There Is No Time to Spare: Multilateral and Bilateral Economic Support to Ukraine
March 8, 2022
Russia’s unprovoked full-scale invasion of Ukraine on February 24, 2022, is leaving behind a trail of economic destruction and human displacement at levels not experienced in recent European history. It is possible that this war may trigger Europe’s largest refugee crisis of this century. More than 2 million people have fled Ukraine to neighboring countries over the past week. Another 4 million Ukrainians could migrate by July 2022 while 6.7 million could be internally displaced, according to some conservative estimates.
Before the war broke out, the Ukrainian government already faced a projected budget deficit of 3.5 percent of GDP for 2022. It must now pay for budgetary items it never intended to spend, increasing wages for the military, buying weapons, and providing unemployment insurance in an economy that has ground to a halt. Essential public services such as health, potable water, internet access, and electricity will need to keep running. Yet, as the war continues and escalates, these will become more difficult to deliver.
Donor countries and multilateral organizations have rapidly mobilized, extending economic support to President Zelensky’s government. The international community is providing both military and humanitarian aid to help Ukraine as well as neighboring countries. The United Nations and partners pledged $1.7 billion for humanitarian aid, while the European Commission has tabled a proposal for a new emergency macro-financial assistance (MFA) program for Ukraine of up to €1.2 billion. The World Bank announced it is preparing a $3 billion aid package, $350 million of which will be immediate funds. The International Monetary Fund (IMF) is exploring options to increase and expediate financial support to Ukraine, building on its November 2021 commitment of a $5 billion loan program. Given the desperate need for medical supplies, the director general of the World Health Organization (WHO) released $3.5 million from a contingency fund for emergencies. In the United States, the Biden administration announced that it would ask Congress for $10 billion in security, economic, and humanitarian aid for Ukraine and its neighbors. Earlier in February, the U.S. government announced a sovereign loan guarantee to Ukraine of up to $1 billion.
As the Russian invasion and bombing of urban areas intensifies, the civilian population will be increasingly targeted. This means that the country’s humanitarian and development needs will grow by the day. The longer the war persists, the higher the costs of Putin’s incursion into Ukraine will rise.
Given the dire situation that the country is facing, there is no time to spare. The international aid community needs to open its purse and use existing assistance tools and mechanisms to step up its efforts in Ukraine.
First, donors should support the viability and sustainability of Ukraine’s legitimate government by providing adequate financing. One of the most urgent actions is providing liquidity to the Zelensky government to pay salaries and pensions and to keep essential public services running. The World Bank, together with the European Bank for Reconstruction and Development (EBRD), could provide short-term liquidity support. The World Bank has approved $350 million immediately, while the EBRD is working with its partners to finance an emergency package for Ukraine and the surrounding region that could include liquidity support. These are good first steps.
On the U.S. side, this could include instruments such as a package of aid similar to that of the Freedom Support Act of 2002 for Afghanistan, granting U.S. bilateral agencies the authority to spend the money over a protracted period of time and with few strings attached. In fact, something similar has been done in the region with the FREEDOM Support Act of 1992, which outlined a list of humanitarian assistance activities for former Soviet Countries that Congress agreed on but gave flexibility beyond those activities. The Biden administration could also consider tapping into the U.S. Treasury Exchange Stabilization Fund to act as bridge loans for international financial institutions’ credit tranches. The United States could also revisit the total amount of its sovereign loan guarantee to Ukraine in the coming weeks, provided the legitimate Zelensky government stays in power.
