Jul 9th 2015

Russia’s War on Ukraine’s Economy

by Anders Åslund


Anders Åslund is a senior fellow at the Stockholm Free World Forum.  

WASHINGTON, DC – Ukraine’s economy may no longer be in free fall, but it remains in dire straits. The country’s GDP contracted by 6.8% last year, and is forecast to shrink by another 9% this year – a total loss of roughly 16% over two years. While things seem, to some extent, to be stabilizing – depreciation of the hryvnia has eliminated the country’s current-account deficit, and a massive fiscal adjustment brought Ukraine’s budget into cash balance in the second quarter of this year – the situation remains precarious.

Ukraine’s primary economic challenges are not homegrown; they are the result of Russian aggression. The country’s belligerent eastern neighbor has annexed Crimea, sponsored rebels in eastern Ukraine, pursued a trade war, intermittently cut off its supply of natural gas, and is threatening financial attack. So far, Ukraine has miraculously managed to withstand these assaults with little international support – but it is in desperate need of assistance.

Russia’s annexation of Crimea in March 2014 seized 4% of Ukraine’s GDP. Since then, Russian-supported armed forces have occupied territories in eastern Ukraine that accounted for 10% of the country’s GDP in 2013. With the Donbas region’s production having plummeted by 70% in the months since, this has cost Ukraine some 7% of its 2013 GDP.

Since 2013, Russian trade sanctions have slashed Ukraine’s exports to the country by 70% – accounting for a drop of 18% in Ukraine’s total exports. Last year alone, Ukraine’s exports to Russia – which included machinery, steel, agricultural goods, and chemicals – fell by half. Logistical issues, the lack of commercial links, and the specialization of some products meant that the goods could not be redirected in the short term. I estimate that the loss is likely to correspond to a 6% decline in Ukraine’s GDP.

Businessmen everywhere are aware of Russia’s assault on Ukraine, and, unsurprisingly, few want to invest in a war zone. As a consequence, Ukraine’s net foreign-direct investment, which was slightly over 3% of GDP before the start of hostilities, has evaporated. This amounts to a corresponding reduction of 3% of GDP. In addition to this, Ukraine has faced an intermittent gas war. A financial assault may be yet to come.

Leaving Crimea aside, we can attempt conservatively to sum up Ukraine’s economic losses from Russia’s aggression. Roughly 7% from lost production in occupied eastern Ukraine, 6% losses from trade sanctions, plus 3% from lost foreign direct investment amounts to 16% of GDP – that is, the total amount Ukraine is estimated to have lost from the beginning of 2014 to the end of this year.

Russia’s apparent but undeclared aim is to make sure that democratic Ukraine fails, without looking entirely guilty of having caused that failure. This leads to an important conclusion: Ukraine is not the culprit but the victim, and it should be treated accordingly. One does not counter military aggression only with stabilization credits, but also with military support.

European countries should note that, given the Kremlin’s saber-rattling in the Baltic and the Balkans, there is little reason to believe that the Russian threat is limited to Ukraine. Delivering arms to Ukraine before Russia attacks, openly or covertly, should be a priority.

On July 1, Russia opened a new front in the economic war on Ukraine when the energy giant Gazprom, which is majority-owned by the Russian state and slavishly pursues Russian foreign-policy objectives, decided unilaterally to cut off the country’s gas supply. Given the global gas surplus, Europe is in a position to tell Russia in no uncertain terms that its corrupt practices are no longer acceptable. In particular, the European Commission should insist that Ukraine be able to continue to import gas from Gazprom in order to augment European supplies.

Furthermore, the economic war is making it almost impossible for Ukraine to deal with the humanitarian emergency that Russian aggression has caused: more than 6,000 citizens killed, tens of thousands injured, and 1.3 million people internally displaced. The international community, again with the EU in the lead, must provide substantial humanitarian assistance.

Ukraine’s stabilization program with the International Monetary Fund is sound but underfunded. An additional credit of roughly $10 billion is needed to raise Ukraine’s international reserves and stabilize its currency so that controls can be lifted. This money should come from the EU and the United States. Meanwhile, the EU should make Russia’s trade war with Ukraine the focal point of any trade negotiations with the Kremlin. And it should abolish its remaining strict import quotas for Ukrainian goods.

