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Beggars with full pockets. What will we tell Western partners about their money?

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Beggars with full pockets. What will we tell Western partners about their money? © depositphotos/deagreez1

We are waiting for a difficult conversation with Western partners about how it happened that, while receiving significant support, we still have not created an effective economic model, which is why this support ultimately “flows” into unproductive savings or even into cash outside the banking system.

Logic check

It is very simple to check the logic of the Ukrainian economiс model during the war. To do this, it is enough to compare the degree of utilization of industrial capacities and the unemployment rate.

If there are still temporarily free industrial capacities, then in war conditions this can only happen against the background of maximum employment of the population: there are simply no more labor resources to attract new industrial assets into economic circulation. In this case, the system has passed the logic check. And if free industrial capacities exist against the background of high unemployment rates, then in this case the logic check has not been passed.

GDP, Inflation and Exchange Rate. What Awaits the Ukrainian Economy In 2025
GDP, Inflation and Exchange Rate. What Awaits the Ukrainian Economy In 2025

In Ukraine, 65–70% of industrial capacities are currently loaded, if compared with 2021. At the same time, the unemployment rate among the economically active population is 15% (and this is despite significant mobilization indicators). So, in this way, our economic model during the war has not passed the logic check.

Let's figure out why this happened.

First, let's calculate how much money Ukraine's sovereign monetary policy brought in during the war. After all, the Ministry of Finance of Ukraine not only raises funds on the domestic debt market for monetary financing of domestic government bonds of Ukraine (OVDP), but also repays old debts at the expense of new ones.

This indicator is called "rollover".

So, "...according to the Depository of the National Bank of Ukraine, during 2024, the Government of Ukraine raised UAH 497,806.9 million, USD 2,728.1 million and EUR 754.9 million from the placement of domestic government bonds of Ukraine (OVDP) at auctions. In addition, it is worth noting that during this period our government allocated UAH 245,437.9 million, USD 2,476.6 million, and EUR 918.3 million for the repayment of domestic government debt securities."

Let's calculate the rollover.

For hryvnia, rollover: 497.8 - 245.4 = 252.4 billion UAH, or about 6.3 billion USD. For the needs to cover the budget deficit at the level of 40 billion USD. Thus, we have 15–16% coverage of the hole in financing our own needs.

For the dollar, the rollover is at the level of a meager 250 million USD, and for the euro it is generally negative by 164 million (i.e. more was repaid than was attracted).

In general, for foreign currency bonds of the domestic loan, the rollover is zero, and therefore, the replenishment of foreign currency reserves at the expense of the domestic capital market is also zero (the foreign currency account of the Ministry of Finance of Ukraine is included in the gold and foreign currency reserves).

The National Bank of Ukraine, of course, says that "...the rollover of investments in domestic government bonds of Ukraine (OVDP) at the end of 2024 is 155% of the nominal value in all currencies at the current official exchange rate", but it is worth noting that this looks quite positive only in qualitative terms. But in quantitative terms, the indicators are too weak. Especially if we recall that the situation was even more negative during the entire war period.

The hryvnia rollover for 2022–2024 amounted to 377 billion UAH. If we take the actual budget deficit for this period at the level of 3.4 trillion UAH, we will get coverage at the level of 11% of the total shortage of state funds.

In terms of the dollar, the rollover is negative by 267 million, in terms of the euro it is positive by 299 million, in general, in terms of currency, it is somewhere at zero.

That is, the domestic capital market in dollars and euros has never become a tool for covering the budget deficit through the issuance of the same currency military bonds. Although the country's currency reserves reach, according to various estimates, the mark of 100 billion dollars.

Thus, it is worth noting that neither the government nor the National Bank of Ukraine have offered the population and business effective instruments of attraction, for example, by abolishing financial monitoring and legalizing capital invested in military bonds (although such ideas existed).

Economic Schizophrenia
Economic Schizophrenia

At the same time, the cost of servicing this debt at an average rate of 15–16% is too expensive for the state budget. After all, the rollover mentioned above does not take into account interest payments. However, raising UAH 500 billion at the auctions of domestic government bonds of Ukraine (OVDP) in 2024 is a payment of almost UAH 150 billion in interest income per year. This means that the actual rollover is less than UAH 100 billion per year, or only 6% of the needs to cover the lack of funds.

It is worth noting that such a low level has not been in any state that would wage a full-scale war. This is what determines our extremely high level of dependence on external financing.

An important discussion should take place both on the “cost of war” and on “who should pay for these costs?”.

So, let's assess expenses and revenues according to the country's balance of payments data. The main hole that absorbs our foreign exchange resources is the negative balance of trade in goods and services.

Let's take three years of war: 2022, 2023, and 11 months of 2024. We have the following figures: minus $25,737 billion, minus $37,879 billion, minus $31,441 billion.

If before the war, our country could partially compensate for the negative balance of trade in goods with a positive balance in trade in services (due to transit, IT and tourism), now there are only minuses. In total, we lost over 95 billion dollars in trade in goods and services during the war.

There is also the factor of outflow of portfolio investments. It is worth noting that over 6 billion dollars left the country during the three years of the war, the most in 2023. Business representatives are withdrawing money from our country, although the outflow channels are almost blocked (as we can see, they are not blocked for everyone, there are those who, supposedly with the same rules for everyone and different privileges, have more opportunities than everyone else).

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Billions For Special Importers. Why Is Parliament Risking Country's Defense Capability Amid War?

Over 36.7 billion dollars. constitute the volume of currency outside banks due to the purchase of cash currency by the population and the shadow economy. This is almost the same as is currently in the reserves of the National Bank of Ukraine. The absolute record here is 2024: almost $15 billion in 11 months, despite the fact that in the first year of the war there was a little more than $10 billion, and in the second there was $11.7 billion.

