Eric Reguly

December 16, 2022

The Globe and Mail


The lobby of the handsome Ministry of Finance building in central Kyiv does not have a café or a restaurant or sofas where employees can sit and talk. It is dominated by a badminton court, complete with anti-skid rubber flooring. Sergii Marchenko, Ukraine’s Finance Minister, says the design oddity is his doing.

In April, two months after Russian President Vladimir Putin launched his invasion of Ukraine, Mr. Marchenko, his staff and the gendarmerie who protect them moved into the building, turning it into a sort of emergency hostel as they tried to keep the country from outright financial collapse.

Mr. Marchenko, 41, is a serious triathlete and needed a break from the round-the-clock pressure. He had the badminton court installed so everyone could blow off steam and get some exercise. “We found it impossible to think only about how to fill the gap in our budget,” he says. “If we did, we’d go insane. So we played badminton once in a while.”

He lived in the building until a few weeks ago and is now back with his wife, Marina, and their two young children in a nearby apartment. He hardly saw them between April and July as he worked overtime prying billions of dollars from Western allies, including the United States, Canada and Germany, to keep the sovereign show going as Ukraine’s GDP collapsed, tax revenue plummeted and inflation soared. “Was I depressed? Yes, a bit, when I could not see my children and my wife,” he says. “To me, my family matters most.”

He and I meet on a sunny Wednesday afternoon, about eight hours after the three million residents of Kyiv were reminded that the war remains a clear and present danger. Shortly before 6 a.m., air-raid sirens went off and the sound of explosions thundered across the city. President Volodymyr Zelensky later issued a video statement to say that 13 Iranian-made drones had been intercepted. There were no casualties but five buildings were damaged, probably from shrapnel from the shredded drones.

By the time we sit down together, Kyiv is pretty much back to normal, even if some parts of the city (including The Globe and Mail bureau’s area) are without electricity. Rotating blackouts are a fact of life as the power infrastructure wrecked by Russian missiles undergoes repairs.

Mr. Marchenko has become one of the most prominent figures in global finance since the start of the war. Besides being the boss in the hottest of global finance ministry hot seats, he is a member of Ukraine’s security council and next year becomes the rotating chair of the boards of governors of the World Bank and the International Monetary Fund, the global financial institutions that may play a big role in Ukraine’s reconstruction – assuming it wins the war.

We talk in a wood-panelled meeting room on the ministry building’s sixth floor, which is equipped with all the technology Mr. Marchenko and his deputies need to conduct video calls. Lean and fit, he is dressed entirely in black casual attire, including a vest he would use for running. He has competed in marathons and Half Ironman competitions. It looks like he has not shaved for three days.  “The pressure is huge, especially at the beginning of the war,” he says in English, which improved when he attended the Harvard Kennedy School a decade ago. “I have to do whatever I can, but that doesn’t mean I have to work myself to death.”

Mr. Marchenko, like the President, never thought Mr. Putin would mount a full-scale invasion, even though Russia had seized Crimea in 2014 – the idea of an all-out land war seemed so 20th century. When they were proven wrong, Mr. Marchenko’s first thought was to keep the country’s money channels open, not only so Kyiv could make payments on its debt but to pay pensioners and government employees.

In the late morning of Feb. 24, Mr. Zelensky, evidently fearing that Kyiv would fall, ordered Mr. Marchenko and his team to leave the city. Mr. Marchenko did not want to abandon Kyiv because all the tax, treasury, customs and management functions were housed in the capital. “But it was a direct order from the President,” he says. “It wasn’t a choice. It wasn’t a matter of discussion.”

They fled by train to a computer- and database-heavy secure government communications and operations hub – its location is secret – in western Ukraine that was commissioned with lightning speed with the help of cloud service providers. From there, the Finance Ministry was able to maintain its basic functions, such as pension and salary payments, largely without interruption. Mr. Marchenko was only able to return to the ministry’s headquarters in early April, when the battle for Kyiv ended with the humiliating withdrawal of Russian forces. I ask if he was scared when he was holed up in the west. Of course he was, he tells me, not for himself but for his family, his employees – some of whom were stuck in Russian-occupied territory – and especially for his parents.

