{"id":28572,"date":"2024-06-12T11:59:23","date_gmt":"2024-06-12T08:59:23","guid":{"rendered":"https:\/\/ces.org.ua\/?p=28572"},"modified":"2024-06-24T10:44:10","modified_gmt":"2024-06-24T07:44:10","slug":"testing-the-limits-of-resilience-blogs","status":"publish","type":"post","link":"https:\/\/ces.org.ua\/en\/testing-the-limits-of-resilience-blogs\/","title":{"rendered":"Testing the limits of resilience: Ukraine\u2019s wartime public finance"},"content":{"rendered":"
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Origin: Friends of Europe<\/a>.<\/p>\n

Although it has recently become customary in European public debate to applaud Ukraine\u2019s resilience amid unprecedented hardships, this resilience is far from infinite.\u00a0Continuing to overlook it would be a serious miscalculation<\/strong>. Ukraine\u2019s wartime public finance analysis adds numbers-driven clarity to this picture.<\/p>\n

Russia shows no signs of war fatigue or willingness to retreat, continuing on-the-ground attacks and aerial bombardments.\u00a0Ukraine is unable to outmatch the war effort, stretching its manpower, ammunition and financial resources.<\/strong>\u00a0Mobilisation has drained key qualified personnel from enterprises, the energy system already lacks spare parts for repairs and the frontline is gradually moving westward.<\/p>\n

The current balance is very uncertain. Since the onset of the full-scale invasion, Ukraine\u2019s military expenditures have increased tenfold compared to pre-war times \u2013 but then has plateaued.<\/p>\n

Figure 1. Monthly dynamics of expenditures in the security and defence sector over the past three years.<\/strong><\/p>\n<\/div>\n

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\"Friends<\/div>
Source: National Bank of Ukraine<\/figcaption><\/figure>\n<\/div>\n<\/div>\n
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From Ukraine\u2019s side, the military funding has reached its limit<\/strong>: nearly all the budgetary inflows generated domestically are being directed to defence efforts. The feature of Ukraine\u2019s public military spending is that it cannot be financed from Western aid sources, which are strictly earmarked for civilian needs. Only the funds generated by the Ukrainian government domestically or borrowed from local banks can be used to fund the military salaries, procurements of weapons and forage and other war-related needs.<\/p>\n<\/div>\n

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Meanwhile, the country is gradually losing land, soldiers\u2019 lives and economic potential in terms of electricity generation, business activity and human capital<\/p>\n<\/div>\n<\/blockquote>\n

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Locally-generated budget inflows effectively put a cap on the level of defence expenditures. At the same time, the other expenditures are covered by international aid. In 2023, general government sector expenditures totalled $135bn, from which approximately half, or $68bn, was used for defence purposes[1]<\/a>\u00a0and covered internally. This amount includes some of the in-kind military aid[2]<\/a>\u00a0and all kinds of other military expenditures, like salaries \u2013 roughly one-third of the total military spending \u2013 supplies and weapons procured by Ukrainian procurement agents.<\/p>\n

Figure 2. Approximate illustrative* distribution of inflows and expenditures of the general government sector in 2023<\/strong><\/p>\n<\/div>\n

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\"Friends<\/div>
*There are numerous limitations to the information disclosure on wartime finance. Since the actual distribution of direct aid to budget entities is unknown, we have used it as a balancing item in the graph, assuming that all income from internal sources, except for the single social contribution, is used for military purposes. Calculations of defence expenditures and direct aid in the budget entities\u2019 own revenues are also performed using certain assumptions. The specific distribution of grants and foreign borrowings for social and other non-military expenditures was not publicly disclosed, and it is presented in this form only for illustrative purposes.Source: Centre for Economic Strategy.\u00a0Ukraine\u2019s needs and funding sources: budget review 2023<\/a><\/p>\n<\/figcaption><\/figure>\n<\/div>\n<\/div>\n
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With more resources available, Ukraine could procure more weapons from Ukrainian drone producers, recruit and train more soldiers and elevate the defence effort in general. Meanwhile,\u00a0the country is gradually losing land, soldiers\u2019 lives and economic potential<\/strong>\u00a0in terms of electricity generation, business activity and human capital.<\/p>\n<\/div>\n

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Using frozen Russian assets to deliver the victory would be a morally just and logical step<\/p>\n<\/div>\n<\/blockquote>\n

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The policy options here are limited, however the following could be recommended:<\/p>\n