Joe McConnell
Ukraine’s finance minister has called on Western allies to speed up the disbursement of a $50 billion loan, arguing that delays in arms deliveries have contributed to a huge budget deficit that has leVscek Kiev struggling to find money to pay its military.
Serhiy Marchenko told the Financial Times that the slow dispersal of weapons, mostly from the United States, had contributed to a $12 billion increase in military spending.
The $12 billion increase meant the country would run a deficit that other government officials have estimated at just under a quarter of GDP, or $43.5 billion, this year.
In April this year, Congress approved direct U.S. military aid worth $27 billion, but its disbursement continues to be “slow,” Marchenko said. “We still have a shortage of necessary weapons, ammunition and shells.”
The situation has meant that the country “will no longer have money to cover the salaries of our troops,” the finance minister said, adding that delays in aid have meant that paychecks set aside for the end of 2024 were used to “purchase necessary weapons and ammunition” earlier this year.
Western allies do not directly finance the salaries of the Ukrainian military, but the lack of US weapons and the simultaneous increase in military spending have meant that Kiev has had to finance the war by cutting spending, selling state assets and raising taxes.
The finance minister said the country’s precarious financial situation highlights the need for the United States and other countries to commit to providing more aid and to speed up progress on a $50 billion loan pledged by G7 leaders.
The G7 aims to finalize the loan this year and repay it with profits generated by €260 billion in frozen assets of the Russian central bank, most of which are held at Euroclear in Belgium. The allies will decide how to spend the $50 billion, but Ukrainian officials hope at least some of it will go to weapons.
“Ukraine is in a very vulnerable position,” he said, adding that the $50 billion loan was “a magic solution” that would allow the country to purchase military supplies and avoid falling into a financial situation that would alarm its creditors, such as the IMF.
However, the finalization of the $50 billion loan has been hampered by complex negotiations between the United States and European Union countries.
The US wants guarantees that the €260 billion will remain frozen for the foreseeable future and fears that Hungary could block efforts to make this a reality. Hungary, governed by pro-Russian Prime Minister Viktor Orbán, has repeatedly blocked EU aid to Ukraine.
With the U.S. presidential election approaching and Republican candidate Donald Trump threatening to cut American aid to Ukraine, Marchenko expressed concern about delays beyond the summer recess.
“They are not ready to accept this as an urgent matter for Ukraine,” he said, referring to the EU and the $50 billion.
Prime Minister Denys Shmyhal called on the EU to consider revising its sanctions policy to get the loan approved.
Shmyhal said this month in a letter to the European Commission, seen by the Financial Times, that the bloc should agree to freeze the assets “until the Russian Federation’s armed aggression against Ukraine ends and all damages are compensated.” But such a move requires unanimity among the 27 EU members, with officials worried that Hungary could block it.
The commission said it would not make any statements about “partner correspondence”.
Brussels this week released a €4.2 billion tranche from a separate €50 billion credit line for Ukraine agreed in February and financed by the EU budget. The payment was conditional on Ukraine fulfilling certain reforms as part of its EU membership bid.
Kiev urgently needs a signal from its Western allies that the asset freeze plan will go ahead, not least to show the IMF that it is on solid fiscal ground when the lender begins reviewing Ukraine’s public finances in September.
Ukraine’s Finance Ministry has also set mid-September as the deadline for submitting its 2025 budget.
“We can’t pause this war,” Marchenko said. “You can’t stop fighting. You need this money. So if you don’t have enough support from your partners, you’re going to try to figure out how to find this money with your own resources.”
However, while the government is carrying out a series of debt restructurings, privatizations and tax increases to plug the deficit, investors believe Kiev should do more to address the country’s large shadow economy.
“The Ukrainian government must recognize the scale of the shadow economy and begin combating it immediately,” said Andy Hunder, president of the American Chamber of Commerce in Ukraine.
The head of the Ukrainian parliamentary committee on taxation, Danylo Hetmanstsev, estimates that Ukraine’s shadow economy could generate up to $12 billion. “Companies that pay taxes are pushed to pay more, while those that evade taxes get away with it,” Hunder said.
Instead, the Ukrainian government has proposed increasing its war tax, levied on people’s salaries, from 1.5 percent to 5 percent. It could also be extended to self-employed workers. They also hope to expand the number of companies eligible to pay the war tax and impose higher taxes on luxury goods. The number of goods subject to excise tax will increase, as will the rate applied in some cases.
Some economists believe further tax increases are inevitable.
“War is extremely expensive… If foreign aid is not coming, it means that these resources have to be sought internally,” said Yuriy Gorodnichenko, a specialist in Ukraine’s macroeconomic policy based at the University of California, Berkeley. “It’s a bit of a miracle that we are in the third year of the war and taxes have not been raised. [more] aggressively.”