Finally, every legal avenue to holding Russia to account must be pursued. Sanctions against Russian President Vladimir Putin’s cronies should not only be continued, but also deepened. And the US should follow on its success in tackling FIFA by exposing criminals in former Ukrainian President Viktor Yanukovych’s regime and Putin’s entourage. Given that many of them have international bank accounts in US dollars, they are liable to American prosecution. Ukraine should not be left to face Russia on its own.


Anders Åslund is a senior fellow of the Atlantic Council in Washington and author of Ukraine: What Went Wrong and How to Fix It.

Copyright: Project Syndicate, 2015.
www.project-syndicate.org
=

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Jul 29th 2022
EXTRACT: ".... the likelihood is that Biden, who spent his life as a senator, played a central behind-the-scenes role in turning Manchin around and keeping the Democratic Party Senators together on this pared-down version of Build Back Better. Biden’s legislative accomplishments, not to mention his administrative ones, will likely end up being very impressive for the first two years of his presidency. ------ In matters of climate, every ton of CO2 you don’t put into the atmosphere is a decrease in how hard life will be for our grandchildren. They will have reason to be grateful to President Biden and the Democratic Party if this bill becomes law."
Jul 29th 2022
EXTRACTS: "Right-wing media outlets including Fox News, One America News (OAN), Newsmax, and talk radio are grossly abusing the right to free speech and are causing profound, if not irreparable damage to our country at home and abroad. They have been engaged in these deliberate practices of spreading poisonous misinformation all in the name of free speech." ---- "A team at MIT, analyzing propaganda techniques in the news, underscores the use of logical fallacies – such as strawmen (the misrepresentation of the other’s position), red herrings (the provision of irrelevancies), false dichotomies (offering two alternatives as the only possibilities), and whataboutism (a diversionary tactic to avoid directly addressing an issue). ---- Whataboutism is worth considering more closely because it is becoming ubiquitous among Republicans – perhaps this is not surprising given that it is certainly Trump’s “favorite dodge.” It is one of the fundamental rules by which he operates: when you are criticized, say that someone else is worse. In an interview with Trump, Bill O’Reilly states the obvious fact that “Putin is a killer,” and who can forget Trump’s response: “There are a lot of killers. You got a lot of killers. What, you think our country is so innocent?” That is classic whataboutism. And it is also of course all over Fox News’ most popular line-up."
Jul 24th 2022
EXTRACTS: "For three hours, against the unequivocal advice of his counsel, friends, and family, Trump purposefully and steadfastly declined to give the mob he had summoned any signal to disperse, to exit the building peacefully, or to simply cease threatening the life of his vice president or other members of Congress." ------ "Trump is corrupt to the core, a traitor who deserves nothing but contempt and to spend the rest of his life behind bars because he remains a menace to this country and an existential threat to our democratic institutions."
Jul 21st 2022
EXTRACT: "For some countries, diasporas also are not new. Just ask the Russians. For three-quarters of a century, Stalin’s NKVD and its successor, the KGB, kept close tabs on expatriate Russians, constantly worrying about the threat they might pose. And now, Russian President Vladimir Putin’s security service, the FSB, is continuing the tradition. According to recent FSB estimates, almost four million Russians left the country in the first three months of this year. Obviously, FSB statistics are hard to verify. But the sheer magnitude of this year’s departures is striking."
Jul 20th 2022
EXTRACTS: "We need leaders who will be honest about our problems in the short, medium, and long term. We are becoming poorer than our neighbors, with our per capita growth and productivity lagging behind theirs. We confront surging energy prices, soaring inflation, and public-sector strikes. Our fiscal deficit is uncomfortably high. Our influence is diminished. Far from recognizing these challenges, let alone proposing sensible solutions, the candidates to succeed Johnson are trying to win votes with reckless proposals like ever-larger tax cuts." ----- "There is one exception. Former Chancellor of the Exchequer Rishi Sunak refuses to abandon the notion that expenditure should bear some relationship to revenue. "
Jul 13th 2022
