Tue. Dec 6th, 2022

Brussels, 9 November 2022

Following the European Council meeting of 20-21 October 2022, the Commission has today proposed an unprecedented support package for Ukraine of up to €18 billion for 2023. This will come in the form of highly concessional loans, disbursed in regular instalments as of 2023.

This stable, regular and predictable financial assistance – averaging €1.5 billion per month – will help cover a significant part of Ukraine’s short-term funding needs for 2023, which the Ukrainian authorities and the International Monetary Fund estimate at €3 to €4 billion per month. The support put forward by the EU would need to be matched by similar efforts by other major donors in order to cover all of Ukraine’s funding needs for 2023.

Thanks to this package, Ukraine will be able to keep on paying wages and pensions and maintain essential public services running, such as hospitals, schools, and housing for relocated people. It will also allow Ukraine to ensure macroeconomic stability, and restore critical infrastructure destroyed by Russia in its war of aggression, such as energy infrastructure, water systems, transport networks, roads and bridges.

Support under the instrument will be accompanied by reforms, to further enhance the rule of law, good governance, anti-fraud and anti-corruption measures in Ukraine. Therefore, while taking into account the evolution on the ground, financial support will be framed by policy conditions, geared towards strengthening Ukraine’s institutions and preparing the ground for a successful reconstruction effort, as well as supporting Ukraine on its European path.

How will this package work?

Building on previous Macro-Financial Assistance packages, this Macro-Financial Assistance+ (MFA+) instrument offers high flexibility and very favourable terms for Ukraine, catering to the country’s current situation and ensuring swift action to support the Ukrainian people.

The funds will be provided through highly concessional loans, to be repaid in the course of maximum 35 years, starting in 2033. In a further expression of solidarity, the EU also proposes to cover Ukraine’s interest rate costs, through additional targeted payments by Member States into the EU budget. EU Member States and third countries will also be able to add more funds to the instrument, to be used as grants, should they wish to do so. The funds will then be channelled through the EU budget, allowing Ukraine to receive the support in a coordinated manner.

The MFA+ instrument will be accompanied by reforms to help Ukraine advance on its path to becoming a member of the EU. This means that the Ukrainian government will have to complement the financial support with sectoral and institutional reforms, including anti-corruption and judicial reforms, respect of the rule of law, good governance, and modernisation of the national and local institutions. We will check that these reforms have been effectively put in place when paying out the instalments.

How will the package be financed?

To secure the funds for the loans, the Commission proposes to borrow on capital markets using the diversified funding strategy. This would enable the Commission to use the full portfolio of funding instruments to secure market funding on the most advantageous terms, when these are needed.

To guarantee this borrowing for Ukraine, the Commission proposes to use the headroom of the 2021-2027 EU budget in a targeted manner for Ukraine, limited in time. The headroom is the difference between the own resources ceiling (i.e. the maximum amount of resources that the Commission can ask Member States to contribute in a given year) and the funds that it actually needs to cover the expenses foreseen by the budget. The headroom, which is already used to guarantee the borrowing for financial assistance programmes to Member States, will guarantee bond investors that the amounts lent to the EU to finance Ukrainian loans borrowing will be repaid under all circumstances.

Next steps

To ensure a smooth delivery of the package, the Commission is putting forward three legislative proposals. These will need approval by the European Parliament and EU Member States in the Council before entering into force.

As always, the Commission will be working hand in hand with all EU institutions concerned for a swift adoption.

Background

Russia’s unprovoked and unjustified invasion of Ukraine has inflicted horrific human pain and mass-scale destruction of towns and communities. The European Union and its Member States have shown unwavering solidarity with people fleeing the war. The Union has immediately mobilised support to the Ukrainian government to keep its essential functions going, on top of the emergency and humanitarian assistance, and military aid provided to Ukraine.

Since the start of the war, Team Europe has mobilised €19.7 billion to support Ukraine, a large part of which comes in the form of macro-financial assistance (MFA). We have already disbursed €4.2 billion in MFA and will disburse further €2.5 billion by the end of the month as second disbursement of EUR 5 billion emergency MFA. Another €620 million in grants as budget support has also been disbursed to help Ukraine cover urgent needs on the ground.

