COMMISSION STAFF WORKING DOCUMENT ex-ante evaluation statement Accompanying the document Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on providing macro-financial assistance to Ukraine
Date: 2022-02-01
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: EU aid, EU loan, European neighbourhood policy, Ukraine, coronavirus disease, economic reform, economic stabilisation, enlargement of the Union, epidemic, macro-financial assistance

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 1.2.2022  SWD(2022) 25 final  COMMISSION STAFF WORKING DOCUMENT ex-ante evaluation statement Accompanying the document Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on providing macro-financial assistance to Ukraine {COM(2022) 37 final}  
 
 
Ex-ante evaluation statement 

EU Macro-Financial Assistance to Ukraine 

TABLE OF CONTENTS 

1.1 

1.2 

Introduction ............................................................................................................................. 2 

Ukraine's macroeconomic situation ........................................................................................ 3 

1.3. 

IMF and other donor support .................................................................................................. 5 

1.4. 

External financing needs .......................................................................................................... 8 

1.5. 

Structural reforms .................................................................................................................. 10 

2.1.  Objectives............................................................................................................................... 14 

2.2  Monitoring indicators ............................................................................................................ 15 

3.1 

3.2 

5.1 

5.2 

5.3 

5.4 

5.5 

6.1 

6.2 

Delivery mechanisms ............................................................................................................. 15 

Risk assessment ..................................................................................................................... 16 

Exceptional Character and Limited Time-frame .................................................................... 18 

Political preconditions and EU-Ukraine relations .................................................................. 18 

Complementarity ................................................................................................................... 19 

Conditionality ......................................................................................................................... 19 

Financial Discipline ................................................................................................................. 20 

Evaluation .............................................................................................................................. 20 

Achieving cost-effectiveness .................................................................................................. 20 

ASSESSMENT ON DEMOCRACY, HUMAN RIGHTS, RULE OF LAW AND REFORMS IN UKRAINE ......... 22 

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PROBLEM ANALYSIS AND NEEDS ASSESSMENT 

1.1 

Introduction 

Ukraine  has  been  developing  a  strong  partnership  with  the  European  Union  since  2014,  going 
beyond mere bilateral cooperation to evolve towards gradual political association and economic 
integration. The EU-Ukraine Association Agreement, which entered into force on 1 September 
2017 and includes a Deep and Comprehensive Free Trade Area (DCFTA), is the main tool for 
bringing  Ukraine  and  the  EU  closer  together.  In  addition  to  promoting  deeper  political  ties, 
stronger economic links and the respect for common values, the Agreement has provided a solid 
framework for pursuing an ambitious reform agenda, focused on the fight against corruption, an 
independent  judicial system,  the rule of law, and a better business  climate. The EU has shown 
continuous  support  for  these  reforms,  which  are  crucial  for  attracting  investments,  boosting 
productivity  and  lifting  the  standards  of  living  in  the  medium  term.  Among  other  support 
instruments, the EU has supported Ukraine through five consecutive Macro-Financial Assistance 
(MFA) operations that totalled EUR 5 billion of loans in the period 2015-2021. 

However,  notwithstanding  the  strategic  long-term  political  orientation  and  commitment  to 
implementing reforms, Ukraine continues to face significant challenges. The risks from the current 
geopolitical tensions and the security concerns at the border with Russia have been rising steadily 
since  mid-November.  They  have  weighed  heavily  on  investors’  confidence,  as  evidenced  by  a 
steady outflow of capital and drain on official foreign reserves. The weakening of the hryvnia, 
despite continued interventions by the National Bank of Ukraine (NBU) in support of the domestic 
currency, and the de facto loss of access to capital markets for the government increase the risks 
to  the  macroeconomic  outlook  of  Ukraine  significantly.  Moreover,  since  the  outbreak  of  the 
COVID-19 pandemic, more than 3.8 million contaminations resulted in almost 100,000 deaths. 
The return to economic growth in 2021 was slow, driven primarily by the retail and construction 
sectors, and the outlook is surrounded by considerable risks. Inflation accelerated and reached 10% 
at  the  end  of  2021.  The  growing  geopolitical  tensions  at  its  border  with  Russia  have  had 
considerable  knock-on  effects  on  confidence,  in  particular  of  foreign  investors.  The  national 
currency  has  lost  9%  of  its  value  relative  to  the  USD  since  mid-November  2021,  despite 
interventions by the National Bank of Ukraine for about USD 1.6 billion during the same period, 
thereby drawing down the stock of official reserves by 5.5%. 

In this context, the yields on the Ukrainian government Eurobonds increased to prohibitive levels 
in mid-January 2022. Private financing of the underlying balance-of-payments gap of Ukraine is 
thus no longer available at sustainable terms. Based on the latest projections by the International 
Monetary Fund in their first programme review, concluded on 8 November and approved on 22 
November 2021, the lack of access to capital markets would imply a widening of the country’s 
funding  gap  by  the  equivalent  of,  at  least,  USD  2.5  billion  in  2022.  Moreover,  the  escalating 
geopolitical tensions are having a detrimental effect on Ukraine's already precarious economic and 

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financial stability. Persistent security threats have already triggered a substantial outflow of capital. 
The negative impact on future investment, where Ukraine has been lagging behind regional peers 
already,  further  reduces  the  country’s  resilience  to  both  economic  and  political  shocks. 
Furthermore, the multiple threats  that Ukraine  currently is  facing put  a lot  of pressure on state 
institutions  to  protect  its  citizens,  which  generates  significant  additional  risks  to  the  overall 
stability of the country and the broader society. 

Against the backdrop of the loss of access to international capital markets due to the heightened 
geopolitical uncertainty and its impact on the economic situation in Ukraine, the Commission is 
submitting to the European Parliament and the Council a proposal to provide a new MFA of EUR 
1.2 billion in the form of loans to foster stability in Ukraine. 

The planned emergency MFA, put forward to provide swift support in a situation of acute crisis 
and to strengthen the resilience of the county, will have a duration of 12 months and include two 
disbursements.  The  release  of  the  first  tranche  would  occur  swiftly  after  the  approval  of  this 
proposal, upon entry into force of the Memorandum of Understanding (MoU) on specific structural 
policy measures, agreed between the European Commission on behalf of the EU and Ukraine. The 
disbursement of the second tranche would be linked to the continuous satisfactory implementation 
of both an IMF programme and the policy measures agreed in the MoU. The MoU underpinning 
this  emergency  macro-financial  assistance  operation  is  likely  to  focus  on  a  limited  number  of 
feasible,  short-term  policy  actions  in  the  most  urgent  priority  areas,  such  as  strengthening 
economic resilience and stability, governance and rule of law, and energy. A subsequent, longer-
term MFA could look beyond the immediate crisis and focus on a broader set of reform priorities. 
The implementation of the proposed operation is expected to go hand-in-hand with the support 
under  budgetary  operations  financed  by  the  Neighbourhood,  Development  and  International 
Cooperation Instrument (NDICI –Global Europe). The announced additional allocation of EUR 
120 million in NDICI – Global Europe grants will be important to further strengthen Ukraine’s 
state-building and resilience efforts. Moreover, the EU will work closely with Ukraine to follow 
up on their request for a subsequent, regular MFA operation when the situation stabilises. 

As further elaborated in this Commission Staff Working Document accompanying the proposal, 
the  Commission  considers,  based  also  on  the  assessment  of  the  political  situation  made  by  the 
European External Action Service, that the political and economic pre-conditions for the proposed 
MFA operation are satisfied. 

1.2 

Ukraine's macroeconomic situation 

The return of Ukraine to economic growth in 2021 was rather slow. Following a less severe than 
expected recession of 4% only in 2020, Gross Domestic Product (GDP) contracted by 2.2% year-
on-year  in  the  first  quarter  of  2021.  The  second  quarter  rebound  by  5.7%  year-on-year  was 
disappointing, given base effects with a corresponding severe contraction of 11.2% in the second 
quarter of 2020. Growth further decelerated to 2.7% year-on-year in the third quarter. The growth 
of the index of key sectors’ output slowed down to 2.3% year-on-year in July and the index even 

3 

 
 
declined  by  4.4%  in  September  2020.  Following  this  soft  patch,  it  subsequently  expanded 
noticeably  by  more  than  15%  in  the  last  months  of  2021  compared  to  a  year  earlier.  By  end-
November 2021, and relative to the same period of last year, early indicators suggest that industry 
(+1.3%)  and  construction  (+0.3%)  stagnated,  while  agriculture  (+16.7%)  and  retail  (+11.4%) 
recovered more assuredly. Yet, whether this moderate rebound sufficed to reach the pre-COVID-
19 GDP level by the end of 2021 is yet to be seen.  

