Ukraine Faces an Economic Abyss

The West has a vital interest in keeping the country’s wartime economy running.

By , a nonresident senior fellow at the German Marshall Fund and an adjunct professor at Sciences Po.
Russian attack on shoe factory in Ukraine
Russian attack on shoe factory in Ukraine
Firefighters spray water on a destroyed shoe factory following a Russian airstrike on civilian targets in Dnipro, Ukraine, on March 11. EMRE CAYLAK/AFP via Getty Images

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An often-overlooked element in enabling Ukraine to prevail in its struggle against Russia: keeping its wartime economy running. Although tens of thousands of Ukrainians are fighting on the front and millions of people have been forced to flee, the country still needs to support some 38 million citizens with food and jobs, keep its infrastructure running, and finance public services. A functioning economy is essential for morale and momentum on the front.

But Ukraine’s economy is running on fumes and needs urgent assistance everywhere one looks. Russia has blocked Ukrainian ports from exporting goods, targeted factories and essential infrastructure with barrages of missiles, and stolen an estimated 400,000 tons of grain for transport to Russia. The latter is a bitter echo of the 1930s, when Moscow engineered a genocidal famine in the restive region by taking its food. The scale of Ukraine’s economic implosion is mind-boggling: GDP is projected by the World Bank to contract by 45 percent this year.

Over the past few days, the West has started to provide a much-needed economic lifeline to Ukraine through unprecedented trade liberalization in addition to billions of dollars mobilized for military equipment, refugee aid, and budgetary support. Just as the West has become the arsenal of Ukraine’s democracy, it will also need to open the financial floodgates further if Ukraine is to beat back its invaders. As U.S. President Joe Biden argued last week when requesting congressional approval for $33 billion in additional aid, Ukrainians need this outsized support to “make their courage and sacrifice have purpose so they can continue this fight.”

An often-overlooked element in enabling Ukraine to prevail in its struggle against Russia: keeping its wartime economy running. Although tens of thousands of Ukrainians are fighting on the front and millions of people have been forced to flee, the country still needs to support some 38 million citizens with food and jobs, keep its infrastructure running, and finance public services. A functioning economy is essential for morale and momentum on the front.

But Ukraine’s economy is running on fumes and needs urgent assistance everywhere one looks. Russia has blocked Ukrainian ports from exporting goods, targeted factories and essential infrastructure with barrages of missiles, and stolen an estimated 400,000 tons of grain for transport to Russia. The latter is a bitter echo of the 1930s, when Moscow engineered a genocidal famine in the restive region by taking its food. The scale of Ukraine’s economic implosion is mind-boggling: GDP is projected by the World Bank to contract by 45 percent this year.

Over the past few days, the West has started to provide a much-needed economic lifeline to Ukraine through unprecedented trade liberalization in addition to billions of dollars mobilized for military equipment, refugee aid, and budgetary support. Just as the West has become the arsenal of Ukraine’s democracy, it will also need to open the financial floodgates further if Ukraine is to beat back its invaders. As U.S. President Joe Biden argued last week when requesting congressional approval for $33 billion in additional aid, Ukrainians need this outsized support to “make their courage and sacrifice have purpose so they can continue this fight.”

To be sure, Ukraine’s economic situation is daunting. Its infrastructure losses are already over $100 billion, according to an estimate by the United Nations that is likely outdated given Russia’s stepped-up attack on civilian infrastructure this past week. Ukraine may need $600 billion for postwar reconstruction—and more the longer the war drags on. Ukraine’s long-term economic prospects are conditioned on the war’s outcome—including how much of its territory and resources it will control—and the level of relative stability and security that can be established after the war.

By comparison, the European Union and European financial institutions—Ukraine’s main backers—provided around $18 billion in grants and loans to Ukraine between 2014 and the start of Russia’s latest invasion on Feb. 24. Over the same period, the United States committed only around $2 billion in economic assistance. Total economic aid received by Ukraine over these eight years was just one-tenth of what the country has already lost this year alone—not to mention its long-term needs.

An even deeper collapse of Ukraine’s wartime economy could send millions more refugees to Europe.