In addition, Member States have shown unprecedented solidarity by welcoming millions of people fleeing the war in Ukraine. To support these efforts, the EU has activated the Temporary Protection Directive, granting access to jobs, housing, education and healthcare across the EU to over 4 million people fleeing the war.

The Commission is also coordinating its largest ever operation under the EU Civil Protection Mechanism for a wide array of support measures for Ukrainian citizens, including in the health, energy, food and agriculture sectors, and providing shelters, machinery as well as vital medical and energy equipment and evacuations.

Furthermore, the Commission, together with the Member States and the Energy Community, has been providing support for the Ukrainian energy system since this spring, and stepped up its efforts following the targeted shelling of vital energy infrastructure. The EU’s Civil Protection Mechanism has facilitated the shipment of generators, transformers and cables, among others. Under the Ukraine Energy Support Fund established by the Energy Community at the request of the European Commission, €25.5 million have been made available to cover the immediate needs in the energy sector. The Commission also delivered more than €40 million worth Chemical, Biological, Radiological and Nuclear threat countermeasures and equipment from the EU reserves and allocated €13 million for the restoration of laboratories damaged by the Russian occupiers at Chornobyl.

To support Ukraine, the Commission has also put forward measures to facilitate trade, notably the suspension of import duties on Ukrainian exports, and to establish solidarity lanes to help Ukraine export agricultural goods.

In addition, military assistance measures amounting to €3.1 billion have been provided under the European Peace Facility. This will be used to reimburse Member States for their in-kind military support to Ukraine.

The EU’s efforts to support Ukraine come on top of the comprehensive set of actions put forward to tackle the dramatic consequences of Russia’s war of aggression. The invasion has led to the ramping up of energy prices and of the overall cost of living for citizens in the EU. In this context, both the EU and Member States have been taking concrete measures to support businesses and households, especially vulnerable ones, in their ability to pay their energy bills and to ensure access to energy supplies.

For More Information

Macro-Financial Assistance + instrument

Proposal for an amendment to the Regulation on the Multiannual Financial Framework

Proposal for an amendment to the Financial Regulation

Questions and Answers: Commission proposes a support package of up to €18 billion for Ukraine for 2023

Communication of 18 May 2022 on Ukraine relief and reconstruction

Macro-Financial Assistance to Ukraine

EU Delegation to Ukraine

Ukraine: International Expert Conference hosted by the Commission and G7 Presidency reaffirms unwavering commitment to support Ukraine’s recovery

European Council conclusions, 20-21 October 2022

Proposal for an amendment to the Regulation on the Multiannual Financial Framework     

Regulation on the current financial framework

Proposal for an amendment to the Financial Regulation

Quote:

Source – EU Commission – Commission proposes an up to €18 billion support package to Ukraine for 2023

 


 

EU Commission Q&A on the proposed 2023 financing package for Ukraine

 

What has the Commission proposed today?

Following the European Council meeting of 20-21 October 2022, the Commission has today proposed a support package for Ukraine of up to €18 billion. This will come in the form of loans that would be disbursed as of 2023 through a Macro-Financial Assistance+ (MFA+) instrument.

When approved by the European Parliament and the Council, the funds will ensure predictable, continuous, orderly and timely financing, to help Ukraine:

  •  cover its immediate funding needs, with a view to maintaining the macro-financial stability of the country;
  •  ensure its rehabilitation, for instance in restoring critical infrastructure, such as energy infrastructure, water systems, transport networks, internal roads or bridges, or in strategic economic sectors and social infrastructure, such as healthcare facilities, schools, and housing for relocated persons, including temporary and social housing;
  •  carry out sectoral and institutional reforms, including anti-corruption and judicial reforms, respect of the rule of law, good governance, and modernisation of the national and local institutions;
  •  prepare for reconstruction, with a view to supporting the country on its path towards European integration.

The loans will be highly concessional, to be repaid in the course of maximum 35 years, starting in 2033. The EU also proposes to provide Ukraine a subsidy of the loan-related interest rate costs of Ukraine, which would be financed by the EU Member States in the form of external assigned revenue to the EU budget until the end of 2027. These contributions should be renewed after 2027, unless interest rate payments are covered through other means in future long-term EU budgets.

