In Search of Financing. Potential New Sources of External Support for Ukraine

Since the beginning of the full-scale invasion of the Russian Federation, the European Union has become our largest donor of funding. The sum of the obligations of the collective institutions of the European Union and its member states to support Ukraine as of June 30, 2024 reached 160.5 billion euros, including 84.3 billion — financial and 65.9 billion — military support (see table.). The total amount of international bilateral aid commitments to Ukraine reached 300.3 billion euros, with the share of the European Union and its member states in these commitments at the level of 53.5%.

The total amount of aid actually allocated from bilateral donors — 199.9 billion euros — lagged by 100.4 billion euros from the sum of the specified obligations. Collective institutions of the European Union and member states have sent Ukraine 93.9 billion euros of aid of all kinds since the beginning of the full-scale military conflict. At the same time, financial aid is 46.3%, and military aid is 44.1% of the total amount of aid.

Among individual countries, the United States of America (EUR 98.4 billion in terms of commitments), Germany (EUR 24.8 billion), Great Britain (EUR 16.9 billion), Japan (12 .4 billion), the Netherlands (11.7 billion), Sweden (11 billion), Denmark (10.1 billion), Canada (8.2 billion euros). At the same time, the largest volumes of military aid were provided by the United States of America, Germany, Great Britain, Denmark and the Netherlands (see figure).

Among the recent decisions of donors, it is worth noting the decision of the Congress of the United States of America from April 2024 regarding a package of support in the amount of 61 billion dollars, including 7.8 billion dollars of budget support. In May 2024, the European Council approved the decision to transfer to Ukraine revenues from the frozen assets of the Russian Federation in the amount of 3 billion euros. Before that, on February 27, 2024, the European Parliament passed a decision on a new support mechanism — Ukraine Facility (Ukrainian Fund) in the amount of 50 billion euros for 2024–2027.

It is expected that in 2024, 16 billion euros of total allocations in the form of loans and grants will be allocated from the Ukrainian Fund. In addition, it is worth noting that M. Emerson from the Center for European Policy Studies estimated that if Ukraine were a full member of the European Union, the net financing of our country from the European Union's solidarity funds would reach 18.9 billion euros per year. That is, Ukraine is already receiving financial assistance from the European Union, comparable to the status of a new member of this community.

However, in 2026–2027, the financial potential of the Ukrainian Fund will significantly decrease due to the use of most of it in 2024–2025. If we assume that payments from the Fund will amount to 16 billion euros in 2024 and 13 billion euros in 2025, then in 2026-2027 Ukraine will be able to receive only 10-11 billion euros per year.

At the same time, Ukraine will need large-scale financing for the restoration and modernization of assets damaged by the aggressor and the implementation of institutional reforms necessary for gaining membership in the European Union. Experts from the World Bank, the government and the European Commission estimated Ukraine's needs for financing recovery and reconstruction at the level of 486 billion dollars over ten years. That is, the financing needs of our country will amount to approximately 44 billion euros per year.

Unfortunately, the currently available mechanisms of international support for Ukraine do not guarantee an adequate level of funding for the reconstruction of the national economy and the implementation of the standards of the European Union in the period after 2025.

That is, Ukraine, as a candidate for joining the European Union and a country that suffered from armed aggression, will objectively need additional external financing from the European Union and other donors in relation to the amounts provided for the Ukrainian Fund and embodied in other commitments of donors.

As for financial assistance from the European Union, the difficulties of its increase are connected with the fact that the parameters of the medium-term fiscal framework of the European Union for 2024-2027 have already been determined. But a certain space for financial maneuvers will appear in 2026, when the European Commission will stop attracting loans on the market for the anti-covid fund Recovery and Resilience Facility and will be able to borrow more funds for Ukraine's needs.

It is positive that the leaders of the "Big Seven" at the summit in Italy in June announced their intention to provide Ukraine with a loan in the total amount of 50 billion dollars. The joint communiqué of the Group of Seven (G7) members states that the assistance will be provided in the form of an "accelerated loan from emergency revenues (ERA) and will be repaid from future revenue streams from the frozen sovereign assets of the Russian Federation." The Group of Seven (G7) Plan, in fact, provides Ukraine with an advance as a loan, which, however, will come to Ukraine in the form of grants, not loans.

The G7 financial plan can be a good tool to support the stability of Ukraine's economy during the war and part of its post-war reconstruction efforts. However, the details of the Group of Seven (G7) plan are still being discussed, so it is difficult to assess its adequacy and long-term sustainability.

From the point of view of the needs of our country, the implementation of the Group of Seven (G7) plan does not eliminate the need to actively support Ukraine from the European Union in order to accelerate economic recovery and institutional reforms. Aid to Ukraine in the amount of 50 billion dollars, secured by revenues from the assets the Russian Federation, will obviously cover only a part of its military and economic needs for one or two years. However, in the long run, these revenues will not be sufficient to cover all the costs associated with the war.