After an initial deterioration during the recession, unemployment started to decrease in the second 
quarter of 2021. The unemployment rate reached 10.5% in the first quarter of 2021, which was 
still 1.9 percentage points above its level a year earlier. Yet, the return to economic growth had an 
immediate impact in the second quarter, when the unemployment rate declined already to 9.9%. It 
further declined to 9.7% in the third quarter. Nominal wages moderated their annual growth from 
almost 30% in April 2021 to 19% in November 2021, when the average monthly wage reached 
EUR 460. The annual growth of wages in real terms accelerated to almost 20% in April 2021, 
which is well above developments in 2018 (+12.6% by year-end) and in 2019 (+9.8%). By end-
November 2021, annual growth in real wages moderated to 8%.  

Taking into account the growing money supply and the accelerating inflation, the National Bank 
of Ukraine increased its key policy rate by 400 basis points to 10% between June 2021 and January 
2022. The growth rate of the supply of money in the broad sense (aggregate M3) accelerated to 
32.7% in November 2020, before slowing down to 13.5% in August 2021, thanks to the policy 
rate hikes. Although an increase in the precautionary demand for money might have played a role, 
money  supply  factors,  and  in  particular  additional  loans  to  the  government,  have  also  been 
instrumental, as suggested by the price dynamics. Consumer and producer prices inflation reached 
10.0% and 62.2% year-on-year in December 2021, respectively, up from 5% and 14.5% a year 
earlier, and compared to an inflation target of 4% to 6%. 

After a lasting stabilisation of the exchange rate and of the level of international reserves, an abrupt 
decline in investors’ confidence started to reverse the stabilisation trend in November 2021. Earlier 
in the year, the gross international reserves at the NBU had continued to grow and had reached 
more than USD 31.6 billion (more than 5 months of imports) in August 2021, also thanks to the 
allocation of additional Special Drawing Rights (SDRs) by the International Monetary Fund (IMF) 
for USD 2.73 billion. The improved confidence in the economy was also reflected in the higher 
amounts of net central bank purchases of foreign currency amid a context of domestic currency 
appreciation. However, the trend started reversing already in November 2021, when the NBU had 
to intervene in the foreign currency market by buying back hryvnia for the equivalent of USD 940 
million. The cumulative support measures in the first three weeks of 2022 reached another USD 
730 million. Thus, the stock of official foreign reserves ofg Ukraine declined by 5.5% in response 
to the changed investors’ perception. Meanwhile, the domestic currency has depreciated by 8% 
relative to mid-November and has been exchanging at 28.3 hryvnias for 1 US dollar in mid-January 
2022, up from 26.1 hryvnias for 1 US dollar in mid-November. In the current context of a gradual 

4 

 
 
global tightening of financing conditions, and as an emerging market, Ukraine is also exposed to 
additional fragility stemming from a re-assessment of global risks. 

According to the central government’s preliminary estimate, the 2021 public deficit stood at 3.1% 
of GDP in December, which is 2 percentage points better than initially planned. Public revenues 
increased by 24% year-on-year, which is 2.8 pps higher than planned, while public expenditure 
increased by 11% year-on-year, which is 1.5 pps less than planned. All of the expenditure increase 
reflects current spending, while public investment has stagnated. Based on data until end-August, 
the expenditure rise was particularly pronounced in healthcare (+32%), education (+26%) and state 
administration (+15%). Gross public debt reached 54.2% of GDP at the end of the second quarter 
of 2021, down from 60.8% at the end of 2020, largely reflecting a denominator effect. 

International investors’ perception of the sovereign risk remained volatile throughout 2021 and 
started  worsening  since  mid-November,  until  Ukraine  effectively  lost  access  to  international 
capital  markets  in  January  2022.  Against  the  backdrop  of  the  protracted  IMF  first  programme 
review, the yield on the EUR 1.25 billion Eurobond issued in January 2020 had deteriorated in the 
autumn of 2020 to almost 7% before stabilising below 5% in December 2020. Since then, it has 
increased again to 6.5% in November 2021 before reaching almost 10% on 18 January 2022. The 
yield on the USD-denominated Eurobond with remaining maturity of two years spiked to more 
than 20% on 19 January, before moderating slightly to 14.8% a few days later and compared to 
below  5%  in  early  November  2021.  This  deterioration  in  the  funding  conditions  implies  that 
Ukraine  no  longer  has  access  to  international  capital  markets  and  cannot  finance  its  external 
funding gap privately at sustainable rates. 

Consistent with the resumption of economic growth, the significant 2020 current account surplus 
turned into a deficit in 2021. After a surplus of USD 5.3 billion in 2020,  reflecting above all a 
strong demand compression as COVID struck, the current account registered a deficit of USD 830 
million, or 0.5% of GDP, in January-August of last year. Exports and imports of goods rose by 
respectively 36% and 30% year-on-year, resulting in a merchandise trade deficit of USD 3 billion. 
The services balance, where exports and imports increased by respectively 12% and 21%, showed 
a surplus of USD 2.3 billion. Primary income turned into a significant deficit of USD 3 billion, as 
opposed to a surplus of USD 3.2 billion in January-August 2020, despite remittances surging by 
18% to USD 8.9 billion. This development is driven by the significant widening in the deficit of 
the net investment income, in turn reflecting an improvement in the reinvested earnings by more 
than USD 5.2 billion relative to January-August 2020. 

The stock of foreign direct investment recovered notably in the first half of 2021, with reinvested 
earnings being the primary driver. Fresh foreign equity stakes increased by less than USD 700 
million in the first seven months of 2021. Yet, it is still encouraging that existing investors decided 
to re-invest their profits and incomes rather than repatriate them, for more than USD 4.7 billion. 
Portfolio  investments  also  contributed  towards  a  net  capital  inflow  of  USD  2.8  billion,  though 
essentially  due  to  investments  into  government  debt.  Other  investments,  mostly  driven  by  the 

5 

 
 
hoarding of foreign cash and by trade credits abroad, contributed to a net capital outflow by USD 
6.5 billion. Including the effect of all other factors, and in particular, the allocation of additional 
SDRs by the IMF amounting to USD 2.73 billion in August, official reserves increased by USD 
917 million in Jan-Aug 2021, as opposed to USD 1.5 billion during the same period a year earlier. 
They declined significantly in September as the country faced a peak in external debt repayments. 
Because of delays with official support, Ukraine used USD 1 billion from the new SDR allocation 
to repay external obligations in September. Moreover, the official reserves have been declining 
since  mid-November  2021  due  to  cumulative  foreign  exchange  interventions  in  support  of  the 
domestic currency for about USD 1.7 billion. 

Table 1: Ukraine – Selected macroeconomic indicators, 2017-2021 

Source: National authorities, Commission staff. 

1.3. 

IMF and other donor support 

The IMF has been engaged in Ukraine with successive programmes since 2014, accompanied by 
EU MFA operations. Following a Stand-by Arrangement in 2014, the IMF approved a four-year 
Extended Fund Facility (EFF) programme of USD 17.5 billion for Ukraine in March 2015, out of 
which USD 8.4 billion were disbursed only. This programme was replaced in December 2018 by 
a Stand-by Arrangement (SBA) for a total of USD 3.9 billion, out of which USD 1.4 billion were 
disbursed.  General  political  uncertainty  and  a  divided  parliament  contributed  to  the  poor  track 
record with implementation of commitments. Following the 2019 parliamentary elections, the new 
government started negotiations on a new programme with the IMF. 

