The War Will Last for Years. What Are We Hoping for?

Even in the face of the obvious risk of the situation worsening, we have become too laidback and grown accustomed to comprehensive support. Not only will the war last for years, but it must be larger in scale if victory is to be its ultimate goal. Therefore, the war will require more weapons, money, and people. Everything is in short supply.

It is clear that the transition to a wartime economy in the modern world is a kind of anachronism. So is war, after all. It is clear that if you need billions of dollars, but you are only capable of billions of hryvnias, this is hardly encouraging. It is clear that the voters like ordinary life with war being “somewhere far away” more than the requisition of cars, work in three shifts or reductions, God forgive me, of welfare benefits. But there are at least three reasons why these “rear frontline” games do not benefit us: we lose capabilities, agency and support. One does not win wars that way.

 

Capabilities

The risks of systematic problems with the flow of international aid to Ukraine are obvious — as are the risks that this aid will be less than we expect.

In fact, we are expecting tremendous sums: as much as $37 billion this year. Another $25 billion shall be needed in 2025 and $12 billion in 2026. Let's take into account that the funding for 2025–2026 is the amount calculated based on the idea that the hot phase of the war in Ukraine will have ended by that time. If not, the needs will be nowhere less than the current level. It is naive to hope that the country will be able to keep finding such resources abroad year after year. Making this funding consistent is still more difficult. Currently, we see with our own eyes that there is a problem both with the consistency and funding per se.

Even good news from the European Union regarding the allocation of €50 billion does not reassure us, because this is a four-year program from which we will receive a maximum of €12.5 billion in 2024. Success at the European Council meeting is an important, but not the last stage, and the final terms of the program are still to be determined and voted on by the European Parliament at the end of February. Therefore, in the best case scenario, the first tranche under the Ukraine Facility will arrive in March in the amount of €4.5 billion — a third of the annual volume. The consistency of further tranches will depend on our ability to fulfill the terms of the program. For us, this is no less of a challenge than for Orban.

The promised $61.4 billion from the United States is still in question. From this amount, the lion's share ($46 billion) will go to defense, while the economy is expected to receive $15 billion. Both components are the key to our survival. It is extremely difficult to find a replacement for them, and living without them is impossible. At the moment, however, apart from money from the US and the EU, we can only hope for $5.4 billion from the IMF and a total of about $2 billion from the Netherlands, Canada, Norway, Denmark, Japan and South Korea to be allocated in 2024.

At the end of last year, when negative scenarios of aid from the allies were being discussed in the corridors of power, the deadline was clearly announced — two months. This is exactly how long our own financial capabilities will last without external support.

One month has already passed. One more and the financial stability we are so proud of will turn into a pumpkin. Record-high foreign exchange reserves of $40 billion will begin to melt before our eyes. A pessimistic exchange rate and inflation expectations will force the National Bank of Ukraine to return to a austere monetary policy that slows down economic development. And if the situation does not improve soon, the National Bank will be forced to pull out its only trump card – money issuance. That same printing of money, the side effects of which usually exceed the positive therapeutic effect many times over. In fact, after two months without support, we will revert to March 2022 — that's about the estimate of our capabilities.

 

Agency

As you will understand, if 15 out of 37 billion is missing, you should have plans B, C and down the alphabet until it is over. And these plans exist.

The 10-year aid plans being prepared by our key allies are a great start, and since we've already seen Britain's firstborn, we won't get carried away. Strengthening our defense capability is an inspiring prospect, but it still has a long way to go. The next similar ten-year program is to be presented by France, probably during Emmanuel Macron's visit to Ukraine. In the spring, the US looks to release their own 10-year commitments as a guarantee in the event that Donald Trump returns to the White House. Of course, the success of this endeavor is also only possible with the support of Congress and is thus not guaranteed.

What else is in the works?

