Positive signals about assistance to Ukraine are coming from Europe. Western media report that Hungarian PМ Viktor Orban has relented, endorsing the establishment of a 5 billion euro military fund, and purportedly promised to refrain from blocking 50 billion euros of economic assistance. In the meantime, Ukraine, in the face of stalled financial assistance from its allies, is gradually moving to the implementation of ‘Plan B’. According to government officials, the measures taken under this plan will allow the country to survive for several months until it receives the money. Apostrophe looked into how the government intends to finance the budget if it becomes difficult to obtain foreign assistance.
Transitioning to Plan B
On January 25, Bloomberg, citing its own sources, disclosed that Hungary is poised to drop its opposition to a 5 billion euro annual military aid fund for Ukraine. This move clears the path for an agreement on the modernization of a mechanism aimed at stable arms supplies to Kyiv.
In a recent interview with RedaktionsNetzwerk Deutschland, Finnish Foreign Minister Elina Valtonen indicated that during a special summit of the European Commission on February 1, Hungarian Prime Minister Viktor Orban is expected to refrain from obstructing 50 billion euros in EU aid to Ukraine.
‘I am very confident that Hungary will lift its blockade. Foreign Minister Szijjártó has given us a positive signal and I very much hope that we can finally decide on aid for Ukraine. If not, we will find another solution’, she said.
The answer to the question - “what if not” - is extremely important for Ukraine. The 2024 budget relies heavily on substantial assistance from external sources, covering half of revenues and virtually all non-defense expenses. Funding for government operations, education, healthcare, social benefits, and other public sector expenditures is contingent on support from international partners.
This year's budget deficit stands at around 1.57 trillion hryvnia, approximately $42 billion at current exchange rates. Anticipating hryvnia depreciation, The Wall Street Journal estimates it at $40 billion. Ukraine aims to secure the majority from allies, with expectations of $37.3 billion, led by the EU's 18 billion euros ($19.6 billion) and potential U.S. assistance of $11.8 billion, as indicated by Treasury Secretary Janet Yellen. Successful reform commitments could unlock $5.4 billion from the IMF, while other countries are expected to contribute.
Despite some success in navigating through controversies and securing a $900 million tranche from the IMF, Ukraine's plans have nоt fully materialized. Delays persist in receiving expected revenues from foreign partners. In the U.S., support for Ukraine is linked to border security, causing a deadlock between Democratic and Republican parties. While positive signals from Europe are noted, actual outcomes may not align with expectations.
Therefore, while awaiting the resolution of disputes in America and Europe, Ukraine finds itself in a survival mode, relying on its own capabilities.
According to Roksolana Pidlasa, head of the Verkhovna Rada Budget Committee, Ukraine can sustain itself without foreign assistance at least through the first quarter of this year.
‘In January, the government tapped into initial savings, accelerating some planned 2024 revenues. Notably, the National Bank's net profit contribution to the state budget will be utilized in Q1. To finance social and humanitarian needs, the Ministry of Finance is actively issuing war bonds, implementing a well-prepared "Plan B" for the quarter. The government is meeting its obligations, ensuring timely payments, including salaries to public sector employees’, MP says.
To meet its commitments, the government must secure approximately 130 billion monthly. Besides the planned issuance of war bonds mentioned by Roksolana Pidlasa, alternative sources may include tapping into income from state-owned enterprises.
‘State-owned banks, notably PrivatBank and Oschadbank, recorded substantial profits last year. The government may opt to distribute dividends in early February once the annual results are consolidated. Profits from state banks in the previous year could potentially cover expenses for two months’, the head of analytical direction of the network for protecting national interests ANTS, Ilya Neskhodovskyisays.
Counteroffensive against Orban
Reserves for additional state budget revenues are extremely limited. If international funding does not resume by April, authorities may be compelled to implement drastic budget cuts or engage in monetary issuance, potentially both simultaneously. These actions carry severe consequences for the state and the economy. To avert this scenario, Ukrainian authorities, as emphasized by Roksolana Pidlasa, are currently working diligently at all levels to secure support from international partners at the outset of the second quarter.
Unblocking the EU's $50 billion bailout program is critical, making reports of Orbán's shift in position highly encouraging.
‘After prolonged inaction against Viktor Orban's tactics, the European Union has launched a counter-offensive. The European Parliament passed a resolution on stripping Hungary's voting rights. If Orban persists in obstructing vital decisions, they may proceed without his participation’, international affairs expert Ruslan Osypenko told Apostrophe.
Furthermore, as per the expert, the EU has set in motion a resolution stating that Hungary, with its recurrent breaches of democratic norms and the rule of law, might be obligated to refund previously granted funds of 10 billion euros.
