KYIV - Short of cash as well as personnel and equipment for its war against Russia, Ukraine’s government says it has cobbled together financing to last several months without long-stalled aid from the United States and Europe.

But further delays would trigger an all-but-certain economic crisis, officials and analysts say.

Government workers might not get paid or lose their jobs. Retirees, already living close to a subsistence level, could slip deeper into poverty if their pensions are not topped up to keep pace with inflation.

Museums and theatres – as well as government research institutes and universities – could be forced to shut their doors.

Restaurants, department stores and a host of other businesses currently remain open in Ukrainian cities away from the front line.

But without enough financial aid, the ripple effects would quickly be felt across the economy, as the government runs out of cash to support a wide range of people and institutions.

Along with artillery shells, missiles and drones, Russia’s war in Ukraine is fought in the economies of both countries.

Western sanctions are intended to curb Moscow’s resources, and Western aid is aimed at sustaining Ukraine. An economic crisis in Ukraine could severely undermine its ability to successfully fight the war, experts say.

“It’s the economy that wins wars,” said Ms Orysia Lutsevych, head of the Ukrainian programme at Chatham House, a London-based research group.

Ukrainians are already strained economically by war and ill-prepared for financial turmoil.

In a poll conducted by the Red Cross in November 2023, 42 per cent of Ukrainians said they had insufficient income to meet basic needs, including food and housing.

Ukraine needs the Western aid to cover about a quarter of its national budget in 2024 but has faced numerous hurdles getting it.

On Feb 1, European Union leaders will meet in Brussels, hoping to reach an agreement on a €50 billion (S$72.4 billion) multi-year aid package that was blocked by Hungary in December 2023.

The Biden administration is also struggling to get through Congress a package worth about US$60 billion (S$80.41 billion) of military, humanitarian and financial aid for 2024.

If Ukraine fails to get the aid it needs from the West, the economic stability that has been an unexpected wartime success could start to crumble.

Ukraine’s Finance Minister Serhiy Marchenko warned in an interview of the risks of a looming financial crisis.

“Achieving macroeconomic stability is not easy,” he said. “It takes a lot of time to boost confidence in businesses, in the citizens of Ukraine.”

Ukraine has also contributed to its own problems, with chronic corruption that has made Western allies more sceptical that money donated is going to the right cause.

The prospect of ever-shrinking government funds is one that worries Ms Olena Bondarenko, a 30-year-old single mother who works for a private utility company in Zaporizhzhia.

She supplements her meagre income of US$210 a month with a monthly payment of US$135 given to people forced to flee their homes, in her case an apartment in the front-line town of Orikhiv, damaged by shelling.

On Jan 26, the government announced cutbacks in such payments for internally displaced people in Ukraine, to save about US$530 million in 2024.

“I’m not sure I will get by” when the payments end on Feb 1, Ms Bondarenko said.

“I’m really worried. I’m afraid I will have to return to my town and live there with my child amid explosions because I don’t have financial help.”

Ukraine relies on foreign aid for about half its annual budget and is prohibited by donors from spending that assistance on the military. It receives separate aid from both the US and the EU for military purposes.

This aid instead covers things such as salaries for teachers, pensions and medical care for the population. For this, Ukraine was getting US$13.5 billion from the EU and expecting US$11 billion from the US in 2024.

The EU aid package that Hungary blocked in December and which European leaders will be discussing on Feb 1 would provide grants and loans to Ukraine from 2024 to 2027.

Ukraine can make ends meet in the first quarter of the year by shuffling funds between the central and local government, raising taxes and cutting spending, Mr Marchenko said.

Part of the plan is to tap funds that would normally have been held by local governments, including taxes paid by soldiers, he said.

But while that will help provide wiggle room as Ukraine awaits more aid, it would come at the cost of squeezing local governments.

The government will raise funds with a new tax on banks and cut all capital spending, except what is needed for the military, deferring things like road repairs or purchases of railroad cars, Mr Marchenko added.

And it is borrowing money from within Ukraine, issuing three tranches of domestic bonds so far in 2024 that officials said exceeded expectations.

Mr Tymofiy Mylovanov, president of the Kyiv School of Economics and a former minister of economy, also said that the government was not filling vacancies in public sector jobs and had withheld some funding for higher education.

Even with all these measures, the loss of the foreign aid from the US and the EU would have devastating effects.

Wartime support from the International Monetary Fund is contingent on the US, for example, continuing to support the Ukrainian government. If the US backs out, Ukraine would have to renegotiate the fund’s US$5.4 billion programme in 2024.

And support from the world’s richest nations can convince other donors and markets that Ukraine has sufficient financial backing, opening the door to even more money from different sources.

Ukraine’s central bank is already quickly going through reserves to prop up the value of the national currency, the hryvnia, amid market jitters over delayed aid. The bank spent US$2.4 billion in the first four weeks of 2024.

“The only way to preserve macroeconomic stability is support from the United States,” Mr Marchenko said.

If that were not forthcoming, he said, Ukraine would seek additional assistance from other allies; increase domestic borrowing, regardless of the rates on the bonds, which are now 18 per cent; or print money to cover immediate needs, even if it leads to inflation and the devaluation of the hryvnia.

He raised the spectre of bank runs and people rushing to change their hryvnia into dollars or euros, crashing the local currency.

“I am talking about a nightmare scenario,” he said.

“It would start in one day, last a week”, and the consequences of a collapse of the hryvnia “would be catastrophic”, he said. “People on the one hand try to protect our country and on the other hand try to flee and protect their assets.” NYTIMES