Ukraine - West needs financing wake up call
The IMF announced this week a staff level agreement over the completion of the latest review under the $15bn plus EFF with Ukraine. This was largely as expected as Ukrainian compliance with conditionality has been strong.
I wish the same could be said for Ukraine’s Western partners responsible for giving financing assurances which underpin the programme and help cover the $100bn plus gross financing needs under the programme.
After some delay the EU did sign off on its €50 billion Ukraine support programme for 2024-27, but with the $61 billion U.S. support programme stuck in the House of Representatives a potentially massive hole threatens the financing assumptions in the programme. Without the US contribution the IMF programme simply does not add up. Even if the House signs off on the $61 billion this only covers US military/financial assistance to the US election. If Trump wins one has to doubt whether the US will still fund Ukraine as per the programme from 2025 to 2027. And then the question is if the US money does not come thru whether other Western donors would be prepared to step up to fill the void. This would heap yet more pressure on Europe - likely requiring the €50 billion existing commitment to increase by another €30-40 billion, at least. I am not sure there is the longer term political durability in Europe to guarantee that - that’s why I think the only solution is to further tap frozen Russian assets given real doubts now as to the quality of Western financing assumptions.
Needs must!
Having signed off on the latest review the Fund would ordinarily want to push on with negotiations with the private sector on debt treatment as required in the programme. However, it is hard to start any such negotiations unless US financing is secured as, as noted above, the numbers in the financing plan simply then do not add up, and any DSA would be meaningless. Perhaps some informal, preliminary talks with private creditors can start - assuming that either the House eventually backs financing for Ukraine or other financing sources are identified to cover the drop off in U.S. funding. At the moment the focus will be some short term stop gap funding from Japan et al. The Fund would though need to make some very heroic longer term assumptions as to the state of politics and democracy in Western countries.
Again, I just think it’s all far more realistic and practical to tap frozen Russian assets. We have been banging this drum now for 18 months while the Western official sector has had its head in the sand/been in denial of the political reality. But this hard to see any of this adding up without tapping as yet only immobilised Russian assets - and taxing the interest on these assets really does not touch the sides.
On debt treatment, the reality is any NPV reductions achieved from such treatment pale into insignificance compared to securing access to frozen Russian assets for Ukraine. As of the end of 2023 Ukrainian state debt amounted to $137bn. Half of this is liabilities to multilaterals so outside the restructuring envelope. Around $23 billion is Eurobonds. Assuming even a 50% haircut on debt within the likely restructuring envelope (which actually is never likely to be agreed by creditors given the backdrop of the availability of frozen Russian assets) plus a further service suspension thru to the end of 2027, this delivers financing contributions of something like $40 billion max from debt relief. But arguably by doing this, creditors (private sector) they play to the official sectors game of ring fencing and protecting Russian assets. This is not in the interests of Ukraine or private creditors - albeit it might suit some of the bilateral creditors (Germany in particular - but unlikely most of the others). Hence by going on with the IMF’s financing assumptions, agreeing debt treatment the whole pitch of securing frozen Russian assets for Ukraine is undermined. As above best case Ukraine could secure $40 billion financing gains from any debt treatment (actually likely much less than this) but in so agreeing to any such treatment it undermines its own pitch to secure the $300 billion plus in immobilised Russian assets - by making the Western official sector believe that they can fund Ukraine without resort to tapping frozen Russian assets. They simply cannot. Some Western governments would like Ukraine and private creditors to just quietly toe the line but I cannot see that as ultimately been in Ukraine’s long term interests. It might suit Germany, but not Ukraine.