Lambert here: The bios tell the tale.
Torbjörn Becker, Director at Stockholm Institute of Transition Economics, Olena Bilan, Head of Research and Chief Economist at Dragon Capital, Ukraine’s leading investment firm, Yuriy Gorodnichenko,Quantedge Presidential Professor, Department of Economics at University of California, Berkeley, Tymofiy Mylovanov, President at Kyiv School of Economics, Associate Professor, Department of Economics at University of Pittsburgh, Jacob Nell, Senior Research Fellow at the Kyiv School of Economics, and Nataliia Shapoval, Vice President for Policy Research at Kyiv School of Economics & Head of KSE Institute. Originally published at VoxEU.
There is a risk that Ukraine’s war effort may be undermined by inadequate external support, leading to excessive reliance on monetary financing, which would drive high inflation, risk a currency crisis, and could undermine the war effort just as the military tide is turning in Ukraine’s favour. This column argues that donors should fund Ukraine next year and describes how best to do it.
Ukraine has enough external financing to fund the war this year. But next year, as noted recently by the Gillian Tett in the Financial Times and Niall Ferguson on Bloomberg, Ukraine needs more donor support, since it cannot finance the war from its own resources and it cannot raise financing on the external market. We see a live risk that Ukraine’s war effort may be undermined by inadequate external support, leading to excessive reliance on monetary financing, which would drive high inflation, risk a currency crisis, and could undermine the war effort just as the military tide is turning in Ukraine’s favour. In a new CEPR Policy Insight (Nell et al. 2022), we argue that donors should fund Ukraine next year and describe how best to do it.
Why Fund Ukraine?
We see four main reasons why Western governments should fund Ukraine’s war:
- Credibility. Western leaders have promised to support Ukraine, and failure to provide enough support in a timely way to avoid a loss of confidence would constitute a failure to deliver on this commitment and damage the credibility of other Western commitments.
- Consequences. Ukrainian failure would demonstrate that a war of aggression like Russia’s invasion of Ukraine can be successful, and leave the original crime of aggression and subsequent war crimes unpunished. This would undermine the rule of law, and encourage Russia to launch further acts of aggression.
- Efficiency. Russia is the main military threat to European stability, and Ukraine’s armed forces have been effective in destroying a large volume of Russian military equipment and capability at a low cost. For instance, official aid to Ukraine of all sorts – financial, military and humanitarian – so far is estimated at $85 billion,8 which is just 7% of the 2022 defence budgets of NATO members.
- Tipping point. So far, Russia’s economy has been more resilient, shielded by high oil and gas revenues. The tables are now set to turn, however, with Russian oil and gas revenues falling to a critical level. The European oil embargo and G7 price cap, and the collapse in Russian gas sales to Europe, will reduce Russian oil and gas revenues next year to below the level – around $150 billion per annum – where Russia has struggled in the past to finance its budget and external account. As oil and gas revenues fall to critical levels, we expect Russia’s financial fragilities in its currency and banks to resurface, constraining its ability to finance its war.
How to fund Ukraine
Governance
Traditionally, the IMF takes the lead on behalf of the international community on agreeing a financial programme with a country in a crisis situation – providing some support itself and paving the way for wider donor support, which it helps to coordinate. However, for much of the conflict the IMF has been missing in action, reportedly because it cannot finance a programme in a country without a sustainable debt position and, while the war continues, it cannot say that Ukraine has a sustainable debt position. It likely also reflects differences among the membership.
In the best-case scenario, Ukraine’s allies on the IMF Board will overcome this opposition, perhaps helped by a G7 commitment to underpin Ukraine’s debt sustainability. This would pave the way for a large IMF programme of perhaps $15 billion as the centrepiece of the 2023 financing effort. If this cannot be agreed, then the IMF should at least agree on and monitor a programme, monitored by the Board, which can help support contributions from other donors, and at least provide enough financing to cover the $2.7 billion payment due next year.
