Ukrainian financier tells of serious challenges facing not only Ukraine, but the whole world

4 July, 11:38 PM
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Chairman of the European Council Charles Michel, US President Joe Biden, and Head of the IMF Kristalina Georgieva symbolize Ukraine's main donors - the EU, the U.S. and IMF (Photo:NV collage)

Chairman of the European Council Charles Michel, US President Joe Biden, and Head of the IMF Kristalina Georgieva symbolize Ukraine's main donors - the EU, the U.S. and IMF (Photo:NV collage)

The war in Ukraine has become long-term, which creates a number of serious challenges not only for Ukraine but also for its global allies and partners, Vladyslav Rashkovan, an Alternative Executive Director at the International Monetary Fund, told NV in an interview on July 4.

Rashkovan spoke about the impact of Russian aggression on the world economy, and what amounts of international aid Ukraine can count on in such conditions. He also called the payment of taxes by Ukrainians in wartime a manifestation of patriotism.

NV: How does the war in Ukraine affect the world, what risks does it create at the global scale, and how are these risks already foreseen in our situation, in particular in the situation with international aid?

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Rashkovan: The first thing we need to understand is that the number of imbalances and risks in the world is growing. The war in Ukraine is problem No. 1, but, unfortunately, it's not the only problem in the world. And we must learn global empathy so that while calling for our support, we also recognize the problems that concern our allies.

The war has become an additional negative factor for other elements of the cocktail of crises in the world, including the inflationary crisis. It was initiated by the situation in the era of the pandemic when the central banks of the United States and European countries printed serious amounts of money to cover the needs of citizens during forced quarantines.

However, the current attempts to balance the situation with inflation are already superimposed on the risks created by the war. Prices for energy resources and food are rising. Central banks are raising interest rates, so servicing and obtaining loans is becoming an expensive luxury. Problems in the markets of successful countries are followed by threats of possible famine in poor countries, as the problems of grain supply from Ukraine have not yet been resolved.

All this leads to the fact that the world, which has been on the way to reducing poverty for 20 years, will begin to get poorer again. The IMF expects that, in particular, because of the war in Ukraine, there will be 100 million more poor people in the world. As a result, Europe will face a new wave of migrants from Africa.

I'm sure that Russian propaganda will use this situation and people's discontent to shake up the situation in the developed and developing countries, including with the aim of reducing their support for Ukraine.

This is important for us to understand: politicians in Europe and the United States, who are busy solving their economic problems, will no longer be able to pay so much attention to Ukraine. Rising prices can become a source of social protests, which can be directed both against Ukrainian refugees and aid to Ukraine, as well as against the governments of countries that are helping Ukraine today.

In the new round of elections, this may bring Ukraine's opponents to power. The situation with the coronavirus has not yet been fully resolved in the world and it will become an additional factor in the complexity of the situation in the autumn-winter period.

All this should prompt Ukraine to move much faster on the path of reforms, attracting aid and increasing its influence on the world. We need the right decisions and the fastest possible movement towards the EU.

NV: Today, achieving financial stability is one of the most urgent tasks of Ukraine. Ukraine needs about $5 billion a month to cover its budget needs. We received $1.3 billion from the United States, money is coming from EU countries. Based on your autumn forecast, to what extent will the countries of the world be able to help Ukraine close its budget imbalances?

Rashkovan: A deficit arises from the difference between income and expenditure. Incomes in Ukraine have decreased significantly, but it is also important to understand why the decrease is so high. The first factor is the decrease in economic activity in the country due to the war, while costs have increased: for the war, for supporting internally displaced people, while foreign markets are closed to us due to the war.

But there is a second factor why profits have declined. At some point, parliament approved tax cuts. And tax cuts seem to be the right move to reduce the burden on business. However, a more correct model would be: "Who can – pay taxes at the former rate, and if you can't, we won't fine you yet."

Ukrainians are quite responsible citizens. They help the army, the state, pay taxes and thereby help the country survive in difficult times.

By reducing taxes, we also reduced economic activity in the country. Raising taxes during a war is unpleasant, but it is inevitable.

Those who pay taxes despite the legal possibility not to do so have really increased. Starting from March, Ukrainian business has been gradually adapting to the war.

While at the beginning of the war 86% of Ukrainian small- and medium-sized enterprises claimed that they had stopped their business, now this figure is 47%. That's still a lot. But after lowering taxes, the state did not collect anything from those who returned to work.

The situation with taxes will still have to be fixed. This will help us to slightly reduce the amount of $5 billion we hope to receive from our allies.

NV: The president has recently signed the law on import taxation. Is this the right move?

Rashkovan: This is correct and very timely, because it would be difficult to continue to exist in such a model, especially since the National Bank of Ukraine (NBU) had to cover the difference all the time. The NBU has already printed almost $8 billion in (hryvnias) to cover the deficit.

This leads to an increase in inflation, but also to the fact that the NBU's independence, which we have been building for so long, will slowly crumble. If the government gets into the habit of constantly turning to the NBU, and the NBU keeps printing money in response, we will return to what we've been fighting so hard since 2014.

Tax is a good thing, we're stepping up and showing that we're covering some of that $5 billion difference ourselves. But we will not cover it completely, so we really need international partners.

