EU and US Ukraine Funding Even More in Doubt as War Effort Falters

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As Ukraine’s military condition looks worse and worse with each passing day, its continued support looks in an even more desperate condition. It is now becoming an open question, analogous to dealing with a severely ill with multiple organ systems functioning poorly, which will put them in a terminal decline. Most commentators focus on the kinetic war because it’s more visible and dynamic, and historically, countries at war usually are vanquished or surrender (or if you are at the US, slink off and try to pretend that you really didn’t care much about the outcome). But the Ukraine leadership is already engaged in infighting, and outsiders look to fanning the fires.1

In other words, it could be that, out of pattern for most conflicts, that Ukraine being so much a proxy fighter for the West, and in particular having its government and economy propped up by external funding to such a large degree that the sudden withdrawal of those monies could be destabilizing politically and operationally in ways outsiders can’t anticipate, since this aspect of the conduct of the conflict has been not very visible. This graphic gives a sense of “financial” aid as opposed to military support. From Visual Capitalist:

Note that the detail under the chart depicts both the EU and US assistance as “loans and grants,” signaling that loans are more important. Recall that the military aid was substantially in kind (although it would be treated as a budgetary item, if nothing else to give an excuse for “replacement” procurement with newer kit. For instance, early in the conflict, former Warsaw Pact countries emptied their larders of aged Soviet hardware, since that was what Ukraine forces knew how to operate. Remember that there were complaints of the US sending Javelins that many were so old that their batteries did not work. Then the US went scouring the world for shells (remember South Korea contributing) and Patriot missiles (we leaned on Saudi Arabia among others). In addition, when the US managed suddenly found more money for hardware after what was depicted as an accounting check, it’s not hard to imagine that the Department of Defense simply revised the value of its past contributions lower, magically creating the appearance of additional money.

Interestingly, of the major international/Anglosphere media organs, the Financial Times makes the sudden, sharp and presumably unavoidable cut to Ukraine support from Europe an above-the-fold report (the pink paper makes it the lead story).

The short version is that last week, the German Constitutional court ruled against a financing gimmick, that of allowing the government to use spending authorized under emergency allocations (which allow Germany to relax its otherwise hair shirt deficit rules) in years after the emergency is over. German leadership wanted to engage in two no-nos in the eyes of the court: using funds earmarked for Covid in past years in budget years after the authorization and for purposes other than Covid. As the story explains, the impact on the German budget is substantial, as are the knock-on effects to the EU, since Germany provides about 25% of EU spending. The current EU budget authorization has gone pear-shaped and Ukraine funds are sure to take a big hit.

And that’s before getting to the fact that the budget has to have unanimous approval, and the Netherlands (and Hungary and Slovakia) are not on board, at least at the intended lavish level. From EU budget dispute threatens €50bn war lifeline for Ukraine in the Financial Times:

Disputes within the EU over money and Ukraine’s future are endangering crucial pledges to Kyiv made months ago….

EU member states are far from reaching a deal over topping up the bloc’s joint budget — including €50bn for Ukraine — ahead of a summit in Brussels on December 14-15…

EU efforts to reach a compromise are being hampered by the victory of a far-right party in last month’s Dutch election and a recent German court ruling curbing the government’s borrowing. A budget agreement would be “very, very difficult”, a senior official said….

A failure to approve long-term funding, a separate €20bn facility for weapons purchases and the start of accession negotiations would be a hammer blow to Kyiv after the failure of its summer counteroffensive and growing concern about faltering western support. Olha Stefanishyna, Ukraine’s deputy prime minister, last week described the EU summit as an “existential moment” for her country….

Germany and other states have vowed to give Brussels no additional funds beyond that required for Kyiv, while others are demanding extra cash for domestically sensitive issues such as migration….

“I think the doom and gloom around this issue is vastly over-exaggerated,” said one EU official involved in the discussions. “We are not going to allow Ukraine to experience a sovereign default.”

It does not appear to occur to EU officials that Ukraine does not have to default. As a sovereign currency issuer, it can always create more hyrinas to pay its debts. But Ukraine is already at an estimated 30% inflation level. More net spending to meet obligations and continue funding government operations would turbo-charge price increases. Regardless, the specter of default will focus some minds.