EXTRACT: "Looking ahead, five factors could make today’s energy crisis even worse. First, Putin has opened a second front in the conflict by cutting back on the contracted volumes of natural gas that Russia supplies to Europe. The goal is to prevent Europeans from storing enough supplies for next winter, and to drive prices higher, creating economic hardship and political discord. In his speech in June at the St. Petersburg International Economic Forum, Putin made his reasoning clear: “Social and economic problems worsening in Europe” will “split their societies” and “inevitably lead to populism … and a change of the elites in the short term.” ...... As it is, Germany is now anticipating the need for gas rationing, and its minister for economic affairs, Robert Habeck, warns of a “Lehman-style contagion” (referring to the 2008 financial crisis) if Europe cannot manage today’s energy-induced economic disruptions."
Jul 5th 2022
EXTRACT: "Fortunately, I am not alone in claiming that the survival of democracy in the US is gravely endangered. The American public has been aroused by the decision overturning Roe. But people need to recognize that decision for what it is: part of a carefully laid plan to turn the US into a repressive regime. We must do everything we can to prevent that. This fight ought to include many people who voted for Trump in the past."
Jul 2nd 2022
EXTRACT: "The Israeli philosopher Avishai Margalit described this succinctly in his book On Compromise and Rotten Compromises. In “politics as economics,” material interests are “subject to bargaining, everything is negotiable, whereas in the religious picture, centered on the idea of the holy, the holy is non-negotiable.” This, then, is why politics in the US is now in such a perilous state. More and more, the secular left and the religious right are engaged in a culture war, revolving around sexuality, gender, and race, where politics is no longer negotiable. When that happens, institutions start breaking down, and the stage is set for charismatic demagogues and the politics of violence."
Jul 2nd 2022
EXTRACT: "...EU enlargement is essentially a political decision by member states, based on a multitude of considerations that sometimes include dramatic events. Russia’s war of aggression against Ukraine is such a turning point."
Jun 29th 2022
EXTRACT: "Most market analysts seem to think that central banks will remain hawkish, but I am not so sure. I have argued that they will eventually wimp out and accept higher inflation – followed by stagflation – once a hard landing becomes imminent, because they will be worried about the damage of a recession and a debt trap, owing to an excessive build-up of private and public liabilities after years of low interest rates." ----- "There is ample reason to believe that the next recession will be marked by a severe stagflationary debt crisis. As a share of global GDP, private and public debt levels are much higher today than in the past, having risen from 200% in 1999 to 350% today (with a particularly sharp increase since the start of the pandemic). Under these conditions, rapid normalization of monetary policy and rising interest rates will drive highly leveraged zombie households, companies, financial institutions, and governments into bankruptcy and default."
Jun 28th 2022
EXTRACT: "It is tempting to conclude that today’s central bankers are damned if they do and damned if they don’t. Maybe if they sit tight, they will ride out the storm. Then-Fed Chair Paul Volcker was Public Enemy Number One in the United States in the early 1980s, when he squeezed post-oil-shock inflation out of the system with double-digit interest rates. But in his later years he was revered, and became a national treasure, called on to advise successive presidents in any financial emergency. ----- But central bankers would be wise not to assume that their reputations will automatically recover, and that the status quo ante will be restored. We live in a more disputatious age than the 1980s. Public institutions are more regularly challenged and held to account by far less reverential legislators." ----- "Moreover, former central bankers have joined the chorus of critics. Former Fed Chair Ben Bernanke, breaking the unwritten rule not to reproach one’s successors, has said that today’s Fed made “a mistake” by responding slowly to inflation. And Bailey’s immediate predecessors, Mervyn King and Mark Carney, have weighed in, too, with challenges to the BOE’s policy. The fabric of the central banking fraternity is fraying."
Jun 25th 2022
EXTRACT: "Public opinion in Belarus remains firmly against involvement into the war with Ukraine. Moreover, according to a Chatham House survey, 40% of Belarusians do not support Russia’s war, compared to 32% who do, while around half of those questioned see predominately negative consequences of the war for Belarus (53%) and for themselves (48%). The Belarusian military and security services are also aware of the determined and skilful resistance that Ukrainian forces have put up against Russia and the risks that they would therefore be running if they entered the war against Ukraine. This, in turn, means that the risk to Lukashenko himself remains that he might lose his grip on power, a grip which depends heavily on the loyalty of his armed forces." ---- "Ultimately, Belarus may not be on the brink of being plunged into war quite yet, but its options to avoid such a disaster are narrowing."