There are ample resources across the West to finance Ukraine’s wartime economy through grants, loans, and trade concessions. Getting Ukraine up and running is in the West’s—and above all, Europe’s—own interest. Not only does the EU need a functioning bulwark against an imperialist Russia, but the EU is also Ukraine’s main trade partner. Ukraine’s supply chains sustain German factories, its grain and a host of other agricultural products feed the world, and an even deeper collapse of its economy could send millions more refugees to Europe.

European policymakers seem to be realizing this. Last week, the EU and Britain opened up their markets to Ukrainian exports by lifting all tariffs. As European Commissioner for Trade Valdis Dombrovskis noted, “The EU has never before delivered such trade liberalization measures.” With Ukraine’s exports to Europe totaling more than $30 billion last year, even a small increase can deliver urgently needed cash. At the same time, the Ukrainian government can determine which goods to export and which are prioritized for domestic consumption.

With Ukrainian ports blocked by the Russian Navy—which sank several freighters trying to pick up Ukrainian goods—exports to non-European markets, such as grain, need safe and expedited passage through Europe via so-called green corridors. Much to its credit, the European Commission has focused laser-like on this complex issue, where requirements include additional border inspectors, safety procedures, and new railway capacity to facilitate the expanded flow of goods.

The hardest part will be mobilizing the significant funds required to finance Ukraine’s economy. One model could be the Ukraine Defense Consultative Group, where around 40 countries recently met to coordinate military aid. A similar group could be set up for economic and financial support within a future G-20 reconstituted without Russia. Countries such as South Korea, Saudi Arabia, and Mexico are well positioned to help underwrite this effort. And over time, perhaps even China could be persuaded to support Ukraine’s economy, given its loans and investments in the country and wider stake in maintaining its economic and financial lifelines to Europe and the West.

Before the war, the EU and United States had already coordinated their economic and technical assistance to Ukraine in the G-7 Ukraine Support Group, which I helped launch at the 2015 G-7 summit while serving as an advisor on Ukraine in the U.S. State Department’s Policy Planning Staff. However, that group is much too low level and informal for the much-expanded scale of what’s needed, involving only local ambassadors based in Kyiv, Ukraine’s capital, who meet periodically to exchange perspectives and best practices. Today, any contact group will have to be much more ambitious, making and coordinating financial commitments in the tens of billions of dollars—if not more. At that scale, it would also require appointing a prominent coordinator to help maintain political consensus and oversee the effective administration of pledges.

The trans-Atlantic division of labor over the past eight years—roughly speaking, about 80 percent of economic aid for Ukraine from Europe and 80 percent of military aid from the United States—suggests likely future trends. As European Commission President Ursula von der Leyen argued this week, Europe has a “special responsibility” toward Ukraine and must allocate “massive investment” to sustain it. In particular, the European Bank for Reconstruction and Development—which has invested more than $150 billion across Central and Eastern Europe since its founding in 1991—will be a key player in galvanizing this effort. The bank has already facilitated over $16 billion of investment in Ukraine and recently announced a new $2 billion package. Its annual meeting next week will already be dominated by the topic of Ukraine.

In the coming weeks, leading economies reorganized in a new G-20 should commit to scaling up assistance for Ukraine and organize a broader donor’s conference that builds on recent efforts. In the long term, Europe should spearhead Ukraine’s recovery. Since it will need a well-respected, experienced leader to corral political support and oversee assistance on an unprecedented scale, why not ask former German Chancellor Angela Merkel to lead it?

Before Russia’s full-scale invasion, the West’s economic strategy for Ukraine was to help it gradually while high-level political efforts were focused on negotiating an end to the ongoing conflict over the Donbas and Crimea. The focus was on slow and gradual technical assistance aimed at tackling corruption, ensuring the rule of law, and improving competitiveness. Now that Ukraine’s economic survival is crucial to the outcome of the war and Europe’s security itself, it will require a serious, scaled up, and fast response to ensure Ukraine’s ultimate success.

Bart M. J. Szewczyk is a nonresident senior fellow at the German Marshall Fund, an adjunct professor at Sciences Po, a former member of the U.S. State Department’s Policy Planning Staff, a former advisor on refugee policy to the U.S. ambassador to the United Nations, and the author of Europe’s Grand Strategy: Navigating a New World Order. Twitter: @bartszewczyk

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