Size
Western governments and international financial institutions (IFIs) have pledged $35 billion in budget financing for Ukraine this year, of which $17 billion had been disburse by September 2022. This implies that Ukraine should receive another $18 billion of financing by end-2022, or $4.5 billion per month – broadly enough to cover the official $5.0 billion monthly funding gap,
But there is no visibility over financing for 2023. And as long as military hostilities continue, we see limited scope to reduce the funding need. The government has already cut all non-critical spending and will struggle to increase tax revenues materially, given the deep contraction in the economy due to Russia’s invasion (e.g. Blinov and Djankov 2022). Still, lower domestic debt redemptions next year and the recent restructuring of $22 billion in sovereign bonds provide some relief. Overall, we see it as reasonable to assume that the monthly fiscal funding gap will around $4.0-4.5 billion per month, and propose a fund size of $50 billion to provide certainly over budget financing through 2023.
We note that the 2023 draft Ukraine budget assumes funding needs next year of $41 billion, including a $31 billion budget deficit. However, we see two problems with this projection. First, risks are tilted to the downside in a war situation, and so the government needs to build in a larger-than-normal contingency margin. For example, the draft budget assumption of nearly 5% real growth in GDP in 2023 may prove optimistic. Second, the budget assumes higher inflation and a further significant weakening of the currency. Arithmetically, this helps the public finances, allowing FX funding to finance more hryvnia spending and squeezing budget spending, as government wages, pensions and spending lag inflation. But this risky path flirts with a currency crisis and risks entrenching high inflation, which could undermine the war effort.
While $50 billion sounds large, it represents only one tenth of one percent of the GDP of Ukraine’s allies, 4% of NATO’s annual budget, and 9% of the spending announced so far by European countries on helping consumers with energy costs.
In addition, we note that the financing need not entail a call on government’s budgets. In particular, Ukraine’s allies can make contributions in the form of Special Drawing Rights (SDRs), the IMF’s special currency; G7 countries’ combined SDR holdings stood at $410 billion as of end-August, enough to finance Ukraine’s 2023 needs multiple times.
Conditionality
In normal times, programmes require conditionality to ensure that unpopular decisions which restore fiscal and external balance are implemented. However, in this case, where Ukraine is in a war – an existential struggle for survival – we think normal conditionality is largely redundant. In particular, the scope to raise additional domestic resources is limited by the war and the scope for cutting spending is also limited, since the imperative of survival gives Ukraine the incentive to prioritise expenditure aggressively and cut everything that does not directly contribute to the war effort. Moreover, the key anchor for Ukraine’s reform and modernisation is EU integration, which should, over time, improve governance and create a framework for competitive markets, as it has across Central and Eastern Europe – and here the government is moving fast to implement conditions, since EU membership is one of the objectives of victory.
Of course, once victory is achieved, incentives change and some ‘normal’ conditionality may be needed as part of a package where Ukraine takes difficult decisions to restore fiscal and external balance, and receives exceptional support from donors and reparations from Russia to rebuild.
Fair contribution
The US is providing significantly more support than Europe, even though the security risk for Europe from Russian aggression is higher, and Europeans are the main underspenders on defence in NATO. However, within this overall picture, many eastern European countries, notably Poland and the Baltics, are providing proportionately even more support than the US.
Conclusion
We argue that donors should fully cover Ukraine’s 2023 financing gap with external financing, providing a contingency against downside risks and ensuring financial stability, to keep their word, support the rule of law, weaken the Russian military threat at low cost, and sustain Ukraine as sanctions and the decline in oil and gas revenues undermine the Russian economy.
We estimate this implies providing $50 billion in financing. In the best case, a large-scale IMF programme of perhaps $15 billion would be the centrepiece of this effort. But at any rate, the IMF should agree a programme, monitored by the Board, which will pave the way for other donors to participate, and provide enough financing to cover the $2.7 billion payments due to the IMF itself next year.
References available at the original.
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I do not know of any credible expert who believes Ukraine can win this war. With such a bold claim, the minimum the author could have done is include one paragraph on why he thinks Ukraine can defeat Russia.
They are economists (4 of the Ukrainian) so they only need to assume Ukrainian victory.
As somebody here said in an earlier comment thread, for these people everything can be solved by throwing money at it.
Also, if it can be shown that using Ukrainians to kill Russian is indeed cheaper than using NATO forces, it follows that NATO should use Ukrainians. Because no war of aggression [launched in February of this year] can go unpunished.
for these people everything can be solved by throwing money at it.