Jun 20th 2022
EXTRACT: "Russification (the policy of enforcing Russian culture on populations) appears to be being reinforced by ethnic cleansing. Last month the Ukrainian parliament’s commissioner for human rights, Liudmyla Denisova, informed the United Nations’ High Commissioner for Refugees, Filippo Grandi, that 1.3 million Ukrainians, including 223,000 children, had been forcibly deported to Russia."
Jun 11th 2022
EXTRACT: "If Trump had his way, then Vice-President Pence would have also broken his oath to the constitution and derailed the certification of electoral votes. Our continued existence as a Republic might very well have hung on Pence’s actions that day. The mob’s response was to call for Pence to be hanged, and a noose and scaffold was erected apparently for that very purpose. What was Trump’s reaction when he was told that the mob was calling for Pence’s summary execution? His words were: “Maybe our supporters have the right idea.” Mike Pence “deserves” it."
Jun 10th 2022
EXTRACTS: "Speaking to journalist Sophie Raworth on the BBC’s Sunday Morning show recently, former war crimes prosecutor Sir Howard Morrison, now an advisor to the Ukraine government, highlighted the dangers posed by the negative – often insulting and dehumanising – statements made by some Russian politicians and media personalities about Ukraine and its people." ---- "The conditions and attitudes described by Morrison have existed for centuries: Russians have viewed Ukrainians as inferior since before the Soviet era." ----- "And, as Morrison said, stereotyping and denigrating a people as inferior or lacking agency makes atrocities and looting more likely to happen, as we are seeing in Ukraine."
Jun 9th 2022
EXTRACT: "Unless Russia realises that the west is willing and able to push back, a new, stable security order in Europe will not be possible. Concessions to Russia, by Ukraine or the EU and Nato, are not the way to achieve this. That this has been realised beyond Ukraine’s most ardent supporters in the Baltic states, Poland, the UK and the US is clear from German support for strengthening Nato’s northern flank and a general increase in Nato members’ defence spending."
Jun 8th 2022
EXTRACT: "Highly civilized people can turn into barbarians when demagogues and dictators exploit their fears and trigger their most atavistic instincts. Rape, torture, and massacres often happen when soldiers invade foreign countries. Commanding officers sometimes actively encourage such behavior to terrorize an enemy into submission. And sometimes it occurs when the officer corps loses control and discipline breaks down. Japanese and Germans know this, as do Serbs, Koreans, Americans, Russians, and many others."
Jun 1st 2022
EXTRACTS: "Like Metternich, Kissinger commits the fatal error of believing that a few wise policymakers can impose their will on the world. Worse, he believes they can halt domestically generated change and the power of nationalism. Many years ago, this is what Senator William Fulbright termed the “arrogance of power.” This approach failed in Vietnam, Iraq, and Afghanistan. It is also doomed to fail in Russia and Ukraine." ------ "Not surprisingly, Kissinger misunderstands Russia. He appears to believe that, because Russia has been an “essential part of Europe” for over four centuries, it is therefore fated to remain so for the foreseeable future.The claim is completely at odds with history." ---- "Finally, Kissinger misunderstands the implications of his own analysis for Western relations with Russia. “We are facing,” he said, “a situation now where Russia could alienate itself completely from Europe and seek a permanent alliance elsewhere." ---- "But what’s so bad about Russia’s isolating itself from Europe and becoming a vassal state of China? "
Jun 1st 2022
EXTRACTS: "According to the latest figures from China’s National Bureau of Statistics, China’s population grew from 1.41212 billion to just 1.41260 billion in 2021 – a record low increase of just 480,000, a mere fraction of the annual growth of eight million or so common a decade ago." ----- "China’s total fertility rate (births per woman) was 2.6 in the late 1980s – well above the 2.1 needed to replace deaths. It has been between 1.6 and 1.7 since 1994, and slipped to 1.3 in 2020 and just 1.15 in 2021."
Jun 1st 2022
EXTRACTS: "Casualties are very high. A very conservative estimate of overall Russian losses is that they have lost more troops killed since February 24 than in ten years of fighting in Afghanistan. This implies well over 40,000 men taken out of the fight, including the wounded." ----- "Away from the cauldron of Donbas, Belarus has been rattling its somewhat rusty sabre by deploying troops to its border with Ukraine. This is unlikely to trouble Kyiv. The Belarus president, Alexander Lukashenko, is well aware that he may need them at home to shore up his shaky regime."