EU Member States as well as third parties will be able to add more funds to the instrument, to be used as grants, should they wish to do so. The funds would then be channelled through the EU budget, allowing Ukraine to receive support in a coordinated manner.

The exceptional size of the instrument and the high degree of concessionality have been made possible thanks to the proposal to use the guarantees provided by the EU budget, as well as of the use of a diversified funding strategy that would bring stability to the funding on optimal financial terms.

This package is thus an unequivocal expression of Europe’s ongoing solidarity and support to Ukraine, as demonstrated since the start of Russia’s unprovoked and unjustified war of aggression against the country.

Why is the Commission providing this support to Ukraine?

Due to Russia’s ongoing war of aggression, the short-term funding needs of Ukraine for 2023 are expected to be significant. According to recent estimates by the Ukrainian authorities, in cooperation with the International Monetary Fund, there will be a continuous funding gap of between €3 and €4 billion per month in 2023.

Ukraine will continue to experience high funding needs in the short-term, on account of the need to maintain essential state functions, ensure macroeconomic stability and rehabilitate critical infrastructure destroyed by Russia’s war. That is why it is critical that new support for Ukraine is mobilised as quickly as possible.

This proposal for predictable, continuous, orderly and timely support to Ukraine and covering a sizeable share of the expected funding gap for 2023 is an expression of the Union’s solidarity with the people of Ukraine. This support would need to be matched by other international partners to ensure that the entirety of Ukraine’s funding gap will be covered.

How is this MFA+ instrument different from the previous MFA operations?

The MFA+ instrument proposed today ensures a more predictable, continuous, orderly and timely financing to help Ukraine meet its sizeable short-term funding needs. It offers high flexibility and very favourable terms for Ukraine, catering to the country’s current situation and ensuring swift action to support the Ukrainian people.

This Macro-Financial Assistance+ (MFA+) instrument is of unprecedented size and duration. It foresees up to €18 billion in loans with very long maturities of up to 35 years, and repayment of the ‘principal’ (i.e. the original amount of money lent, without the interest costs) no earlier than 10 years from now. The concessional nature of the support is strengthened by the fact that the interest rate costs will be subsidised.

The mobilisation and disbursements under the MFA+ will be possible in a cost-effective and flexible manner, thanks to the diversified funding strategy that the proposals aim to establish as the baseline method for borrowing.

The loans to Ukraine will be guaranteed through the headroom of the 2021-2027 EU budget, instead of provisions and bilateral guarantees from Member States. The headroom is the difference between the own resources ceiling (i.e. the maximum amount of resources that the Commission can ask Member States to contribute in a given year) and the funds that the Commission actually needs to cover the expenses foreseen by the budget. Through this mechanism, the MFA+ will avoid further pressure on a strained EU budget due to provisioning requirements and complex arrangements, involving a multitude of ad-hoc national guarantees as was the case for the MFA support provided to Ukraine earlier in 2022.

Support under the instrument will require Ukraine to further enhance the rule of law, good governance, anti-fraud and anti-corruption measures.

Under what conditions will the funds be provided to Ukraine?

Financial support will be framed by policy conditions, increasingly geared towards strengthening Ukraine’s institutions and preparing the ground for a successful reconstruction effort, as well as supporting Ukraine’s efforts on its European path.

This means that the Ukrainian government will have to complement the financial support received with sectoral and institutional reforms, including anti-corruption and judicial reforms, respect of the rule of law, good governance, and modernisation of the national and local institutions. We will check that these reforms have been put in place when paying out the instalments.

In addition, as with previous MFA operations, there will be clear requirements to ensure transparency and efficiency when Ukraine will report on the progress made.

What does the legislative proposal consist of?

Today’s package consists of three pieces of legislation:

  • A proposal for a new instrument, Macro-Financial Assistance+ (MSA+), to ensure the Commission can channel support to Ukraine for 2023 in a predictable, continuous, orderly and timely manner;
  • A proposal to modify the Financial Regulation which sets out general rules on EU spending, to allow loans to be financed on the most advantageous terms and loans to be structured with higher concessionality thanks to borrowing using the diversified funding strategy as put in place for other borrowing operations for EU funds;
  • A proposal for a technical amendment to the regulation on the multiannual financial framework 2021-2027, to guarantee the borrowing for Ukraine using the budgetary “headroom”, i.e. the difference between the own resources ceiling (i.e. the maximum resources that the Commission can call from Member States in a given year) and the lower amount of funds provided for the EU budget actual spending in the same year.
What are the next steps in terms of adoption?

