How the United States can contain Russia by strengthening the Ukrainian economy

The influence of the Russian Federation is on the rise lately. Rallying thousands of troops along the Ukrainian border, brokering a ceasefire between Armenia and Azerbaijan, playing a key role in the recent cessation of hostilities between Israel and Hamas: now seems like the time for Russia.

The Biden administration sees Russia as our most serious threat (well, after climate change and white supremacy on our own shores). Therefore, any material geopolitical advance by Russia is at our expense and must be contained.

One way to stop Russia is to help Ukraine. President Trump bragged about shipping anti-tank missiles to Ukraine, while President Obama only provided “pillows and sheets”. The best way to support Ukraine in its efforts to derail Russian aggression does not involve arms or bedding. The United States should invest to help Ukraine realize its enormous potential to rival Russia in terms of economic power.

On the world stage, economic might trumps military might, and trade can be an incentive to cease hostilities and do business together for years to come. We should help Ukraine reform and rebuild its failing, corruption-ridden economy to loosen Russia’s grip on Eastern Europe.

When the Soviet Union broke up 30 years ago, Ukraine should have emerged as the leader of the new guard. It has the largest land mass in Europe, with fertile soil for thriving agriculture unrivaled in Europe. Ukrainian ports (which Russia covets) give it access to international trade. The country produces natural gas for much of its own needs, and with American technology it could expand to supply its neighbors, who now rely solely on Russia.

Yet Ukraine lags behind its neighbours. The West’s high hopes for Ukraine turned first to confusion, then to frustration. High tariffs, high business taxes and onerous regulations are hurting Ukraine’s economy, as is the lack of free market competition and efficient pricing. It is dominated by oligarchies that control most major sectors, turning Ukraine into a modern version of a feudal society.

Thus, inflation is high at 8%, and the unemployment rate is close to 9%, and double that for young workers. Amid the Covid-19 pandemic, Ukraine’s GDP shrank nearly 11% last year to $137.3 billion, according to the World Bank. The country’s economy is 25% below its peak in 2013. Foreign direct investment in the country, at just $5.82 billion in 2019, fell to zero last year and foreign investors withdrew nearly of 600 million dollars in assets from Ukraine.

The flight from Ukraine is so severe that since the Russians took over Crimea in 2014, up to two million people have left their country to work in Poland, where the minimum monthly wage of $660 is more than three times higher than that of Ukraine. Last year, foreign remittances sent to Ukraine totaled almost $12 billion, far more than the contribution of foreign investment. The economic death spiral conveyed by these statistics is not encouraging news for potential investors.

Yet there is great potential behind Ukraine’s structural problems. The country has a young population, with 70% under 55 and 25% under 25. They can supply workers to a booming technology sector. Coders and software developers can earn up to $1,500 per month. In Lviv, the largest city in western Ukraine and home to UNESCO World Heritage sites, some 20,000 IT workers had purchased $60 million worth of real estate and were buying more than a third of the cars sold locally, a story in the Financial Times announced at the end of 2018.

The United States could offer advice and investment to help Ukraine develop three cutting-edge areas: Big Data, Artificial Intelligence, and Blockchain. In exchange, US officials could demand concrete actions from the Ukrainian government to reform its economy:

  • Negotiate a mutually beneficial way to break up the empires of the dozen oligarchs who control the economy with overlapping interests in steel, media, banking, energy, chemicals, machine building, racketeering, etc.
  • Drastically reduce corporate tax rates. Reduce VAT by 20% and unified social tax by 22%.
  • Eliminate taxes on natural gas and other public services needed by the population. Reduce the price of natural gas, which is dictated by government authorities and is probably much higher than it should be.
  • Establish microfinance for startups, long-term microloans of $100,000 offered by banks at 3% annual interest without collateral. Provide tax incentives to companies that employ recent college graduates and do business with these startups.

That would represent a triple for the Biden administration. Ukraine would find new urgency and incentive to push through the reforms its politicians have been promising for years. This would multiply and accelerate the impact of US aid. The resulting stronger economy would strengthen Ukraine as a bulwark against our Russian rivals. Win-win.

Yuri Vanetik is a California-based private investor, lawyer and political strategist. Read Yuri Vanetik’s reports — More here.

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Christi C. Elwood