On the US end, the budget fight positions are getting harder. Recall the Republicans wanted an audit of Ukraine spending as a condition of additional allocations, and more recently, the Republicans were pushing for trading approval on the notorious border wall and other immigration curbs for agreeing to more Ukraine monies. That idea is getting new opponents. From The Hill:

Progress on border talks has screeched to a halt as Democratic negotiators have come under intense pressure from progressives and immigration activists, further complicating potential passage of aid for Ukraine in the coming weeks.

Negotiators returned from the Thanksgiving break on an optimistic note, indicating that they had made progress on changes to asylum and that the ball was moving in the right direction. However, talks have become increasingly stagnant, especially as the drumbeat of concern from the left about the direction of talks has gotten louder, and pressure increases to unlock a supplemental deal that can reach President Biden’s desk.

Democrats and progressives are upset that Republicans are attempting to chip away at the humanitarian parole authority of the Biden administration and view it as a total non-starter, especially if no action on behalf of Dreamers — those who were brought to the U.S. as children — is included in any deal….

Republicans have repeatedly sought to frame the talks as centering on the border rather than on immigration writ large and maintain they are trying to slow the number of migrants at the southern border in the name of national security.

But reports of potential curtailment to the asylum system have alarmed Democrats….

Adding to the troubles for negotiators is the push by conservatives to adopt as much of the House GOP’s signature border bill, H.R. 2, as possible. That was the message Speaker Mike Johnson (R-La.) delivered to a Senate GOP luncheon last week, creating a tug of war between the two sides.

Democratic negotiators have tried to assure those in their party that any final product will in no way resemble the conservative proposal that they consider a non-starter.

Now of course something may give so that a budget deal gets done. But it hasn’t two times now. It’s now become clear that the cliffhanger of the lack of an agreement can be finessed short term with a stopgap funding bill. So the lack of a bona-fide crisis to force resolution means hardliners can hold fast. So it’s entirely possible that we’ll see yet more temporary funding, which means more delay in any Ukraine cash.

Recall as we have stressed that the parade of official visitors and tony journalists have almost entirely gone to Kiev, where only a comparatively few areas need to be kept in good shape (near official buildings, the embassy area, and the top tourist hotels and restaurants) to create Potemkin normalcy. And a few of these outsiders have gone to the front lines….which has been at points revealing, but not of general conditions in society and the economy. Given the big fall in GDP, the yawning budget deficit, the departure of millions and low odds that many will return (and those who left likely skew to prime age adults and the educated), the loss of the resources and output of the productive eastern oblast, domestic conditions are sure to be pretty poor. And that’s before unpleasant facts like the money to repair the Ukraine electrical grid after the Russian attacks of last winter was largely looted. So Russia may not have to do much more in the way of strikes to have it fall over under increased winter load. That could happen in large measure all on its own.2

Experts have pointed out that Russia has succeeded in greatly depleting Western weapons supplies even as the largely de-industrialized US/NATO combine has banged on about the paramount importance of not letting the evil Putin prevail in Ukraine. Yet the rhetoric of urgency has not even been remotely met with commensurate action, namely a World War II or even Sputnik-level rearmament program.

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1 Alexander Mercoursis and Gilbert Doctorow, among others, recently debunked Seymour Hersh’s latest story, which claimed that Russia’s General Gerasimov, the Chief of Staff, was negotiating with Ukraine General Zaluzhny (Doctorow is more willing to consider that there might be some elements of truth here; Mercouris’ good contacts supports his take that this story was quite the howler). The reasons for running this account through Hersh, who is dependent on US spooky contacts and not at all well informed about how Russia works, might be to flog the idea that Ukraine (and the US) were willing to offer reasonable terms that the Russians rejected. But anyone who has been following the war would recall that Putin clearly warned early last year that the longer the war went on, the harder it would become to negotiate with Russia. A second motive might be to heighten the simmering conflict between Zelensky and Zaluzhny, with the hope that Zelensky forcing Zaluzhny out would trigger military or other opposition and precipitate his removal or flight, an outcome the US would likely welcome (Zelensky has not been taking US direction for how to conduct the war for some time).

2 Expect new Russian attacks to be depicted as the cause if there are electricity crises, even if new strikes are limited. Note I am not saying Russia might not target the grid in a big way again, but that will be depicted as the cause of any crisis, as opposed to Ukraine stealing rescue funds rather than making repairs.

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