And why not? It has always worked for elections, hasn’t it? /s
There is a good deal of ‘assume a can opener’ going on here. Other highly questionable assumptions I noted: the G7 oil price cap will be implemented successfully; Ukraine will be admitted to the EU if it wins.
As you say, there are also some moments where the moral bankruptcy of contemporary economists is thrown into sharp relief – notably the ‘efficiency’ point, which asserts that if Ukrainian lives can be traded for Russian ones at a favorable rate then it’s a good trade for the West and should continue.
I assume this one is running as fodder for the commentariat to sharpen their critical thinking skills.
This is just another example of Western Ukrainians trying to extort more money from the suckers that already have dumped money on a lost cause. However, since the original “goal” was to weaken Russia, then it really doesn’t matter, it could still be considered money well spent if there is long term harm to Russia. So far that has not materialized, and it seems the West and their Ukrainian Underlords needed to up the ante by burning the NS 1 and 2 bridges to EU energy security. Burning other people’s bridges is a US/NATO specialty.
Every Climate Scientist (that I know of), at my biggish University, believes that Ukraine will win this war!
Climate Scientists (in my circles) are adamant on this important issue. They unequivalently expect a Ukrainian victory, no matter the costs.
Can anybody in the NC commentariate link to a climate scientist who contradicts my (N=1) observations? I yearn to be proven wrong!
And yes, there is a clear and disturbing link between the Ukrainian War and the environment. The entity, who ruptured the NS pipelines, which is releasing massive amounts of methane into OUR atmosphere, should be shunned and shamed………..
This ex-paleoclimatologist was fairly sure the war had been decided in March after considering Russia’s historical record. Just a suggestion of where you might look.
“I do not know of any credible expert who believes Ukraine can win this war.”
If September’s battles are any indication, there’s reason to believe Kiev can retake much of southern and eastern Ukraine in the next few months. That’s what many Western experts have been predicting since last spring.
Russia’s in military trouble. It’s probably outnumbered by a factor of three or four at critical sectors of the front. There’s also the HIMARS issue, which may or may not be tipping combat in Ukraine’s favor. Either way, nothing’s likely to change for Russia unless it rushes huge reinforcements into the war zone, or uses battlefield tactical nukes. Both options are probably off the table for Putin.
So, if Ukraine clears Russia out of Kherson, Zaporizhzhye, Lugansk, and Donetsk by the end of the year, Russia will have lost the military aspect of this war. Very, badly too.
I hope I’m wrong, as I genuinely believe US/NATO provoked this war, and that Russia’s defending its existential interests against threats from the West and Ukrainian far-right nationalists.
There’s actually literally no reason to believe any of that. Russia is outnumbered because it’s choosing to run this war in a such away as to minimize its own casualties. It falls back constantly to lure Ukrainian troops into the open where they get bombarded by artillery and missile strikes. HIMARS is inconsequential. No singular weapon system, especially one in such small numbers, effects a war at a strategic level.
Saying ‘if Ukraine clears out Kherson, Lugansk and Donetsk’ is like saying ‘if Ukraine marches on Moscow’. It’s gibberish.
The nuke stuff is fantastically absurd. It exists entirely in the Western media, where, having convinced themselves Russia is losing, they baselessly speculate how far evil bear man might go to not be defeated.
Ugh. Feels like I’m being sold a used car.
Me: What’s with all the clanging and banging under the hood?
Dealer: Well, it’s been on the lot awhile, you may have a small infestation of Fascists.
Me: I dunno….
Dealer: Tell you what: I’ll throw in a free case of Nazi-B-Gon, scrubs the tatoos right off them little sumbitches. Good as new, you’ll never know they were there.
External financing will not solve the problem of scarcity in Ukraine as this article apparently purports. The more money you pour, the higher the inflation will go in Ukraine, and the need to pour even more and more money. Much more than the amount estimated here. The West will import Ukraine’s inflation as if it is not high enough already. These financial types live in a bubble.
I believe that the biggest sign that these financial types are deluded is their point “Efficiency” .
Taking the statement on its own idiotic basis that the military events in Ukraine are only depleting Russian defense abilities is ignoring how much of NATO’s equipment has been lost to them. Not to mention the unknown costs of the people they aren’t admitting to sending.