All three legislative proposals require the approval by the European Parliament and EU Member States in the Council before being finalised. For the modification of the Financial Regulation, an opinion of the European Court of Auditors is required as well.

As always, the Commission will be working hand in hand towards a swift adoption with all EU institutions concerned.

When will you start disbursing the funds to Ukraine?

The Commission hopes to secure swift adoption of today’s package with co-legislators.

Once the legislative process has been completed, the Commission and Ukraine can proceed to finalise the Memorandum of Understanding establishing the conditions for granting the loans and a Loan Agreement laying down the financial terms and conditions of the loans.

Once these instruments are in place, the Commission will be able to proceed with the first borrowing operation, and the first disbursement, early in 2023.

How many instalments do you foresee?

The use of the diversified funding strategy gives the Commission more flexibility in raising the necessary funds when market conditions are favourable and disbursing them when it is most useful to the Ukrainian authorities. This flexibility in adapting the borrowing and the disbursement schedules to best suit the needs of the Ukrainian authorities is one of the main reasons why moving to a diversified funding strategy is so important.

The Commission stands ready to organise the disbursements in a swift and flexible manner as of 2023, in response to the needs of the Ukrainian authorities. For example, disbursements can be carried out on a quarterly basis so as to minimise the administrative burden on the Ukrainian authorities.

How will the borrowing be guaranteed?

The European Commission has so far used provisions from the EU budget – held in a Common Provisioning Fund – to guarantee borrowing to third countries under its Macro-Financial Assistance programmes.

With Ukraine still being a country at war and facing a huge reconstruction challenge, much higher levels of provisioning are needed. For the most recent emergency MFA proposed earlier this year, the Commission has used a combination of 9% (of the loan value) provisioning from the EU budget and a further 61% in the form of guarantees from EU Member States. Although this approach has enabled the Commission to mobilise €6 billion in financial support – which are to be fully disbursed by the end of the year – this system of reliance on national guarantees to complement the depleted resources available from the EU budget – has reached its limits.

This is why the Commission is proposing to guarantee the loans to Ukraine for 2023 in the same way as done for borrowing for financial assistance to its own Member States, i.e. through the use of the budgetary headroom. It will be used in a targeted manner for Ukraine.

What is the diversified funding strategy and how will it help the Commission in the case of borrowing for Ukraine?

A diversified funding strategy combines the use of different funding instruments and funding techniques with open and transparent communication to market participants. It makes it possible to raise funds in a cost-efficient, flexible and financially sound manner, as the timing, the volume and the maturity of the financing can be adapted to market conditions and investor preferences.

The European Commission is currently using a diversified funding strategy to raise funds for other EU programmes already. With this proposal, the EU will move towards a single, unified issuance programme capable of serving different policy programmes.

The benefits in terms of organising financial assistance for Ukraine are as follows:

  • Being able to use the full range of funding instruments (including EU-Bill issuance) at the Commission’s disposal to borrow for Ukraine, thus obtaining the best possible funding costs, to the benefit of the beneficiaries and the EU budget (for any shared costs);
  • Capacity to arrange highly concessional loans with additional attractive features for Ukraine;
  • Flexibility in the timing of the loans to reflect the needs of Ukrainian authorities.

A liquidity pool set up by the Commission would ensure smooth payments to both the creditors and debtors of the Union.

What happens if Ukraine does not pay back? Who will cover the losses?

The loans that the Commission proposes for 2023 are highly concessional and with very long maturities of up to 35 years and repayment of the principal no earlier than 10 years from now. This will give Ukraine sufficient time to get back on its feet to be able to repay its obligations.

At the same time, in case the EU did not receive payments in time, the Commission would use in the first instance its liquidity pool as a first resource to ensure payments to EU bond investors. If necessary, as a last instance, the guarantee available through the headroom would enable the EU to call on its Member States.

How much funding has the Commission provided to Ukraine so far?

