Since Russia’s full-scale invasion in February 2022, Ukraine has received US$145 billion in international financial assistance. While this support, generously provided by partner countries and other donors, has been immensely valuable, it comes with strings attached. The most significant restriction is that these funds can be used only for non-military purposes, such as healthcare, education and public servants’ salaries.
Consider the World Bank-managed Public Expenditures for Administrative Capacity Endurance Fund, which provides financing for government salaries, including ministry staff, teachers, emergency responders and healthcare workers, as well as pensions and other social services, through the state budget. With this civilian-focused approach, Ukraine’s Western allies have sought to avoid the Kremlin’s ire. However, economic aid delivered this way encourages Russia, while also creating distortions that undermine Ukraine’s war effort and generate waste.
For example, the Ukrainian parliament was forced to increase the state budget last year by about 12 percent, or 495 billion hryvnia (US$11.8 billion), to cover military expenditures. In July, the Ukrainian government further raised defense spending by about 400 billion hryvnia, and on Wednesday last week, it allocated more than 300 billion hryvnia in additional financing for the ministry of defense.
Illustration: Yusha
At the same time, the Ukrainian government recently allocated more money to school meals and other social programs. And since October last year, it has spent 4 billion hryvnia on a rebate program for domestic products — a project with an unclear economic impact. While this money constitutes a small portion of overall expenses, it could finance about 276,000 first-person view drones, a weapon which accounts for 80 percent of Russian losses.
These budgetary developments illustrate how the constraints of the current foreign aid structure create perverse incentives. To make international assistance for Ukraine more efficient, we must recognize two facts. First, defense is the most important spending item, because all other considerations — from social programs to reconstruction — depend on the continued existence of the Ukrainian state. Second, the war-ravaged Ukrainian economy cannot keep pace with Russian military expenditures, which totaled US$149 billion last year, compared with Ukraine’s significantly smaller US$65 billion.
Given this, Kyiv’s partners should support military spending, rather than social programs. Reinforcing Ukrainian defenses protects Europe’s security, and the Ukrainian army imposes the most forceful “sanctions” on Russia.
Ensuring the effectiveness of foreign aid is particularly important, as European leaders discuss using frozen Russian assets to provide a “reparations loan” to Ukraine. While these funds could help sustain Ukraine’s people and economy, it is more important to fund their defense, as German Chancellor Friedrich Merz has proposed — in other words, to tackle the existential challenge posed by Russia’s invasion.
Ukraine’s allies should be laser-focused on winning the war, which is the sole precondition for peace, Ukraine’s reconstruction and EU integration. This implies placing more emphasis on helping Ukraine repel Russian aggression than on designing security guarantees for “when the war stops” or preparing a European defense plan to be ready by 2030.
Various reports suggested that Ukraine uses only one-third of its drone production capacity, owing to limited funding. With direct financial support from foreign donors, Kyiv could quickly increase its drone output, helping to blunt Russian assaults. It would also send the signal that Ukraine’s will to fight is backed by a robust financial lifeline from the West. These measures would make the war more costly for the Kremlin and might even motivate Russia to engage in genuine peace talks.
This “victory first” mindset should guide the conditions Ukraine’s partners attach to their financial assistance. At this point, any reforms should support Ukraine’s current, not future, defense capacity. For example, reforms of tax administration can create fiscal space and should be welcomed, whereas stronger environmental regulations that impose additional costs on businesses should be passed over — especially because Russian aggression is significantly more harmful to the environment than the Ukrainian industry is. However, climate policies that build resilience — such as constructing decentralized “green” power plants — should be implemented immediately.
International donors should also fund defense, because it forces the Ukrainian government to finance social programs with tax revenues. This incentivizes Ukrainian authorities to improve the effectiveness of tax collection, and address other long-standing issues related to tax administration and customs enforcement.
Foreign aid to Ukraine should reflect the reality on the ground. Above all, the country must protect its territorial integrity and sovereignty. Efforts to close funding gaps in areas other than defense — no matter how worthy — distract attention from this primary goal and create waste. Even with international support, Ukraine has far fewer resources than Russia. The efficiency of every penny must be maximized.
Anastassia Fedyk is assistant professor of finance at the University of California, Berkeley. Yuriy Gorodnichenko is professor of economics at the University of California, Berkeley. Ilona Sologoub is Editor of VoxUkraine.
Copyright: Project Syndicate
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