In 2024, Ukraine’s national debt has nearly matched its national GDP and is still on the rise. What risks does this present, and how should we address this situation?
Debt relief
Since the start of the full-scale Russian invasion, Ukraine has had no alternative but to rely on external assistance and debt financing. The loss of nearly a third of GDP, mass emigration, the necessity to allocate significant funds for defence, and other factors have created conditions where about half of Ukraine’s state budget expenditures are covered by external inflows.
As a substantial portion of these funds comes in the form of loans rather than grants, Ukraine’s national debt is rapidly increasing. As of early 2024, the International Monetary Fund estimated it at 94% of GDP, or 5.5 trillion UAH (with 70%, or nearly 100 billion USD, being external debt), compared to 49% of GDP, or 2.7 trillion UAH, at the beginning of 2022. Without creditors granting Ukraine a reprieve from debt servicing, we would have had to pay 1.02 trillion UAH in 2024 alone. For comparison, the state budget’s projected revenues for this year are approximately 1.8 trillion UAH, meaning we would have allocated 57% of state revenues solely to servicing debts.
In July 2022, the G7 countries agreed to provide Ukraine with a moratorium on debt servicing for two years. Currently, discussions are ongoing regarding its extension. It is important to note that the Ukrainian government is not currently requesting debt cancellation but rather a postponement of payments. Clearly, creditors understand that demanding repayments from Kyiv under current conditions would be impractical, as it would divert resources from wartime needs, for which these funds are intended. There’s also no sign of quickly ending the moratorium once the fighting stops, as that would really set back Kyiv’s plans to recover economically.
In December 2023, a consortium of major creditors to Ukraine (Canada, France, Germany, Japan, the United Kingdom, and the United States) signed a memorandum extending Ukraine’s debt payment deferral until March 2027. They have encouraged other creditor nations to negotiate similar agreements with Kyiv.
Decisions won’t be easy
Seizing Russian assets frozen in the European Union, the United States, and other allies in February and March 2022 might seem like a simple solution. These assets amount to nearly $300 billion and could serve various purposes: providing loans to Ukraine, funding post-war reconstruction, or immediate arms purchases. In April, the United States showed support for using these assets by authorising approximately $8 billion of frozen Russian assets within its borders.
However, the European Union isn’t ready for such a move quite yet. For example, 192 billion euros, or 70% of the frozen assets held by the West, are in the Euroclear depository in Belgium. Valérie Urbain, CEO of Euroclear, opposes full confiscation because “such a decision would severely impact not only Euroclear but also financial markets overall.” Eurozone officials fear that confiscating these assets would set a precedent for breaching sovereign immunity, eroding trust in the EU financial market among major investors like China and Arab states. If they withdraw funds from European banks, the euro could lose its status as an international reserve currency.
Denis Malyusky, Ukraine’s Minister of Justice, offers two potential scenarios: in the optimistic one, Ukraine secures a loan backed by future interest earnings from Russian assets, totalling around 30 billion euros. Conversely, in the less favourable scenario, Ukraine would receive only the current interest income, amounting to up to 5 billion euros annually.
Japan’s stance closely mirrors Europe’s approach, with Finance Minister Shunichi Suzuki noting that consensus is lacking on how to handle Russian assets, asserting, “Japan’s position is that we should not violate international law.” Looking ahead, if Ukraine fails to receive funds from Russia, two scenarios emerge to address the debt crisis: either complete or partial cancellation of debts, or restructuring obligations with an extended repayment term for Ukraine.
The exact size of Ukraine’s debt by the end of active hostilities remains uncertain. Nevertheless, it will undoubtedly pose a burden that Ukraine’s war-torn economy cannot manage alone. Therefore, it is crucial for us to engage in discussions with our partners today to develop a comprehensive plan of action for the future.
Preparing for the worst
Meanwhile, without any easy solutions on the horizon, the Ukrainian government is bracing itself for the worst-case scenario. It seemed that this scenario could have become a reality earlier this year, as our partners took a long time to decide on providing assistance. However, in February, the EU agreed to offer us 50 billion euros, followed by over 60 billion dollars allocated by the US Congress in April.
To reduce our reliance on external aid, Kyiv is now considering raising taxes. The Verkhovna Rada has already supported a bill in its first reading to hike excise taxes on tobacco products. Danylo Hetmantsev, Chairman of the Committee on Finance, Tax, and Customs Policy, has also indicated that the government will need to increase the value-added tax (VAT) and military levy. The latter is set to rise from 1.5% to 5%, while VAT could see an increase of 2-3%.
Throughout more than two years of major conflict, the Ukrainian government has aimed to ease the burden on its people by avoiding tax hikes, aware that such measures could severely hamper economic recovery. However, the uncertainty surrounding future aid levels and the necessity to bolster military funding presents a tough dilemma for policymakers: rely on partner generosity or sacrifice economic growth.
Ukraine’s mounting national debt in peacetime was a significant concern, highlighting deficiencies in tax and budget policies. Today, in comparison to the existential threat facing our nation, the debt crisis has lost much of its urgency. Yet, our path forward hinges on the goodwill of our allies. The ascent of less friendly governments in key creditor nations could precipitate calls for immediate debt repayment, imposing a hefty burden on Ukraine’s war-torn economy.
