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Ukraine | Detailed

Ukraine, EU, EU-integration, politics

Foreign aid to Ukraine. Part I: Bottomless barrel for European and American taxpayers

According to leading analytical agencies, Ukraine’s sovereign credit rating did not exceed “B” for more than 20 years, but international organizations and foreign countries keep pouring money into the country.

It was announced during the visit of Ukrainian President Volodymyr Zelensky to the UK in October that London will provide Kyiv with an additional £5 million in humanitarian assistance. The amount involved is not much for the state, but financial support of this kind from Europe and the United States has been received by Ukraine regularly since 2014. Dollars and euros help the economy to maintain a precarious balance on the background of general fall in the industry and the global turbulence due to the coronavirus pandemic. Part of the international assistance comes to the country as donations, but significant amounts come to Ukraine in the form of investments or loans.

According to the senior analyst of the Ukrainian Council on Foreign Relations Vladimir Denisyuk, there are no official statistics on how much money and from what sources Kyiv received. Such information is not systematically collected in one particular agency. According to information from the open sources, the main donors of the country are the United States, the European Union and the International Monetary Fund, which over the past 6 years have transferred tens of billions of dollars to Kyiv.

Foreign aid from Washington

Since 2014, the US has been annually providing to Ukraine from $306 to $518 million financial assistance. By 2020, the total amount represents more than $2.7 billion. Funds were used to diversify energy, support government institutions and encourage anti-corruption efforts. More than a billion of donations were spent to strengthen the Ukrainian armed forces and improve cooperation with NATO. Washington donated equipment, military hardware, lethal and non-lethal weapons to Kyiv, organized courses for retraining officers.

From Brussels with love

According to approximate estimates Ukraine received financial support from Europe totaling €15 billion for the last six years. The European Union’s spokesperson for foreign affairs Maja Kocijancic underlined that the EU’s support to Ukraine in the past years has been “unprecedented and consistent.” European aid was divided into several tranches provided by various institutions, states and organizations.

Since 2014, the European Commission has donated four macrofinancial assistance tranches totaling nearly €4 billion to Ukraine. In addition, the EU provided Kyiv with grants for development and humanitarian aid totaling about €1.5 billion. This year, Ukraine received another €190 million from the EU to purchase medical supplies, personal protective equipment and reduce the consequences of COVID-19. Brussels has repeatedly emphasized that Ukraine is the largest recipient of European financial assistance among non-EU countries.

Particular EU member states also supported Ukraine in the form of grants, loans and investments. In 2014-2017, the total amount of tranches had reached €1.5 billion. Germany allocated the most funds – nearly €1 billion. Other important donors were Sweden (€122 million), Poland (€118 million), Great Britain (€106 million) and France (€62 million). Based on open source data, the European Commission and EU member states donated at least $7 billion to Kyiv.

Another part of financial assistance from European countries was grunted in the form of loans. In 2014-2019, the European Investment Bank and its partners in Kyiv signed commitments worth €3.8 billion. The projects involved investments mainly in the public sector (municipal infrastructure, education, transport, etc.).

From June 30, 2014 to June 30, 2019, the European Bank for Reconstruction and Development allocated to Ukraine about €3.5 billion as loans and capital investments.

The IMF loans

The main pillar of financial support for Ukraine is the IMF. In just 25 years of cooperation, the Fund provided the country with loans totaling $31.3 billion. Active borrowing occurred right after the Revolution of Dignity in 2014. In April 2014, the IMF approved a two-year stand-by (SBA) program for Ukraine costing about $17 billion, under which only $4.5 billion was allocated.

In the summer of 2014, it became clear that as a result of the events in Crimea and the conflict in southeastern Ukraine, a large-scale economic crisis has been triggered in the country. The current cooperation program between Kyiv and the IMF has been revised. In March 2015, the IMF replaced it with a new $17.5 billion expanded financing plan. According to it, Ukraine received $6.6 billion in 2015, and $1 billion each in the next two years. In return, the Ukrainian government agreed to take austerity measures: cut social payments, increase the retirement age and gas tariffs.

