Ukraine the Day after Tomorrow
July 21, 2022
The Russian invasion of Ukraine was meant to set two distinct forms of power against each other. Gross Russian “hard power” would shatter the Ukrainian army in a few days, while the “soft power” of the West would destroy the Russian economy through sanctions and - combined with a Ukrainian insurgency backed by western arms - would eventually force the Russians to pull out of Ukraine.
This is not what has happened. After four months of fighting the Russians are yet to achieve their military objectives, and while they are making steady progress, will almost certainly never achieve their initial aim in Ukraine, regime change and military occupation of the whole country. But on the other hand, while the Russian military has taken vast casualties, the damage to their economy has been rather less than many expected. Moreover, there are beginning to be serious economic worries in the West as a result of attempts to isolate the Russian economy.
In this context I want to ask if the West is running down their economy in an effort to do the same to the Russians, will anyone have the money and will to fix Ukraine, and prevent it from spiralling into levels of poverty that are meant to have become unimaginable in Europe?
Ukraine’s Forgotten Political Economy
There has been a flurry of pieces recently pointing out the basic reality that sanctions against Russia aren’t working as intended, and that they are making an already bad economic climate for the West worse. You can see this perspective in “Western Sanctions on Russia Aren’t Working as Intended” by Branko Marcetic in Jacobin, “Our Russia strategy has backfired” by Anusar Farooqui in Unherd, and “Whatever Moscow’s military defeats in Ukraine, Vladimir Putin is winning the energy war” by Helen Thompson in the New Statesmen.
Yet, in all these pieces, the Ukrainian political economy is neglected to the point of essentially disappearing. Of course, this criticism is perhaps slightly unfair as nearly all articles ignore nearly every issue. Still, it is interesting how the apparent subject of this whole issue, Ukraine, barely gets a look in, with the focus being entirely on the West and Russia. Even if you have no real interest in Ukraine in and of itself, attending to its political economy is still something any analysis of the ongoing conflict between Russia and the West ought to do, as preventing the Ukrainian economy from collapsing is something both sides must do in their “half” of Ukraine if they have any hope of a significant and long-term victory. For both sides, this will be difficult, because of the small size of the Russian economy, fiscal caution in the West, and the economic damage the two sides are doing to each other.
On the 21st of April, The World Bank estimated that the Ukrainian economy would shrink 45% in 2022. Ukraine was already Europe’s poorest country, with a Nominal GDP per capita of $3,700, less than Mongolia, Indonesia, and El Salvador. PPP GDP per capita - based on the actual local purchasing power- is $13,000, less than Iran. After this expected 45% shrinkage, we are looking at a Nominal GDP per capita of $2,035, less than Niger, and a PPP GDP per capita of $7,150, $1100 less than that of Laos. The World Bank expects that this will increase the share of the population in absolute poverty – those living on less than $5.50 - from 2.1% to 58%.
These are incredibly brutal figures that show clearly that one of Europe’s largest countries is falling into a level of poverty we associate with the “Third World”.
What will the response be? The ‘positive’ side of Ukraine already being such a poor country is that if the US and the EU were so inclined, they could keep the country going with direct aid without breaking the bank. Full maintenance of the pre-war Ukrainian economy would be $13 billion a month, around 0.4% of the US and EU combined GDP. The reality is that the figure would not nearly be so high as the World Bank expects half of the economy to still be there and, moreover, a large part of the country, and thus its economy would be Russia’s responsibility. Zelensky has recently asked for $5 billion a month, or 38% of Ukrainian GDP, down from an earlier and more ambitious request of $7 billion a month or 54% of GDP.
But direct economic aid to the tune of billions a month is not at all what I expect Ukraine will receive from the West. The World Bank estimates that the Ukrainian government will need $23 billion in 2022 for the maintenance of the central government and of the state-owned oil and gas company, Naftogaz. At the time of their report in late April, $7 billion had been pledged, as of the time I am writing the EU has pledged $10 billion.
It should be noted that the actual amount Ukraine has so far received is far less than this, with the EU having approved only around $1 billion. Four and a half months into the war and this is not even free money! The monies from the EU are “long-term loans on favourable conditions”, recent economic aid from the UK to the tune of hundreds of millions is the UK giving guarantees to the World Bank so that Ukraine can borrow more from them. So the current picture is one where Ukraine is receiving far less than the World Bank or their President thinks they need, and this money is debt, debt that it is hard to see Ukraine ever managing to pull itself out of. Already Ukraine’s debt to GDP ratio has nearly doubled, going from 57.6% at the start of the war to 96.3% now. As I write Ukraine is negotiating to avoid a hard default, but what they are asking for are freezes and delays, something that will not solve the problem, but push it off.
