As Prepared for Delivery
Thank you for hosting me here today. For more than sixty years, the Atlantic Council has focused on promoting positive U.S. engagement around the world. This makes it a fitting venue for my remarks, which will focus on perhaps the defining international economic issue of President Biden’s first term: Russia’s war, and our economic support for Ukraine.
Just a few days ago, I returned from a visit to Kyiv. From afar, it can be easy to anaesthetize the war with technical discussions of the violation of territorial integrity and international law, and the undermining of the post-World War II international order brought by Russia’s illegal invasion of Ukraine. But up close, it is impossible to lose sight of how the lives of forty million Ukrainians have forever changed. I spoke with many Ukrainians and heard their stories. Young adults terrified about enlisting and fighting. New parents, exhausted, but constantly tracking the time it’d take to get their kids to the closest bomb shelter. Everyone had lost a friend or relative, or knew someone who had. Russian bombs and bullets have stolen children from their parents and parents from their children.
As Secretary Yellen has emphasized, Ukraine’s resistance against Russia is nothing short of heroic. Ukraine stands at the vanguard defending the international order’s norms against wars of conquest. I am proud that the United States saw a moral obligation to help. We quickly joined forces with partners and allies to immobilize Russia’s sovereign assets in our jurisdictions, to impose novel sanctions on Russia’s imports and exports, and to send many billions of dollars of weapons and defense support to Ukraine.
And, as I’ll focus on today, I’m also proud of our work to help Ukraine shore up its economic front. In the first two years of the war, the United States gave $23 billion in direct budget support and $4 billion in recovery and reconstruction funds to Ukraine. And in late April of this year, the President, with support from an overwhelming bipartisan majority in Congress, signed the National Security Supplemental, which included nearly $10 billion more in direct budget support and other economic assistance.
Economic assistance is often overshadowed by military support. But just as Ukraine’s guns can’t shoot back without bullets, it’s soldiers can’t deploy without repaired roads, can’t recover without functioning hospitals, and can’t fully focus on their mission without knowing that their kids are in schools staffed by teachers and that their families have access to water and electricity. As all Ukrainian tax revenues go to military spending, running Ukraine’s government and providing critical public services requires this type of outside support.
The ongoing provision of these critical services, coupled with Ukrainian determination, ingenuity, and even good humor, has enabled the economic and financial life of much of the country to continue. In Ukraine, I visited the Kyiv School of Economics, where they showed me a bomb shelter that was outfitted with a white board so they could remain productive and discuss research even when sheltering from Russian attacks. After hearing an air raid alert and seeking cover, we quickly got back to our business when a pre-recorded “all clear” was voiced by none other than Mark Hamill, complete with his advice to “use the force.”
I met young professionals that run online trackers of Ukraine’s war economy and use social media creatively to discuss war bonds and Ukraine’s public finances. Russia’s brutal war of aggression has cost them all enormously. And yet, they are pouring their ambition, belief, creativity, and determination into securing a brighter future for their Ukraine. Walking along Reitarska Street in Kyiv, we stopped into a sportswear store called Riot Division that embodied the resilience of the Ukrainian people. The tags on their clothing say, proudly: “Made in Ukraine during the wartime.”
Ukraine’s macroeconomic resilience
As the war has extended over time, economic factors have become more salient, not less. Ukraine needs a successfully functioning economy to produce equipment, support soldiers on the battlefield, and allow civilians to stay in the country and make investments in its future. In the face of a devastating economic shock, Ukraine’s macroeconomy has demonstrated that same resilience as I saw in its people.
After Russia’s full-scale invasion in February 2022, Ukraine’s economy shrank by 30 percent, a decline that went faster and further than what the United States experienced during the Great Depression. In a country with a population of roughly 40 million, nearly 7 million have become refugees in other countries and 4 million more have been internally displaced. Hundreds of bridges, thousands of miles of roads, more than 1,500 schools, and almost one-tenth of all housing was destroyed. Maritime routes previously used to export Ukraine’s enormous wheat harvests became war zones full of floating mines. Economies need labor and capital to produce, but after the attacks, Ukraine faced massive shortages of both.