But the basis of that statement has already blown up if you look at the facts. Prior to meddling in Ukraine, urged not by Russia but by a supposed ally, Europe and Russia lived in a state of détente, one that actually benefited both. Russia attempted diplomatic solutions while Europe toyed with allowing growing aggression by the proxy. And then compliantly or perhaps even happily joined in supporting this openly once Russia was forced to act. Largely because they stupidly thought the biggest was Russia AND the Mind Trust of the EU, UK, and that supposed ally the US apparently believed there would be no blow back. Or at least the UK and EU did. By following the advice of the US and so many of their own people who had much of their training curtesy of American programs, the EU. Is now flooded with more refugees, are facing the destruction of industry and businesses and deaths due to the cost and availability of power, their agricultural industries already wracked by climate change are also knocked by fertilizer shortages. Inflation is through the roof. And their governments are facing increasing unrest and replacement as citizens unhappy with above are protesting or flat out throwing them out.
Russia was not the biggest threat to them. Trying to take out a relationship that was largely beneficial has in fact utterly destabilized them and exposed cracks in their ability to sustain themselves not just economically but basically. Continuing to claim that Russia was the problem is like examining the animals in a blindfold to determine that the back of a donkey is an elephant.
Only way I can understand the ongoing idiocy is that these individuals in positions of power (they don’t deserve the word leaders) are in a state of shock, traumatized by events they didn’t expect.
Actually, I think the best line in this hilarious piece is in the Conditionality paragraph: “…we think normal conditionality is largely redundant.” I.e., just give us the money and let us do whatever we want to with it. Oversight? We don’t need no stinkin’ oversight!
Yikes.
“There’s a hole in Daddy’s arm where all the money goes.”
Maybe somebody can rewrite with “Big Z” in place of “Sam Stone.”
What a shame that the IMF finds itself in a Catch 22 bind about giving money to Ukraine!
They could try selling ‘Zelensky Bonds’ here in the States, each with a photo of Zed in one of his unlaundered t-shirts. But better hurry, as the future looks grim.
Do we still get to grow Liberty Cabbage?
Or is it now Freedom Cabbage?
So hard to tell without a scorecard. /s
It’s “Freedom Fries.”
In this comment I shall argue that Becker, Bilan, Gorodnichenko, Mylovanov, Nell and Shapoval should all be rounded up and sent to the front in Ukraine.
I see four main reasons why these persons would make more of a contribution to the war effort on the front line:
* Credibility. Failure to provide enough support in a timely way to avoid a loss of confidence would constitute a failure to deliver on the commitment and damage the credibility of said academics.
* Consequences. Failure to report for duty would demonstrate that a while arguing for an aggressive respons said academics would like others to bear the consequences. This would undermine their credibility, and encourage said academics to support further wars.
* Efficiency. Given their skill in passive-agressive verbiage it is estimate that said academics would be capable of destroying a large volume of Russian military equipment and capability at a low cost. For instance, when sent to the front only five out of six of said academics are estimated to perish before killing another human being.
* Tipping point. So far, most warmongering academics has been shielded from the consequences of war. It is estimated that would Becker, Bilan, Gorodnichenko, Mylovanov, Nell and Shapoval be rounded up and sent to the front the fragilities in warmongering rethoric would resurface, constraining its ability to argue for war.
I estimate that the cost in air fares, weapons and training would more then be off-set by the decrease in cost per verbiage as said academics are replaced by currently non-tenured lecturers.
Hahaha! I think you win the internet today!! And I feel bad about this, but “when sent to the front only five out of six of said academics are estimated to perish before killing another human being” is the affirmation of the greatest utility available for economists. think! Trade 5 academic economists for 1 dead Russki, what a deal!
Agreed! fjallstrom on fire with that comment!
Absolutely right. Fjallstrom’s prescription is too good to confine to academics: it should be applied to journos and politicians, too.
upvote!
This is gold.
No worries, Ukraine will be able to pay it all back through “structural adjustment” programs.
I do wonder if that tipping point assessment is valid, or Wishful thinking.
Thank you for this, by the end of the second paragraph I could tell more than one PHD was involved in writing this piece and I started counting virtual can openers.
By the end of the third paragraph I could see the outlines of a virtual can and by the end I could make out what the label said by squinting a bit.
