Ukraine's urgent fight on the financial frontline

As Ukraine's soldiers fight, the government is trying to secure the country's economic future (Image: EPA)

For Ukraine the financial frontline is perhaps the unseen battlefield in the war with Russia.

 Keeping the economy on a level footing isn't just about today, but central to the future that they've spent four years fighting for.

 Sergii Marchenko, Ukraine's Finance Minister, asserts, "We don't want to be just a poor neighbor [to the EU]." He says, referring to the military expertise that the nation has reluctantly acquired since February 2022, "We want to provide for Europe, something that they lack." Marchenko adds that the "very painful" experience his country has gained could help the rest of the continent defend itself.

 As Kyiv places a high priority on becoming a member of the EU, the country is indebted to the EU for its financial assistance, which aims to bring the two countries closer together and give Ukraine an advantage over Russia. Over the course of the next two years, the EU will provide Ukraine with a new €90 billion (£79 billion) loan to make up for the budget shortfall. The European Parliament has approved it, and the first payment could be made in April.

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That loan is the biggest share of a $136.5bn (£101bn) international support package, without which Marchenko says his country cannot survive after everything it's been through.

 "All of our resources, which we mobilize internally, we channel... to defend our nation," he states. "Our strong army depends on our strong economy." "We are grateful for the assistance of other nations, but Ukraine's taxpayers are unquestionably providing our army with the best assistance." In December 2024, taxes in Ukraine were increased for the first time since the war began, including on personal incomes, small businesses and financial institutions.

 That's part of the reason why domestic sources are expected to bring $67.5bn into government coffers this year, a 15% increase from a year earlier.

 However, the government's spending plans for 2026 total approximately $112 billion, with approximately 60% going to the army. As a result, there is a $45 billion shortfall.

To bridge the gap the government is trying to get contentious new tax increases through parliament before the end of this month.

 As part of the terms of a new $8.1bn loan that the International Monetary Fund (IMF) recently approved, digital platforms in Ukraine will have to pay more tax, and exemptions to value added tax will be reduced.

 Kyiv received the first $1.5bn from the IMF at the start of this month.  Ahead of that the IMF's mission chief for Ukraine, Gavin Grey, said that with its spending needs "expected to remain very high" the country needed to live within its means.

 In addition to outside help, "Ukraine will also need to do more to tackle tax evasion and avoidance, and mobilizing domestic revenue in the near-term", he said.

 The IMF support is crucial to unlocking the EU money, which has become even more significant since US financial support dried up.

 Ukraine could run out of funds by the end of April so is also rushing to meet other EU conditions.  According to a government source, spending on social and humanitarian causes remains one of its "key priorities." However, Viktor Orban, the prime minister of Hungary, has withheld the EU loan due to allegations that Ukraine is enforcing an "oil blockade" on his nation. Kyiv claims that the pipeline's slow repairs are due to injuries sustained by its repair crews from additional Russian attacks. The dispute indicates that the outcome of the Hungarian elections next month has significant implications for Ukraine. Some though, think the reforms Ukraine is implementing are the wrong path to ensure the war-torn country's economic survival.

 "We believe that Ukraine, by continuing the war and increasing taxes, is moving toward default and economic collapse", says the think tank the Ukrainian Institute of the Future in a recent assessment of the economy.

 The war is also straining Russia's much larger economy, however its military effort is worth 5.1% of GDP.  In contrast, Ukraine spends 27% of its GDP on its military.

IMF Managing Director Kristalina Georgieva had encouraging words for Ukraine when she visited in January (Image: Reuters)

This indicates that, after four years of war with Russia, the government of Ukraine is reliant on aid from abroad to pay for expenses such as pensions, healthcare, and education. This includes a plan to expand a program that provides free school meals to the entire nation starting in September and a 30% pay increase for teachers this year, who the government says are helping children through the war. Despite falling to 7.4% from 26.6% during the war, inflation continues to be a problem. This indicates that the war's financial burden is also being felt by numerous consumers and businesses across the nation. Tetiana, 65, described the difficulties on the snow-covered Kyiv streets. "Due to the small and inadequate pension, I am a pensioner who must work. The cost of food and utilities has gone up." Mykyta, 19, works in the kitchen of a restaurant.  It is just one of many businesses struggling to survive. "There are issues with individuals and low salaries. Due to difficulty in recruiting staff members, the team is small." He goes on to say that "we have to struggle with the generator" when there is no power. That's a problem that many businesses face, as demonstrated by the recent statement from the central bank of Ukraine that "The difficult situation in the energy sector will continue to restrain business activity for a long time." It's why it cut the forecast for economic growth this year from 2% to 1.8%, although the latest IMF forecast is for growth of 1.8 to 2.5%.

Rows of generators outside stores are now a common sight across Ukraine (Image: Reuters)

Marchenko asserts, "The biggest challenge is that we don't have enough electricity" for the economy as a whole. He explains that this means that businesses can't be as productive as they would like to be and have to raise prices on their products to cover the cost of using generators. "All of our governmental programs now channel our resources to partially restore capacity to generate electricity," he states. The estimation of the reconstruction and recovery bill for Ukraine that was put together by its own government in conjunction with the EU, World Bank, and UN highlighted the significance of doing so and boosting economic growth last month. The cost of $588 billion includes repairing damage to housing, transportation, and other infrastructure as well as removing mines from areas around the frontline. This amount is almost two and a half times the size of the entire economy. The difficulties haven't stopped the president of the Ukrainian Chamber of Commerce and Industry, which represents more than 8,000 businesses nationwide, from being hopeful about the future. Gennadiy Chyzhykov asserts, "Despite the war, we see how [foreign] business are interested in and starting to invest in Ukraine." "The new trend is that numerous delegations visit Ukraine and inquire about what we require and where to begin preparing for post-war reconstruction and rebuilding. "They believe in the victory, and they believe in the good business in Ukraine."

Ukraine's finance minister Sergii Marchenko says that during wartime a strong army depends on a strong economy (Image: BBC)

However, despite the fact that millions of people have either joined the military or left the country, there is a persistent shortage of workers with the necessary skills. When it comes to reconstruction, the International Labor Organization of the United Nations has predicted that there will be a shortage of 8.7 million workers, and some business leaders have suggested that the solution is to import workers from other countries. A lot of support is coming from the European Bank for Reconstruction and Development (EBRD), which has spent more than $10bn in Ukraine since the war began.

 Odile Renaud-Basso, the organization's president, asserts, "I think the challenge will be immense but it can be managed." She says many foreign companies are willing to invest but "having a real just peace, credible peace settlement, will be key, for investors to be sure that there is not a risk of the war will start again".

 Yet with little sign of any end to the war she adds that the EBRD has the resources "to continue to support Ukraine in the war for how long it takes".

Ukraine's finance minister acknowledges that "we need support, military support, and budgetary support" due to the ongoing struggle to balance the government's books and the battlefield. However, Marchenko says the challenges of a wartime economy are driving changes that could lead to a "better economy for the future".

 "Because we will defend ourselves, the Ukrainian people, government, and economy are resilient and determined to fight this war."

Source: BBC