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5.12.19 12 BUSINESS 04.08.2022 Matt Qvortrup Matt Qvortrup is Chair of Applied Political Science, Coventry University theconversation.com War is stopping Ukraine from paying its debts UKRAINE is burning through money fast. e invasion by Russia has been costly for the country. According to the International Monetary Fund, Ukraine's GDP could shrink by 35% as a result of the war. e country's international grain ex- ports have been severely hampered, with a recent deal to restart exports likely to move only some of its current stocks. e country shipped US$27.8 billion (£22.6 billion) in agricultural products to other countries last year, or 41% of its total exports. It is not surprising then that the coun- try's public finances are in distress. Ukraine's ministry of finance has esti- mated its public sector deficit increased from US$2 billion in March 2022 to as much as US$7 billion by May. If Ukraine runs out of money it would not only affect the war effort, but could also leave the country unable to pay nurses, teachers and police officers, among other important workers. e negative implications of this for the people of Ukraine would be varied, ranging from the breakdown of impor- tant services to an inability for house- holds to pay bills and buy food. is a significant concern of course, but the outlook is not as catastrophic as some might think. Ukraine has already received funding from allies, with more promised. e US, for example, has committed ap- proximately US$5.3 billion in security assistance to Ukraine since the begin- ning of the Biden Administration, in- cluding around US$4.6 billion during "Russia's unprovoked invasion", the US Department of Defense says. And this is not the only help received by Ukraine. e G7 and EU have an- nounced official financing commit- ments to Ukraine worth US$29.6 billion. EU leaders have also pledged additional support of up to €9 billion (£7.6 billion), on top of a previous €1.2 billion emer- gency loan. is money from interna- tional partners will tide Ukraine over in the short term. So paying the interest on this debt and managing its upcoming bills will be not an immediate problem for Ukraine, although it remains a con- cern. A more pressing challenge will be re- paying its outstanding loans and bonds. With little money coming in, it will be hard for Ukraine to fulfil these obliga- tions. Indeed, the country already asked for permission to freeze around US$20 billion in debt earlier this month. is request was immediately approved by western governments, most notably Germany. Another challenge for the Ukrainian economy right now is the continuation of the war – of course because of the on- going negative impact on its people, but also due to the financial consequences. A prolonged war will only bring more uncertainty for the country's economy. Major cities across Ukraine are being hit by Russian missiles and there have been continued attacks on important infra- structure, including railways and ports. In addition to the short-term concerns around this, it also leaves little incentive to invest in the country at the moment, adding another long-term challenge to Ukraine's economic outlook. Avoiding a debt default ere is always the danger of a default, which is economist-speak for running out of money. And, in fact, Ukraine al- ready defaulted on loans in 2020. is was not a catastrophic event, but it raised interest rates on any new loans the country sought. Lenders are typ- ically not keen to loan money if there is a risk they won't get it back, but the political situation and the pronounce- ments of support by western powers discussed above means Ukraine is more likely to receive money to prevent an- other default. is kind of very public commitment means these governments are likely to be willing to continue to pay a considerable price to keep Ukraine afloat, both militarily and economically. It is also worth bearing in mind that, as bad as the economic situation is for Ukraine, the Russian economy is suffer- ing too, which could affect the length and outcome of the war. Reports that Russia has withstood the sanctions – that they "sting but do not cripple" its economy – are inaccurate. is is the story the Kremlin would like us to be- lieve, and is perhaps why Russia decid- ed to no longer release data on key eco- nomic indicators. A recent report published by Jeffrey Sonnenfeld and colleagues from the Yale School of Management, points out that, due to business retreats: "Russia has lost companies representing 40% of its GDP, reversing nearly all of three decades' worth of foreign investment and buttressing unprecedented simul- taneous capital and population flight in a mass exodus of Russia's economic base." Add to this that the country's foreign exchange reserves are diminishing at a startling rate – an estimated US$75 bil- lion has been lost since the start of the war – and we get a more nuanced per- spective of the true state of affairs. e destruction, death and devasta- tion experienced by Ukraine is only one part of this war, loss of livelihood is another. Governments opposing such invasions need to help economically as well as militarily. So far, western coun- tries have done so for Ukraine, but this support must continue if its economy is to survive. Ukrainian president Volodymyr Zelensky and G7 ambassadors visit the port of Odesa, a vital export hub for Ukraine's agricultural products

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