His father, a musician, and his mother, a bookkeeper, both in their 60s, found themselves trapped in the Makariv region, about an hour’s drive west of Kyiv. It was the site of horrific fighting – and probable war crimes – until late March. Some 200 civilians were killed, and a few elderly residents were tortured before being shot in the head with their hands tied behind their backs. “They were right in the middle between Russian and Ukrainian troops,” he says. “It was very probable that they could be killed. In March, I lost connections with them. It was impossible to call them. They had no electricity, without gas, without mobile.” His parents survived. They saw their son in early April.

As he agonized over his family’s safety, he had to remain in crisis-management mode. Nothing less than the financial survival of Ukraine was at stake. Since March, the country has been running a budget deficit of US$5-billion a month. “This is a huge problem, this gap, that we try to solve every day,” he says.

Its cumulative deficit has come to some US$50-billion, a fortune for a country whose prewar GDP was only US$200-billion, about the same as Greece’s. How is he plugging the hole?  So far, Ukraine has hauled in a total of US$28-billion in emergency money, mostly from the U.S.,

Canada, Britain, the European Union, Germany, the World Bank and the IMF. That’s the good news.

The bad news is that only half that amount is in the form of grants (mostly from the U.S., plus about US$1.4-billion from Germany); the other half is in the form of loans (mostly from the EU, though Canada has provided US$1.5-billion). The loans will place an enormous burden on a country where funding the war, which consumes almost 60 per cent of the budget, may make the sovereign debt unsustainable.

Megan Greene, global chief economist at the Kroll Institute, says the EU is not being mean-spirited; its machinery is just not set up to extend grants. “The EU’s decision-making process is consensus-based, which makes it far easier to agree to extend loans than grants,” she said. “But it’s doubtful that a war-torn economy can emerge from conflict and service its existing debts, let alone new loans. Providing loans to Ukraine, not grants, increases the risk that it will fall into debt crisis just as it is trying to rebuild.” Next year the bloc will extend another US$18-billion in loans to Ukraine, compounding its debt burden.

Mr. Marchenko says Ukraine is in no position to negotiate a grant package from the EU. It needs money now. “We prefer to use existing facilities because time for us was important and entering discussions to obtain grants to support Ukraine could postpone the delivery of money to us,” he says.

The other issue is the timely arrival of the funds. A report by the Kiel Institute for the World Economy said the EU had delivered only about 27 per cent of its pledged financing to Ukraine by late November. The U.S. was far more efficient, delivering about 60 per cent.

Next year will see Mr. Marchenko go begging again. Ukraine’s budget deficit in 2023 is projected to be US$38-billion. The EU pledge and an expected US$9.9-billion from the U.S. will still leave Ukraine about US$10-billion short. Loan packages from the IMF and the World Bank, which is typically more flexible than the IMF, might go a long way to filling the gap.

But making any forecasts about Ukraine’s funding needs is mere guesswork as the war drags on. Both sides have rejected a Christmas ceasefire, and Ukraine’s Foreign Minister, Dmytro Kuleba, this week said the military expects a major Russian offensive in late January or February, after Moscow’s press-ganged new recruits are trained.

Ukraine’s economy is shattered. As Russia targets critical infrastructure such as electricity grids, Mr. Marchenko knows that an economic rebound is not certain. GDP is expected to fall 33 per cent this year, according to the National Bank of Ukraine. Next year, a 3.8-per-cent rebound is in the forecast. “This is possible, but if Ukraine goes into full blackout because of missile attacks on electricity systems, maybe not,” Mr. Marchenko says. “There could be a loss of 10 per cent of GDP next year in the worst-case scenario.”

At the same time, the country’s poverty rate has hit 25 per cent, up from the prewar level of 5 per cent; revenue from customs and taxes has fallen by alarming double-digit rates; and inflation is running at more than 25 per cent, partly because the central bank is printing money to try to plug

the deficit hole. All the numbers are going in the wrong direction, which should not come as a surprise for a country caught in an existential war.

The numbers only partly reflect the extreme pain that grips the country, its people and its government leaders, like Mr. Marchenko, who have to put on a brave face every day as they try to convince donor countries that Ukraine is not a hopeless cause. Their argument is that it is protecting European democracy from Russian aggression, which would only intensify if Ukraine were conquered. “We lost something more than can be calculated by money,” Mr. Marchenko says. “We have lost part of our future. Our children have lost years of their youth. It could take more than five years to recover from this war. What we can’t bring back is time. We have lost years and years.”

On that note, he disappears, not to the badminton court but to another video call, presumably to plead for more money to allow the men and women in uniform to keep fighting.