On  7  December  2019,  the  IMF  announced  the  conclusion  of  a  staff-level  agreement  with  the 
Ukrainian  authorities  on  a  new,  three-year  programme  under  the  EFF  for  USD  5.5  billion. 
However, in 2020, the plans for a new EFF programme were superseded by an eighteen-month 
SBA  that  would  allow  for  more  policy  flexibility  in  light  of  the  COVID-19  crisis.  Staff-level 
agreement on this new SBA for about USD 5 billion was reached on 21 May 2020. Policies under 
the  new  arrangement  focus  on  four  priorities:  (i)  mitigating  the  economic  impact  of  the  crisis, 

6 

Ukraine20172018201920202021 latestDatesNominal GDP, USD millions112,202130,844154,136155,495168,315H1 annualised Nominal GDP per capita, USD2,6393,0953,6663,6503,980est 2021Real GDP, % change2.53.43.2-4.02.7Q3Consumer price inflation, %, end of period13.79.84.15.010.0DecemberConsumer price inflation, %, average14.411.07.92.77.7SeptemberKey monetary policy rate, %, end of period14.518.013.56.010.0January'22Unemployment rate, LFS, %9.58.88.210.19.7Q3General government balance, % of GDP-1.4-1.9-2.2-5.4-3.1DecemberPublic expenditure, % of GDP35.535.134.538.036.8Q2Gross Public debt, % of GDP71.860.950.260.854.2Q2Current account balance, % of GDP-2.2-3.3-2.73.6-5.3Q2Official international reserves, USD billion18.820.825.329.130.9DecemberInternational reserves, months of imports3.23.34.84.96.1DecemberGross external debt, % of GDP102.987.779.080.874.4Q2Net foreign direct investment, % of GDP3.33.43.4-0.14.6Q2 
 
including  by  supporting  households  and  businesses;  (ii)  ensuring  continued  central  bank 
independence and a flexible exchange rate; (iii) safeguarding financial stability while recovering 
the costs from bank resolutions; and (iv) moving forward with key governance and anti-corruption 
measures  to  preserve  and  deepen  recent  gains.  Following  the  successful  implementation  by 
Ukraine of the attached prior actions, the IMF Executive Board approved the new SBA on 9 June 
2020 and disbursed the equivalent of USD 2.1 billion on the same day. 

Ukraine’s engagement with the IMF under the new programme has been slow and uneven. While 
Ukraine met the two structural benchmarks for the period up to end-August 2020 on time, there 
has been a lack of progress and even some evidence of backtracking in relation to crucial reforms 
in the areas of rule of law, the fight against corruption and governance of state-owned enterprises. 
This  delayed  the  official  start  of  the  first  IMF  review  mission  to  mid-December  2020.  The 
engagement with the IMF was revigorated in the summer of 2021. A physical visit by the Minister 
of Finance to Washington in mid-July provided a push to the reform implementation momentum, 
which was backed also by a strong effort from the Rada.  

The Executive Board of  the  IMF validated the first  programme review on 22 November 2021, 
which paved the way for the immediate disbursement of the equivalent of about USD 700 million. 
Simultaneously, the Board also approved the extension of the current Stand-By Arrangement until 
end-June 2022. Two more programme reviews are planned. If these disbursements take place, the 
outstanding  amount  of  IMF  loans  to  Ukraine  would  reach  the  binding  upper  limit  of  450%  of 
Ukraine’s SDR quota in the IMF. This means that the IMF would not be able to provide any net 
funding to Ukraine beyond the current programme. 

As regards support to Ukraine from the World Bank, the Bank’s commitments to the country have 
totaled more than USD 14 billion in about 80 projects and programmes since Ukraine joined the 
World Bank in 1992. The portfolio of projects supports improvements in basic public services that 
directly  benefit  citizens,  in  areas  such  as  water  supply,  sanitation,  heating,  power,  energy 
efficiency,  roads,  social  protection,  education  and  healthcare,  as  well  as  private  sector 
development. 

Since the beginning of the pandemic, the World Bank has provided Ukraine with a total of USD 
2.3 billion in budget support and investment projects. Ukraine received two Economic Recovery 
Development Policy Loans (DPLs), each of USD 350 million, in June 2020 and December 2021. 
The  second  loan  complements  additional  financing  of  USD  150  million  for  the  Emergency 
COVID-19 Response and Vaccination Project, approved on 10 December 2021. The DPLs support 
key reforms in Ukraine, notably i) fostering de-monopolization of the economy and strengthening 
the  anti-corruption  institutions;  (ii)  strengthening  land  and  credit  markets,  including  access  to 
finance  for  small  farmers;  and  (iii)  bolstering  the  social  safety  net  for  the  vulnerable  elderly 
population to cushion the impact of the COVID-19 pandemic.  

7 

 
 
In turn, the EU has stepped up its assistance since the events of 2013/2014 and the security situation 
in and around Ukraine,  underlining the importance it attaches to common fundamental values and 
respect for Ukrainian stability, sovereignty and territorial integrity.  

The  EU  financial  support  via  the  programmes  of  the  2014–2020  Multi-annual  Financial 
Framework  provided  EUR  1.565  billion  bilateral  financial  and  technical  assistance  under  the 
European Neighbourhood Instrument (ENI) to support Ukraine's stabilisation and reform process 
in  areas  such  as  the  fight  against  corruption,  judicial  and  public  sector  reforms,  economic  and 
private sector development,  energy reforms as  well as  support to  civil society organisations. A 
specific allocation under ENI was also made to support the COVID-19 response in 2020 (a support 
package of more than EUR 190 million covering both the health crisis and socio-economic relief). 
In addition to ENI, Ukraine benefits from different cooperation projects at regional level in a wide 
range  of  fields,  and  of  assistance  under  specific  EU  instruments,  for  instance  the  Instrument 
contributing to Stability and Peace (IcSP) or the  Instrument for Democracy and Human Rights 
(EIDHR). 

The new Multi-annual Financial Framework 2021-2027 will continue the bilateral assistance to 
Ukraine  under  the    heading  “Neighbourhood,  Development  and  International  Cooperation 
Instrument – Global Europe” (NDICI-Global Europe), which streamlines a number of previous 
financial instruments within one broad geographical and thematic instrument. The Multi-annual 
Indicative Programme for the seven years prioritizes the areas of economy, rule of law, climate 
resilience, digital transformation, support to civil society and response to conflict.  

The Annual Action Plan 2021 financed under NDICI-Global Europe was adopted on 15 December  
2021  for  the  total  commitment  of  EUR  141  million  to  support  border  management,  media 
democracy and fight against disinformation, and reform of the Public Administration.  Moreover 
the Technical Cooperation Facility 2021 supports institutional and administrative capacities of the 
Ukrainian  public  authorities  to  implement  reforms  and  commitments  under  the  Association 
Agreement (and DCFTA) and EU agreements. The Commission has recently announced that (in 
conjunction  with  the  emergency  MFA)  to  strengthen  Ukraine’s  state-building  and  resilience 
efforts, another EUR 120 million will be allocated to Ukraine this year.1    

In  addition  to  policy-based  support,  Ukraine  also  benefits  from  substantial  project-based  loans 
from  the  European  Bank  for  Reconstruction  and  Development  (EBRD)  and  the  European 
Investment Bank (EIB), among others.  

As of end-November 2021, the cumulative EBRD investment since 1991 reached EUR 16 billion, 
with  a  private  sector  share  of  48%  in  the  portfolio.  The  current  portfolio  amounts  to  EUR  4.1 
billion, out of which EUR 2.4 billion are actually realised, distributed across 203 projects. 56% of 
these  investments  are  in  the  area  of  sustainable  infrastructure,  32%  in  industry,  commerce  and 
agrobusiness, with the remaining 12% supporting financial institutions. Annual investment by the 

1 https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_22_545. 

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EBRD  fluctuates  between  EUR  500  million  and  EUR  1  billion  and  involves  an  average  of  30 
projects. 

The EIB has been active in Ukraine since 2007. It operates in the country in line with the European 
Neighbourhood Policy (ENP), the Eastern Partnership (EaP) and other EU bilateral agreements. 
Its operations make a particularly strong contribution to the labour market, preserving existing jobs 
and creating new opportunities. EIB operations focus on financing transport, small and medium-
sized enterprises (SMEs), energy efficiency as well as municipal and social infrastructure. Since 
the start of its activities in Ukraine, he EIB has committed more than  EUR 1.9 billion to support 
small and medium companies and EUR 3.6 billion to support the public sector. Lately, the EIB 
has  been  working  actively  to  improve  the  absorption  rate  of  its  commitments,  as  actual 
disbursements are less than 30% of commitments. 

1.4.  External financing needs  

In  its  November  2021  update  of  its  projections  of  the  balance  of  payments  (BoP),  general 
government finances and gross external financing requirements of Ukraine, the IMF estimates an 
overall financing gap of USD 2.6 billion for 2022. The underlying balance of payments gap that 
results  from  private  international  transactions  is  estimated  at  USD  3.6  billion.  Given  the  high 
amount of accumulated official reserves, the IMF allows for a reduction in the stock of reserves 
throughout 2022 by USD 1 billion, which explains the difference between the underlying balance 
of payments gap and the estimated financing gap. As of November 2021, the IMF considered that 
this financing gap was fully funded with available official financing. In particular, the IMF itself 
would  contribute  USD  2.3  billion,  with  the  remaining  USD  0.3  billion  coming  from  other 
international donors. At the time, the projections did not include any official contribution by the 
EU. 

Table 2: Ukraine – Financing Gap in USD billion, 2020-2022 

Source: IMF projections. 