Since the start of the war, Team Europe has mobilised €19.7 billion to support Ukraine, a large part of which comes in the form of macro-financial assistance (MFA). We have already disbursed €4.2 billion in MFA. We are going to disburse another €2.5 billion by the end of the month. Another €620 million in grants as budget support has also been disbursed to help Ukraine cover urgent needs on the ground.

In addition, EU countries provided €3.1 billion in military assistance under the European Peace Facility, and a military assistance mission in support of Ukraine with EUR 100 million for the common costs aiming at training 15.000 soldiers as a first start. The EU and its Member States have also delivered unprecedented in-kind emergency response via the EU Civil Protection Mechanism, constituting the largest emergency operation since the creation of the Mechanism, and channels 70.000 tonnes of emergency items to Ukraine and the region. Furthermore, To support Ukraine, the Commission has also put forward measures to facilitate trade, notably the suspension of import duties on Ukrainian exports, and to establish solidarity lanes to help Ukraine export agricultural goods.

All this support comes on top of unprecedented solidarity shown by EU Member States with persons fleeing the war in Ukraine, of which over 4 million received Temporary Protection in the EU. This allows persons fleeing the war to have access to jobs, housing, education and healthcare across the EU.

What about long-term reconstruction needs?

The Russian war of aggression damaged profoundly the Ukrainian society and the economic potential of the country. A collective international effort will be required to support Ukraine in facing these needs.

Looking at the long-term reconstruction of Ukraine, on 25 October the Commission and the G7 Presidency jointly organised an International Expert Conference on the Recovery, Reconstruction and Modernisation of Ukraine in Berlin. Building on the discussions held in Lugano on 4-5 July at the Ukraine Recovery Conference, it added expert input and advice to the deliberations on the recovery process of Ukraine.

The Conference will feed into the creation of an international coordination platform as proposed by the Commission on 18 May. The EU is ready to assume its full responsibility, including by hosting the platform’s secretariat. The EU will stand with Ukraine for as long as it takes.

More Information

Press release: Commission proposes stable and predictable support package for Ukraine for 2023 of up to €18 billion

Macro-Financial Assistance + instrument

Proposal for an amendment to the Regulation on the Multiannual Financial Framework

Proposal for an amendment to the Financial Regulation

Communication of 18 May 2022 on Ukraine relief and reconstruction

Macro-Financial Assistance to Ukraine

EU Delegation to Ukraine

Ukraine: International Expert Conference hosted by the Commission and G7 Presidency reaffirms unwavering commitment to support Ukraine’s recovery

European Council conclusions, 20-21 October 2022

Proposal for an amendment to the Regulation on the Multiannual Financial Framework     

Regulation on the current financial framework

Proposal for an amendment to the Financial Regulation

 


Remarks by Executive-Vice President Dombrovskis at the Financing for Ukraine press conference

Good afternoon, ladies and gentlemen

Russia’s escalating aggression against Ukraine continues to cause tremendous suffering and damage – to Ukraine and its people above all, but also across the world.

The International Monetary Fund estimates that the Ukrainian economy will contract by 35% in real terms by the end of this year. Inflation is set to reach 30%.

Europe will continue to do all it can to support Ukraine and its people. We have promised this repeatedly from the start of Russia’s invasion in February.

Russia’s relentless attacks on Ukraine, its cities and its infrastructure, are making daily life unbearable. This pressure is constant. And it is being escalated cynically by the Kremlin. Ukraine needs our help.

Since February, the EU, its Member States and European institutions have provided €19.7 billion to support Ukraine’s economic, social and financial resilience.

Military assistance comes on top of that amount.

We expect the next payment of €2.5 billion of macro-financial assistance to reach Kyiv by the end of this month.

However, for the future, Ukraine has made it clear that our assistance should be as stable and predictable as possible.

So today, we are proposing to create a new instrument called Macro-Financial Assistance Plus to channel the EU’s financing to Ukraine. MFA+ would consist of long-term loans on highly favourable terms of up to €18 billion.

They would have a grace period of ten years, with maximum maturity running up to 35 years.

Interest-related costs would be covered by EU Member States.

This marks a departure from the EU’s “classical” Macro-Financial Assistance.

We are presenting a tailor-made package that reflects the acute needs that Ukraine faces – everything from paying people’s salaries and pensions, to repairing energy, water and other infrastructure – also social infrastructure like healthcare facilities and housing that Russia has destroyed.