The West and post-War Ukraine
And when the war ends, what will happen to the Ukrainian economy? The World Bank report also makes this clear, and it’s what you’d expect. Ukraine will need to “resume its ambitious market-enabling reform agenda” and “roll back some severely constricting policies”, they must move “towards a lower tax rate”, while making sure they “accelerate divestiture of unnecessary public sector assets”. In other words, the complete normal strategy imposed by the capitalist world order across the planet, everything but the iron hand of the state owned by capital, no regulation of capital’s business within what it owns, and the emaciation of the state outside of its coercive functions.
Ukraine has already begun to rapidly walk down this road, with a recent law excluding 70% of its workforce from labour laws. This is not to say that some kind of social democratic Ukraine is being forced down this path by cruel outside forces. Even before the war, in terms of coercive functions, Ukraine was already further along than the West in an “ambitious market-enabling reform agenda” with oligarchs funding private militias and using them to attack each other, seize each other’s property, and murder journalists with little interference from the state. Perhaps Ukraine could become an innovator and accelerate divestiture of unnecessary public sector assets here too. The state could focus on what the World Bank suggests, on “Private Public partnerships”, to extract money from the population (having paid private militias to make sure this happens) and place it gently into the hands of capital.
Ukraine is not going to be admitted into the European Union, at least not before nearly every fact about the country's economy changes from its present and predicted state, and everyone saying otherwise is engaged in either delusion or theatre. But it is certainly going to be opened up more than ever before to Western capital.
This will not be Western capital rampant though, backed by states with overflowing coffers, but rather one that has been battered by COVID and then battered again by the fall out of the war. Generosity, even for the sake of PR, is going to be hard to find. A more or less open border will likely remain, something which will be good for the average Ukrainian. Nevertheless, it is doubtful this will be positive for Ukraine in general. It will have the cream of its “human capital” harvested, while the rest will likely be moved throughout Europe, providing European capitalists with many millions of desperate people willing to work for next to nothing.
The East and Post-War Ukraine
Over in the East, the Donetsk People’s Republic has a new Prime Minister, Vitaliy Khotsenko. Khotsenko, a youthful 36-year-old, has been vat-grown for exactly the role he has now. Born in Soviet Ukraine, he graduated from Moscow State University with a degree in sociology before getting a second degree in business management in Singapore. This was followed by a master's in “State Regulation of the Economy” from the Russian Presidential Academy. At the age of 22, he was appointed as the head of “analysis and forecasting” in Yamalo-Nenets Autonomous Okrug and at 27 the Minister of Energy, Industry and Communications in Stavropol Krai, a Russian state of three million people. At 33, he became the head of the Department of Industrial Policy and Project Management for all of Russia.
Newly appointed in Donetsk, his role has been made clear, the “reconstruction and integration of Donetsk with Russia”. How much of his rise is due to his abilities and how much is to do with nepotism I do not know. Nonetheless, he is one of Russia’s most clearly rising stars, and his appointment, beyond making it utterly clear that Russia has no plans at all to leave the region, demonstrates how serious Russia's plans are for the Donbas.
For the last eight years the Donbas - which includes Luhansk as well Donetsk as - has been essentially left to rot. Beyond anything else, the intermittent artillery duels are hardly attractive to capital, even the “scary macho Russian capital”, but this has already changed. Russian capital has been hemmed in as it has been expelled from the west. At the same time, they have also gained from acquiring the assets of western capital in Russia for pennies on the dollar and the state is overflowing from oil and gas revenue. The Russian state as well as Russian capital has money to spend, and not many places to spend it, so much will be thrown into the Donbas, into Kherson (where the former deputy head of Kaliningrad has been appointed governor) and wherever else Russia ends up controlling in eastern Ukraine.
But again, we should not expect generosity. In the East, Russian capital will get to have a mini-1992, as Ukrainian bosses are swapped for Russian bosses. Denis Pushilin, Donetsk’s president, showed his commitment to what one of my friends called “the barracks neoliberalism” in the Donetsk and Luhansk People’s Republics by saying that Ukrainian capitalists who were “not involved in war crimes” could return to manage their property, but this statement was for show. In the absence of these capitalists, he said that his breakaway state would nationalise and manage the property for now but planned to sell it off to Russian capital as soon as possible.
