Trade Wars

Why Ukraine Needs More Than U.S. Weapons As It Fights Russia

Over the past two weeks, the Ukrainian military has once again proven itself. Many American observers had predicted that she could not win an offensive campaign against Russian troops, but that is exactly what she did. The war is by no means over, but Russian forces have suffered another humiliating defeat, and President Vladimir Putin faces possible unrest at home.

But despite the Ukrainian military’s recent successes on the battlefield, the country’s economy is understandably in a tough state after nearly seven months of war. Now that the United Nations General Assembly brings together leaders from around the world, it’s a great time to start thinking about what it will take for Ukraine to sustain itself once the conflict is over.

Despite the recent success of the Ukrainian army on the battlefield, the country’s economy is understandably in a difficult state after almost seven months of war

In particular, it would be wise for the American and European powers to organize more economic support for Kyiv – especially for the Ukrainian currency – in addition to providing the weapons that have been a top priority and have helped shape the current state of the war.

As economist Adam Tooze explained, the war had immediate and devastating effects on the Ukrainian economy. Obviously, the fighting in several major cities caused great physical damage and enormous disruption to trade and production, and in a few cities like Mariupol, total devastation. (During their recent retreat, Russian forces retaliated by bombing civilian power stations, causing temporary blackouts.) The provinces where fighting continues accounted for about 30% of Ukraine’s pre-war GDP. and contain a large part of its mineral resources. The total impact on GDP this year will see Ukraine’s overall economy shrink by a third. (For context, the US economy shrank 4.3% in the depths of the Great Recession.)

A recent report estimates that if Ukraine wins the war, the medium-term reconstruction bill will be around a quarter of a trillion dollars. But more immediate concerns are pressing, especially regarding its currency, the hryvnia.

In addition to physical damage, the war caused a huge population drain of perhaps 17% of Ukraine’s population. Many now work remotely, which weighs on Ukraine’s balance of payments, that is, the difference between money leaving the country and money entering it. When remote workers are paid in hryvnia and spent abroad, it worsens the position of the hryvnia against other currencies (mainly the dollar and the euro).

More importantly, Ukraine (as often happens in wars) resorted to financing much of the war effort by having its central bank buy government debt – that is, say by printing money – because she has no other choice. Unsurprisingly, this is fueling high and rising inflation, measured at around 24% in August. While the global inflationary environment contributes to this pressure, if the war persists, outright hyperinflation is a real possibility.

The United States has already spent considerable sums on Ukraine – around $40 billion in total, although most of this expenditure has taken the form of weapons and military equipment (mostly built by contractors). US Defense Forces, it should be noted). Only $8.5 billion was spent on direct budget support. This is very welcome aid, and far more than any other country has contributed, but not enough even to cover two months of Ukraine’s $5 billion monthly budget deficit. Its total deficit for 2023 is expected to be around $38 billion.

Several major creditors – the US, UK, Canada, France, Germany and Japan – have also recently agreed to a freeze on their Ukrainian debt repayments until 2023, and possibly for a another year thereafter. Private creditors have already given him a two-year freeze.

So much the better and it will prevent an immediate collapse of the Ukrainian economy, but more could be done. The simplest and most direct solution would be for the US Federal Reserve to open a “swap line” with the Ukrainian central bank, which would allow it to swap hryvnia for dollars at a fixed price, essentially giving it a limited authority to print dollars. This would require no further increase in the federal budget. At most, the stabilization of Ukrainian purchasing power could slightly increase global inflation.

This idea may sound strange, but it’s actually quite common in an emergency. During the 2008 financial crisis, the Fed single-handedly rescued the banking systems of the Eurozone, UK, Switzerland and Japan with some $10 trillion in swaps they needed to avoid bankruptcies. rampant banking and currency crises. If Europe can get hundreds of billions of dollars to avert a crisis caused by the foolish misbehavior of its own bankers, surely Ukraine can get a much smaller amount to help fight imperialist aggression.

Similarly, government creditors in the United States and Europe could simply write off much of the debt rather than freeze repayments for a while. Far better to put Ukraine on the path to economic prosperity – and to maximum production of badly needed food – than to rush it into paying off future debt that it may not be able to. not produce anyway.

Ukraine is clearly not the only country deserving of significant and sustained economic aid — Afghanistan, Yemen, Pakistan and other crisis-ridden countries come immediately to mind. But there is a special story here. When the Ukrainian economy was crushed after the financial crisis, Western institutions offered a completely pitiful loan with crippling austerity demands that would have only deepened the crisis. This prompted then Ukrainian President Viktor Yanukovych to accept a Russian loan instead. The drift to Moscow helped spark a revolution, overthrowing the Yanukovych government, which prompted Russia to seize Crimea and start a bush war in Donbass.

It is impossible to say that the current war would have been entirely avoided if Kyiv had received the help it needed from the West. Putin’s motivations appear to be classic Russian chauvinism and nationalism. But this time, rather than leaving Ukraine to fend for itself, let’s do the right thing from the start.