“Dehydrated Water”.
You’ve hit on a New and Improved acronym. Virtual Can Openers, or VCO’s.
“Where do you work now?”
“I got a neat new gig at a VCO NGO.”
“Oh, great! Job security in spades! They’ll be searching for those and how to use them for ever.”
“Thanks. Now we’re secure. Little Mystery Person will have its University Funds assured now.”
Note for the person who reviews posts before publication. If your screen says “Wrong email address” it is because I’ve gone from using Gmail to using my privately owned domain.
ACTUAL POST BELOW
Re “Ukraine has enough external financing to fund the war this year. But next year, as noted recently by the Gillian Tett in the Financial Times and Niall Ferguson on Bloomberg, Ukraine needs more donor support, since it cannot finance the war from its own resources and it cannot raise financing on the external market.”
In other words, those responsible for spending and investing their own money are unwilling to buy Ukrainian government bonds and notes. The real money has spoken. Only those spending Other People’s Money are willing to invest.
What the guy said in the video shared on social media earlier this year: It only takes about 8% of the armed forces to turn a country fascist.
These economists are just being ‘good Germans.’
He probably would have been pro-Ukraine, but I would have loved to have seen Al Capp’s take on this mess.
Thanks, Mark, for the Al Capp reference and link.
Our cartoonists are an essential ingredient for survival in the new Dark Ages.
… well, along with a reality based ‘commentariat’ among the population.
Ninty percent of Ukraine’s GDP just decided that they want a divorce. Why are Americans supposed to pay the child support?
Because the Good Old US of A is the co-respondent in the divorce filing.
Do note that Sascha and the Kidz have already moved out of the house. You can contact them at Uncle Ivan’s address.
We broke it, we gotta fix it.
A small sign in a gift shop in Denver, circa 1968, which stuck with me because of it’s broadly applicable warning:
>>> NB: This Old Dog is on a memory jag, so please feel free to ignore the following…
This was a shop specializing in Japanese products, and located in a neighborhood where many survivors of a WWII Japanese internment camp relocated, encouraged by the governor. “Governor Ralph L. Carr took an unpopular stance, inviting Japanese Americans to stay in Colorado after the war and publicly stating his opinion that internment was unconstitutional.” (https://www.historycolorado.org/amache-japanese-internment-colorado-online-exhibit)
The camp, called Camp Amache by the internees, was near a small town in southeastern Colorado, Lamar. The city describes it’s founding thus:
Wikipedia offers this insight into the town’s founding:
Apparently the hope was that Secretary Lamar would be flattered and the town awarded the lucrative county land office. They became the county seat, instead.
“so far is estimated at $85 billion,8 which is just 7% of the 2022 defence budgets of NATO members.”
Just the numbers quoted above are a problem and make little sense.
Considering that approximately 70% of the NATO budget is financed by the US it seems to me that the cost to the US is borderline outrageous. So far I believe (with the new allocation of $12B to the US contribution) that this is costing the US a small fortune, easily the $85B mentioned in the article.
For what?
Not just that, but the vast majority of a defence budget is in fixed or already committed costs, like manpower, maintenance and contracted equipment deliveries. Typically, a government will have committed 80% of its budget before the year even starts. I really don’t understand why economists are allowed to talk about things like this.
Increased energy costs this winter for the EU are expected to near €1.5 to 2T. That probably deserves a line item in the reckoning. If you doubt this number, UK is is spending 150B GBP and Germany 200B EUR to hold the cost to consumers at a mere triple.
Then count the closing small businesses. And ‘conditionally’ reckon the possible costs to Italian manufacturing, or, god forbid, BASF having to close down Ludvigshafen. And don’t even think of adding in the second order effects of supply chain collapse or crushed consumer spending.
Meanwhile, in the last month published (June 22), Russia had reached a 30B monthly trade surplus from fossil fuels alone (apparently it is a bit less now)… up from 12-14B monthly pre war. don’t know how that squares with reaching the 150B revenue per year that is ‘somehow critical’
Russia is the main military threat to European stability
Keep looking.
This caught my eye as well … they literally just blew up N2 themselves.
The call is coming from inside the house …
Thanks to the site for posting up such a nice fat target for informed disdain and critique.
