an economics professor at the University of California, Berkeley. “Everyone thought the war would end quickly… but it will last months, if not years.”

Kyiv’s room for maneuver is extremely limited. With all but the most essential spending already cut to the bone, and VAT and customs duties on imports, temporarily abolished after the Russian invasion, reinstated, there are no easy options left. Increasing the tax burden on enterprises risks leading to their bankruptcy and aggravating the humanitarian crisis, Repko believes.

If maintained at current levels, a massive increase in military spending will lead to the government running out of money again in the fall, she warns.

According to the Moody’s rating agency, the budget deficit in 2022 will amount to 22% of GDP, or about $50 billion (based on $5 billion per month). Without external financial support, Ukraine “will go into a dive and will not be able to ensure the continuation of military operations,” Repko believes.

After the Russian invasion, countries and international organizations promised to provide about $38 billion in budget aid to Ukraine, but by the beginning of July, according to the Ministry of Finance, they had provided only $12.7 billion. Another 1 billion euros of funding from the EU should arrive by the end of July. “The liabilities are very large, but funds are being released slowly and in insufficient quantities,” says a foreign banker working with Kiev.

To help the government, the central bank has bought $7.7 billion in government bonds since the invasion, including $3.6 billion in June alone, effectively printing money. It is “very risky” to resort to such a measure for a long time, as it could lead to an acceleration of inflation, Finance Minister Sergei Marchenko told the Financial Times last week. The rate has doubled since the invasion to 20% and is likely to increase further following the devaluation, which will lead to higher prices for imported goods.

Net foreign exchange reserves now stand at just $12.9 billion, down from $19 billion in February. This is enough to pay for important imports, from agricultural products to car parts and fuel, for only 2.5 months.

The agreement signed last week with Russia to unblock supplies of Ukrainian grain, if implemented, will bring about $800 million in export earnings per month, according to calculations by Kyiv-based Dragon Capital. But the agreement was already in jeopardy after Russia fired missiles at the Odessa port the very next day.

The government’s capabilities are very limited, says Victor Szabo, investment director of the British Abrdn:


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