How much money does Ukraine need? I ask the question because the IMF has just dropped the report for the eighth review of its financial support programme for Kyiv. But I really ask it because the answers one chooses to give — read on for mine — cast light on much wider questions of economics and of war. Share your thoughts with us at freelunch@ft.com.
The IMF’s report is, in the circumstances, good news. It’s all relative! Despite being under intense assault by Russian President Vladimir Putin’s armies, Ukraine’s economy is robust, policy is good and is producing improvements in the public finances, and reforms are on track. So far, so impressive.
The analysis indicates that the IMF’s own programme — for $15.5bn in financial assistance over four years — is also on track, as is the $153bn financing package it is part of, which includes much bigger contributions from the EU, the US (until this year) and other friends of Ukraine. About $40bn a year in “financing needs”, then, which this coalition has managed to provide until now and should be able to keep providing, even if the US lets Ukraine down.
But “financing needs” of $40bn a year does not mean Ukraine only (only!) needs $40bn a year. Timothy Ash, a financial analyst, has written a righteously angry blog post on how the IMF analysis risks obscuring a bigger and more worrying truth. Ash makes the following observations. First, the total amount of assistance western countries have given Ukraine, including military kit, is in the order of $100bn a year, according to the Kiel Institute’s excellent Ukraine support tracker. Second, even that is only enough to allow Kyiv to keep fighting, not win the war. Third, the IMF’s calculations are premised on the war ending at the end of 2025, or in mid-2026 in a downside scenario. That is why the financing needs quickly fall to negligible amounts from 2026 in the IMF analysis.
Ash speculates it would take $150bn a year, rather than $100bn, to put Ukraine in a sufficiently dominant position to defeat the Russian invaders. Who knows? But it is clearly a lot more than what is being given to Ukraine now, which lets it hold the line but not more. So Ash is no doubt right that the IMF figures may give an incorrect impression that Ukraine’s financial needs are relatively modest, hence manageable. This allows western technocrats to say Ukraine is “fully financed” for the time being, which, in turn, distracts western political leaders from the reality of what they must do.
In fact, it’s worse than that: if the west lowballs financial support for Ukraine, the war will last longer than what’s assumed in the more reassuring analysis, setting leaders and publics up for a nasty surprise.
There are understandable, if bad, reasons why the IMF number is what it is. One is that “financing needs” means something different to technical economists than to most people: it refers roughly to how much new borrowing you need to undertake given your projected outlays, existing resources (including free military kit), and debt to service. It does not represent any objective or realistic measure of how much Ukraine actually “needs” in any sensible non-technical sense. Another is that the IMF cannot legally lend into a programme that doesn’t add up, so the day its analysis were to show unmet financing needs would be the day it would have to pull the plug. That would be worse than a misleading number.
There are several other important observations to make about the Ukrainian economy and public finances; some good, some bad. The good news first: the Ukrainian government is getting better at raising resources (tax and other revenues) domestically. This is noted by the IMF, and is also borne out in the latest “fiscal digest” of the Kyiv School of Economics. In the first quarter of this year, tax revenues surpassed the government’s target substantially, in part thanks to policy improvements (but also inflation). The bad news: ever more of the budget goes to defence-related spending — if this continues, it’s another reason to think the needs estimates above are too optimistic — while social spending is getting squeezed.
And yet there is something strikingly resilient about the country’s economic activity. We hear a lot about how the Russian economy is performing better than expected (much of it exaggerated). But look at the Ukrainian economy! A big chunk of GDP was lopped off in 2022, reflecting the large territories being occupied and millions of refugees having to flee. But since then, Ukraine has ploughed ahead. The IMF puts recorded and forecast growth at 5.5 per cent in 2023, at or near 3 per cent in the following two years, and close to 5 per cent again in 2026 and 2027.
That compares quite favourably with Russia. Ukrainian inflation is no worse than Russia’s, while its central bank interest rates are lower. Unemployment, admittedly, is high — in part a function of Kyiv deciding to spare its youngest men from the horrors of the front line.
But all in all, Ukraine’s growth performance since 2022 has edged out that of Russia, and if the IMF’s forecasts are right, its cumulative growth to 2030 will be more than twice that of the country that has attacked it.
Another way of looking at this is which is the better investment. A US dollar-based investor buying a share of the Ukrainian GDP in 2022 would have earned a cumulative 27 per cent nominal dollar return by this year, against a 10 per cent nominal dollar loss on a share in Russian GDP. For comparison, the figure for US GDP is 17 per cent. If we believe the IMF’s 2030 forecasts, the cumulative nominal dollar returns by then are 74 per cent, 4 per cent and 43 per cent. Ukraine is worth betting money on.
All this, however, is precarious. Ukraine struggles to attract capital; it is largely forced to borrow from the EU. Even for the IMF’s contortionist numbers to add up, an ongoing debt restructuring needs to be completed successfully. Also, Ukraine must not be left on the hook — as it legally is — for the “extraordinary revenue acceleration” (ERA) loans that are backed by profits on blocked Russian central bank reserves, which are at risk of going back to Russia with every six-month renewal vote on EU sanctions. In terms of the real economy, growth obviously depends on the war, but the IMF and the KSE also warn that the end of generous trade access to the EU and the loss of access to the Black Sea shipping route would give the economy a bad knock.
So how much does Ukraine need? Ash is right to say it needs enough to win the war, and his guess of $150bn a year is as good as any. The KSE, meanwhile, estimates that capital of $300bn over a decade will be required from abroad for “investments needed to ensure productivity improvements and robust economic growth”.
But here is how to think about it: the total amounts depend overwhelmingly on how soon Ukraine can end the war on terms to its advantage — and that, in turn, depends on how much money the country is given now. Ash has a striking back-of-the-envelope calculation comparing the $100bn extra over two years that it might take to help Ukraine win with the additional amounts European governments are vowing to spend on defence because of the threat an undefeated Russia is now seen to pose:
Now just think of the cost of our not funding Ukraine to win — the strategy we have pursued over the last 3.5 years. This is that the West still has to fork out $100 billion a year, but now we hear that European Nato has to increase its defence spending from 2% of GDP to 3.5% and then 5% eventually. Each 1% of GDP extra European Nato defence spend is $300 billion, so twice the annual cost of funding Ukraine to win, and defeat the Russia threat. If we end up increasing European defence spending to 5% of GDP, that is a $750 billion, in annual recurring defence spending. Are we actually idiots? So we can increase funding to Ukraine by $50 billion a year for two years to defeat Russia, or we can spend an extra $750 billion a year for the next however many years.
And this, I think, understates the cost-benefit difference. A victorious Ukraine would be a booming Ukraine (KSE foresees a 7 per cent growth rate in 2027 if the war has ended). And this would benefit western countries through smaller burdens on their taxpayers, and gains for their investors who bring reconstruction capital to Ukraine. A defeated Ukraine, or even one suffering this war dragging on in the same way, would not offer these economic opportunities.
And then there is my long-term bugbear: the west’s failure to transfer Russia’s blocked foreign exchange reserves — about $300bn — to Ukraine as a down payment on the compensation Moscow clearly owes for its destruction. There is only one alternative to giving this to Ukraine, which is to let it eventually return to Russia, and for western (now mostly European) taxpayers to meet Ukraine’s financing needs instead.
One high-placed EU diplomat tells me it is unlikely there will be a renewed debate at the top of the EU institutions over transferring these assets unless there are new unmet funding needs for Ukraine. What I have written above suggests that such a moment of reckoning could come sooner rather than later.
Other readables
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● Pilita Clark explains how climate risk could trigger the next big financial crisis.
