Putin seriously hurt Ukraine’s economy without firing a single shot
Even without launching his threat of a full-scale invasion of Ukraine, Vladimir Putin is already causing great economic loss to the country. The West cannot sit idly by and watch this happen. Indeed, the economic front in the ongoing Russian-Ukrainian war is just as decisive as the military front and demands equal international attention.
As the costs of the current crisis continue to mount, Western leaders must step up and provide substantial financial support to Ukraine, as they did in 2014-2015. At the same time, the Ukrainian government must urgently return to a comprehensive reform program that will put the country’s economy on a much more stable long-term footing.
Since November 2021, Russia has increasingly surrounded Ukraine from the north, east and south with a potential invasion force of over 130,000 troops. This military build-up has been described as the largest in Europe for three decades and has raised fears of the continent’s biggest conflict since World War II.
Unsurprisingly, Putin’s slashings have managed to scare the international business community in several ways. By mid-January, annual yields on Ukrainian Eurobonds had risen to over 10%, depriving the country of access to international financial markets. Neither the Ukrainian government nor large Ukrainian companies can issue international bonds anymore.
Another blow was the depreciation of the Ukrainian hryvnia, which fell to a yearly low against the dollar. During this time, almost all domestic and foreign private investment has ceased. Due to the uncertainty of the situation, companies have become increasingly reluctant to make financial commitments and some multinationals have forced their international employees to leave the country.
Insurance has become a major headache for Ukraine’s economy, with insurers covering merchant shipping and commercial flights raising red flags over the perceived dangers of traveling to Ukraine. Needless to say, the tourism and business travel industries have all but come to a standstill.
Although no exact figures are available, it would be reasonable to assume that the threat of a full-scale Russian invasion has already cost Ukraine billions of dollars it can ill afford. The opportunity costs in terms of lost future economic potential are harder to quantify, but likely considerably higher. Simply put, Putin’s bullying tactics are a great way to keep Ukraine locked in the economic doldrums and vulnerable to pressure from the Kremlin.
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Fortunately, Ukraine’s financial starting point at the start of this crisis was quite good. The country’s public debt has fallen below 50% of GDP, while the economy has largely benefited from the high prices of agricultural raw materials and iron ore over the past two years. At the end of 2021, Ukraine’s international foreign exchange reserves reached $31 billion, the highest level in a decade.
At the same time, Ukraine also has important external debt obligations to honour. Dragon Capital estimates its external financing needs this year at $8.5 billion, of which $5 billion would finance the budget deficit and $2.5 billion would be needed for external debt.
Ukraine’s Western partners are already offering funding. The IMF is expected to send a mission to Ukraine very soon and reportedly intends to strike a new deal in addition to the remaining $2.2 billion of a $5 billion stand-by arrangement that is expected to be disbursed in spring 2022.
The European Union has already offered €1.2 billion in macroeconomic financial assistance. France has offered the same amount, mainly in the form of a credit to buy Alstom electric locomotives which Ukraine badly needs. US Secretary of State Antony Blinken offered $1 billion in loan guarantees, while Canada offered $0.5 billion. Overall, this represents approximately 6.4 billion USD.
In addition, the World Bank and the European Bank for Reconstruction and Development can be counted on to provide about $1 billion each this year. More bilateral funds are on the way, so Ukraine’s total financial support in 2022 is expected to reach some $10 billion.
As soon as we know the outcome of the current crisis, the international community, usually the World Bank, should organize a donor meeting for Ukraine to mobilize and coordinate these commitments. Switzerland will host the annual Ukraine reform conference in Lugano in early July. This conference would be a good opportunity to conclude the financing of Ukraine for 2022.
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While international economic support for Ukraine is both welcome and necessary, the West should not and cannot provide such substantial financial support without conditions. These conditions are clear: Ukraine must relaunch the economic and governance reforms that the Zelenskyy administration halted or allowed to stagnate.
More importantly, Ukraine must carry out real judicial reform. The highest courts in the land must be thoroughly cleansed of corrupt judges and then used to cleanse the lower courts. At the same time, the Prosecutor General’s Office and the Security Service of Ukraine must be depoliticized.
Second, Ukraine’s currently disorganized energy markets need to be both liberalized and better regulated. The wide gap between different prices for the same type of energy must be eliminated and the government must fulfill its obligations. Private production of natural gas should be facilitated so that Ukraine can finally become self-sufficient. The country must also pursue the decarbonization of electricity production.
The Zelenskyy administration must renew Ukraine’s efforts to reform the corporate governance of large state-owned companies. It is a question of installing competent and independent administrators in the supervisory boards of large companies with the power to select the general management and to adopt the financial and strategic plans.
Finally, the authority of government ministers must be restored. Ministers should be appointed on the basis of their skills and not because of close personal relations with the Office of the President. Ministers must also be given a reasonable time in office to prove themselves.
Under Zelenskyy, Ukraine had seven energy ministers and five economy ministers, none of whom had time to do anything. The Cabinet of Ministers should regain its authority over economic policy and should no longer be subjected to telephone dictates from the presidential team.
With sufficient international support and political will, the current crisis could eventually lead Ukraine in the right direction towards a stronger economy and the rule of law. This is the only way to achieve the higher living standards and better quality of life that will mark Ukraine’s ultimate victory in the civilizational confrontation with Putin’s Russia.
Anders Åslund is senior researcher at the Stockholm Free World Forum.
The opinions expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the opinions of the Atlantic Council, its staff or its supporters.
the Eurasia Center mission is to strengthen transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and the Central Asia to the East.