Ukrainian Debt, Military Spending, and Energy

Ukraine has been in deep debt for some time now from spending on natural gas contracts, natural gas infrastructure, the steep buildup of its military since 2014, and years of deficit spending going back to 2000.

Besides the $5 billion loan guarantee for unbundling its energy sector, international lenders such as the World Bank, IMF, and European Commission have given the country somewhere on the order of $38 billion. External debt went from $25 billion in 2000 to $140 billion in 2015.

Through the years of added debt, Ukraine’s currency, the hryvnia, stayed stable, and only recently increased three-fold starting in 2015.

In 2015, Ukraine's creditors agreed to write-off 20 percent of their debt as part of a large sovereign debt restructuring plan. And the IMF planned a $40 billion bailout for the country in 2016 that was dependent on reforms to eliminate corruption. The year before, the IMF identified a potential $40 billion funding gap that would require additional certainty that bondholders would be paid out first.

As Russia is being cut off from the financial world as a result of its incursion, Ukraine is also having its debt downgraded. Fitch downgraded the country’s debt to CCC/CCC-, right above the lowest rating, CC, although it is nowhere near the ratings collapse seen in 2015 when it was considered in default.

With that debt and the current pitched battle with Russian forces, natural gas prices in the Ukraine have skyrocketed leading to high prices in Europe as well. The high prices follow the deregulation and unbundling of energy markets in Ukraine, something enacted as a way for the country to get access to International Monetary Fund (IMF) loans.

While the recent spike in natural gas prices might potentially add to their debt burden, Ukraine produces most of the gas it consumes and only buys about 10 percent of its natural gas from other countries according to GlobalData analyzed by Power Technology. Even for costs on domestic production, it may not affect much. Nuclear energy powers 54 percent of its grid.

Military Buildup

But Ukraine's military buildup may be a growing concern for its debt. Following Russia's annexation of Crimea and the conflict in the Donbas region of Ukraine, Ukraine heavily invested in their military. They went from spending ₴20 million a year in 2013 to ₴135 million a year in 2019 according to data from the World Bank. As a percentage of gross domestic product (GDP), it more than doubled.

While Ukraine was building up its military, there’s no sign it was buying extensively from other countries. It was only in March of 2021 that the Pentagon announced a $125 million military aid package for Ukraine, which was described at the time by Ted Galen Carpenter at the Cato Institute as a potential provocation for Russian conflict.

NATO Believed the Only Threat to Ukraine Was Reliance on Russian Gas

As NATO and the Ukraine have been courting each other for some time, going back to 2008, NATO believed unbundling its natural gas industry was more important than preparing for a Russian invasion.

A story on the North Atlantic Treaty Organization (NATO) website by Dan Milstein on energy security in Europe highlighted “gas imports from non-NATO countries” as the “paramount energy threat.”

Milstein, an international relations specialist in the United States Department of Energy, cites historic issues when a single supplier was able to alter energy markets in major ways, like the oil crises of the 1970s in the U.S. or when Russia's Gazprom limited exports in 2006 and 2009, as examples for why energy diversification is essential for those countries dependent on Russian fuel. But while NATO encourages diversification and unbundling of energy markets through reforms, that is not part of NATO's operational focus.

Milstein's reference to Gazprom limiting gas exports had to do with repeated disputes between the supplier and Ukraine over natural gas contracts and the prices paid at the time. The debt the Ukraine is looking to pay off with IMF loans comes from some of these natural gas contracts and ongoing disputes.

Ukraine is not a member of NATO but has been in consideration to be a member for some time, going back to 2008. In the beginnings of the recent Russian incursion towards Kiev, Ukrainian Prime Minister Zelenskyy specifically requested a timeline for NATO membership. More recently, he made a formal request to join the European Union (EU).

NATO Military Spending

While Ukraine is interested in joining NATO, ex-president Trump has criticized member organizations for not paying enough. Although members don’t pay into NATO but spend that money on their own military.

Some countries pay 3-4 percent of their gross domestic product (GDP) into their military as others only pay 2 percent or less. While the US pays 3.42 percent of its GDP. At times that amount equates to 75 percent of NATO's total funds. A few years prior it was only 50 percent. In 2021 it was 69 percent. Nineteen countries of the 20 member nations paid less than 2 percent of their respective GDP in 2021. Since the massive increase since 2014, Ukraine now spends around 3 percent of its GDP on its military.

NATO is an alliance where member countries ascribe to an agreement based on the 1949 North Atlantic Treaty that they will mutually support each other if diplomacy fails. In opposition to NATO, the Soviet Union defined the Warsaw Pact alliance of eastern European countries. NATO's potential expansion to Ukraine is one of the major reasons for the recent conflict with Russia.