However,  the  change  in  foreign  investors’  sentiment  since  November  2021  and  the  sell-off  of 
domestic  currency  holdings  question  the  validity  of  two  critical  assumptions.  First,  the  loss  of 

9 

in USD billion202020212022Financing gap3.42.82.6      Underlying BOP gap-0.42.23.6      Official reserves accumulation3.80.6-1Available official financing      from the IMF2.10.72.3      from the EU1.20.70      from other institutions0.11.40.3Memo:Capital market access4.61.82.5Gross international reserves29.129.728.7 
 
 
market access, as evidenced by the hike of the Eurobond government yields to prohibitive levels 
in mid-January, implies that the assumed market funding of the government’s funding needs for 
USD 2.5 billion will not materialize. Hence, the financing gap widens by this same amount, which 
is unfunded as of today. Second, should the loss of confidence by foreign investors persist, the 
contraction in the official foreign reserves would exceed the projected USD 1 billion reduction. 
Indeed, the National Bank of Ukraine has intervened already in the first three weeks of January 
2022  for  about  USD  750  million.  Should  the  trend  persist,  the  reduction  in  the  international 
reserves that had been projected to take place over the course of one year could instead take only 
one month to materialise. Without a notable improvement in the confidence of foreign investors 
and domestic currency holders, the financing gap could even widen by much more than USD 2.5 
billion. 

Assessing  financing  needs  is  surrounded  by  an  unusual  degree  of  uncertainty  at  the  current 
juncture. From the point of view of government finances only, Ukraine faces a USD 2.5 billion of 
external  debt  redemptions  in  the  course  of  2022,  with  the  largest  one-time  payment  of  USD  1 
billion on 1 September (Eurobond maturity). The remaining redemptions are split relatively evenly 
throughout the year. The reserve liquidity available to the State Treasury is currently estimated at 
the  equivalent  of  USD  2  billion,  out  of  which  60%  is  in  foreign  currency.  Without  access  to 
international  capital  markets,  the  government  of  Ukraine  would  have  to  rely  primarily  on  the 
domestic banks to finance its deficit. This, however, could result in a further drain on the official 
reserves, thereby de facto widening the external financing gap beyond USD 2.5 billion. While the 
government could use the avilable liquidity reserve of USD 2 billion, a sizable impact on the stock 
of official reserves could potentially further weigh on international confidence. This emergency 
MFA responds to the new situation in the external financing gap of Ukraine and aims at stabilising 
both the level of official reserves and investors’ sentiment. 

The proposed MFA operation of EUR 1.2 billion would cover almost half of the USD 2.5 billion 
by which the external financing gap has widened as a result of the loss of access to international 
capital markets. The level of MFA support is justified by the exceptional crisis context in Ukraine. 
Moreover, it is is in line with the conclusions of the ECOFIN Council of 8 October 20022, which 
specified that “[…] for candidate countries (countries which have signed Europe or Association 
Agreements with the EU) and European countries which are concerned by the Stabilization and 
Association  process  (countries  which  have  signed,  or  are  expected  to  sign,  Stabilisation  and 
Association Agreement), the maximum Community involvement may amount to as much as 60% 
of the country’s residual financing needs over and above contributions from multilaterals.” 

1.5. 

Structural reforms 

Since the political transition in 2014, Ukraine embarked on an ambitious and wide-ranging reform 
programme. This programme has been supported by large-scale financial and technical assistance 

2 https://data.consilium.europa.eu/doc/document/ST-12592-2002-INIT/en/pdf. 

10 

 
 
                                                           
provided by the EU and other multilateral and bilateral partners. Following the initial strong reform 
impulse, however, progress has become uneven, which impacted not only on the pace of economic 
recovery but also on the implementation of the financial support programmes for the country.3 The 
main obstacles to faster reform implementation were the complex domestic political environment, 
the lack of political will among some of the decision-makers to implement ambitious reforms in 
certain sectors, and the opposition by vested interests some of which continue to exert influence 
on policy-making in the country. 

Despite these challenges, Ukraine managed to push through reforms in a variety of sectors. Here 
is an overview of the recent reform efforts, with a focus on those supported by the MFA operations 
that have been implemented over the last years.   

Governance reforms resulted in the set-up of new anti-corruption institutions: the National Anti-
Corruption Bureau (NABU), the National Agency for the Prevention of Corruption (NAPC), the 
Specialised  Anti-Corruption  Prosecutor  Office  (SAPO)  and  the  High  Anti-Corruption  Court 
(HACC). After a difficult start, these institutions have started to prove their effectiveness: in the 
last two years, the HACC issued 45 decisions in cases investigated and prosecuted by NABU and 
SAPO respectively, 80% of which led to convictions for bribery, embezzlement of public funds, 
abuse of office and other corruption offenses4. The most recent legislative changes in this field 
aimed at strengthening the institutional independence of NABU and enhancing the credibility of 
the selection process of its head.  

In spite of reform efforts since 2016, the current judicial system suffers from very low levels of 
public trust due to systemic corruption, low efficiency of the courts, poor management of resources 
and insufficient transparency. This is considered as a key impediment to investment and economic 
growth.  The  recently  adopted  laws  adress  two  key  judicial  self-governance  bodies,  namely  the 
High  Council  of  Judges  (through  integrity  vetting)  and  the  High  Qualification  Commission  of 
Judges that pre-selects judges for Ukrainian courts. However, challenges remain, including in the 
Constitutional  Court.  The  attestation  of  prosecutors  at  both  regional  and  local  levels  has  been 
recently carried out; however, some 2000 cases challenging the attestation are pending in various 
courts. 

Important measures were launched in order to improve corporate governance and transparency 
of state-owned companies and banks. For instance, their supervisory boards have been granted 
appropriate powers and are required to have a majority of independent members, to be selected on 
a  competitive  and  transparent  basis.  However,  the  adherence  to  the  corporate  governance 
framework has worsened. 

3   This effect was evidenced by the the non-disbursement of the final loan instalment from  the MFA III operation 

(2015-18) and delays in IMF programme reviews.  

4  IMF Staff report for the first review under the SBA, November 2021 

11 

 
 
                                                           
The energy sector also witnessed comprehensive reforms, aimed at introducing the liberalised gas 
and electricity market model inspired by the EU Third Energy Package. Ukraine transposed the 
majority of the relevant EU gas and electricity-related sector acquis in 2015-17. This legislation 
provided, inter alia, for a stronger role of the market in the energy sector, for unbundling generation 
and supply from its transmission and distribution and for strengthening of the energy regulator. A 
number of issues hamper the functioning of and competition in the market. In view of the recent 
international energy price hikes, mounting debts and payment arrears in both gas and electricity 
sector  are  of  particular  concern.  Secure  and  competitive  provision  of  energy,  which  is  of  key 
importance for the resilience of the economy, remains a challenge. 

In  the  area  of  public  finance  management,  the  track  record  is  rather  favourable.  New  laws 
adopted in 2018 improved the fiscal governance by introducing medium-term budgeting and by 
strengthening programme-based budgeting.  The State Tax Service and Customs Service, created 
in 2018 and effectively reorganised in 2019 and early 2020, are now fully operational, even though 
the quarantine conditions have not allowed yet for an open and transparent selection of their senior 
management. More recent actions in this area included, inter alia, enhancing the VAT monitoring 
system based on risk management, developing the methodology of electronic tax audit and and the 
use of new IT solutions in customs. To improve tax compliance, the authorities started the gradual 
deployment of electronic software tax registrars in 2020, to be fully adopted by all businesses by 
2025.    At  the  same  time,  the  State  Fiscal  Service,  considered  as  an  old-style  tax  police  with  a 
disruptive effect on business, has been replaced by the recently established Bureau for Economic 
Security. 

In the social domain, a reform of healthcare financing aims at improving its efficiency and quality 
of services, under the principle “the money follows the patient” A new institution, the National 
Health  Service  of  Ukraine  has  been  established,  which  concludes  contracts  with  healthcare 
providers for the provision of healthcare services. Another central agency has been created to deal 
with centralised procurement of medicines. Other major actions in the social field concerned, intrer 
alia, providing social benefits and integration measures for some 1.4 million of internally displaced 
persons following the Donbas war; and improved targeting of the Household Utility Subsidies.  

While structural challenges needs to be addressed, this emergency MFA operation will primarily 
focus on reforms that addresses the current crisis and are realistic within the operation’s one-year 
availability period. Focus areas may include economic resilience, governance and the rule of law, 
and energy sector. The detailed list of structural actions supported by the MFA will be agreed with 
the Ukrainian authorities after the adoption of the MFA decision.  

2. 

