Ukraine exchanged aid for reforms

Last week, Ukraine received the first tranche of €3 billion under a new macro-financial assistance program from the European Union. The total amount of the loan could reach €18 billion, but to receive further tranches, the country must meet the conditions for combating corruption and restoring market mechanisms after martial law is lifted. It is assumed that the funds will be used to cover the budget deficit, including the restoration of critical infrastructure.

On Tuesday last week, Ukraine received the first tranche of financial assistance from the European Union in the amount of €3 billion, and on Friday the country’s Ministry of Finance published the conditions under which agreements were reached on a macro-financial support program totaling €18 billion (the loan agreement was signed on January 16 ). The loan has a maturity of 35 years, and the interest payments on these debts will be repaid by the EU countries themselves, and not by Ukraine.

According to the Minister of Finance of Ukraine Serhiy Marchenko, the funds received will be used to pay off urgent budget expenses and support financial stability – under the terms of the EU, the loan proceeds cannot be used to cover military spending, but can be used to restore critical infrastructure. In total, since the beginning of the military operation of the Russian Federation in Ukraine, the EU has allocated funding to the country in the amount of €10.2 billion. At the same time, according to the Ukrainian Ministry of Finance, the total budget expenditures last year amounted to 2.7 trillion hryvnias ($75 billion), of which 38.6 %, or $29 billion, were covered by foreign partners. So, back in May last year, the G7 countries agreed on the allocation of financial assistance to the country in the amount of $18.4 billion without any conditions. On top of this, the EU promised to allocate loans in the amount of €9 billion, of which Ukraine received €6 billion. The International Monetary Fund previously estimated that Ukraine’s budget deficit in 2023 could be up to $4 billion per month.

The first two-month tranche under the macro-financial assistance program from the EU was also allocated without any conditions, but the receipt of further tranches is interconnected with the implementation of the reform program, which involves the country’s return to a non-military structure of the economy. In total, the memorandum signed by the parties contains 20 conditions, divided into four blocks – “Macro-financial stability”, “Rule of law”, “Structural reforms and effective management” and “Energy”. The requirements largely coincide with the terms of the memorandum signed by Kyiv with the IMF (so far it involves preparations for the launch of a full-fledged assistance program). The interest payment subsidy will also operate on the condition that the policy of reforms be maintained.

The first block requires the restoration of the powers of the created economic and financial institutions (primarily the Central Bank, including with regard to the freedom of movement of capital) after the lifting of martial law. In the first half of the year, it is planned to phase out temporary emergency tax measures, in the second – to improve the bankruptcy procedure and strengthen the insurance market. The “Rule of Law” block contains the conditions for the appointment of the head of the national anti-corruption bureau, the resumption of the work of the High Council of Justice and the High Qualifications Commission of Judges, the improvement of the procedure for selecting judges and legislation in the field of combating money laundering, including in terms of beneficial ownership, as well as the development and implementation of law enforcement sector reform.

In the structural reform section, there is a reform of customs administration, an improvement in the selection process for independent members of the supervisory boards and boards of large state-owned enterprises, as well as an action plan to deregulate and improve the business climate (to be ready by February) and gradually bring the public procurement system into line with EU legislation . In Energetika, on the other hand, we are talking about improving energy efficiency and preparing in the second quarter an action plan for the restoration of energy infrastructure with reference to the goals of the “green transition”, by the end of the year progress should also be made in the implementation of the roadmap for integrating the electricity market with the European one.

It should be noted that the reforms ideologically proposed by the EU to Ukraine are quite close to those economic and anti-corruption initiatives that the EU sought from the authorities of the Russian Federation in 2008-2014 – then, we recall, the harmonization of legislation and state regulation in the Russian Federation with European standards was linked to the discussion of a “single economic space from Vladivostok to Lisbon”, including the possibility of a visa-free regime with the European Union (“Partnership for Modernization”, see “Kommersant” dated June 9, 2011). At the expense of the funds allocated for this (including through the European Bank for Reconstruction and Development), several ministerial programs were implemented (such as the program for improving the financial literacy of the population of the Russian Ministry of Finance). However, the reforms were partly compromised by corruption scandals (see, for example, “Kommersant” dated April 2, 2011), and after the annexation of Crimea by the Russian Federation in 2014, they were de facto curtailed (the EBRD then abandoned new projects in Russia). Moscow has made a choice in favor of an alternative project of a single economic space in the format of the EAEU.

Tatyana Edovina, Oleg Sapozhkov