‘This possibility might prompt Orbán to reconsider his stance, potentially leading to a unanimous decision to allocate aid to Ukraine. If consensus cannot be reached, European nations may resort to an alternative approach: issuing special securities. These bonds will be bought by EU member states, and the funds received will be directed to support Ukraine. Consequently, this assistance will not be a collective effort on behalf of the entire European Union but will originate from individual countries’, Osypenko explains.
Another potential solution involves seizing Russian assets, predominantly held in Europe (amounting to around $200 billion). This approach could offer support to Ukraine without tapping into EU budgetary funds.
‘A resolution to this matter, however, is not anticipated in the immediate future. European governments are concerned that such action might erode private property rights, impacting confidence in the dollar, euro, and the Western financial system. As an interim measure, there is contemplation on facilitating the transfer of profits from these assets to Ukraine, which amass 3-5 billion euros annually—a considerable sum’, Osypenko says.
Regarding the current $61 billion US package held up in Congress, a major portion is earmarked for military aid. Yet, slightly over $10 billion is allocated for financial assistance.
‘The Trump-Biden clash has taken a personal turn, - Osypenko explaines. - Trump blocks any government initiatives to help Ukraine, no matter how justified they are. There is the only hope that American politicians realize that in this case we are talking not only about Ukraine. If they leave us to our own devices, this could diminish the United States' influence and jeopardize longstanding alliances and coalitions’.
Nonetheless, as per Roksolana Pidlasa, the prospects of Ukraine receiving timely assistance are quite promising.
‘Should the US assistance be approved in February, the initial tranche is anticipated in early March. Furthermore, an IMF program review is expected, and tranche are expected in the same timeframe, fostering a cautiously optimistic outlook’, the MP says.
iPhone tax
While optimism is encouraging, practical measures are imperative to bolster the budget. Authorities concede that without assistance, financing issues may surface from the second quarter of 2024. The Wall Street Journal presents a bleak outlook, citing potential delays in salary and pension payments, along with the cancellation of government social obligations.
As previously noted, cutting expenses and launching the ‘printing press’ have been discussed. Nevertheless, these measures may fall short to sustain without Western assistance.
As per Roksolana Pidlasa's statement, the government and parliament are exploring ways to boost budget revenues, primarily through the introduction of new taxes and hikes in existing ones. One option being considered, as mentioned by the MP, involves raising military taxes for high-income earners.
‘If you earn little, you should not pay much tax, and if you earn more than 20,000 hryvnia ($528), then you could pay a military tax of not 1.5%, but 3%. MPs have higher salaries, we can pay 5%. This would be fair’, Pidlasa explains.
Furthermore, she suggests implementing an extra tax on the acquisition of luxury goods.
‘Despite the war, there is a substantial influx of cars and high-end equipment into Ukraine. Customs statistics reveal the significant monthly importation of laptops and phones. For instance, if it's a new iPhone priced at 60-70 thousand hryvnia ($1500-1800), it might be subject to additional duties’, MP says.
Nevertheless, even if implemented, such measures are unlikely to serve as a comprehensive solution to the existing problems.
‘Raising military taxes on high-income earners is a relatively mild measure. Someone with a 100,000 hryvnia salary would pay 3,000 instead of 1,500 hryvnia—an inconsequential sum for them. However, its budgetary impact is limited, given the scarcity of such high-earning individuals. Preliminary estimates suggest this measure could generate an extra 1-2 billion hryvnia annually. This is a drop in the ocean for this year's budget deficit’, Neskhodovskyi believes.
Simultaneously, according to the expert, substantial reserves for replenishing the state budget can be identified within the shadow economy.
‘Primarily, focus should be on excisable goods trade—tobacco, alcohol, and gasoline. Currently, illegal tobacco products account for up to 25%, resulting in multi-billion-dollar losses for the state. Additionally, revenue potential exists in the restaurant business, where many of them operate in the ‘gray’ or ‘black’ market, registering employees as individual entrepreneurs with minimal taxes under a simplified system as contractors’, Neskhodovskyi says.
Another reserve for increasing revenues is reforming customs. According to experts, losses from smuggling currently amount to approximately 100 billion hryvnia per year.
‘Moreover, the ongoing war has led to a notable imbalance in foreign trade. Ukrainian product exports have halved, while imports surged by 17%, adversely affecting local producers and destabilizing the hryvnia. In this scenario, considering an extra import duty to curb foreign goods and boost budget revenues is prudent. However, it should be implemented only after curbing corruption at customs, as immediate action might amplify the existing "corruption tax"’, Neskhodovskyi suggests.