OBJECTIVES AND RELATED INDICATORS OF THE MACRO-FINANCIAL ASSISTANCE 

2.1.  Objectives 

The objectives of the proposed MFA operation are to:  

12 

 
 
 
i)  Contribute  to  covering  the  external  financing  needs  of  Ukraine  in  the  context  of  a  sizeable 
external  financing  gap  and  the  current  lack  of  access  to  external  capital  markets  due  to  a 
significant increase in geopolitical tensions and security concerns at the border with Russia.  

ii)  Support  structural  reform  efforts  aimed  at  restoring  external  stability,  improving  overall 
macroeconomic  management,  strenghening  economic  governance  and 
transparency, 
improving  the  conditions  for  sustainable  growth  and  strengthening  the  resilience  of  the 
country. 

iii) Facilitate and encourage efforts by the Ukrainian authorities to implement measures identified 
under  the  EU-Ukraine  Association  Agreement  and  in  the  context  of    bilateral  cooperation 
programmes  (including  capacity-building),  support  regulatory  convergence  and  economic 
integration with the EU and strengthen the EU's economic policy dialogue with the authorities. 

2.2  Monitoring indicators 

The fulfilment of the objectives of the assistance will be assessed by the Commission, including 
in the context of the ex-post evaluation (see below), on the basis of the following indicators:  

i)   Progress with macroeconomic and financial stabilisation, notably by assessing the track record 

of implementation of the IMF-supported programme.  

ii)  Progress with the implementation of structural reforms, notably the specific policy actions to 
be  identified  as  conditions  for  disbursement  of  the  assistance,  which  will  be  included  in  a 
Memorandum of Understanding to be negotiated between the Commission and the Ukrainian 
authorities. 

3.  DELIVERY MECHANISMS AND RISK ASSESSMENT 

3.1 

Delivery mechanisms 

The MFA operation under consideration is expected to cover part of the residual financing gap for 
the  2022-2024  period  and  would  amount  to  a  maximum  of  EUR  1.2  billion.  The  Commission 
proposes to provide the assistance in the form of medium-term loans. Given the proposed size of 
the operation, the Commission is considering releasing the assistance in two instalments. The first 
instalment will be released upon the signature and entry into force of the relevant documents (the 
Memorandum of Understanding and the Loan Facility Agreement) and will be conditional upon a 
satisfactory track record  of implementation  of the programme agreed between Ukraine and the 
IMF. The disbursement of the second instalment will be also conditional on a positive assessment 
of progress made with respect to a number of macroeconomic and structural adjustment measures.  

MFA is an untied and undesignated macroeconomic support instrument, which helps the partner 
meet its external financing needs, and may contribute to alleviating budgetary financing needs. 
The funds would be paid to the Central Bank of the partner. Subject to provisions to be agreed in 
the  Memorandum  of  Understanding,  including  a  confirmation  of  residual  budgetary  financing 

13 

 
 
needs,  the  funds  may  be  transferred  to  the  Ministry  of  Finance  of  the  partner  as  the  final 
beneficiary.  

3.2 

Risk assessment 

There are fiduciary, credit, policy and political risks related to the proposed MFA operation. 

There  is  a  risk  that  the  MFA,  which  is  not  dedicated  to  specific  expenses  (contrary  to  project 
financing, for example), could be used in a fraudulent way. In general terms, this risk is related to 
factors such as the quality of management systems in the central bank and the ministry of finance, 
administrative  procedures,  control  and  oversight  functions,  the  security  of  IT  systems  and  the 
appropriatedness of internal and external audit capabilities. 

To mitigate the risks of fraudulent use, several measures will be taken. First, the Loan Agreement 
will comprise a set of provisions on inspection, fraud prevention, audits, and recovery of funds in 
case of fraud or corruption. Also, the assistance will be paid to a dedicated account of the National 
Bank of Ukraine.  

Moreover, in line with the requirements of the Financial Regulation, the Commission services have 
carried out an Operational Assessment of the financial and administrative circuits of Ukraine in 
order  to  ascertain  that  the  procedures  in  place  for  the  management  of  programme  assistance, 
including  MFA,  provide  adequate  guarantees.  The  final  report  of  the  Operational  Assessment, 
prepared by a consultancy company, was received in August 2018. The report concludes that the 
status of Ukraine’s financial circuits and procedures is deemed favourable for a subsequent MFA 
operation.  An  update  of  the  Operational  Assessment  has  been  prepared  in  June  2020. 
Developments in this area are closely monitored by the EU Delegation in Kyiv, also through the 
regular progress reports.  

Finally,  the  assistance  will  be  liable  to  verification,  control  and  auditing  procedures  under  the 
responsibility  of  the  Commission,  including  the  European  Anti-Fraud  Office  (OLAF),  and  the 
European Court of Auditors.  

A second risk stems from the possibility that Ukraine will fail to service the financial liabilities 
towards the EU stemming from the proposed MFA loans (default or credit risk), which could be 
caused by a significant additional deterioration of the balance of payments and fiscal position of 
the country or/and by unforeseen events. This risk is mitigated, however, by the fact that the EU’s 
MFA is one of several international donors supporting Ukraine, including the IMF. The loan is 
backed by the External Action Guarantee. The provisions to cover any financial liabilities arising 
from the loan will be held in the Common Provisioning Fund. The provisioning rate for the macro-
financial assistance is set at 9% of the total amount of the loan. 

Another  key  risk  to  the  operation  stems  from  the  regional  geopolitical  situation,  in  particular 
potential escalation of tensions stemming from Russia and the lingering conflict in the eastern part 

14 

 
 
 
of  the  country,  which  acts  as  an  important  deterrent  to  private  capital  inflows  and  impacts 
negatively  on  the  economic  recovery.  A  worsening  of  the  regional  geopolitical  situation  could 
have  a  negative  impact  on  Ukraine’s  macroeconomic  stability,  affecting  the  repayment  of  the 
proposed MFA.  Diplomatic efforts for de-escalation conflict management and resolution continue, 
including with the support of the EU.  

On  the  domestic  front,  the  main  risks  stem  from  the  complex  political  environment  and  the 
existence of strong vested interests against reforms. Various multifaceted attempts to destabilise 
Ukraine’s  internal  political  landscape  cannot  be  excluded  thereby  limiting  the  political  capital 
further. This could undermine a more broadbased reform implementation at the current juncture. 
In the current difficult political environment, Ukrainian authorities have requested further MFA, 
knowing that the disbursement of the second tranche  will be conditional on the implementation 
of reforms to be agreed. This conditionality provides a tool to support reform-oriented forces in 
the  country  and  in  particular  within  the  authorities  (government  and  Parliament).  Moreover, 
politically  Ukraine  remains  highly  committed  to  its  comprehensive  commitments  under  the 
Association  Agreement  with  the  EU,  including  in  the  part  on  the  establishment  of  a  Deep  and 
Comprehensive Free Trade Area, which is also reflected in the government’s action plan of April 
2020. Having made  a thorough  assessment of the risks, the Commission services  consider that 
there are sufficient grounds and guarantees to proceed with the proposed MFA to Ukraine.  

The  Commission  services  will  maintain  close  contacts  with  the  authorities  during  the 
implementation  of the macro-financial assistance in  order to  address  quickly any concerns that 
may arise.  

4.  ADDED VALUE OF EU INVOLVEMENT 

The Union's financial support to Ukraine reflects the country's strategic importance to the EU in 
the  context  of  the  European  Neighbourhood  Policy.  The  MFA  instrument  is  a  policy-based 
instrument directed to alleviate short- and medium-term external financial needs. As a part of the 
overall  EU  package  of  assistance,  it  would  contribute  to  supporting  the  European  Union's 
objectives  of  economic  stability  and  economic  development  in  Ukraine.  By  supporting  the 
authorities' efforts to establish a more stable macroeconomic framework and improve economic 
governance, the proposed assistance would help improve the effectiveness of other EU financial 
assistance to the country, including budgetary support operations. 

The EU's MFA would also complement the standard EU aid packages mobilised under the NDICI-
Global  Europe.  By  supporting  the  adoption,  by  the  Ukrainian  authorities,  of  an  appropriate 
framework for macroeconomic policy and structural reforms, the EU's MFA would enhance the 
added value and effectiveness of the EU's involvement through other financial instruments. The 
proposed  MFA  would  increase  substantially  the  EU's  leverage  on  policy  making  in  Ukraine, 
helping steer the country towards a reform trajectory that should restore macroeconomic stability, 
support resilience, address governance problems and boost potential growth in the longer run. 