Second, donors should facilitate ways to get cash directly in the hands of ordinary Ukrainians. An idea put forward by Simon Johnson, former chief economist at the IMF, and Oleg Ustenko, economic advisor to Zelensky, is to use the frozen Russian exchange reserve and oligarchs' assets that could amount to $300 billion to fund cash transfers to Ukrainian citizens, residing both inside and outside the country. There is precedent for such a move. In February 2022, President Biden signed an executive order that requires U.S. financial institutions to transfer $7 billion in Afghan exchange holdings into a consolidated account at the Federal Reserve Bank in New York. The Biden administration aims to transfer at least half of this money to provide direct humanitarian relief to the Afghan people. In the case of Ukraine, this kind of action should be accompanied by measures such as increasing the number of armored vehicles allowed to transport cash, facilitating cash-out options (such as through the post office and other institutions), and ensuring that internet and mobile communications are not disrupted and the banking system continues operating. In this regard, it would be important to guarantee that private companies—like Western Union and MoneyGram—conduct money transfers (and remittances) in Ukraine and remain open.
Third, donors should work with Ukrainian civil society, ensuring that essential supply chains are not disrupted so that food and medicine can be distributed. Although cash on hand is important, people need access to buy essential items and services with that money. One of the major challenges during an armed conflict is to deliver supplies to civilians, especially in urban areas. According to the World Food Programme (WFP), food and drinking water shortages are already reported in pockets of the capital, Kyiv, and in Kharkiv. Logistically, there are impacts on food and shipping costs, oil, and fuel. There needs to be an urgent appeal to get food and medicine on the ground. Before the invasion, 400,000 Ukrainians experienced food insecurity. Ukraine and Russia will need to maintain humanitarian corridors for civilians so that supplies can be allowed to enter. At the same time, the Black Sea basin is one of the world’s most critical locations for agricultural production, prompting global food security concerns. Both Ukraine and Russia are major food exporters, particularly of grains and vegetable oils. With 855 million people suffering from food insecurity globally, the Ukraine crisis will create a new upheaval. Organizations that work on food security will experience operational changes since they procure food sources from this area of the world. For example, the WFP gets 50 percent of its grains from this region.
In addition, Ukraine’s medical needs are worsening, with supplies of antibiotics, oxygen, drugs, and blood running low. There are also concerns about the spread of Covid-19 and other viral diseases (such as polio and tuberculosis) worsening the humanitarian situation. Ukraine is receiving medical aid from some countries. International organizations need to help support the healthcare infrastructure and ensure medical resources are available. Mobile clinics will need to be expanded in order to reach communities impacted by the war.
Fourth, multilateral and bilateral donors will need to provide significant financial and technical support for neighboring countries that goes beyond humanitarian relief. The staggering number of Ukrainians who fled to Poland, Hungary, Slovakia, and Moldova are receiving humanitarian aid in the form of shelter, food, medical aid kits, medicine, and sleeping bags. The WFP is launching an emergency operation to provide food assistance to Ukrainian refugees in neighboring countries. However, the majority of refugees are women and children, who, if forced to stay, will need jobs, education, and health services. Ukrainian children were already in a precarious situation before the war, experiencing significant school disruptions due to the Covid-19 pandemic—now, they are traumatized by the war. The longer the war lasts, the more neighboring countries will have to pivot from an emergency and humanitarian situation to a refugee resettlement process. To help this resettlement process, the European Union is considering a special mechanism that would grant blanket protection for all Ukrainians fleeing the conflict, allowing them to live, study, and work across the EU bloc for up to three years.
The situation on the ground is rapidly deteriorating, and there is great uncertainty over the turn of events in the coming weeks. What is clear is that this unprovoked Russian invasion will have long-term consequences for the Ukrainian economy, its people, and the country’s social fabric.
Although the United States and its Western allies have made it clear that NATO will not defend Ukraine militarily, these countries should accelerate their economic support for Ukraine and begin planning the country’s reconstruction phase. In this regard, the international community needs to start putting together development plans for the medium term once a ceasefire is negotiated, which could include preferential access for Ukrainians to U.S. markets and technical assistance. Both multilateral and bilateral donor agencies need to rise to the moment.
Romina Bandura is a senior fellow with the Project on Prosperity and Development and the Project on U.S. Leadership in Development at Center for Strategic and International Studies (CSIS) in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2022 by the Center for Strategic and International Studies. All rights reserved