And yet, even while waging a successful military defense of its territory, Ukraine’s economy nimbly absorbed and responded to this shock. Different goods and services are now needed, and existing goods are now needed in different places. Household consumption, which averaged over 70 percent of GDP during 2020-2021, dropped to below 63 percent in 2022-2023, while government’s share more than doubled over that same period. Relatedly, concentrated production centers are more difficult to protect from missiles and drones, so output has expanded to where production is geographically diffuse and better sheltered, such as to IT services. Manufacturing’s share of GDP dropped from 11 percent in 2020-2021 to 9 percent during 2022-2023. And whereas real construction activity in the final quarter of 2023 is at 61 percent of its level in the quarter just before the war started, information, communication, finance, and insurance activity has recovered to 96 percent of its pre-war quarterly level.
To meet these new economic needs, Ukrainian entrepreneurs and managers are rapidly registering new businesses. The number of registrations of new individual entrepreneur businesses collapsed from 63,000 during the first quarter of 2021 to 47,000 during the first quarter of 2022, the start of the war, a drop of nearly 25 percent. But these new business registrations have now fully recovered. In fact, in the first quarter of 2024, they reached 74,000, exceeding pre-war levels. They are also reacting to the new geography of commerce, with companies changing their place of registration about 19,000 times since the start of the war. And businesspeople and others are traveling again to make this happen – train passenger numbers, for example, are now back to pre-invasion levels.
Ukraine’s leadership even engineered a shift in trade routes after Russia pulled out of the Black Sea Grain Initiative. To keep its grain flowing to market, Ukraine has started using ports on the Danube River, which had not been used for this purpose before the war. And grain-carrying ships have started transiting through the territorial waters of Bulgaria, Romania, and Turkey. Ukrainian authorities collaborated with private companies to establish an insurance mechanism for ships along these temporary corridors. Ukraine has also shifted from exporting many commodities by sea to now using trucks and trains.
The banking and financial system has also successfully evolved to meet the moment. Following Russia’s invasion, government officials delayed recognition of non-performing loans, opened an emergency unsecured financing facility, and tightened limits on withdrawals by Ukrainians abroad. Just one year later, many of these emergency measures were already being carefully unwound. To date, the majority of commercial bank branches remain operational. There have been no bank runs. Liquidity is ample, and the financial sector has repaid the emergency financing provided by the National Bank of Ukraine (NBU) at the start of the war.
When the war began, the NBU gave approval for Ukrainian banks to use cloud services backed by hardware located in the EU, UK, Canada, and the United States to bolster their operational resilience. It upgraded and hardened the domestic interbank payments system, which has continued to work reliably. The NBU has even worked with Ukraine’s systemically important banks to devise a plan called Power Banking, which entails a series of protocols designed to allow the banking system to maintain critical operations if a blackout or major attack occurs. Participating banks have backup generators and their customers can, if needed, access their accounts from another participating bank, an innovation that improves system-wide durability.
The IMF in Ukraine
Immediately after Russia’s invasion, it was clear that Ukraine would face acute balance of payments pressures. Resources used for the production of tradable goods had to make way for mobilization efforts, there was no safe and reliable access to ports, agricultural inventories were stolen or destroyed, and the price of critical imports surged. Were it not for the unusual circumstances, the swift approval of a traditional IMF program, with policy conditionality and funding to support macro adjustment, would have been an obvious remedy.
But Ukraine was in the midst of a “hot” war. The hostilities were the proximate cause of Ukraine’s balance of payments pressures, not fiscal imprudence or unsustainable policies. And while there had been previous IMF programs in post-conflict, war-torn countries, such as those in Croatia and Rwanda in the 1990s or in Ethiopia or Cote d’Ivoire in the 2000s, and programs for countries fighting domestic insurgencies, like in Somalia in 2020, Ukraine clearly posed a different challenge. Relative to those countries, Ukraine’s military spending was much higher. And in a war, monetary and exchange rate policies might not work the way we would normally expect. Finally, it might be unreasonable to ask policymakers to pursue macroeconomic targets when, understandably, success on the battlefield would trump any other goals.
Given the uncertainty about the impact of the war on economic policymaking, the IMF did not initially approve a standard program. Instead, it took two steps relevant to Ukraine. First, it instituted a temporary Food Shock Window that could provide immediate financing for countries experiencing acute food insecurity and related crises generated by Russia’s war. Ukraine was the first country to access this window, tapping it for $1.3 billion in October 2022. Other countries, like Malawi and Haiti, soon followed. Second, the IMF created something they called a “Program Monitoring with Board Involvement”, or PMB arrangement, with Ukraine. No financial support was offered under the PMB, but it allowed IMF staff to work with Ukrainian authorities to build a macroeconomic stabilization framework and provided a platform for donor coordination. It also allowed Ukraine’s economic policymakers to demonstrate that they were able to successfully deploy tools and course a trajectory for Ukraine’s macroeconomy consistent with the PMB’s framework.