It is worth noting that this indicator is very characteristic. It illustrates both the adaptation of part of the shadow economy and part of the "elites" to the format of the war, and the devaluation expectations of the population that chooses the dollar.

So, the hole in the balance of payments is over $136 billion.

Who will compensate for our deficit?

The balance of secondary income (mainly grants from Western partners) amounted to $65 billion over three years, the largest in 2022 — $25.3 billion. Another $60 billion is the balance of “other liabilities”, mainly due to loans from the public administration sector. The record in 2023 was over $27 billion.

Thus, in total, our partners invested $125 billion in us, which covered the trade deficit in goods and services ($95 billion), including the outflow to refugee accounts abroad (minus $25 billion), the outflow of business capital ($6 billion), and the outflow of currency outside banks ($36 billion).

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No Compromise on Assets. Why $300 billion immobilized by the West Must Not Be Returned To Russia

That is, more than $136 billion of outflow was covered. As we can see, the balance is slightly different in the calculations. There are no sources here. And indeed, It is worth noting that there is another $31 billion. which came from migrant workers and businesses on external outsourcing (mainly IT). Another $ 8.3 billion. over three years was provided by the inflow of foreign direct investment. In this case, 80% of the amount is reinvestment of capital gains (because it is prohibited to withdraw dividends abroad) primarily by banks and Financial and Industrial Groups (FIG).

As a result, if in 2022 a balance of payments deficit of $ 2.9 billion was recorded (which led to devaluation), then in 2023 there was already a surplus of $ 9.45 billion (which ensured exchange rate stability of the hryvnia). Unfortunately, for January-November 2024 there was again a deficit of $ 3.12 billion and a new round of devaluation, although currently moderate. By the way, our Western partners can calculate balance of payments data just as well as we can.

Their claims will be as follows:

  • where is the economic growth model and why is unemployment still 15%, while 30% of the military-industrial complex is not involved (these are a priori incompatible concepts, we are talking about unemployment and excess industrial capacity);
  • why are tens of billions of dollars going into cash and all this at the expense of external monetary aid (exchange rate stability is important, but shadow cash flows also need to be regulated and minimized);
  • why is there an outflow of business capital in the context of portfolio investments, albeit relatively small;
  • how will the refugee problem be resolved and the reduction in transfers from abroad by labor migrants be compensated;
  • where is the step-by-step and detailed plan for covering the balance of payments at the expense of our own capabilities, primarily by launching the economy, reducing imports and increasing exports (currently at a level of just over $ 40 billion per year).

All this in the context of a war that should mobilize everyone and make them more effective. After all, external financial assistance from our partners in 2025 risks being very demanding in terms of the conditions for its provision, both in the form of grants and in the form of soft loans.

It is worth noting that out of more than a hundred billion dollars of direct budget assistance from Western partners to Ukraine in three years, approximately $ 60 billion went to increase the savings of business, elites and the richest 10% of the population (increase in cash hryvnia, balances on bank accounts of the population and business, increase in cash foreign currency). In addition, banks earned UAH 200 billion (or USD 5 billion) in profit during the three years of the war, mainly at the expense of state financial instruments. Almost all of this earned money went to increase savings.

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Piotr Łukasiewicz: "Our Strategic Goal Is for Ukraine to Emerge Victorious in this War"

The state was able to attract only UAH 440 billion in net investments in its domestic government bonds of Ukraine (OVDP) from the population, business and banks. By the way, in the first two years of the war, the above-mentioned rollover of the Ministry of Finance of Ukraine was generally negative.

It is worth noting that lending, especially corporate, is practically not growing, and if we subtract preferential financing under the “5–7–9” programs, we will see a general decline in banks’ loan portfolios for legal entities. In addition, the ratio of the loan portfolio to the Gross domestic product (GDP) is only in the range of 14–15%, and should be no less than 30%.

In general, this is a very specific format of a “beggar on the threshold of the church”, who is not really a beggar at all, because at home there are both “herds of sheep” and “painted chests with various valuables”. True, not everyone has things this way.

All this is happening, of course, against the background of terrible poverty of approximately 50% of the country's population, especially among some internal refugees. Thus, it is worth emphasizing that the society of our country is now divided, and the level of inequality is growing every day.

However, our Western partners did not give us money so that representatives of the upper echelons of society could accumulate it in the form of unproductive wealth. On the contrary, our country was allocated money so that a new economic model resistant to war conditions could be launched.

We are talking about launching production and creating jobs. After all, if the country has idle industrial capacity and at the same time 15% of the unemployed, then something is definitely wrong with the government's economic model.

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Hybrid Warfare Under Water: Threats to the Baltics and Lessons for Ukraine

Instead of searching for new development models, the government of our country continues to ask our partners for money "for various savings". Thus, the Government does not have a model for the development of the economy during the war, and the "hand of the market" does not have a decisive influence (it is partially paralyzed by the risks of war and general uncertainty). In addition, it is also worth paying attention to the credit dysfunction of banks. After all, they do not lend to the economy, because there is no clear, predictable development model. In addition, in such an uneasy situation that has developed in our country, the National Bank of Ukraine adds colors to this palette with the help of high positive interest rates and a tight monetary policy.

The growth of savings during the war is not something new and unusual. Many countries had the same situation. The main thing is that these accumulations go into the economy through bank credit transmission or military bonds. But that is precisely not the case. Thus, dysfunction is the keyword in the economic policy sphere of 2024. We have outsourced our work and become too dependent on its functioning during the most critical period of our history.

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