Why Ukraine needs debt forgiveness

Photo: Kamil Zajaczkowski / Shutterstock

The decision came just in time for the September repayment deadline. However, debt in the hands of those creditors is only a portion of Ukraine’s burden. A significant part – more than one-third of public debt – is in the hands of international financial institutions, such as the International Monetary Fund and the World Bank. To this date, they have not stated whether they would agree to defer repayments. Private investors have also yet to follow these moves and, for now, their share of debt remains to be repaid on time. Moreover, it is important to remember that for private markets, any suspension, even if voluntary, is recognised as a default. Soon after the government’s announcement, Ukraine’s credit score was downgraded by Fitch Ratings from CCC to C. This means that Ukraine may have a problem with future access to capital. 

Instead of temporary and long-delayed steps, we need solutions that fully address the problem. The people of Ukraine have stood up against the imperialist oppressor and continue to fight a heroic war for dignity and sovereignty. They have been bearing the enormous cost of such resistance, both in human and economic terms. Now Ukrainian civil society groups and trade unions are calling for debt forgiveness; any show of solidarity should not be just an empty slogan.

Debt burden 

Even before the Russian invasion the country was succumbing to a massive foreign debt burden. As of the end of 2020, the gross external debt of Ukraine amounted to almost 130 billion US dollars, of which 57 billion was owned by the general government and central bank. However, the real problem for the Ukrainian economy was not the amount but the costs of debt servicing. This is mainly a result of the terms imposed by creditors for the postponement and restructuring of the Ukrainian debt in 2015, when the country faced a huge political crisis caused by the annexation of Crimea by the Russian Federation and the declarations of independence by the Moscow-backed Donetsk and Luhansk People’s Republics. As a consequence, Ukraine had to allocate around ten to 15 per cent of gross national income annually to debt servicing.

This year alone, debt service costs were expected to be approximately 6.2 billion dollars. This is a lot even for a country not at war, but the Russian invasion has made it virtually unattainable. It is predicted that Ukraine’s economy will shrink by almost half in 2022 as a result of the ongoing war. At the same time, the war caused a significant drop in budget revenues. Depending on the sources, they are now between 15 and 25 per cent of the normal level in peacetime. As a result, Ukraine’s finance ministry assesses that the country’s fiscal gap is five billion dollars a month. Some argue, however, that the financing needs are even higher. Oleg Ustenko, an economic adviser to Ukraine’s President Volodymyr Zelenskyy, suggested that Ukraine needs an extra four billion dollars a month in addition to the finance ministry assessments. And while Ukrainian allies, be they European or American, pour money into helping Ukraine in various forms, these funds should not quickly flow out of the country to repay the creditors, sometimes from the very same countries these funds initially came from. We must not deceive ourselves. Sending money back and forth is not, after all, the real financial assistance that Ukraine needs at the moment.

In the face of the Russian invasion, Ukraine must provide military equipment and food supplies for the army and territorial defence units. Resources are needed to protect the civilian population and provide housing for the displaced. It is also necessary to maintain the regular activities of the state, such as the payment of civil servants’ salaries or pensions. Any repayment of debt takes money away from where it is so needed at the moment. This is why the decision to suspend debt service is crucial right now. And while we welcome the decision by the Group of Creditors of Ukraine, we need international financial institutions and private creditors to follow.

Future rebuilding  

We also need to recognise that debt suspension is only a first step. As the war rages on, the damage experienced, and with it the cost of future reconstruction, increases. As reported by Sotsialniy Rukh, the Russian military “destroys sites and enterprises of strategic and critical infrastructure, transportation arteries and the economic potential of our country”. Every day, the media shows us new images of towns shattered by Russian bombardment. As of June 13th, the direct damages to real estate and infrastructure exceeded 95 billion dollars. Back then, Ukraine’s reconstruction needs already amounted to 165 billion. Now the figures are much higher.

Taking into account that we do not know when the Russian invasion will end, it is impossible to say what the final post-war reconstruction cost will be. However, given the scale of the destruction that the war has caused in six months, we can expect it to be astronomical. The post-war reconstruction will require a propitious economic environment, which can only be facilitated by debt cancellation. Otherwise, we can expect that Ukraine’s debt will hamper efforts to rebuild the country by eating up a large proportion of economic aid and blocking access to capital needed for large-scale investments. 

The debt restructuring alone will in all likelihood lead to a situation comparable to that in 2015, when the postponement of payments for some time led to higher costs of debt servicing soon after. If Ukraine is to rebuild, it cannot be held back at the same time by such a burden. Without rapid reconstruction, in turn, Ukrainians will be doomed to poverty and a standard of living well below that before the war. And even back then Ukraine was considered the poorest country in Europe. 