Ukraine’s strong performance on the PMB, together with safeguards instituted under a new IMF policy to lend into circumstances with exceptionally high uncertainty, opened the door to an eventual agreement. In March 2023, Ukraine and the IMF agreed to a 4-year extended fund facility (EFF) program with $15.6 billion in financing.
It has helped a lot. Ukraine’s economy grew 5 percent last year, exceeding the IMF’s expectations. Inflation, which peaked at over 26 percent, is now below the NBU’s target range of 4 to 6 percent. The NBU has taken some measured steps to allow a bit of flexibility in the value of Ukraine’s currency, the hryvnia, and has accumulated $20 billion in reserves in less than 2 years, more than the target set by the IMF.
Now, I don’t want to paint too rosy a picture. After such a staggering GDP decline in 2022, we’d expect some recovery and growth in 2023. And, disappointingly, the NBU’s growth estimate for 2024 was recently downgraded to only about 3 percent. One contributor to this downgrade is the destruction the Russian attacks continue to bring to Ukraine’s energy sector. Ukraine has lost about 8 gigawatts of power generation capacity, an amount in the ballpark of half of peak load. Walking the streets of Kyiv last week, I routinely saw mobile diesel power generators and heard about the difficulties of managing a business through a period with unscheduled rolling blackouts. Another contributor to the downgrade in growth forecasts is the ongoing labor shortage. While in Ukraine, I heard that some companies like McDonalds or Zara, which typically have access to large pools of possible hires, were having to use staffing firms to find workers for their stores. So, there’s a long way to go in an extremely challenging environment. But credit is no longer contracting, exports are recovering toward pre-war levels, and Ukraine’s government has stabilized its economy under its program with the IMF.
The IMF’s involvement in Ukraine also produced benefits for developing and emerging economies around the world. Russia’s war impeded the export of Ukraine’s agricultural production and led food prices to spike. Countries such as Egypt, Bangladesh, Kenya, and Sri Lanka relied heavily on Ukrainian exports of wheat, maize, and sunflower oil. By helping support the stabilization and recovery of Ukraine’s exports, the IMF program has been critical to restoring global food security. And on this, we also can’t be complacent. Russia quit the Black Sea Grain Initiative last year, rejecting safe passage for food shipments out of Ukraine. Ukraine’s friends and the international community must remain steadfast in allowing Ukraine’s agricultural products to make it out to the global market.
Just last Friday, the IMF and Ukrainian authorities reached a staff level agreement on the fourth review of the program. It was another strong performance which, together with the PMB, makes it five in a row. My office at Treasury oversees the U.S. relationship with the IMF. I look closely at a lot of programs. Many struggle. Ukraine’s level of success is not common.
Given how unusual Ukraine’s circumstances were for an IMF program, it was only natural for there to be significant debate and discussion among staff, management, and major IMF shareholders on whether and how to move forward. I am proud of the leadership role the U.S. Treasury played in supporting an IMF program for Ukraine. The program has provided oversight, accountability, and technical assistance and has been a critical lynchpin of Ukraine’s macroeconomic stability. It shows how the IMF can roll up its sleeves, work creatively, and deliver tremendous impact even in extremely difficult or uncertain situations so long as it has a serious and committed partner.
A Wartime Economy in Ukraine
Ukraine’s prudent management of fiscal and monetary policies so far has left it with room to maneuver. Looking ahead, policymakers might carefully consider some additional economic tools and approaches commonly used in wartime economies. First, early in the war, Ukraine restricted imports of various non-essential goods as a way to preserve foreign reserves and strengthen its external position. But it has since relaxed these restrictions. One possibility would be to increase tariffs on imports of luxury consumer goods, like cars.
Second, careful monetary policymaking by the NBU has contributed to a steep drop in inflation expectations and a stabilization of the hryvnia. As I mentioned, inflation in April was just 3 percent at an annual rate, making it the seventh straight month with inflation at or below the central bank’s target range. Inflation expectations are anchored at levels well below peer economies that are not at war, and forecasts call for relative stability in the hryvnia’s value. Given these successes, if ever desired or needed to support recovery, bolster reserves, or facilitate a steady external adjustment, Ukraine is now in a position to, together with the IMF, consider additional flexibility in their approach to monetary and exchange rate policy.