15 

 
 
5.  CHARATERISTICS OF MACRO-FINANCIAL ASSISTANCE 

5.1 

Exceptional Character and Limited Time-frame 

The  MFA  operation  would  be  exceptional,  aiming  to  support  the  restoration  of  a  sustainable 
external  finance  situation,  in  the  situation  of  increased  geopolitical  risk  related  to  escalated 
tensions  and threat  of military invasion.  It  would run in  parallel to  the  ongoing  IMF  Stand-By 
Agreeement arrangement, the first review of which was adopted by the IMF Executive Board in 
November  2021.  As  usual,  the    MFA  disbursements  would  be  conditional  upon  successful 
implementation  of  the  IMF  programme  and  on  meeting  the  political  pre-condition.  The 
disbursement of the first tranche could take place in the first half of 2022. The second disbursement 
is also conditional on the satisfactory implementation of policy measures, to be agreed with the 
EU and listed in the Memorandum of Understanding attached to the proposed MFA operation. The 
availablility  period  of  the  MFA  is  one  year  from  the  entry  into  force  of  the  Memorandum  of 
Understanding. While in the short-term the country faces substantial external  financing needs, the 
proposed MFA, the IMF programme and other donors’ support is expected to produce a gradual 
strengthening of the external position and of the country’s resilience to external shocks. 

5.2 

Political preconditions and EU-Ukraine relations 

Countries that are covered by the ENP, like Ukraine, are eligible for MFA. A pre-condition for 
granting MFA is that the eligible country respects effective democratic mechanisms, including a 
multi-party parliamentary system and the rule of law, and guarantees respect for human rights.  

Political preconditions: The political preconditions for receiving MFA may be considered to be 
fulfilled in the case of Ukraine. Ukraine's constitution and legislation enshrine the principles of 
democratic pluralism and multi-party political system, the rule of law and respect of fundamental 
rights and freedoms. Ukraine is an open society, where elections are held freely and largely in line 
with  international  standards.  Media  freedom  has  improved,  but  further  work  is  needed  to 
strengthen  the  pluralistic  media  environment.  Severe  human  rights  violations  take  place  in  the 
areas not under the control of the Government, following the illegal annexation of the Crimean 
peninsula and the conflict in the east provoked by acts of aggression by the Russian armed forces 
since February 2014. Ukraine has made considerable progress in reforms of the judiciary and the 
fight  against  corruption,  but  continued  efforts  are  needed  to  ensure  full  implementation  and 
irreversability of these reforms, as well as launching of further key reforms, in particular of the 
Consitutional Court. The EU remains fully committed to supporting Ukraine in its reform efforts 
together with other international donors. The envisaged financial assistance should help keep the 
current  reform  momentum  to  the  extent  that  its  effective  disbursement  will  be  conditional  on 
continued progress with key reforms. In this context, the European External Action Service and 
the Commission stand ready to provide a further detailed assessment of the situation of democracy, 
human rights, rule of law and reform in Ukraine throughout the lifecycle of the proposed Macro-

16 

 
 
Financial Assistance operation. Delivering on key anti-corruption and governance reforms will be 
indispensable if the Macro-Financial Assistance operation is to be successfully completed..5  

EU-Ukraine  relations:  The  EU  and  Ukraine  have  developed  close  political  and  economic 
relations over the years, leading to the signature of an Association Agreement, including a Deep 
and  Comprehensive  Free  Trade  Area  (DCFTA),  on  21  March  and  on  27  June  2014.  The 
Association Agreement, which is the main tool for bringing Ukraine and the EU closer together, 
replaces earlier frameworks for cooperation. It promotes deeper political ties, stronger economic 
links and the respect for common values. 

Parts of the Association Agreement have been provisionally applied since 1 November 2014. This 
has enhanced EU-Ukraine cooperation on human rights, fundamental freedoms and the rule of law, 
political  dialogue and reforms,  movement  of persons.  It  has also  strengthened cooperation in  a 
number of sectors such as energy, environment and climate action, transport, financial services, 
public finances, agriculture, consumer protection and civil society. The provisions concerning the 
DCFTA have been provisionally applied since 1 January 2016, when the EU and Ukraine started 
to mutually open their markets for goods and services. The Association Agreement, including its 
trade part, entered into force on 1 September 2017, following the conclusion of the ratification 
process. On 11 June 2017, a visa free regime for short term stays in Europe for Ukrainian citizens 
holding biometric passports came into force. 

The EU is Ukraine's first trading partner, accounting for 36% (in value terms) of Ukraine's total 
exports and 42% of imports in 2020. The EU share in Ukraine’s trade has increased substantially 
over the recent years.  

The EU is also an important source of assistance to the reform process in Ukraine. This includes 
EUR 5.6 billion in macro-financial assistance (out of which EUR 5 billion has been disbursed) in 
five consecutive programmes since 2014. This is the largest amount of MFA the EU has disbursed 
to any single partner country. The EU has also provided to Ukraine EUR 1.565 billion of grants 
for  bilateral  financial  and  technical  assistance  under  the  European  Neighbourhood  Instrument 
(ENI).  In addition, the EIB has committed more than EUR 5 billion  and the EBRD has signed 
project investment contracts for more than EUR 16 billion to support infrastructure development 
and private sector activity, among others (see also section 1.3).  

5.3 

Complementarity 

The proposed MFA would complement the assistance provided by other multilateral and bilateral 
donors, including the IMF. Based on the information currently available, multilateral and bilateral 
donors other than the EU are expected to cover some 50% of the estimated external financing gap, 
ensuring reasonable burden-sharing. The EU’s MFA would also complement the standard EU aid 
packages  mobilised  under  the  NDICI  –  Global  Europe.  By  supporting  the  adoption    of  an 

5   A  more  detailed  assessment  of  the  compliance  with  this  criterion,  provided  by  the  European  External  Action 

Service (EEAS), is reproduced in the Annex of this Staff Working Document. 

17 

 
 
                                                           
appropriate  framework  for  macroeconomic  policy  and  structural  reforms  by  the  Ukrainian 
authorities,  the  EU’s  MFA  would  enhance  the  added  value  and  effectiveness  of  the  EU's 
involvement through other financial instruments. The proposed MFA would increase substantially 
the  EU's  leverage  on  policy  making  in  Ukraine,  helping  steer  the  country  towards  a  sustained 
reform  trajectory  to  restore  macroeconomic  stability,  address  governance  problems  and  boost 
potential growth in the longer run and in a sustainable manner. 

5.4 

Conditionality 

Disbursements under the proposed MFA operation would be conditional upon a satisfactory track 
record of implementation of  the IMF programme. In addition, the Commission and the Ukrainian 
authorities  would  agree  on  a  specific  set  of  structural  reform  measures,  to  be  defined  in  a 
Memorandum  of Understanding. These reform  measures would support the authorities’ reform 
agenda and complement the programmes agreed with the IMF, the World Bank and other donors, 
as well as the policy programmes associated with the EU’s budgetary support operations. They 
would be consistent with the main economic reform priorities agreed between the EU and Ukraine 
in the context of the Association Agreement, including its DCFTA, the Association Agenda and 
other strategic documents.  

The Commission will seek a broad consensus with the Ukrainian authorities, so as to ensure their 
ownership and foster smooth implementation of the agreed conditionality. These policy conditions 
should  address  some  of  the  fundamental  weaknesses  shown  over  the  years  by  the  Ukrainian 
economy and economic governance system. Possible areas of conditionality could, in principle, 
include economic resilience, governance and the rule of law, energy sector as outlined in detail in 
section 1.5 on structural reforms.  

5.5 

Financial Discipline 

The proposed EUR 1.2 billion of MFA operation for Ukraine is foreseen to be disbursed in two 
equal tranches to be released in 2022  and 2023. The validity period of the programme is 12 months 
from the entry into force of the Memorandum of Understanding. The required provisioning, at a 
rate  of  9%  of  the  External  Action  Guarantee,  will  be  programmed  under  the  Neighbourhood, 
Development  and  International  Cooperation  Instrument  (NDICI  -  Global  Europe),  for  a  total 
amount of EUR 108 million (budget line 14 02 01 70 “NDICI - Global Europe – Provisioning of 
the Common Provisioning Fund”). 

6.  EVALUATION AND COST-EFFECTIVENESS 

This assistance is of exceptional and macroeconomic nature and its evaluation will be undertaken 
in line with the standard Commission procedures.  

6.1 

Evaluation 

Ex-post evaluations of MFA operations are foreseen in the Multi-Annual Evaluation Programme 
of  the  Commission's  Directorate-General  for  Economic  and  Financial  Affairs.  An  ex-post 

18 

 
 
evaluation of the proposed MFA to Ukraine will be launched within a period of two years after the 
availability period has expired. A provision for the ex-post evaluation is included in the proposed 
Decision  for  the  assistance,  and  will  also  be  included  in  the  Memorandum  of  Understanding. 
Budget appropriations from the macro-financial assistance grant budget line will be used for this 
evaluation.  

