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Emerging Markets

THE FINAL WORD: Why is Russia still part of the Washington community after its war on Ukraine?

Sergii Marchenko .jpeg

February 24, 2022, the day of the full-scale Russian invasion of Ukraine, will go down as a tragic date not only for the Ukrainian people, but also for the whole civilised world.

Many of humanity’s achievements, such as global peace, security and rule of law were hugely undermined. Now we are in mid-October, and I am reflecting more and more on what has happened during these months.

The majority of countries at these meetings are already dealing with internal problems caused by Russia — high energy prices, spiralling inflation, food insecurity and the increased of cost of borrowing. Many were forced to recalibrate their budgets towards higher military spendings, replacing those things that mattered to them before the war.

Increases of energy, gas and oil prices caused the replenishment reduction in ESG expenditures in order to use the money to purchase fossil fuels, which again is contrary to the environmental plans that existed in many of our countries before the Russian war. Populist politicians have come to power and made reckless spending pledges. There is a danger that in many countries budgets, deficit and debt could spiral out of control.

There is no blueprint for how to deal with a budget in a country caught up in a full-scale war. Now is the time for large economies and IFIs to find new tools and solutions for countries such as Ukraine. The IMF must be the premier institution for global macroeconomic policy and financial stability. In September, the World Bank, the Government of Ukraine and the European Commission presented a joint report that estimated the cost of reconstruction needs at more than $349bn, which exceeds the GDP of Ukraine in 2021 by more than 1.6 times.

Coming to Washington for these Annual Meetings, I was ready to present the forecast budget deficit and our financing needs for a rapid recovery. But on the first day of my stay in Washington, on Monday, a massive Russian missile attack on Ukraine took place, with more than 80 missiles launched. These attacks killed people but hardly damaged our critical infrastructure, including thermal and electric power stations. Emergency shutdown was activated. Twenty-nine objects of electricity infrastructure have been damaged, including communications facilities, residential buildings. All together more than 140 objects have been hit.


FUNDING FOR RUSSIA?

I now have to do another round of assessment of the damage and of our needs, as my previous figures are no longer up to date.

What is unfair is that Russia still receives more funding than Ukraine does — although it is a huge number — which fuels its capacity to continue its fight against Ukraine. The killing of thousands of Ukrainian soldiers and civilians is causing a dramatic loss of revenues and increased military and humanitarian expenditures.

Since the beginning of the war, our tax revenues have collapsed while military spending has soared. We have managed to increase tax collection in comparison with the first months of the war. During that whole time we had a fixed need of $5bn per month. But unfortunately, despite the huge efforts all the countries have made towards helping us, we have not reached the amount needed to fill the gap. It also took a lot of time between commitments announced and disbursements made.

We are assuming for 2023 that the war drags on. Prolonged war will exacerbate infrastructure damage, population displacement, economic hardship and can increase poverty. If our needs are not fully addressed this will result in immediate and severe economic disruption. In our draft 2023 Budget we have compressed non-priority expenditures and reoriented spending towards critical needs and to support our defence efforts and our citizens most affected by the war.

On the good side, we need less. We have done the latest phase of a contraction in expenditures, and our monthly gap for the next year is now around $3bn-$4bn. 2023 is also a multitasking year for the Ukrainian government. We need to move towards attracting external concessional funding and grants to cover priority social budget spendings on the one hand, and make a well-structured, good-footed and trusted fundraising exercise for a rapid recovery, on the other.

Among the G20 are those countries which have been supporting Ukraine throughout this period, despite having internal problems caused by the Russian war. Also, there some other countries which remain neutral, due to different reasons. But here and now the joint question for everyone here at the table is why Russia is still the part of this community.

 

Sergii Marchenko is Minister of Finance of Ukraine