Ukraine surprises the world not only with its stubborn resistance in the war against Russia. It is no less surprising that the state remained manageable and stable during the full-scale war.
Governmental and banking systems work even during blackouts. Ukrainian trains get less later after rocket attacks than Deutsche Bahn after some snow.
This miracle has its own price.
According to the report of the Ministry of Finance of Ukraine, budget expenditures in 2022 amounted to UAH 2,704 billion ($75 billion), of which 38.6%, about $29 billion, was funded by partner states. In addition, EU and NATO states provide Ukraine with weapons and humanitarian aid. If we look at all the expenses, the West paid most of the Ukrainian costs.
Western financial and military assistance must continue for Kyiv to win the war. However, the European Union has put forward some conditions to Kyiv in 2023: they will transfer the funds only if reforms are carried out. The war is no longer perceived as a reason to slow down changes in Ukraine.
"European Pravda" has found out the conditions for €18 billion from the EU and what kind of aid Ukraine expects from the West.
No more unconditional aid
The full-scale war has changed the minds of Western donors for aid to Ukraine.
Kyiv is receiving weapons and ammunition, which it had requested for several years, and this flow does not stop now. Ukrainian partners hand over heavy, high-tech, and expensive military equipment (like the Patriot, worth about $1 billion per battery). It needed time to accomplish such decisions. The cost of weapons the Ukrainian army will receive from partners in 2023 may exceed $40 billion.
Financial assistance has also changed.
In the spring of 2022, the G7 countries decided on joint financial assistance for the Ukrainian economy. The USA and the EU promised to allocate $1.5 billion per month to cover the budget deficit. They agreed on no conditions for the funds to Kyiv. It helped save Ukraine and preserve the controllability of the Ukrainian economy.
However, the EU did not fulfill its political obligations due to internal issues. Ukraine received only €6 billion out of the promised €9 billion. The biggest share of this money was transferred only in late 2022. That's why Kyiv had to carry out emissions, undermining the hryvnia exchange rate.
The only part of the agreement that the Union fulfilled was funding without preconditions, which is unusual for macro-financial assistance.
Given last year's failures, the approval of a new package of €18 billion of macro-financial assistance for 2023 has become a matter of honour for Brussels. They reaches a compromise in late December.
However, a new issue showed up.
"The EU has started putting forward the conditions for the financial assistance" - several EuroPravda sources in the Ukrainian government complained in December.
Negotiations on the criteria for granting the 18 billion euro macrofinancial assistance lasted for several weeks and have already been completed, Deputy Prime Minister Olha Stefanishyna has confirmed to EuroPravda.
"The European Union needs assurance that Ukraine will properly use 18 billion euros. That's why the EU traditionally pays attention to the rule of law and anti-corruption. So these indicators are also on the list," explained Stefanishyna.
These criteria have always been the most difficult for Ukraine. The Deputy Prime Minister hopes that Ukraine will get the entire sum of €18 billion. "One of our main arguments (in negotiations with the European Commission) was that we need these funds for the country to survive," she explained, adding, however, that after the unsuccessful experience of 2022, it is impossible to exclude new problems. "But the European Commission also learned from this experience," added Olha Stefanishyna.
Most important is that Kyiv had to agree: the time of unconditional help is history.
The war was no longer perceived as an excuse for delaying structural reforms. This sounds logical: President Zelenskyy insists that Ukraine should move towards joining the EU even during the war. Therefore structural reforms should resume.
Reforms worth €15 billion
The details of the agreement have yet to be made public. "European Pravda" has restored the list of conditions from its own sources and conversations with representatives of the government of Ukraine. We also had the opportunity to see a draft memorandum of understanding, establishing indicators for providing funds to Ukraine.
The first tranche of €3 billion (two-month aid) will be unconditional. Kyiv expects to receive this money in January. The EU will transfer the remaining €15 billion only after fulfilling Ukraine's commitments.
The memorandum consists of 20 points, divided into four blocks: "Rule of law," "Energy," "Structural reforms and good governance," and "Macro-financial stability." Each item has a deadline. Ukraine is obliged:
– complete the selection of a new director of the NABU by the end of March; in the second quarter appoint him to the position;
– to approve the strategic plan for the comprehensive reform of the law enforcement sector by the end of September;
- to resume the work of the Supreme Council of Justice (SCJ) and the High Qualification Commission of Judges (HQCJ) based on the recommendations of the Ethics Council and the competition commission by the end of September;
– to change the system of selection of future judges according to the new methodology and with the participation of the reformed HQCJ by the end of 2023;
– to introduce an assessment of the effectiveness of SAP management;
– return the criminal liability for smuggling in significant amounts (decriminalised during Yanukovych's time);
- deregulate the licensing and permit system by the end of February; digitise the issuance of licenses by the end of the year;
- to keep "Medical Procurement of Ukraine" as the only national purchaser of medical equipment, medicines, and vaccines at the central level;
- to elect the supervisory board of "Naftogaz" by March;
- to launch the corporate restructuring of "Operator GTS of Ukraine" LLC by June.
The government underlines that most of the obligations coincide with Ukraine's obligations under the IMF memorandum. Also, the first three listed points correspond to Ukraine's obligations by obtaining EU candidate status.
It seems that the Ukrainian authorities understand the price, so the implementation of reforms from this list has already begun. For example, the government is now urgently selecting candidates for the Supervisory Board of Naftogaz, which ceased work in September 2021 due to Kyiv's violation of corporate procedures.
35 years without interest
The government makes clear that €18 billion are not for military expenses. "We have agreed with the EU, and we adhere to it, that their funds go to humanitarian needs, not on financing security and aid," Stefanishyna said. However, whatever the intended purpose, Ukraine receives this debt aid.
Some EU states, primarily Germany, wanted to allocate money to Ukraine as a grant, as the USA did last year. This idea did not find unanimous support. As a compromise, they agreed on extremely favourable conditions which guarantee that the loan of €18 billion will not put Ukraine in a "money pit."
First, the loan repayment period is due within 35 years. The EU has never lent money to Ukraine for such a long time. Last year's macro-financial assistance was for 25 years. It was usually about a 15-year term before the war.
Secondly, Ukraine will have to repay its debt not before 2033, according to EU Council. This is an unprecedentedly long grace period.
Moreover, it is not ruled out that the debt could be written off or the seized funds of the Russian Federation will repay it.
Thirdly, Ukraine will not pay interest and other loan services. The EU made a political decision to avoid the side effects of the "macrofin" for Kyiv. After all, even with preferential interest, debt service of €18 billion is expensive. For this, Brussels came up with the mechanism of "interest subsidy": the interest will be paid by EU countries instead of Ukraine.
The "interest subsidy" was already applied to Ukrainian loans in 2022, the Ministry of Finance has assured EuroPravda. However, in 2023, a new difference has been added to the conditions of the €18 billion loan: the subsidy is activated in case of reforms or, speaking in the language of the document, "in case of compliance with political prerequisites." The EU will check it each year.
Therefore, in case of cancelling some key reforms in the future, Ukraine risks losing the right to an interest-free loan. According to the memorandum, the EU should stop the "interest subsidy."
All this gives a high level of confidence that Ukraine will appropriately implement reforms from this list. After all, the price of their failure is exceptionally high.
Written by Sergiy Sydorenko
"European Pravda" editor