6.2 

Achieving cost-effectiveness 

The proposed assistance would entail a high degree of cost effectiveness for several reasons:  

i)   Since  the  assistance  would  be  leveraged  by  that  provided  by  the  international  financial 
institutions, with which, as noted, it would be closely coordinated, its ultimate impact could be 
very significant compared to its cost. Moreover, in negotiating specific policy conditions, the 
Commission will be able to draw on the expertise of those institutions, including the IMF and 
the World Bank, and to influence their conditionality as well in ways that will take into account 
the EU's views.  

ii)  Providing coordinated macroeconomic support to Ukraine on behalf of the EU countries, the 
MFA would be more cost efficient than the provision of a similar total amount of financial 
support by EU Member States individually.  

iii)  The proposed assistance would be provided in the form of loans, the budgetary impact of which 

is limited. 

iv)   Finally,  the  Commission  will  aim  at  achieving  synergies  with  other  EU  policies  and 
instruments used to support the implementation by the beneficiary of the relevant measures 
(notably in the area of public financial management).  

19 

 
 
 
 
 
ANNEX 

EUROPEAN EXTERNAL ACTION SERVICE 

Head of Division 

Eastern Partnership Bilateral  

Brussels, 26 January 2022 

EURCA EAST 2 (2022)  

ASSESSMENT OF DEMOCRACY, HUMAN RIGHTS, RULE OF LAW AND REFORMS IN UKRAINE 

Political preconditions: Countries which are covered by the ENP are eligible for MFA. A pre-
condition  for  granting  MFA  should  be  that  the  eligible  country  respects  effective  democratic 
mechanisms, including  a multi-party parliamentary system and the rule of  law and guarantees 
respect for human rights.  

Ukraine's Constitution envisages a parliamentary-presidential democracy which is based on the 
rule  of  law,  division  of  powers,  and  guarantees  for  local  self-government.  The  Constitution 
protects human dignity, equality, rights and freedoms such as freedom of media, speech, religion, 
association and assembly as well as broad social and economic rights. It also guarantees the free 
functioning of political parties. Cabinet of Ministers is accountable both to the Parliament and the 
President who holds important powers and who has also legislative initiative and veto rights.  

Following a major political crisis in 2013-2014, Ukraine has embarked on an ambitious reform 
path,  supported  by  its  international  partners.  The  reform  agenda  is  rooted  in  the  EU-Ukraine 
Association Agreement, including its Deep and Comprehensive Free Trade Area (AA/DCFTA), 
the Association Agenda and various Government strategies and action plans.  

The AA/DCFTA was signed in 2014, has been partly provisionally applied since November 2014 
(the DCFTA since January 2016), and entered into force on 1 September 2017. The constitutional, 
electoral and judicial reforms and preventing and combatting corruption are among its priorities 
for action.  

Ukraine has pursued the implementation of structural reforms, generating positive trends in the 
governance,  economic and social spheres despite the internal  and  growing  external  challenges, 
including the illegal annexation of the Crimean peninsula by Russia and the conflict in the east of 
the country provoked by Russia's destabilising actions. Ukraine has continued to advance measures 
to tackle corruption, but the sustainability of reforms remains a challenge and immediate actions 
need to be taken in order to to ensure the full implementation and sustainability of these reforms.  

20 

 
 
 
 
Recent developments  

Regular presidential elections were held in Ukraine over two rounds in March and April 2019. 
The International Election Observation Mission of the Organisation for Security and Cooperation 
in Europe's Office for Democratic Institutions and Human Rights (OSCE-ODIHR) assessed the 
two election rounds as "competitive and held with respect for fundamental freedoms". Voters had 
a broad choice and turned out in high numbers. President of Ukraine, Volodymyr Zelenskyy, called 
early  parliamentary  elections  in  July  2019,  on  which  the  International  Election  Observation 
Mission concluded that "fundamental rights and freedoms were overall respected and the campaign 
was competitive, despite numerous malpractices, particularly in the majoritarian races". 

A new Electoral Code harmonising the rules for all types of elections, was adopted in December 
2019. The Electoral Code introduces new election systems for parliamentary and local elections. 
It enfranchises internally displaced persons and other mobile groups of the population. It contains 
more progressive provisions on gender representation, and improves access to elections for persons 
with  disabilities.  In  July  2020,  shortly  before  the  start  of  the  electoral  process,  Parliament 
addressed some of the technical shortcomings, strengthened electoral justice and introduced new 
important changes to the electoral rules. 

Nationwide local elections based on the new Electoral Code were held in October 2020. Elections 
were  held  neither  in  the  illegally  annexed  Crimea  and  Sevastopol  nor  in  the  non-government-
controlled  areas  in  the  east.  In  addition,  elections  were  not  held  in  18  communities  in  the 
government-controlled part of Donbas. 

The  elections  were  competitive  and  were  characterised  overall  positively  by  domestic  and 
international  observers,  although  various  irregularities  and  legal  shortcomings  were  recorded. 
COVID-19 posed an additional challenge to the organisation of the elections. 

Work  on  amendments  to  the  Electoral  Code  to  implement  previous  international  and  domestic 
recommendations have continued within a working group in Parliament, which included also civil 
society experts.  

Next  parliamentary  and  presidential  elections  are  expected  in  October  2023  and  March  2024 
respectively.  

The Servant of the People Party (Sluha Narodu) enjoys the parliamentary majortiy with 242 out of 
the  450  seats  of  the  Ukraine’s  unicameral  Parliament  (Verkhovna  Rada).  It  is  followed  by 
Opposition Platform — For Life (44), European Solidarity (27), Batkivshchyna (25), and Holos 
(20), as well as  two  groups formed mainly by  MPs elected in  single-mandate districts,  For the 
Future (21) and Dovira (20).  There are currently 27 vacant seats.  Strong vested interests are still 
represented in the Parliament, as well as among institutions and authorities.  

Since 2014, Ukraine has been implementing a decentralisation reform at the basic (community) 
level.  Overall,  it  has  led  to  significant  increases  in  tax  revenues,  notably  in  the  voluntary 
amalgamated communities, increased trust among the population towards the local authorities and 
new opportunities for socio-economic development. Following completion of the administrative 
part of the decentralisation reform in 2020, work continues on the legislative framework aimed at 
ensuring  effective  local  self-government,  including  constitutional  amendments.  The  public 
administration reform is being implemented steadily, albeit in some areas at a slow pace. A new 
public administration reform strategy was adopted by the Government in line with the OECD and 
European  public  administration  principles  and  merit-based  recruitment  to  the  civil-service  was 

21 

 
 
restored.  The  long-awaited  law  on  administrative  procedure  was  adopted  in  autumn  2021.  The 
President vetoed the law sending a few proposals to the text. The Parliament is expected to consider 
them and thus finalise the adoption of the law.  

In  terms  of  media  freedom,  Freedom  House  ranked  Ukraine  as  "partly  free  country"  in  2021. 
Reports  by  Freedom  House  and  Reporters  sans  Frontières  highlight  that  Ukraine’s  media 
environment has significantly improved since 2014, as ongoing reforms continue to strengthen the 
legislative  environment  for  journalists  and  outlets,  including  a  law  on  media  ownership 
transparency  and  establishment  of  the  Public  Service  Broadcasting  Company,  however  several 
challenges  remain.  Although  declining  overall,  instances  of  physical  attacks  against  journalists 
have persisted, along with impunity for those who committed such crimes. More action is needed 
to  loosen  the  oligarchs’  tight  grip  on  the  media,  encourage  editorial  independence  and  combat 
impunity for crimes of violence against journalists. 

Freedom  of media  remains broadly respected but audio-visual media legislation  approximating 
Ukrainian rules with EU law remains to be adopted, including as regards independence of media 
regulator,  transparency  of  media  ownership,  equal  market  conditions  and  resilience  to 
disinformation. A number of ambitious reforms have been initiated in Ukraine's justice sector, in 
particular  the  creation  of  a  new  Supreme  Court  which  started  operating  in  December  2017.  In 
2021, Ukraine has taken major steps towards a comprehensive reform of the judiciary. Two key 
laws  aiming  at  reforming  the  High  Council  of  Justice  (HCJ)  and  re-launching  of  the  High 
Qualifications Commission of Judges (HQCJ) were adopted and their implementation has started. 
However, significant challenges remain, including the urgent reform of the Constitutional Court 
(CCU). A draft law on the CCU reform is pending in Parliament, however it does not include key 
recommendations by the Venice Commission, notably the establishment of a transparent selection 
procedure for CCU judges which would lead to gradual renewal of the Court. 

