Ukraine: international relations: US signs off on further aid, August 2022
In early August the US authorities signed off on large packages of military and fiscal aid to Ukraine, worth US$5.5bn in total. This is the latest funding drawn from the US$40bn sum agreed by the US Congress in May.
The security assistance element, worth US$1bn, provides significant quantities of munitions and equipment, ahead of a planned Ukrainian counter-offensive in the strategically important south-eastern region of Kherson. This is the largest such drawdown of military aid under US presidential authority so far. In particular, the US will supply ammunition for the modern surface-to-air systems (NASAMS) and mobile long-range rocket systems (HIMARS), the deployment of which in recent weeks has produced some success for Ukrainian forces in destroying ammunition dumps, control-and-command posts, and rail links in Russian-occupied areas, so making it difficult for amassed Russian artillery to sustain a high intensity of fire. This takes to US$11.8bn the total of US military assistance to Ukraine since 2014, US$9.8bn released during the Biden presidency.
The other, larger part of the latest US funding, of US$4.5bn, takes the form of direct budget assistance, and is designed to support Ukraine’s social, educational and health facilities and staff. Of this, US$3bn is to be disbursed in August. With this, total US budget support since the Russian invasion of late February rises to US$8.5bn.
Since the invasion, the strain of Ukraine’s public finances has increased considerably, as government expenditure rose sharply while revenue streams weakened, producing a monthly spending gap of US$3bn-5bn. Forecasts put the budget deficit for this year at around 25% of much-reduced GDP, up from around 3.5% in 2021. As some promised external financing was initially slow to arrive, the Ukrainian authorities resorted to printing money to pay their bills, which led to complications in the management of exchange-rate policy and the depletion of reserves. Since June, however, a greater share of the budget deficit has been covered using external macro-financial assistance, according to the National Bank of Ukraine (NBU, the Central Bank). Moreover, following a deal for a two-year delay debt-service payments on loans from official creditors, in August Ukraine’s Ministry of Finance announced a similar agreement has been reached with Ukraine’s commercial Eurobond holders. In the short term, these developments will ease pressure on Ukraine's budget.
As it approaches its sixth month, the current, most violent phase of Ukraine’s long-running conflict with Russia has turned into a war of military and economic attrition. In this light, US aid appears designed to allow Ukraine to prosecute the next, offensive phase of the war, while helping to prevent a destabilisation of Ukraine’s public finances, which is the key immediate economic risk to the continuation of the country’s military efforts.
With Russia reported to have been sending troops from Donbas to Kherson in anticipation of a Ukrainian assault—so that up to 60% of Russia’s remaining forces in Ukraine are now stationed there, according to Novaya Gazeta, a Russian newspaper—the weight of the conflict seems to have shifted again. If Ukraine is able to make military gains here, or to take advantage of the relative depletion of Russian troops in the Donbas, then real negotiations between the two sides could be brought forward, especially if the crisis in the sanctions-hit Russian economy deepens alongside. If Ukraine fails to do so in August and September, however, then a more drawn-out conflict seems more likely.
The security assistance element, worth US$1bn, provides significant quantities of munitions and equipment, ahead of a planned Ukrainian counter-offensive in the strategically important south-eastern region of Kherson. This is the largest such drawdown of military aid under US presidential authority so far. In particular, the US will supply ammunition for the modern surface-to-air systems (NASAMS) and mobile long-range rocket systems (HIMARS), the deployment of which in recent weeks has produced some success for Ukrainian forces in destroying ammunition dumps, control-and-command posts, and rail links in Russian-occupied areas, so making it difficult for amassed Russian artillery to sustain a high intensity of fire. This takes to US$11.8bn the total of US military assistance to Ukraine since 2014, US$9.8bn released during the Biden presidency.
The other, larger part of the latest US funding, of US$4.5bn, takes the form of direct budget assistance, and is designed to support Ukraine’s social, educational and health facilities and staff. Of this, US$3bn is to be disbursed in August. With this, total US budget support since the Russian invasion of late February rises to US$8.5bn.
Since the invasion, the strain of Ukraine’s public finances has increased considerably, as government expenditure rose sharply while revenue streams weakened, producing a monthly spending gap of US$3bn-5bn. Forecasts put the budget deficit for this year at around 25% of much-reduced GDP, up from around 3.5% in 2021. As some promised external financing was initially slow to arrive, the Ukrainian authorities resorted to printing money to pay their bills, which led to complications in the management of exchange-rate policy and the depletion of reserves. Since June, however, a greater share of the budget deficit has been covered using external macro-financial assistance, according to the National Bank of Ukraine (NBU, the Central Bank). Moreover, following a deal for a two-year delay debt-service payments on loans from official creditors, in August Ukraine’s Ministry of Finance announced a similar agreement has been reached with Ukraine’s commercial Eurobond holders. In the short term, these developments will ease pressure on Ukraine's budget.
As it approaches its sixth month, the current, most violent phase of Ukraine’s long-running conflict with Russia has turned into a war of military and economic attrition. In this light, US aid appears designed to allow Ukraine to prosecute the next, offensive phase of the war, while helping to prevent a destabilisation of Ukraine’s public finances, which is the key immediate economic risk to the continuation of the country’s military efforts.
With Russia reported to have been sending troops from Donbas to Kherson in anticipation of a Ukrainian assault—so that up to 60% of Russia’s remaining forces in Ukraine are now stationed there, according to Novaya Gazeta, a Russian newspaper—the weight of the conflict seems to have shifted again. If Ukraine is able to make military gains here, or to take advantage of the relative depletion of Russian troops in the Donbas, then real negotiations between the two sides could be brought forward, especially if the crisis in the sanctions-hit Russian economy deepens alongside. If Ukraine fails to do so in August and September, however, then a more drawn-out conflict seems more likely.
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