German past sets direction

At such difficult moments, it is useful to look to history for examples to guide us. Contrary to the impression that neoliberal economists sometimes try to create, far-reaching debt forgiveness was not such a rarity in the past. For example, after 1989, half of Poland’s communist-era debt was forgiven. But the comparison that seems even more relevant here is the situation in post-war Germany.

In 1953, West Germany was a completely different country than its successor today. High indebtedness – a legacy of reparations following the First World War and reconstruction following the end of the Second World War – was hindering economic development. As the country was viewed suspiciously by creditors, it also had troubles with access to capital. Huge investments were still needed to rebuild state infrastructure after the war, and foreign currency to pay back foreign-owned debts was limited.

And then on February 27th 1953, the London Debt Accords were signed. The governments of the United States, the United Kingdom, France, Canada and 16 other countries came together and agreed on the cancellation of half of West Germany’s debt. In the following years, they were joined by the governments of Egypt, Argentina, Belgian Congo, Cambodia, Cameroon, New Guinea and the Federation of Rhodesia and Nyasaland, making the London Debt Accords at the time a unique example of debt relief on such a scale.

This global effort bore outstanding results. In the years following the debt relief, West Germany experienced the highest growth rate in Europe – known as the Wirtschaftswunder or “The Miracle on the Rhine”. Part of this success should be attributed to the debt relief programme. According to economists Galofré-Vilà, Meissner, McKee and Stuckler, the London Debt Accords “created fiscal space for public investment and social spending, restored the full convertibility of the Deutsche Mark, and stabilised inflation”. As another economist Rombeck-Jaschinski points out, the German economy benefitted immensely from the resulting strengthening of German borrowing capacity and capital flows at low interest rates. Although debt relief was not the only component of the West German miracle, economic development of this scale would not have been possible without it.

Ukraine’s stability is our stability 

There is, of course, a strong moral argument for Ukrainian debt forgiveness. A nation that resists brutal imperialist aggression with such sacrifice should receive our support. However, to those who call themselves “pragmatists” and believe that only hard interests can justify such steps in relations between states, we have an important message: supporting Ukraine, including the cancellation of its debt, is a step that is most definitely also beneficial for us.

In times of economic and political interconnectedness, the question of Ukraine’s stability is also a question of the stability of our economies. Already in the first days of the invasion, we saw how strongly events there affect the economic situation across the region. An excellent illustration of this is the fact that the currencies of most European countries experienced sharp drops, and the euro has hit parity with the dollar, falling to its lowest level in 20 years. But, as Ukraine is one of the top suppliers of some grains and other agriproducts and as many as 400 million people worldwide rely on Ukrainian food exports, its impact stretches far beyond Europe. Now, with the Russian invasion and blockade of ports, we are faced with the danger of global food shortages. While the resumption of deliveries is crucial in the short term, knowing the importance of Ukraine’s role as the world’s granary, we need to work on making its market stable and reliable in the long term. Debt relief will help stabilise the economy by giving it financial breathing space. And the key truth here is that Ukraine’s stability will benefit us and our economies. This is what creditors saw in 1953. This is what some also need to see now.

As the example of West Germany shows, for post-war reconstruction to be successful, it should go hand in hand with debt relief. That is why writing off Ukraine’s foreign debt is not an abstract or radical idea but a realistic way to help our Eastern neighbour. As the political party Razem, we have stood behind this recommendation since day one. We have organised meetings with other left-wing political parties, such as one with our partners from the region in Warsaw in March or one with our allies from France, Switzerland, Denmark and Finland in Przemyśl in May. We have also been writing about Ukraine’s debt in the international press. We have urged our partners to take up relevant resolutions in their parliaments, like those discussed in Portugal and the US. Now that we see some change in thinking about the issue, we have no doubt that things are moving in the right direction. There is no other option but for the Ukrainian debt to be cancelled in the end. We owe this to the people of Ukraine.

Editor’s note: Just as the text was being prepared for print, another agreement was announced that Ukraine’s overseas debt of around $20 billion would be frozen for a period of two years.

Dorota Kolarska holds a BA in philosophy, politics and economics from the University of Oxford and is about to graduate from the IMESS programme at the UCL School of Slavonic and Eastern European Studies. She was also a Transatlantic Future Leader Forum scholar at the US Congress. She is a member of the International Office of the Polish political party Razem.

Magdalena Milenkovska holds an MA in European studies and works as an analyst in a Berlin based think-tank, the European Stability Initiative. Her research focuses on the rule of law and EU migration and enlargement policy. She is also a member of the Razem International Office.

debt relief, Ukraine, War