Since the MFA+ will require backing by the EU budget, we envisage making very targeted changes to the MFF and the financial regulation. Johannes will explain this more.

This new aid will allow the EU to cover Ukraine’s short-term financing needs.

And it needs to be decided quickly – 2023 is approaching fast and Ukraine’s financing needs are urgent.

So we will be working to secure approval from the European Parliament and Council before the end of the year and we are aiming for the first disbursement in January.

Our support will be linked with sectoral and institutional reforms, especially those relating to the fight against fraud and corruption and to strengthening the rule of law.

In parallel, we are working for Ukraine’s long-term reconstruction plans, in line with the outcome of the recent Berlin conference and with a view to supporting Ukraine on its path towards European integration.

However, we need to remember that Ukraine is a country at war. So we need to be realistic and flexible, focusing on what is most relevant and feasible to achieve.

Thank you and I now pass the floor to Johannes.

Source – EU Commission 

 


Remarks by Commissioner Johannes Hahn at the press conference on the plan to provide regular financial support to Ukraine

 

“Check against delivery”

Thank you, Valdis.

Let me now zoom in some key innovations on the funding side.

First, to finance the loans, the Commission would borrow on financial markets on behalf of the EU, and the novelty of this instrument compared to previous MFA operations is that the guarantee for the borrowing would be given by the EU budget headroom, [that is, the difference between the own resources ceiling and the ceilings of the Multiannual Financial Framework]. The possibility to use the guarantee of the headroom is limited geographically, to Ukraine, as well as in time.

As you know, this approach is already used for the provision of financial assistance in the form of loans for Member States. In order to open the headroom to Ukraine (and only Ukraine) a targeted amendment of the MFF regulation is proposed.

The advantage of using the headroom as a backstop for the loans to Ukraine is that there is no need to constitute individual new Member States guarantees, which is procedurally more complex and financially less sound for an ambitious programme.

Second, funding for the loans would be organised through the diversified funding strategy (which we currently used only for Next Generation EU borrowing) and not through back-to-back lending

This has important advantages:

  • It gives us flexibility to arrange the loans independently of the time-profile of the borrowing, so that we can structure loans that are more attractive to Ukraine;
  • The central liquidity pool, that is a core feature of the diversified funding strategy, could be drawn upon as a first resource to make rapid payments to Ukraine as needed and ensure payments to EU bond investors in all eventualities and provides additional safeguards to the EU budget;
  • It allows us to organise all EU issuances efficiently under a single funding programme, thus boosting investor demand for more liquid EU bonds and allowing all EU issuances to be priced on more advantageous terms to the benefit of all who have to bear the costs of EU issuances.

By the way, speaking of costs of issuances, which need to be taken over by Member States, I would like to underline that:

  • There is no budget impact of our proposal next year, it only kicks in, in 2024
  • A very conservative estimate for the costs of the borrowing (3.5% on the interest for 15 year maturity bonds) is €630 million  for the whole year;
  • This amount will be divided among MS according to the GNI key and means for example for Austria around 18 million and for Hungary – €6 million
  • So we need to keep things in perspective here!

To allow implementation of the diversified funding strategy, a very narrowly framed single new provision is proposed to be added to the Financial Regulation.

Let me also briefly speak about the reform agenda underpinning the Instrument.

Clearly, it will take account of the evolution on the ground. In any case, it will feature reforms to further enhance rule of law, good governance, anti-fraud and anti-corruption measures.

Moreover, policy conditions will be increasingly geared towards strengthening Ukraine’s institutions and preparing the ground for a successful reconstruction effort as well as supporting Ukraine’s efforts on its European path. We will also foresee a review clause that allows us to adapt the conditionality at a later stage if needed.

I trust in the co-legislators’ support to facilitate the legislative procedure in the Council and in the Parliament swiftly.

A quick decision-making by the co-legislators will enable the Commission to make a first disbursement in January.

This would be of utmost importance as the Ukrainian authorities’ major concern is on meeting funding needs in the early weeks of 2023. Speed is of essence and we have an ambitious package to match the needs and expectations of our Ukrainian partners as well as of our other like-minded international partners.

Source – EU Commission

 

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