There is progress in the process of transferring the frozen assets of the Russian Federation to Ukraine. At the beginning of January, the White House supported a draft law that would allow confiscating and channeling part of about $300 billion of Russian assets frozen in the United States to Ukraine. Further progress depends, in particular, on the haste of the EU on the same issue because from the very beginning the G7 partners were not happy with the idea of unilateral confiscations. Well, on January 29, the EU countries unanimously approved new rules that will make it possible to de facto withdraw the profits received from operations with Russian sanctioned assets (a total of $180 billion in the EU) and transfer them to Ukraine. In 2023, the Euroclear international depository earned €4.4 billion from such operations. While we are not going to receive this €4.4 billion, we can potentially obtain future profits from such operations. The last step left is to actually agree on the transfer of money to us, but it remains to be seen how quickly this step will be taken by the EU — and then the US.

We are also in the early stages of the creation of an additional aid fund from the EU (Ukraine Assistance Fund) — a military one this time, which can add another €20 billion to us for four years in batches of €5 billion per year.

The launch of the “Ukraine Reserve” — a guarantee instrument that should cover all expenses on EU grant aid and guarantees — is also expected. The annual volume of such guarantees, by design, should not be less than €2.5 billion, its purpose being to stimulate more active grant support for Ukraine. Despite a slightly complicated design, the beginning is absolutely correct: in thinking about the present, we do not even think about tomorrow, when the current debts will have to be paid. At the same time, there is an ever growing number of people willing to support us with a loan: in 2023, grants accounted for 30% of all assistance, down from 45% in 2022. Even from the €50 billion euro Ukraine Facility, grants account for only €17 billion and the rest are loans. This trend must be reversed.

It seems like positive news, but one cannot help noticing that Ukraine is an object here, not an agent. We are showing extremely little proactivity in overcoming our own problems. By the way, agency is one of our key “wartime” achievements, which is better not be squandered.

Yes, we have ensured macroeconomic stability, no kidding — this is an important achievement. But why didn't we do anything more after stabilization? Are we tired? Have we decided to live a little “as before”? Sorry, but it won't work.

In 2023, the state collected UAH 1.66 trillion in taxes with expenditures of UAH 3 trillion and a deficit of UAH 1.36 trillion. Yes, there were unconditional positive moments: in 2023, our Ministry of Finance attracted almost UAH 556 billion to the state budget from the sale of domestic government loan bonds. That is a very solid result of the joint work of the Ministry of Finance and the National Bank of Ukraine. The interest of Ukrainians in government securities has almost doubled. But what benefit would these UAH 500 billion have given if there had not been UAH 1.13 trillion from the allies? We wouldn't even come close to making it. To make matters worse, we didn't really try.

 

Support

The authorities have not yet come to realize that if the economy is not transformed for military needs, no aid will help. If your frontline moves back and forth for 300 meters, it is logical to brace yourself for a protracted war.

In contrast, the president believes that the transition to a military footing is a reduction of the government apparatus, that the war of attrition is Putin's invention to reduce Western support for Ukraine, and that Putin and the Russian economy will lose in the war of attrition.

This is hardly surprising. This is the same president who, instead of preparing for an invasion at the end of 2021, publicly took offense at the American warnings about the imminent war, which, he believes, derailed Ukrainian eurobonds.

Therefore, there is no hope that the advice from Mr. Danylyshyn or Mr. Zhalilo’s recommendations on the transition to a modern military economy have been given at least a cursory glance by someone at the Office of the President of Ukraine. As in 2022, we will wait until push comes to shove.

Not the best of times for expectations.

2024 is the year when elections are going to take place in 70 countries around the world, including many of our partners, and it is also the year of elections to the European Parliament. Therefore, when there is no initiative from us, our external support is shaky too. The closer we are to manifesting our will, the louder are the unpleasant questions, from the abstract “Why should we support Ukraine?” to concrete ones about corruption scandals, irrational spending or efforts that Ukraine is making to win.

What's worse, this is a year of sham elections in the Russian Federation, after which nothing will prevent Putin from closing the borders and conducting a full-scale mobilization.

Here is a war of attrition between a large country, whose economy has adapted even to the sanctions, and a country four times smaller, which, having lost its only ammunition factory in 2014, finally managed in 2024 to allocate funds for the “development of ammunition production” from the state budget.

What are we hoping for?

That while we are all living here, as before, somewhere out there Frodo and Sam are already approaching Mordor?

Read this article in Ukrainian and russian.