What happens next in Ukraine’s debt negotiations could change the course of the war
Debt allows countries to mobilize more resources more quickly than they would otherwise be able to. The cheaper the debt and the easier it is to access, the more resources the country can mobilize for its war effort.
Because debt plays such a large role in war, defaults by states involved in war are rare. The risk of losing access to credit markets is usually too high. However, there are some notable exceptions.
Russia technically defaulted on its debt obligations shortly after invading Ukraine in 2022 because sanctions made it impossible to pay off the debt. And Saddam Hussein’s Iraq defaulted during the Iran-Iraq war in the 1980s. Yet both countries had significant natural resources to draw on – a luxury Ukraine does not have.
The exceptions of Russia and Iraq highlight another crucial factor in war financing: the type of political system a country has. As autocracies, Putin’s Russia and Saddam’s Iraq have been able to impose restrictive economic measures in the event of war. The Russian government, for example, has imposed controls that make it difficult for exporters and foreign companies operating in the country to move money out of Russia.
Read more: Russia’s economy is now completely determined by the war in Ukraine – it cannot afford defeat, but also cannot afford victory
In contrast, the Ukrainian government must take into account the domestic political pressures created by war financing. Measures such as those taken in Russia would likely lead to political discontent in Ukraine.
Debt allows democratic politicians to mobilise resources without resorting to unpopular fiscal strategies. However, faced with the prospect of reduced access to debt, Ukraine has returned to divisive tax policies that increase the tax burden on individuals while cutting social spending.
Taxes are important to the war effort, but they risk jeopardizing the domestic support needed to continue fighting. And the Ukrainian government has been accused by journalists and international monitoring groups of being too restrictive in its response to domestic discontent. Ukraine’s domestic intelligence agency is said to have monitored an investigative media team in its hotel rooms.
The financial future of Ukraine
However, there is also good news for the Ukrainian leadership. After a long delay, the US Congress passed a military aid package worth $60 billion (£47.4 billion) in the spring. At the same time, Britain provided Ukraine with its largest aid package, worth more than three billion pounds, for 2024.
Recently, the G7 (consisting of Canada, France, Germany, Italy, Japan, the UK and the US) agreed to use Russia’s frozen assets to finance a new $50 billion loan to Ukraine.
This additional funding is needed for Ukraine’s war effort. But it does not solve its immediate debt problems. The aid packages from the UK and the US are only for military equipment and cannot be used for budgetary support. The G7 loan will be more flexible, but that money is not expected to be disbursed until later this year.
Ukraine must balance the immediate needs of war funding with long-term economic considerations and domestic political pressures. The stakes could not be higher. The terms Ukraine achieves in debt negotiations will affect not only its ability to finance the current war effort, but also its ability to rebuild after the conflict ends.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
![The conversation](https://s.yimg.com/ny/api/res/1.2/2eYJE1RUYgcu8PY.rvPL3w--/YXBwaWQ9aGlnaGxhbmRlcjt3PTM2O2g9MzY-/https://counter.theconversation.com/content/233355/count.gif)
![The conversation](https://s.yimg.com/ny/api/res/1.2/2eYJE1RUYgcu8PY.rvPL3w--/YXBwaWQ9aGlnaGxhbmRlcjt3PTM2O2g9MzY-/https://counter.theconversation.com/content/233355/count.gif)
Patrick E. Shea does not work for, consult for, own shares in, or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond his academic employment.