Is there life after the end of international aid? How to save Ukraine's economy from collapse
Four pain points and four ways to "treat" them
Anyone who realistically assesses the current financial and economic landscape against the backdrop of today’s political news understands that the current relative stability of Ukraine's currency is merely a temporary illusion, largely sustained by external support. However, it’s essential to recognize that sooner or later, Ukraine will inevitably face extraordinarily serious economic challenges on its own. Whether this occurs after the end of the war or sooner remains difficult to predict. But it is worth preparing just now. In particular, Ukraine will need to achieve a positive trade balance of no less than $10-15 billion annually, address external debt obligations of around $5-10 billion annually, support the hryvnia exchange rate through National Bank interventions ($3-5 billion per year), and replenish its reserves – another $3-4 billion annually to maintain reserves at three months’ import coverage.
How to prepare now to overcome these challenges and what should be taken into account first of all, ex-head of the NBU Kyrylo Shevchenko analyzed especially for Mind.
If we pragmatically assess all risks right now, promptly begin revising our economic strategy, and take decisive actions to stabilize the currency market, we can lay a solid foundation for achieving self-sustained economic stability.
What needs to be regulated?
Inevitable depletion of foreign reserves. In the first nine months of 2024, the National Bank of Ukraine (NBU) spent $23.4 billion on currency interventions, 22% more than the same period last year ($19.3 billion). In October alone, daily interventions averaged $150 million, compared to $100 million per day in April-May.
After the cessation of external financial support, the deficit in foreign currency reserves could become critical, leading to a sharp devaluation of the hryvnia and triggering an inflationary shock.
Massive trade deficit. According to the IMF, Ukraine’s structural balance of payments deficit is around $40 billion annually, much of which is due to a trade deficit. By the third quarter of 2024, the trade deficit in goods reached $22.2 billion, a 2% increase over last year.
Without strong incentives to increase exports and substitute imports with local goods, the chronic currency deficit will continue to grow, creating devaluation pressures.
Rising currency panic among the population. Public expectations around the hryvnia's value have become unmanageable due to instability. In the first three quarters of 2024, net foreign currency purchases by individuals increased 3.5 times from last year – from -$2.4 billion to -$8.2 billion. The total cash currency held by the population grew by $10.3 billion (+40%) compared to last year.
Without measures to restore confidence in the hryvnia, uncontrolled demand for foreign currency will continue, placing additional pressure on the currency market and NBU reserves.
High debt servicing costs. Payments on investment income and debt obligations (excluding government debt) continue to exert significant pressure on foreign reserves. In the first nine months of 2024, $5.8 billion was spent on investment payouts, a 7.3% increase compared to the same period in 2023 ($5.4 billion). Net debt repayments totaled $0.5 billion, marking a 185.7% increase from the previous year ($0.2 billion in the first nine months of 2023).
Without a significant increase in export revenues, such expenses will place an unbearable strain on foreign currency reserves, leaving Ukraine in an extremely vulnerable position.
Urgent measures to prevent financial crisis
Ukraine must take several bold steps.
Aggressive development of export potential. To secure the necessary currency inflows, Ukraine should invest in export-oriented industries such as agriculture, metallurgy, and IT.
Without such investments, the currency crisis will deepen if international aid stops. A step-by-step national strategy is needed to attract and protect investments in export-focused sectors.
Reducing dependency on imports. Cutting import costs for energy and other critical goods is a strategic necessity.
Unless Ukraine decreases its reliance on imports and develops its renewable and non-renewable energy resources, the trade deficit will continue to worsen.
Reforming сurrency policy to restore confidence in the hryvnia. The NBU must revise its currency policy to strengthen control over the currency market and implement mechanisms to boost confidence in the hryvnia.
Otherwise, the currency market risks facing renewed panic and massive capital outflows.
The attraction of foreign investments. Perhaps it should be the main factor in developing economic potential.
After the war, Ukraine will need substantial support to rebuild its economy, which many expect to come in the form of foreign investments. However, practical business realities reveal significant barriers that could prevent an automatic influx of capital.
Key structural issues, including rule of law, democratic institutions, and investment protection, must be addressed.
What to focus on?
Completing judicial reforms will be crucial. Ukraine’s low scores in legal system rankings, like the World Justice Project’s Rule of Law Index, highlight systemic issues with corruption and legal uncertainty. For foreign investors, this means elevated risks in contract enforcement and protection of rights, greatly reducing the country's appeal.
Another obstacle to investment could be the concentration of power and the increase in state control, as highlighted by Freedom House studies. These factors may deter foreign investors, as they create a risk of unpredictable political decisions that could hinder business operations or even threaten the security of investments.
Looking at the issues of attracting investment from this perspective, it becomes clear that relying on an automatic influx of foreign capital after the war is unrealistic. Ukraine needs to implement significant reforms in the legal system, strengthen democratic institutions, and ensure reliable protection of investments.
Ending foreign aid may not seem imminent, but the rapidly changing global political landscape suggests that delaying economic reforms and relying on post-war recovery as an automatic fix is a highly risky strategy.
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