Third, as discussed, fiscal resources are even more essential in wartime economies. Academic research offers some tentative evidence that patriotism can support tax compliance. Indeed, personal income tax revenues rose from 6.4 percent of GDP in 2021 to closer to 8 percent of GDP across 2022-2023. At a time of such common sacrifice, perhaps this partially reflects shifting norms and less social tolerance of tax evasion. Looking ahead, important possibilities further include increasing the value-added tax rate and replacing the flat personal income tax with a more progressive system. These ideas are helpfully discussed in Ukraine’s new national revenue strategy.
Linking Support to Reforms
In addition to the United States and the IMF, Ukraine has received tremendous support from partners, particularly the European Union, Japan, Canada, the United Kingdom, and Norway. This support has taken many forms, including military aid, grants, and concessional loans for Ukraine’s public budget, spending to help the large wave of Ukrainian refugees seeking shelter in neighboring countries, and various programs led by the World Bank, the European Bank for Reconstruction and Development (EBRD), and other official and multilateral development institutions.
This support is not only aimed at helping Ukraine defend itself during the war. It is also designed to help Ukraine transform itself into a fairer and more prosperous place after the war, with reduced corruption, increased transparency, and better governance. To be clear, I believe the United States and the international community should help Ukraine defend itself against Russia’s barbaric attacks even if there were no scope for Ukraine to make these sorts of reforms. Nonetheless, this is an important opportunity to help Ukraine do both. To this end, budget assistance from the United States, Europe, and the International Financial Institutions is designed to help support Ukraine in undertaking a number of priority reforms.
For example, Ukraine has enhanced the institutional autonomy of the Special Anti-Corruption Prosecutor’s Office, or SAPO. SAPO is an independent unit of Ukraine’s National Anti-Corruption Bureau and plays a critical role in the fight against corruption. It has an explicit mandate to prosecute criminal investigations – it is the teeth of Ukraine’s anti-corruption apparatus. However, in order to be able to pursue powerful targets, SAPO needs to be as insulated from politics as possible. To this end, last fall, Ukraine’s Prime Minister submitted legislation to the Rada to make SAPO a separate legal entity, increase its staffing, and change its bureaucratic structure to maximize accountability. For example, the legislation put non-prosecutorial staff under the direct authority of SAPO’s head to discourage leaks. It also set in place transparent procedures to select SAPO leadership and mechanisms for it to be evaluated, including by external auditors. The Rada passed this legislation in December, capping off a year in which SAPO, encouragingly, issued 100 indictments for corruption.
Ukraine has also restored the need for public officials to report their asset holdings and created a single pipeline for public projects that will be chosen through a competitive, digital, and transparent process. These reforms aim to reduce the likelihood for conflicts of interest and corruption, particularly as relates to public contracting and procurement. Ukraine’s recently developed National Revenue Strategy also places an important emphasis on accountable administration in both the State Customs Service and State Tax Service.
Ukraine has also focused on corporate governance improvements at state-owned enterprises, or SOEs. Legislation passed in February broadened the powers of SOE supervisory boards to include hiring and firing CEOs. The legislation also introduced competitive and transparent selection processes for the supervisory board members themselves and gave the Ministry of Finance an enhanced role over the financial reporting and accountability of SOEs to help mitigate fiscal risks. Several key Ukrainian SOEs operate in the energy sector, including Naftogaz, GTSO, and Ukrenergo, so their governance reforms are critical for efficiently rebuilding infrastructure following Russian attacks. They also may accelerate Ukraine’s integration with EU standards, consistent with Ukraine’s goal of future EU accession.
Other Support
In addition to this more conventional support and its associated conditionality, Ukraine’s G7 partners are also working hard in response to their Leaders’ declaration to look at “all possible avenues by which immobilized Russian sovereign assets could be made use of to support Ukraine…” The European Union recently decided that the annual flow of windfall profits earned from the investment of these immobilized assets – different from the assets themselves, and not the property of Russia – will be used for Ukraine’s aid. On its own, this important and innovative approach would deliver billions per year to Ukraine. But we are now making progress with our partners in considering ways to build on this to deliver an even larger amount of funds to Ukraine right now. For example, one possibility may be to lend a significant amount up front to help Ukraine over the short-run and link repayment of that loan to the stream of future windfall profits. This, or a related approach, would both provide an immediate fiscal boost to Ukraine and also signal to Putin that he cannot simply outlast Ukraine and its partners.