There  has  also  been  progress  in  the  implementation  of  anti-corruption  reforms.  Ukraine  has 
adopted  a  number  of  measures  to  limit  the  space  for  corruption  in  public  procurement, 
administrative  services,  energy,  banking  and  other  sectors.  Five  dedicated  anti-corruption 
institutions have been established and are operational since 2014, covering the entire chain from 
checking asset declarations, to investigations, seizure of assets, and criminal justice. These are the 
National  Agency  for  Prevention  of  Corruption  (NACP),  the  National  Anti-corruption  Bureau 
(NABU), the Specialised Anti-corruption Prosecutor’s Office (SAPO), the High Anti-corruption 
Court  (HACC),  as  well  as  the  Asset  Recovery  and  Management  Agency  (ARMA).  With  the 
creation of the High Anti-Corruption Court in 2019, the anti-corruption architecture in Ukraine is 
complete.  An  unprecedented  transparent  electronic  asset  declarations  system  requiring  public 
officials and politicians to disclose information about their private assets was introduced, and the 
deterrent criminal sanctions for failing to report/report incorrectly were reinstated in summer 2021. 
Another  significant  step  was  taken  in  the  reform  of  Ukraine’s  system  for  combating  serious 
economic  and  financial  crimes  with  the  creation  of  the  Bureau  for  Economic  Security  (BES). 
Further actions  are needed to  ensure completions,  full implementation  and sustainability of the 
reforms in the judiciary and anti-corruption area, including ensuring transparent and merit-based 
selection of key institutions. In this context, the selection of SAPO Head needs to be finalised and 
the  winner  of  the  competition  appointed.  NABU  Head  selection  has  been  launched  and 
independent experts by international donors nominated, however Cabinet of Ministers has yet to 
nominate their members to the selection commission.   

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Ukraine’s state-owned enterprises (such as Naftogaz) and banks have continued to face challenges 
from vested interests and undue interference in their corporate governance, prompting engagement 
from partners including EU and US and the international financial institutions. Developments at 
the National Bank of Ukraine (NBU) have also sustained concerns over central bank independence 
and  broader  banking  sector  supervision,  while  full  investigation  of  the  large-scale  fraud  at 
Privatbank prior to its nationalisation, eventual prosecution and conviction of those responsible, 
along with the recovery of misappropriated funds, are still to be conducted. 

A  law  on  “de-oligarchisation”  was  signed  by  the  President  in  autumn  2021,  providing  for  a 
register  of  individuals  designated  as  oligarchs  by  the  National  Security  and  Defence  Council. 
Ukraine  has  asked  for  a  Venice  Commission  (Venice  Commission)  opinion.  The  Venice 
Commission recommendations should be duly considered.   

The longawaited reform of the Security Service of Ukraine (SSU) remains outstanding. 

Ukraine has a vibrant civil society that plays an active role in promoting, design and oversight of 
reforms, especially in the area of anti-corruption, judiciary, decentralisation, human rights, media, 
health  and  energy.  However,  some  civil  society  actors  have  also  denounced  pressure  on  their 
activity, undermining their work and credibility. 

The ongoing conflict in the east of the country and the illegal annexation of the Crimean peninsula 
by Russia continue to take a heavy toll on the human rights situation, resulting in grave violations 
of  human  rights  and  international  humanitarian  law.  Referring  to  the  impact  of  the  ongoing 
conflict, Ukraine has notified of derogations from some of its obligations under the International 
Covenant  on  Civil  and  Political  Rights  and  the  European  Convention  of  Human  Rights.  A 
mechanism  of  periodic  independent  review  of  these  derogations  has  been  established,  but  no 
review has been conducted. 

As a result of the conflict, there are approximately 1.4 million internally displaced persons (IDPs), 
who continue to suffer from socio-economic difficulties and lack of access to certain political and 
social rights.   Ukraine has  taken several  important  steps to  promote a more inclusive approach 
towards the conflict  areas and people living in  the non government  controlled areas (NGCAs). 
However, further steps could be taken to improve the legislative and regulatory framework for the 
conflict-affected population, including residents in the NGCAs.  

The National Human Rights Strategy, adopted in 2015, reached the end of its five year duration in 
2020. In 2021, Ukraine adopted a new National Human Rights Strategy for 2021-2023, based on 
amendments to the previous strategy and its relevant Action Plan. Adequate resources and political 
will remain key to ensure their implementation.  

The investigations into the killings at Maidan and the violent events in Odesa on 2 May 2014 have 
proceeded very slowly and culprits have still not been brought to justice. The Council of Europe's 
International  Advisory  Panel  has  identified  a  number  of  shortcomings  in  these  investigations, 
which need to be addressed. 

As regards the rights of persons belonging to ethnic, linguistic, religious and national minorities, 
Ukraine  has  taken  some  steps  aiming  to  implement  the  recommendations  of  the  Venice 
Commission.  However,  an  overarching  Law  on  national  minorities  remains  to  be  adopted. 
Legislative  changes  still  to  be  made  include  a  ban  on  all  forms  of  discrimination,  including 
discrimination  based  on  the  grounds  of  sexual  orientation  and  gender  identity,  as  well  as  the 
development of the new Labour Code.  

23 

 
 
Despite  progress,  gender-based  discrimination  and  domestic  violence  remain  a  challenge.  The 
ratification of the Istanbul Convention remains pending.  

As  far  as  the  promotion  of  international  justice  is  concerned  Ukraine  is  yet  to  deliver  on  its 
Association Agreement commitment to ratify and implement the Rome Statute of the International 
Criminal Court and its related instruments. 

EU-Ukraine relations 

After almost three years of provisional application of different parts of the AA/DCFTA, it entered 
into force on 1 September 2017. On 11 June 2017, a visa free regime for short term stays in Europe 
for Ukrainian citizens holding biometric passports came into force. The Fourth Report under the 
Visa  Suspension  Mechanism  concluded  that  overall,  Ukraine  continues  to  fulfill  the  visa 
liberalisation  benchmarks.   However,    further    efforts    are    needed    to    address    the    issue    of  
unfounded  asylum  applications  as  well  as  in  the  areas  of  the  fight  against  corruption,  
money  laundering  and  the  prevention  and  fight  against  organised crime.Continued effective 
implementation of the AA/DCFTA provides a clear path for Ukraine's political association and 
economic  integration  with  the  EU.  The  EU-Ukraine  relations,  based  on  the  Association 
Agreement, including its Deep and Comprehensive Free Trade Area, are discussed annually at the 
bilateral Summit, the Association Council and other relevant Committees. At the 23rd bilateral EU-
Ukraine  Summit  (October  2021),  the  two  sides  reaffirmed  their  strong  commitment  to  further 
strengthening  the  political  association  and  economic  integration  of  Ukraine  with  the  European 
Union,  including  through  continued  close  cooperation  to  strengthen  the  rule  of  law,  advance 
reforms, foster sustainable economic growth, support the green and digital transitions and increase 
resilience.  

Conclusions 

Ukraine's constitution and legislation enshrine the principles of democratic pluralism and multi-
party political system, the rule of law and respect of fundamental rights and freedoms. Ukraine is 
an open society, where elections are held freely and largely in line with international standards. 
Media  freedom  has  improved,  but  further  work  is  needed  to  strengthen  the  pluralistic  media 
environment. Severe human rights violations take place in the areas not under the control of the 
Government, following the illegal annexation of the Crimean peninsula and the conflict in the east 
provoked by acts of aggression by the Russian armed forces since February 2014. Ukraine has 
made  considerable  progress  in  reforms  of  the  judiciary  and  the  fight  against  corruption,  but 
continued efforts are needed to ensure full implementation and irreversability of these reforms, as 
well as launching of further key reforms, in particular of the Consitutional Court. The EU remains 
fully  committed  to  supporting  Ukraine  in  its  reform  efforts  together  with  other  international 
donors. The envisaged financial assistance should help keep the current reform momentum to the 
extent that its effective disbursement will be conditional on continued progress with key reforms. 
In this context, the European External Action Service and the Commission stand ready to provide 
a further detailed assessment of the situation of democracy, human rights, rule of law and reform 
in Ukraine throughout the lifecycle of the proposed Macro-Financial Assistance operation, whose 
political preconditions may be considered as being fulfilled. Delivering on key anti-corruption and 
governance reforms will be indispensable if the Macro-Financial Assistance operation is to be 
successfully completed. 

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