Ukraine Needs Debt Forgiveness Now

Moscow’s invasion has pushed Ukraine closer to defaulting on its foreign debt, imperiling its economy and any future reconstruction. It’s time Western governments canceled that debt.


A view of the ruined city of Rubizhne on July 12, 2022, amid the ongoing Russian invasion of Ukraine. (Olga Maltseva /AFP via Getty Images)

If it wasn’t bad enough that Ukraine has had to fend off an invading power the past five months, the country is now buckling under the weight of rising debt as its economy lies in tatters. And remarkably enough, the policy that could save the country from this problem — cancellation of its foreign debt — has still not gained much traction among the Western elite.

According to a recent report from Bloomberg, Ukrainian officials are mulling over restructuring their foreign debt as an upcoming payment of $1.4 billion in September looms. That figure was based on Bloomberg’s calculations, while Ukrainian economist Borys Kushniruk has put the figure at more than $2 billion.

Ukrainian officials have played down this fact in public, but the country’s ability to meet its financial obligations is in serious doubt, with its economy ravaged by Moscow’s invasion. The government has kept the lights on through a combination of foreign loans and grants, selling bonds, and printing money through its central bank, the National Bank of Ukraine (NBU), which has financed 39 percent of its war spending. But the cost of the war effort, along with Russian forces’ destruction of industry and infrastructure, the country’s loss of territory, and the displacement of 11 million Ukrainians and the erosion of the tax base it’s caused, have all put the country in an increasingly precarious financial situation.

The Ukrainian government has a budget shortfall of $5 billion every month, and its Ministry of Economy predicts its GDP will have dropped 40 percent for the second quarter of 2022, while its central bank expects GDP to drop by a third over the course of the year. The World Bank for its part predicts that last figure to be a massive 45 percent. Meanwhile, inflation is tipped to reach 20 percent by the close of 2022, and the NBU early last month issued an emergency interest rate hike of fifteen points to 25 percent, putting enormous pressure on the already put-upon average Ukrainian. Last week, Naftogaz, its state-owned oil and gas giant, signaled it may default on a Eurobond coupon payment on July 19, raising alarm bells for a possible wider government default down the line.

The government is running out of options for raising money needed to stave this off. The NBU has signaled its reluctance to keep printing cash, demand for the government’s war bonds has steadily fallen, and the foreign reserves it’s drawn on to plug the budget gap are being gradually depleted. And while Ukraine has received grants from the United States, the European Union (EU), Canada, and other supportive states, these have comprised a grand total of a little under $11 billion since the start of the war — not nearly enough to cover its budgetary needs. Even a recent $1.5 billion loan from the EU was halted for fear from some quarters that the bloc couldn’t weather Ukraine’s possible failure to repay.

Neither a debt restructure nor a default would be a good development for Ukraine. Its government has striven to meet its debt obligations on time since the start of the war and burnish its reputation as a responsible debtor, knowing it’ll rely on Western lending to finance the country’s reconstruction after the war, which is set to cost more than half a trillion dollars. Either of these scenarios would cause reputational harm for the country, close it off from access to lending markets, and lead to possible capital flight — that is, spooked investors pulling out of Ukraine’s economy — at the worst possible moment.

An obvious and fair solution is something that’s been widely advocated since the war began, even by business journals like Barron’s, but has yet to be taken up by Western officials: canceling Ukraine’s foreign debt.

Loans from bodies like the EU and the International Monetary Fund (IMF) — whose lines of credit often came on the condition of neoliberal reforms like raising the retirement age and cutting gas subsidies for households — played a large role in the country’s current budgetary problems, with debt servicing payments making up a whopping 8.5 percent of government spending by 2021. Ukrainian officials themselves have recognized the absurdity of the situation.

“On the one hand, we receive grants from our allies; on the other hand, we continue to pay off debts that are in private hands. This is not entirely fair,” presidential economic advisor Oleh Ustenko recently said.

The fact that Western governments have pushed the Ukrainian government to fight on instead of come to a negotiated settlement to end the war, and in one case even helped scuttle talks that might have ended the war months ago, adds an extra moral imperative for Western governments to forgive the country’s debt.

Yet there seems to be little momentum to do it. In May, the US House passed the Ukraine Comprehensive Debt Payment Relief Act, which would suspend Ukraine’s debt payments and direct US officials to coordinate debt relief by private and government lenders, but it’s been stuck in the Senate Foreign Relations Committee ever since.

All of this stands in marked contrast to the way these states have poured billions of dollars of weapons into Ukraine. While Washington and other governments could only manage to cobble together $11 billion in grants for the country, military aid has, by one count, totaled $37 billion over the course of the war, and the military support passed just by the US Congress in May alone was nearly double the total value of those grants over the last five months. And unlike some of the proposed financial aid, that military assistance hasn’t come with any strings attached, with EU officials now openly regretting not tracking the weapons transfers, given evidence that arms have already been trafficked to criminal groups elsewhere in Europe.

Whatever one thinks more generally about the war, it’s beyond perverse for Western governments to fuel Ukraine in fighting an indefinite war while quietly allowing foreign creditors to use that same war effort to pick the country’s pockets. Debt cancellation is an uncomplicated as well as morally and politically correct policy that would make a world of difference to the impoverished and now war-torn country. Anyone urging solidarity with Ukraine should make it a central demand of their elected representatives.