Will Ukraine survive without American money?

Due to pre-election squabbles, the United States may leave Ukraine in 2024 without the promised $10 billion in aid. Ukrainian authorities still hope that this money will be allocated, but have already prepared a backup plan in case there is no money. “Apostrophe” looked into where the government could find funds instead of American aid, and whether Ukrainians would have to tighten their belts.

The Ukrainian government is prepared for a scenario in which the provision of financial assistance to our country from the United States will be stopped. This was announced by Finance Minister Sergei Marchenko.

“We are ready for it. But I think that other stakeholders and Ukrainian society are not ready for it. Therefore, we believe that it is too early to talk about this scenario, because it could be unpleasant,” Marchenko said.

The head of the National Bank of Ukraine (NBU), Andriy Pyshny, in turn, spoke more optimistically about this: “We know how to act this year, and next year we understand how to act. It is important that sustainable engagement with the IMF remains at the center of understanding.”

However, no specifics were found in Pyshny’s words either, and therefore one can only guess what the “plan B” of the Ukrainian authorities is in the event of a cessation of American assistance, which, judging by what the Minister of Finance said, does not bode well for Ukrainian citizens.

"Shutdown" for Ukraine

However, why, in principle, did the question arise about stopping US funding for our country, since the Americans never tire of repeating that they intend to help Ukraine as much as necessary?

The United States really does not refuse to help us, but problems have recently arisen with the actual provision of funding. They are connected with the domestic political situation in the United States, namely, with the confrontation between Democrats and Republicans in Congress. Supporters of former President Donald Trump in the Republican Party are increasingly questioning the advisability of allocating multibillion-dollar sums to Ukraine, which, according to them, would not be out of place for ordinary Americans.

The situation is complicated by the threat of a “shutdown” - this is how the cessation of funding for the state apparatus is called in the United States. In November, Congress adopted an interim budget that will allow the shutdown to be unblocked, but this document does not provide for the allocation of assistance to Ukraine. President Joe Biden has already signed the legislation.

It is expected that at the beginning of next year, congressmen will return to consider the federal budget law, but the two parties will again have to look for a compromise, no matter how it affects financial assistance to our country.

And, given that 2024 will be a pre-election year in the United States (US presidential elections will take place in November), the risk that the war in Ukraine will fade into the background is only increasing.

Few options

Thus, the situation is indeed quite alarming, and, unfortunately, our country has practically no levers to resolve it.

At the same time, you need to understand that international assistance is critically important for Ukraine, since it is the main source of covering the budget deficit, which in 2024 should amount to 1.57 trillion hryvnia.

“Ukraine expects to receive $5.4 billion from the IMF, €18 billion in financial assistance from the EU and more than $10 billion from the US, as well as additional budgetary support from Japan, the UK, Norway, Belgium, Sweden, Portugal and other allied countries.” ,” Prime Minister Denis Shmygal said recently.

As you can see, the planned US assistance is not the largest, but it is very significant, and without it it will be very difficult for our country to get through the next year.

Both government officials and experts (and Ukrainian society as a whole) hope that the Americans will overcome their differences and provide us with the previously promised help. But it would be a good idea to prepare for the worst-case scenario, in which there is no money from our key ally.

According to the founder of the First Kyiv Investment Club, Ivan Kompan, in this situation the government does not have many options for obtaining additional funds. However, none of them are guaranteed.

In particular, according to him, we can talk about attracting foreign direct investment.

“If investors come to the country, they build new enterprises, produce products, and pay taxes. This increases budget revenues. But I don’t think we can count on that now, at least until the end of hostilities. And even if we assume that investors will come right now, this will not give an immediate effect,” the expert said in a conversation with Apostrophe.

Another way to raise funds is a big sale of state property: “You can sell large state assets. But I don’t see such attractive assets in our public sector that would quickly generate significant money. Maybe sell part of Ukrzaliznytsia or Energoatom. But such competitions require careful preparation. And the previous “successful” experience of large-scale privatization in Ukraine does not inspire confidence that something in this area can quickly change for the better.”

And, finally, the government can try to raise funds by placing government securities on international markets, but it is unlikely that anyone today will dare to lend large sums of money to our country, unless at very high interest rates, which will significantly increase the already large debt load.

Relying on inner resources

In other words, it will be practically impossible to obtain external funds equivalent to the expected US assistance.

“We can somehow redistribute - take more, for example, from Japan, choose more from the European 55 billion (the EU has planned 50 billion euros, which is about 55 billion dollars, to help Ukraine in 2024-2027 - “Apostrophe”), but “, in principle, it won’t work from the outside,” investment banker and financial analyst Sergei Fursa said in a comment to the publication.

Therefore, the government will have to look for resources within the country.

“First, this is an unpopular measure from the National Bank - printing money. An unpopular measure from the Ministry of Finance is an increase in taxes and an increase in tariffs to market levels,” says the expert.

In turn, financial analyst Andrei Shevchishin does not rule out that the authorities may significantly spend gold and foreign exchange reserves, which today are in very good condition and amount to about $39 billion.

“This will be enough for a while, but not for very long,” he said in a conversation with Apostrophe.

Let us remember that in 2014 this is exactly what the government did - international reserves were “burned” at a tremendous speed, and by the next year, 2015, only $7.5 billion remained. It is extremely difficult to say whether the authorities will decide to take such a step now.

It can also be assumed that the government will be forced to cut some part of budget expenditures.

“The Minister of Finance’s phrase that there is a backup plan, but society is not ready for this, suggests that possible actions will not be simple and painless,” says Andrei Shevchishin.

The expert added that it is theoretically possible to reduce part of military spending, but on the condition that hostilities will cease next year: “But it is clear that such factors are impossible to predict. And I don’t think that any plans can be made based on such reasoning.”

Devaluation is just around the corner

However, it is far from certain that spending cuts will take place.

“There are no expenses that can be cut; they are already limited. We either have social services or defense,” explains Sergei Fursa.

Therefore, the most likely steps for today remain the launch of the “printing press”, as well as an increase in taxes and tariffs (and, possibly, the use of gold and foreign exchange reserves).

But such steps will have consequences. Money emission will lead to the devaluation of the hryvnia and accelerated inflation, in connection with which, most likely, the macro indicators included in the 2024 budget will have to be revised (the dollar exchange rate at the end of next year is set at 42.1 hryvnia, price growth - 9.7% ).

In turn, an increase in tariffs will lead to the fact that the majority of Ukrainians will either not be able to pay them, or after paying them, people will have significantly less money left for everything else, including the most necessary things.

Well, tax increases will traditionally hit, first of all, businesses, and ultimately will also lead to an increase in consumer prices. In addition, many enterprises simply cannot bear the tax increase and decide to stop working, which will only worsen the overall situation in the economy.