Advertisement

The EU is providing Ukraine with $54 billion. How will the money be spent?

Russia Ukraine War Explainer (Copyright 2023 The Associated Press. All rights reserved)
Russia Ukraine War Explainer (Copyright 2023 The Associated Press. All rights reserved)

EU leaders on Thursday sealed a deal to provide Ukraine with 50 billion euros ($54 million) to shore up its war-ravaged economy after Hungary dropped weeks of threats to veto the measure.

The aid package — about two-thirds loans and one-third grants to be paid out over a four-year period — is not intended to fund arms and ammunition, which fall under a separate EU plan. Instead, it aims to stabilize Ukraine’s economy after nearly two years of fighting, pay for rebuilding, and set the country up for future EU membership.

The package will help Kyiv plug budget gaps while avoiding the skyrocketing inflation seen in the first months after Russia’s full-scale invasion in February 2022. Ukraine lost a third of its economic output to wartime destruction and occupation by Moscow, which took over the main heavy industry hubs in the east.

The central bank had to print money to cover state expenses and inflation shot up, reaching a high of 26%. The economy rebounded somewhat last year, but Kyiv spends almost all of its tax revenue on the war.

As of Saturday, neither President Volodymyr Zelenskyy’s office nor the Ukrainian finance ministry have disclosed details of how the funds will be spent. However, statements by EU authorities, Ukrainian lawmakers and diplomats have identified key areas of concern:

1. Paying state salaries and pensions - this means compensation for teachers, doctors, nurses, civil servants and other public-sector employees.

2. Ensuring smooth power and water supplies, and keeping other public services running. The Ukrainian government needs to maintain domestic support for the war and has tried to shield civilians from disruption, including in the face of mass Russian airstrikes last winter that led to widespread power outages.

3. Supporting the currency. Bohdan Yeremenko, a Ukrainian lawmaker and former diplomat, told Ukrainian media on Thursday that he expected the government to use some of the funds to ease downward pressure on the hryvnia, saying it was important for macroeconomic stability.

4. Safety net for foreign investments in Ukraine. Yevheniia Kravchuk, another deputy from Zelenskyy’s Servant of the People party, told the German broadcaster Deutsche Welle Friday that Kyiv will use some of the aid to provide insurance and stable financing for foreign investments, including plants that produce arms and ammunition.

Zelenskyy welcomed the assistance, in a post on X, formerly Twitter. He said that continued financial help from the EU would strengthen Ukraine’s long-term economic stability, “which is no less important than military assistance and sanctions pressure on Russia.”

Russia’s economy, meanwhile, has weathered the unprecedented economic sanctions by Kyiv's Western allies better than expected, despite a price cap on Russian oil and natural gas and a widespread diversification in the West towards other energy sources.

In late November, Moscow adopted its biggest-ever federal budget, with defense spending overtaking social spending for the first time in modern Russian history. Record low unemployment, higher wages and targeted social spending have so far helped the Kremlin ride out the domestic impact of pivoting the economy to a war footing.

However, some analysts have called its spending plans “unsustainable in the long term,” saying they expect tax rises after the presidential election in March.