The IMF has arrived in Kyiv for the latest (8th) review under the $15.5 billion EFF which is slated to take the country through to Q1 2027.
A couple of key issues for the IMF to address herein:
First, financing a longer war scenario, and second, within the context of a longer war and likely increased financing needs, whether there will be a need for additional debt treatment beyond that agreed with private creditors in 2024.
On the issue of the costs of supporting Ukraine through an extended war, the original EFF assumed that the war would draw to a close in 2025, hence it assumed a significant reduction in Ukraine’s budget and financing needs in 2026 and to 2027.
Indeed, the Fund assumed a budget deficit of 21.3% of GDP in 2025, but then more than halving to 10.1% in 2026 and falling to just 4.6% of GDP by 2027.
In terms of financing needs, it assumed a financing gap of $45.1 billion in 2025, falling to $26.5 billion in 2026, and then only $1.8 billion for the first quarter of 2027 to the end of the current EFF.
It now seems likely, given my assumption at least that there is no realistic hope of an early end to the war, that the funding need for 2026 will be closer to that in 2025, so around $45 billion, implying close to $20 billion in additional financing needs, while if one just pushes out the war by one year, would likely increase the financing need for 2027 to closer to the prior 2026 assumption, so nearer to $26.5 billion.
That might suggest an additional financing need of $40-45 billion for 2026-2027, again depending on the war’s duration. Note that the Fund assumed over-financing in 2025 of $12.2 billion which can be carried over, but this would still suggest an additional financing need of over $30 billion for the period 2026-2027, assuming a longer war scenario which now seems more likely.
There might be a desire to delay making a determination as to the duration of the war, perhaps to the next review, or perhaps fudge the financing equation arguing that the $12.2 billion in prefinancing from 2025 and then unallocated funds from the $50 billion Extraordinary Revenue Arrangement (ERA - from the income stream on immobilized CBR assets) can fill some short term gaps. However, in the context of the signaling that the West stands squarely behind Ukraine’s defense for the duration of the war I think it is really important to be realistic in terms of the risks now of a longer war and the financing needs, to signal strongly to Russia that Ukraine has adequate funding to continue with its defense, as long as it takes and certainly through 2027, at least.
In my mind the IMF programme needs to identify another $30 billion in budget financing for Ukraine to take it through an extended war scenario to the end of 2027, at least. I do not think there are the funds available at present from the existing ERA, or the EU’s MFA, plus then existing bilateral pledges, so new money pledges from the West will need to be made. Note herein that the U.S., under Donald Trump, has made clear that it is unwilling to provide any future finance to Ukraine so the burden will inevitably fall mostly on Europe, but with significant contributions also from Japan and Canada.
Note in the discussion about financing the above just refers to traditional budget/BOP support, and as I have long argued, the actual funding need for Ukraine, including military support, is much higher than implied by the IMF, closer to $100 billion pa, as per data from the Kiel Institute.
The West will hence have to assume, in an extended war scenario, continued funding at the rate of this higher $100 billion a year level through to the end of 2027. That is a huge commitment that I think Western governments should make crystal clear to their taxpayers. And if they do not think their taxpayers are in for that level of funding for Ukraine, they need to look at alternative sources. And, again as I have long argued, the most obvious and most readily available source of financing is the $330 billion in immobilized CBR assets in Western jurisdictions. I just wonder therein when Western politicians will wake up and smell the coffee that Russian taxpayers, not their own, should be funding Ukraine’s defense.
On this latter point, there seems to have been some progress in recent weeks.
One option, which I have long argued would be to transfer immobilized CBR assets from Euroclear to an SPV (a sovereign wealth fund for Ukraine, Agency for Ukraine’s Reconstruction and Accession to the EU, AURA) managing the assets in a more innovative way and targeting a higher investment return. An EM style investment portfolio could generate 8-10% returns per year, which would go some way to filling the financing void as above. I would even suggest that Ukraine issues Victory or Reconstuction bonds bought by this new SPV using immobilized CBR assets. Russia would retain ownership of the underlying assets (the Ukraine Victory Bonds), alleviating concerns about the legality of confiscation, until a deal was reached over reparations. But the advantage would be Ukraine would get full access now to the immobilized $330 billion in CBR assets, and able to fully cover its own financing needs in this war - with a little help from the CBR. Oh the irony of Russia paying for Ukraine’s defense! The Victory bonds could even pay a coupon, but payable to the fund, to be distributed to Ukraine, as per the existing ERA mechanism. Message to the EU, and the West - there are solutions. Just think outside the box if you want Ukraine to win, and Russia to lose this war.
On the second issue of the prospect of a second debt treatment, obviously if Western governments are being asked to stump up an additional $30 billion to cover budget and BOP financing needs out thru the end of 2027, and perhaps multiples of that including military financing needs, then questions will be asked whether private sector investors have to step up and provide more relief beyond that ($10bn plus) agreed in 2024. The now most likely outcome of an extended war now more closely matches the IMF’s downside scenario and therein the fund spoke in its seventh review document (page 9, point 2) about the need for a further and definitive debt treatment on available restructurable debt to ensure debt sustainability in its seventh review document.
Under the terms of the 2024 restructuring deal, Ukraine is slated to pay $1 billion in debt service to bondholders in 2026-2027, which might no longer be tenable. This can perhaps be extended with a further moratorium. The bigger problem though, is that in the IMF downside scenario, the debt to GDP ratio increases by close to thirty percentage points on the original base case, and suggesting that the 65% target, ex ERA, is similarly far distant. Restructurable debt is though is less than 20%, hence the question is how IMF targets are reached in the downside scenario without a really aggressive second round debt treatment including a massive haircut.
A Victory bond solution would alleviate Ukraine’s financing needs, enable it to remain current on debt liabilities, albeit the debt ratio would be bloated still further. That said, as per the ERA, the Victory Bond liabilities could be excluded from debt/GDP targets on the assumption that actually, the monies will never be repaid, and will be cancelled out against reparation claims against Russia.
Reprinted from the author’s @tashecon blog! See the original article here.
The views expressed in this opinion article are the author’s and not necessarily those of Kyiv Post.