The other day, Ukraine received $1.3 billion from the United States, EUR 1 billion from Germany, $500 million from Japan, a loan from the World Bank, and this month, June, is our most record-breaking month so far in terms of receiving money.

This is not a miracle, but the result of the work of a group of people headed by the prime minister of Ukraine.

The work of finding money for Ukraine is quite difficult. After all, gas prices are also rising for our partners, and they also need to think about how to allocate money from the state budget for subsidies, for example, for industry, so we will compete more and more for resources against the local problems of the donor countries themselves.

By raising this money, we are also actively testing the bureaucracy in these countries. The IMF provided the first support to Ukraine on March 9, a week after the phone talks between the president of Ukraine and the IMF head. People who know how the IMF works also know that it usually takes 15 weeks between such a call and a response. The issue of loans is resolved faster. Grants take longer to arrive because countries often need to go through their parliaments to approve budget changes for grants.

NV: You are talking about the equivalent of $8 billion, which the National Bank of Ukraine has already printed. How will this affect the financial stability of the country? Is there a point at which the printing press needs to be stopped?

Rashkovan: Survival in Ukraine is a priority today. Salaries should be paid to the army, to civilians. If there are no resources, the National Bank has to print money. At the moment, this is an acceptable risk that the National Bank is bearing. But the sooner we can cover the budget deficit with other resources, the better not only for the NBU, but also for the entire economy.

NV: What will happen to the hryvnia exchange rate under these conditions, or can we predict it for several months?

Rashkovan: I once said that reforms of the banking sector will be successful only when people stop asking this question. I understand people. The exchange rate is a mirror of the economy, and this is important to remember. Therefore, the National Bank did everything possible to maintain the rate, we have had five months of war and the rate is more or less normal. I think everything will be fine.

NV: We see the great work of the Ukrainian state and the promises of our international partners to support Ukraine until the war ends. But to what extent are these promises backed up by long-term motivation and the ability to support us?

Rashkovan: It's always a two-way street. The figure of $5 billion that Ukraine needs monthly is large. The war began in late February. Throughout March, the Western world was sure that Ukraine would not survive, and Russia had to be appeased a bit so that there would be no genocide.

Everyone was afraid that the money going to Ukraine could end up in the hands of, let's say, an illegitimate government. However, almost immediately the government and other key institutions showed that they were functioning, the state was working, the banking system was working, payments were being transferred, the electronic document management system was working, documents were being signed. All this looked like a miracle in the eyes of Western partners.

However, this was not a miracle – it was the coordinated work of thousands of people and dozens of institutions. This was also the nail in the coffin of another Russian narrative that our institutions are very weak – they’re nothing of the kind.

So, when it became clear that Ukraine had survived and, moreover, had a good chance to win, they began to support us, and then the question arose – how much assistance money is needed?

In the second half of April, during the Spring Meeting in Washington, the IMF head came out publicly with the figure of $5 billion in aid to Ukraine, and the world soon accepted this figure.

In May, we tested the international bureaucracy. From where, for example, can Canada give us money? The government must address the parliament, and the parliament must vote. And it's the same in every country, including the United States, where President (Joe) Biden also had to go to Congress. It all took time, so we did not receive enough money in May, the difference was covered by the National Bank.

We are now in June and the international assistance machine is kicking into gear. We will get money from the European Union – up to EUR 9 billion, $7.5 billion has to come from the United States, we received about $500 million from the World Bank. I think that an IMF program will also take place at some point.

However, this is a two-way street. The Ukrainian side must show it’s pursuing rational policies. We are moving to the EU, and we have to make many decisions on this path. We need to show that we are carrying out the proper reforms and want to move quickly. The speed of this path depends on us. But I'm sure that our Western partners will come to meet us. Moreover, they are already on their way.

NV: At many international platforms, including the current meeting in Lugano (Switzerland), Ukraine's international partners are already talking about the country's post-war revival, and Ukraine itself is preparing to present its rebuilding plan. But destruction takes place every day, and much needs to be rebuilt now, during the war. Where will the government find the resources for this?

Rashkovan: This is an important question, because it seems to me that we, including me, made a methodological mistake when talking about the periodization of the war. We thought like this: we have immediate needs, we have short-term needs, which are measured in a few months, we have a six-month process of rebuilding critical infrastructure, and the fourth process is a long-term reconstruction and modernization of the country, which will take at least five, and even up to 10 years – it is not known how many, because the war is not over yet.

I believe that was the wrong wording. Why? Because Ukraine lives in four different time dimensions at the same time. On the one hand, the war is not over yet, and we have urgent immediate needs, in some places we need social payments and support, somewhere else we need to rebuild people's houses in Irpin and Bucha, and in another place we need to repair the Zhytomyr highway and Chernihiv.

Therefore, while talking with Western politicians and businesses, I say that supporting us today is already reconstruction.

If we do not support the Ukrainian economy now, there will be nothing to rebuild. Business will not survive. People will leave the country, so our contribution now is already a contribution to long-term reconstruction – roads are needed right now. And here it is important to remember that time during a war runs very fast – we’re living in a different time dimension to the Western world. That is why we have to quickly and persistently learn how to convince our partners.

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