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War-torn Kyiv’s fiscal outlook ‘very uncertain’; EU weighs up sanctions on Russian LNG projects

War-torn Kyiv’s fiscal outlook ‘very uncertain’; EU weighs up sanctions on Russian LNG projects
Bloomberg
By Bloomberg
25 Apr 2024
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Ukraine’s finance chief said a $61bn US aid package helps cover budget gaps for this year, though the nation’s fiscal outlook for 2025 was ‘very uncertain’, given the duration of the war with Russia.

The European Union is discussing with member states proposals to sanction key Russian liquefied natural gas (LNG) projects and a ban on using EU ports to re-export supplies destined for third countries, as part of an effort to limit Moscow’s ability to generate revenue from fossil fuel.

Poland’s defence chief said the country was prepared to assist Ukraine in getting fighting-age men to return to the war-battered country after Kyiv tightened conscription rules.  

Ukraine budget ‘very uncertain’ in 2025, says finance chief


Ukraine’s finance chief said a $61-billion US aid package helps cover budget gaps for this year, though the nation’s fiscal outlook for 2025 was “very uncertain” given the duration of the war with Russia. 

Finance Minister Serhiy Marchenko said that $7.8-billion of the funding approved on Wednesday by US President Joe Biden would be earmarked for budget needs. But a spike in military spending and uncertainty over how long the war will last could trigger a widening gap for next year. 

“We see great financial constraint and stress because of additional military expenses,” Marchenko said in an interview on Bloomberg Television on Wednesday. 

Biden said assistance to Ukraine would begin to move within “hours” after he signed the package on Wednesday. But after six months of stalling over political infighting, dwindling supplies of ammunition and manpower have sapped Kyiv’s war effort and shifted the initiative to the Kremlin, which has made advances.  

“The situation is very dramatic and dangerous on the battlefield,” Marchenko said, citing the shortages.

European aid for Ukraine failed to fill the gap left by a delay in US support, underscoring the urgency of the US funding, according to the Kiel Institute. In January and February 2024, European countries allocated a total of about €6-billion in aid, almost all of it for the military, the institute said in the latest update to its Ukraine Support Tracker.

“The European aid in recent months is nowhere near enough to fill the gap left by the lack of US assistance, particularly in the area of ammunition and artillery shells,” the report said. The US aid package “is therefore crucial”.

The influx of US aid will offer an immediate boost to Ukraine’s budget, with funds earmarked for fiscal needs such as salaries for teachers, social and humanitarian expenses and the war-battered nation’s healthcare facilities, Marchenko said. The ministry had to increase defence spending by $4-billion in the first quarter, according to the minister.  

And while an expected additional budget gap for military needs this year can be covered with “domestic resources”, the 2025 outlook is murkier. Should the war continue at its current pace next year, Kyiv could run an “additional” deficit of as much as $12-billion, Marchenko said. 

As Russia ratchets up its attacks on Ukraine’s energy infrastructure, some 80% of the country’s thermal generation has been taken out over the last few months, Marchenko said. Ukraine is seeking further resources to rebuild and bring in technology to back the country ahead of next winter.  

EU weighs up sanctions on Russian LNG projects, transshipments


The European Union is discussing with member states proposals to sanction key Russian LNG projects and a ban on using EU ports to re-export supplies destined for third countries, as part of an effort to limit Moscow’s ability to generate revenue from fossil fuel.

The potential measures are being explored as part of the latest round of sanctions on Russia following its invasion of Ukraine. The goal would be to further hit Russia’s LNG supply chain and future revenues at projects like Arctic LNG 2, the UST Luga LNG terminal and the Murmansk plant, according to people familiar with the matter. The US has previously sanctioned some of those projects.

Under the plan, ports in EU member states would also be prohibited from importing Russian supplies that are then re-exported to third countries. But there wouldn’t be a ban on purchasing the fuel for use within the bloc.

The discussions are still at an early stage and some member states are sceptical of the proposals, according to the people, who declined to be named due to its sensitive nature. EU sanctions need the backing of all member states to be adopted. 

Other measures under discussion, in what would be the bloc’s 14th package of restrictions, are sanctions on more than a dozen companies that have continued to buy restricted goods from the bloc and supply them to Russia, according to a document seen by Bloomberg, as well as restrictions on Russian shadow fleet vessels as part of efforts to enforce the price cap on Russian oil. 

Poland ready to help Ukraine return conscription-age men home


Poland’s defence chief said the country was prepared to assist Ukraine in getting fighting-age men to return to the war-battered country after Kyiv tightened conscription rules. 

Defence Minister Wladyslaw Kosiniak-Kamysz cited a figure of 400,000 additional soldiers needed to press back Russia’s invasion in comments to Polsat news late Wednesday. Poland, which took in more than 1.5 million war refugees after war broke out in 2022, has an estimated 350,000 Ukrainian military-age men working in the country, according to the Rzeczpospolita newspaper. 

“For a long time we’ve signalled to the Ukrainian side that we’re ready to help get those obliged to serve to return to Ukraine,” the minister said. “But it rather depends on Ukraine which type of help it needs.”

Ukrainian President Volodymyr Zelensky approved legislation this month to lower the conscription age to 25 from 27 and tighten rules in response to a mounting shortage of manpower on the front. The new rules restrict registration — and make it difficult for Ukrainian men abroad to renew their passports. 

Kosiniak-Kamysz responded to long lines forming at the Ukrainian Embassy in Warsaw as many sought to renew their passports ahead of a deadline. Ukrainian authorities suspended issuing documents from diplomatic missions for citizens of military age this week. 

“Staying abroad does not relieve a citizen of his or her duties to the Homeland,” Ukrainian Foreign Minister Dmytro Kuleba said on X on Tuesday. “That is why yesterday I ordered measures to restore fair attitudes toward men of conscription age in Ukraine and abroad. This will be fair.”  

Ukraine cuts interest rate again after securing vital US aid


Ukraine’s central bank lowered borrowing costs more than expected as inflation continued to slow and the authorities in Kyiv hailed billions of dollars in foreign aid to help counter Russia’s invasion. 

The National Bank of Ukraine cut the key policy rate by a full percentage point to 13.5% on Thursday. One analyst in a Bloomberg survey expected the move, while most economists expected a half-point reduction. 

“The continuation of international financial support and measures to strengthen the resilience of public finances will secure further macro-financial stability necessary for sustainable economic recovery,” the central bank said in a statement.

Policymakers unexpectedly resumed easing last month, highlighting progress in taming price growth and “positive developments” in prospects for foreign aid after the war entered its third year. Biden signed off on a package that included $61-billion in aid to Ukraine on Wednesday. 

The government is likely to receive a total of $38-billion in financial assistance this year, boosting Ukraine’s international reserves to $43.4-billion by year-end, compared with an earlier forecast of $40.4-billion, according to the central bank. Officials should be able to ease capital controls further in the coming weeks, the bank said.   

Policymakers cut their forecast for consumer inflation to 8.2% from 8.6% for this year, while they also downgraded their estimate for economic growth to 3% from 3.6% due to Russian attacks on the country’s energy facilities. DM

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