After the end of the war, at the international level and at the level of individual jurisdictions, the issue of collecting reparations from the Russian Federation for the reconstruction of Ukraine must be resolved. One of the forms of such reparations should be the confiscation of frozen Russian assets. In this case, outstanding credit obligations of Ukraine, formed for future income from Russian assets, will be partially covered by reparations from the Russian Federation.

At the same time, the new medium-term budget of the European Union starting in 2028 should provide for the formation of new funds to finance the reconstruction of Ukraine and the extension of the European Union's solidarity policy to Ukraine.

In this context, many advantages associated with the acceleration of integration into the European Union and significant financial support of the candidate country at the expense of the European Union solidarity funds are provided by the staged accession model. In the previous article, the content and stages of the gradual joining process were already shown.

The gradual accession model is currently the only coherent and structured development that includes financial incentives for the rapid advancement of a candidate country on the way to membership in the European Union. However, the application of these incentives and the inclusion of Ukraine in the solidarity policy of the European Union are possible only if methodological and organizational changes are made to the process of enlargement of the European Union.

The gradual accession model covers a clear structure of requirements, incentives and rewards for the candidate country. Its authors note that the implementation of the model does not require making radical changes to the sections and clusters of the current negotiation process.

In 2023, the authors of the model M.Emerson, S.Blockmans and others updated the template of phased joining to create real steps for its implementation. The new scheme of financing from the solidarity funds of the European Union proposed by them provides that candidates for joining the union receive up to 40% of the usual funding of the member state in stage I, up to 60% in stage II and 100% in stage III.

The materialization of financial incentives from the European Union will depend primarily on the fulfillment of target indicators, preferably quantitative ones, which will record the progress of the candidate country in the area of ​​adopting European Union legislation and implementing the necessary reforms. This progress should be the basis for allocating funding from the European Union's solidarity funds and intensifying the candidate's participation in the collective institutions of the European Union.

Experts of the Vienna Institute for International Economic Studies (wiiw) rightly pointed out that the experience of the countries of Southern and Eastern Europe showed the strength of the solidarity policy of the European Union. In general, it was noted that the new member states had a significantly lower level of infrastructure development and competitiveness at the time of accession to the European Union, but since then they have achieved significant changes and improvements in this regard. Ukraine's needs in terms of expanding and modernizing infrastructure, improving the quality of public services and human capital, etc., are similar to the needs of these countries in the past.

The European Regional Development Fund (ERDF), the Solidarity Fund (SF), the European Social Fund Plus (ESF+) and the Just Transition Fund (JTF) form the foundations of the European Union's solidarity policy. Their goals include increasing employment, social inclusion and gender equality, building trans-European pathways, reducing regional disparities and strengthening the green transition. The medium-term budgets (for 2021-2027) of the solidarity funds of the European Union are as follows: the European Regional Development Fund (ERDF) — 215.2 billion euros, the European Social Fund Plus (ESF+) — 98 billion, the Solidarity Fund (SF) — 36.6 billion and the Just Transition Fund (JTF) — EUR 19.2 billion.

Today, the largest recipient of funds from these funds is Poland, which is often considered a benchmark for Ukraine, given the geographical and cultural proximity of the two countries and similar population size. Between 2021 and 2027, Poland will receive a total of €75.5 billion from the European Union's solidarity funds, including €47.4 billion from the European Regional Development Fund (ERDF) and €14.9 billion from the European Social Fund Plus (ESF+).

In the context of Ukraine's problems, experts of the Vienna Institute for International Economic Studies (wiiw) suggest using the resources of the European Social Fund Plus (ESF+) to improve the qualifications and retrain the workforce, to ensure the integration of war veterans in the labor market and the reintegration of children into the national education system. The Regional Development Fund (ERDF) could finance programs to reduce economic inequality in Ukraine and cross-border cooperation. The Just Transition Fund (JTF) should be included in programs to improve the energy efficiency of buildings and the social aspects of housing provision. The goals of restoration and ecological modernization of the housing sector of Ukraine fall under the functional of the Regional Development Fund (ERDF) and the European Social Fund Plus (ESF+).

Therefore, the practical implementation of the gradual accession model with the opening of access to the solidarity funds of the European Union would give Ukraine the opportunity to take advantage of the financial and institutional advantages of membership in the European Union even in the process of accession negotiations. The implementation of this model should be based on a comprehensive system of quantitative performance indicators, the achievement of which would open access to the solidarity funds of the European Union.

In 2026-2027, there will be an objective need to contribute additional funds to support Ukraine from the European Union beyond the financial capabilities of the Ukraine Facility. The issue of financial support for our country will become particularly acute in 2028, when this fund expires and the new medium-term budget of the European Union comes into effect.

Potential sources of funding for overcoming the consequences of the war in Ukraine and implementing reforms of the European integration course include both reparations from  the Russian Federation (confiscation of Russian assets) and the implementation of targeted support programs from the European Union, the United States of America, microfinance organizations, Canada and other donors. The European Union's aid for the recovery and reconstruction of Ukraine could be provided through newly formed funds or existing funds of the European Union, with the spread of elements of the European Union's solidarity policy to Ukraine.