Not a word in all of this about where all that external financing, wonderful euphemism by the way, is actually flowing. What percent gets siphoned off into foreign exchange accounts and hard assets way, way far away from Ukraine? What percent to grifts and the assumed rake-offs in “defense” contracts? What percent actually gets converted into dead
Russians? Assume a cutout…
And now Liman Has Fallen! to the Victorious Ukrainian Forces (plus a lot of “mercenaries” and “non-Ukrainian troops)! Moscow is just over the horizon! Putin hiding under the covers in fear of US/NATO missiles on his front porch! NATO membership in the offing! Slava Ukraine! /s
C’mon, let’s be fair. I’m sure all of that $50 billion will be carefully accounted for.
By those getting it: don’t want any of it to fall into the hands of some taxman somewhere.
The purpose of outrageous propaganda is to make the slightly less outrageous propaganda seem reasonable.
Ukraine does appear to have made some progress around Lyman. Is this map true? Could it possibly be true?
https://storymaps.arcgis.com/stories/36a7f6a6f5a9448496de641cf64bd375
According to this map which is also used by the Military Summary channel, Lyman has been entered by the Ukrainian forces. However, this information comes from the Ukrainian General Staff, so measure your salt accordingly.
I haven’t done so yet today, but I recommend watching the latest from Military Summary. Dima, the host, seems to have a whole lot of sources on the ground. He posts daily summaries.
Thank you the pointer to that channel. https://m.youtube.com/watch?v=hQ2-hALY6WE It appears like that channel claims Ukraine does control Lyman again – that Russian forces have left. Do you think maybe this is a deep special operation to win a bigger victory with Russian skill?
Ukraine wins Liman as ‘Minutiae as tools of obscurantism’…
http://sonar21.com/if-pr-counted-then-russia-and-putin-are-toast/
Everybody should keep their eyes on the ball and not turn to watch the naked spectator who ran to the pitch. Liman is irrelevant little place, the real thing is happening in Bakhmut and of course behind the frontline where Russians are preparing to protect their new territory. The western media naturally focuses to Liman, what else they can do?
Remember always: “Freedom fries in darkness”
“Le choucroute de something something” also.
Complete and utter bollocks this article but glad you put it up.
The Stockholm Institute of Transition Economics has produced plenty of intellectuals yet idiots and people with plenty of blood on their hands.
The first director was the idiot savant Anders Åslund, engaged to this day in trying to destroy Russia. He was involved in Russia in the 90s as an adviser to the government together with Jefferey Sachs. He ks still allowed to enter Russia for some reason.
https://www.hhs.se/en/research/institutes/site/about-us/history/
I find it astonishing that in all the volumes of commenting on this war, the costs, the geopolitical considerations, etc. there is almost zero discussion of the moral component.
To me, the conflict was summed up maybe three months into the war when one commentator stated, “The Ukrainians are so impoverished, they can only afford to strike military targets.”
It seems that maybe in the last 12 hours that Russia has executed a smart redeployment to better positions in the Kherson region, along the Dnieper River: https://twitter.com/Tendar/status/1576602192990961664
Is it true that this brilliant move will go a long ways towards reducing any chance of a Ukraine victory?
Maybe this will make the complete embarrassment of the global ruling class more likely?
It is most likely a strategic precursor to the luring of the Ukrainian NATO quislings into Crimea, where the skillful Russian armed forces will administer a final beating to these upstart running dogs.
I thought the Ukrainian side dealing in supplying the world weapons black market with fresh Western military supplies was meant to provide extra war funding, foreign exchange, etc, or am I misinterpreting the “most corrupt country in Europe” thing, and why the Western powers are turning such an obvious blind eye to it?
The reason this cockamamie plan has some chance of success is because of the big dirty secret that’s is staring at our eyes yet remains surprisingly unspoken. A lot of this financial support is not going to the Ukrainians per se — it’s lining the pockets of US defense industries — and much of the reminder returning via consultant fees, or offshore transfer of kickbacks and other fun corrupt maneuvers. It is essentially a transfer of (largely US) taxpayer money to the coffers of those who call the shots. Also, for the life of me I fail to understand WHY proper monitoring is so verboten. Maybe because that will let the cat out of the bag?