Further contributing to Ukraine’s fiscal resources, official creditors, including the United States, agreed to a voluntary standstill on the repayment of $4 billion of official bilateral debt until March 2027. Private sector creditors also offered a debt standstill on $20 billion in Eurobonds, but that standstill will expire in less than three months, on August 31 of this year. The IMF program requires that debts owed to both official and private creditors are restructured in a way that restores debt sustainability and respects comparability of treatment, and we hope that Ukraine and its bondholders agree soon to such a treatment.
Historically, many countries have lost market access for extended periods of time in the wake of debt treatments. In Ukraine’s case, their fiscal stress and debt suspension resulted from a brutal and illegal military attack on its soil, well outside of Ukraine’s control. As such, it seems likely to me that their debt suspension will be viewed differently by global investors than other cases in which default resulted from unsustainable domestic policies or decisions that were within the borrower’s control. I’m hopeful that Ukraine will in short order regain the ability to issue debt to private investors on international markets.
Reconstruction and the Role of the Private Sector
Ukraine has managed its macroeconomy well, engaged productively with the IMF, and has additional room to use various economic policy tools if needed. Supported and encouraged by the United States and allies around the globe, Ukraine is defending itself militarily and enacting reforms to improve governance, put its fiscal trajectory on a better footing, and root out corruption. We cannot lose focus on Ukraine’s urgent needs and the immediacy of the threats against it. But we can and should, at the same time, help Ukraine plan for and, where appropriate, get moving on its recovery and reconstruction.
The World Bank’s third Rapid Damage and Needs Assessment (RDNA) estimated that, at the end of 2023, reconstruction and recovery in Ukraine will require nearly half of a trillion dollars of investment spending over the course of a decade. And this estimate excludes damage inflicted by Russia’s attacks in 2024 on Ukraine’s energy infrastructure, where needs are highest. In addition, major investments will be required in housing, transport, commerce and industry, and agriculture. International partners, in cooperation with the Government of Ukraine, have established the Multi-Agency Donor Coordination Platform (MDCP) to help prioritize and coordinate critical program assistance in these areas. The MDCP will reconvene on the margins of next week’s Ukraine Recovery Conference hosted in Berlin.
Private investment from firms from all over the world will also need to play a critical role in Ukraine’s recovery. The German agricultural company Bayer recently started construction on a new $65 million factory in Ukraine. American agricultural firms ADM and Cargill are investing and reinvesting in Ukraine. Creative public and private sector initiatives may pave the way for more such activity.
Toward that end, the insurer Marsh McLennan announced a number of initiatives aimed at reducing or helping foreign firms manage war-related risks, including the development of a framework for a public-private risk pool, the provision of insurance for the new Marine Cargo and War facility focused on grain and other vital food supplies, and a data risk platform to help insurers assess risks to make it easier to enter the market. The World Bank’s Multilateral Investment Guarantee Agency (MIGA) has provided Ukraine with almost $200 million in guarantees to support private sector activity. And in 2022-2023, the EBRD provided $549 million in financial support to Ukrenergo to make emergency repairs of damage caused by Russia’s heavy bombing of civilian power infrastructure and to support its continued functioning, including renewables. Last December, EBRD shareholders approved a €4 billion capital increase for the Bank that will allow it to support up to €3 billion in annual investment in Ukraine during reconstruction while sustaining investments in neighboring countries and others still experiencing spillovers. As the United States is the largest shareholder in the EBRD, it is vital that Congress authorize and fund U.S. participation in the capital increase requested as part of the President’s fiscal year 2025 budget.
The Home Front
Although the economic picture of Ukraine I painted today may not be as bleak as one might expect more than two years into Russia’s unyielding war, the experience of life under the Ukrainian sky remains a nightmare. Just over a week ago, Russia struck a massive shopping center in Kharkiv, Ukraine’s second largest city. Latest estimates suggest nearly 20 people, including at least one child, were killed and scores were injured. Ukrainians live in fear of not coming home alive from a simple grocery run.
As I mentioned, millions of Ukrainians fled the country to escape the horrible war and some estimates suggest that as much as 10 percent of the pre-war population has not yet returned. First and foremost, Ukraine must of course be able to defend itself and fight Russia’s aggression. But beyond that, our work on the economic front is aimed at sustaining strong growth, improving governance, supporting reforms, and fostering recovery and reconstruction. With stable economic conditions, my hope is that as many Ukrainians as possible can and do choose to go home.
###