And there are fantastic opportunities for Russian capital here, even with the added risk of insurgency and rejection of the legitimacy of their actions by western capital. The average salary in Ukraine was around $850 a month at the beginning of 2022, while in Russia the figure was around $1500. Watching interviews with civilians in areas of Ukraine controlled by Russia put out by media favourable to the Russians are interesting in this regard. While one should be wary of such videos as they certainly do not help us gain an accurate picture of levels of popular support for Russia, they are fascinating in terms of understanding the reasons people give when asked why they support Russia. People will bring up the language issue, they will talk about the heavy-handedness of the Ukrainian “Anti-Terror Operation” (ATO) and similar things, but no one is really a mystic nationalist. Bandera, Lenin, or Peter the Great, do not come up. What is brought up is collapsing wages and deindustrialization. One woman in Severodonetsk said that Yankuovich - Ukraine’s last ‘Pro-Russian’ President, who was removed in the Maidan Revolution - was a thief, but at least the industrial plants were still hiring. People complain that in Russian-occupied Crimea you earn more, and in Luhansk, you pay less for utilities, than in Ukraine. But if Russia wants to catapult these complaints into legitimacy, it needs to successfully deliver where Ukraine has failed to, and there is no certainty that this will be the case.
Basic problems must be overcome. Another of these videos, filmed in the city of Nova Kakhovka made it clear that 90 days after the Russian takeover, the occupying force had still had not restored phone and internet access. This was in the Kherson region, which the Russians in essence took without a fight. This was causing a great deal of resentment among the population. Similarly, up to a few weeks ago, Mariupol was still without electricity and running water outside of hospitals and schools. The billions of dollars needed for reconstruction before the East will become profitable for Russian capital will inevitably lay heavy on Russia.
While the combined economy of the USA and EU is around 250 times that of Ukraine, the Russian economy is only 10 times larger, and the money needed is not the tiny percentage it would be for the West. But even if and when Russia is able to guarantee these things, this does not mean they will be easily able to guarantee a high wage in industrial Eastern Ukraine. Far from it, Russian pre-war wages were much higher than those in Ukraine, but this does not mean they will stay so. A bill has recently been introduced to the Duma which restricts workers’ rights in times of “special economic measures” and, while there is no collapse in the Russian economy, there is a very large recession. This will place significant downwards pressure on wages, while sanctions, import substitution, and parallel importation will put upwards pressure on prices. As things get worse in Russia, this means that things will have to get worse in Eastern Ukraine if Russian capital hopes to make a profit.
Of course, it will be much easier for Russia to gain legitimacy in its portions of Ukraine if the economy in the rest of the country has entirely collapsed. At the time of writing the European Commission's Budget Unit is currently blocking a $1.5 billion loan to Ukraine, because it wants guarantees of 70% of the loan total (the usual figure is 9% for borrowing outside of the EU) before it will send the money. It is worth noting that EU states have not immediately jumped to provide the necessary guarantees. Another package of $9 billion, the rest of the aforementioned “pledge”, is being held up by Germany. The delay is based on the obvious fact that Ukraine is very unlikely to pay these loans and could go into default very soon. But, of course, without these loans, Ukraine will also go into default, and worse than that be unable to keep up gas supply to Ukrainian homes, pay public salaries, including that of the military, or pay pensions. The flow of money coming from the state is what is keeping the Ukrainian economy just about ticking over and without this flow things will deteriorate quickly.
The Russian economy is smaller than that of the EU and the US, much smaller, but it started this war and was prepared for it (making the dismal military failures it has suffered all the more dismal). Still, it possesses a political class that is willing to take radical action to turn things to its favour in Ukraine, if this wasn’t true the war would have never started.
In contrast, the West, and especially the EU, has the capacity to flood the Ukrainian economy with the funds it needs to at least stand in place but has so far shown an unwillingness to do this. If the West has plans for Ukraine (Officially a country on a path to joining the EU!) to “win” in any real sense, the EU must break with its cautious financial policy and be ready to do a “Barracks Neoliberalism” of its own. But even if decades of heavy inertia could be overcome, this path is still fraught with difficulties. Economic aid to Ukraine could still remain in third place, behind military aid and the massive amount of money is going to be spent to transform the armies of the European Union into ones that are once again capable of fighting a conventional conflict on the plains of Europe - the absurdity of this in the face of ten thousand nuclear warheads notwithstanding.