Ukraine war: EU pledges €18 billion to cover Kyiv’s budget gap, despite previous aid stuck in limbo

In a bid to help Ukraine cover the widening gap in its government budget, the European Commission has unveiled a new package of €18 billion in financial assistance to be disbursed over the course of 2023.

The envelope will attempt to make the money more predictable and reliable, following the EU’s publicised failure to deliver the €9 billion that were earmarked for 2022.

That original package, announced back in May, remains stuck in negotiations between member states, despite repeated pleas from Kyiv, including by President Volodomyr Zelenskyy himself.

So far, only €3 billion have been sent to Kyiv, with a further €2.5 billion expected to be released by the end of the month and another €0.5 billion scheduled for next month.

The remaining €3 billion, however, appear to have been left in a limbo, with no resolution in sight. Since the bloc never signed off that very last tranche, it is not legally bound to release it.

“Obviously, it would be much better to be able to disburse the whole package,” European Commission Executive Vice-President Valdis Dombrovskis told Euronews on Wednesday afternoon.

“But we know that to finance this exceptional macro-financial assistance programme for this year, we need additional guarantees of member state. There were discussions amongst member states, which did not arrive to the definitive conclusions on the full amount.”

Brussels now intends to move past this year’s fiasco and focus on the new €18 billion package for 2023, which will amount to €1.5 billion per month to help Ukraine cover its budgetary deficit.

Crucially, the Commission will ask the two co-legislators – the European Parliament and the EU Council – to endorse the envelope as a whole, which will create the legal obligation to disburse the €18 billion.

A first payment is expected at the end of January and quarterly disbursements will follow after that.

The EU funds will be used to sustain basic public services and repair critical infrastructure. To unlock the money, Ukraine will be asked to carry out reforms related to the rule of law, anti-corruption and anti-fraud. 

Reacting to the news, President Zelenskyy expressed his gratitude.

“This shows true solidarity of the EU. Together we resist Russia’s aggression, together we‘ll rebuild Ukraine, together we’ll be in the EU,” Zelenskyy tweeted.

Fresh EU borrowing

Foreign aid has become increasingly urgent for Ukraine as Russian forces continue to strike civilians targets and power systems, leaving cities in the dark and making daily life unbearable for residents.

The International Monetary Fund (IMF) had previously estimated Kyiv required between €3 billion and €4 billion a month to keep the national economy running. The budget gap, however, could widen if the war takes a turn for the worse.

The United States has pledged to deliver $1.5 billion a month, matching the EU’s contribution. But more money will be needed to reach the monthly €4 billion.

“We are in coordination with other international donors, G7 countries, international financial institutions, like the IMF and the World Bank, so that together we can cover the entire financing need,” Dombrovskis told Euronews.

The Commission will raise the €18 billion on the international capital markets, using the EU budget’s extra space as a guarantee to investors, as it did to create the €750-billion COVID recovery fund.

The long-term loans will be highly favourable, with a maturity of 35 years. Ukraine will be asked to make the first repayment in 2033, after the expiration of a grace period of 10 years.

The interest rates will be covered by EU countries, alleviating Kyiv’s financial burden.

In total, the fresh borrowing will entail an additional €630 million cost for the EU every year, according to the Commission’s most conservative estimation.

Any move that increases common EU debt requires the unanimity of the 27 member states. Such prospect has already been met with the frontal opposition of Hungary.

“We supported joint borrowing during the coronavirus epidemic, but that was more than enough,” Péter Szijjártó, Hungary’s foreign affairs minister, said on Monday.

Asked about Budapest’s position, Dombrovskis said Ukraine’s dire situation will bring all countries on board.

“Obviously, it will require still some discussions with member states, but we are hopeful that we will be able to arrive with a positive result at the end of the day,” Dombrovskis said.

“Everyone recognises that Ukraine is a country at war and Ukraine needs our support.”