In December 2018, the IMF Executive Board approved a 14-month SBA program totaling about $3.9 billion, under which Ukraine managed to get only $1.4 billion. The assistance was not paid in full, as Kyiv could not fully meet the requirements of the Fund. Although Ukraine adopted a law creating an anti-corruption court, the stumbling block were slow increase in gas prices and a high budget deficit. However, soon cooperation was resumed.

To date, Ukraine has agreed with the International Monetary Fund on another support amounting to $5.5 billion. The conditions for the provision of financial assistance were the continuation unpopular with the people medical, land, and educational reforms, as well as the growth of utility bills. In June 2020, Kyiv received the first tranche under a new agreement in the amount of $2.1 billion. In general, since 2014, the IMF has provided Ukraine with loans totaling $16.7 billion.

Digging the debt hole

As of February 2020, Ukraine ranks third in the world in terms of debts to the International Monetary Fund. Multibillion-dollar financial injections into Ukraine’s economy over the past six years have driven the country into debt, which constitutes for almost half of GDP. At the end of this summer, Ukraine’s external debt has already crossed the $85 billion mark, which is about $7500 per citizen, while $2000 of them everyone owes exactly the IMF.

Servicing such an external debt is expensive for the government. According to experts, new tranches from the IMF go to repay previous loans to the Fund, and not to restart the economy and gradually recover from the debt. Indeed, international aid today is only a refinancing of previous loans. Within 3 years, Ukraine has to return $5.3 billion to the Fund, and the IMF is just allocating $5.5 billion for 3 years under the updated cooperation program. It turns out that the state needs even more money from foreign donors to revive sustained grow of the economy.

Ukraine is a risky asset

Relations with the IMF are considered on a strategic level for Kyiv. Most other organizations, world banks and funds agree to lend to the country only after the decision to open a loan program made by the IMF Executive Board. Cooperation with the IMF is a kind of “investment anchor” for Ukraine. Other international credit organizations, funds and states have invested tens of billions of dollars in Ukraine over the past six years thanks to the Kyiv’s long history of relations with the Fund.

At the same time, the largest analytical agencies have been assigning extremely low credit ratings to Ukraine for more than 20 years. On the Standard & Poor’s, Fitch or Moody’s scale the country needs to overcome at least 5 more steps to become attractive to foreign investors. In 2014-2015 (when foreign states were most actively allocating money), estimates of the Ukrainian economy predicted a default. Current ratings of international experts recommend not to invest in Ukraine due to the significant risks of such investments. In September this year, Fitch left the credit rating of Ukraine unchanged at “B” with a stable forecast. At the same time, a minimum acceptable and attractive for investors rating is «BBB-».

In exchange for risky investments in the Ukrainian economy, foreign donors demand that the government comply with strict austerity measures. In addition to cutting social payments, creditors insist on implementing structural reforms unpopular with the people.

Who pays the piper calls the tune

When agreeing on financing programs with the IMF, Ukraine each time signed a memorandum of cooperation, which was an indispensable condition for receiving funds. In 2014, Kyiv agreed to increase gas tariffs, conduct judicial, anti-corruption reform and reform of state-owned enterprises, including Naftogaz. Among the requirements was also the lifting of the moratorium on the sale of agricultural land and raising the retirement age. When signing a new memorandum in 2015, Ukraine agreed with the IMF to privatize the largest commercial PrivatBank, legalize gambling, even more increase utility tariffs, and again promised to open the land market and continue the fight against corruption. Despite the pressure of creditors, Ukraine never hurried to implement the points of the memorandum. For example, laws on the legalization of gambling and the opening of the land market were adopted only in 2020.

The current program of cooperation with the IMF of December 2019 implies even more serious requirements. Ukraine pledged to continue pension, medical and educational reforms, reduce welfare payments and benefits for age and hazardous employment. The new conditions again prescribe lifting restrictions on utility tariffs, boosting the privatization of large state-owned enterprises, as well as further reforming of land market, allowing foreigners to buy vast Ukrainian lands.

In the following articles we will try to explain what foreign aid to the Ukrainian economy was spent on. We will also try to answer for what purpose Europe and the United States continue to invest taxpayer money in Ukraine, and how do they intend to return these investments.


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