The observer of FP Ace explained what is behind Zelensky's request not to return to refugeesSanctions have affected Russia, but they have not led to the collapse of the economy, said Foreign Policy columnist Adam Ace.
Meanwhile, Ukraine's economic situation is becoming more dangerous, despite Kiev's attempts to stabilize the situation.
Cameron AbadiThe armed conflict in Ukraine lasts ten months.
During this time, it has become the leading political and military theme of the year, and possibly the main economic theme. Economically, the issue is very diverse: here is the destruction of Ukraine's production base, and the question of its restoration, and the consequences of anti-Russian sanctions, which are hotly debated. The military actions have also at least partly caused the incessant inflation that has hit the whole world this year.
How have the sanctions affected the Russian economy? How is Ukraine's economy holding up in the context of the armed conflict? And how can Europe change as a result of this crisis? I recently discussed these and other issues with Foreign Policy economic columnist Adam Tooze in the podcast Ones and Tooze. Below is an excerpt from the conversation, edited for the sake of brevity and clarity.
Cameron Abadi: Everyone seems to agree that the sanctions imposed on Russia after the start of its military operation are unprecedented. But there are different opinions about how they affected the Russian economy. Could you summarize these various analytical calculations?Adam Ace: I think today we have realized that if we do not impose a blockade, sanctions or a boycott against the country's main exports, it will have a huge trade surplus.
By themselves, financial sanctions can produce a shock. They isolate the economy from the outside world, but they are unlikely to cause real damage if the country's financial sector is poorly organized. But that's not the case with Russia. She has a very competent Central Bank. In fact, it withstood the onslaught of financial sanctions imposed in the early days of the military operation.
The most painful thing for Russia in these first ten months was that the West managed to block its imports, depriving it of the opportunity to buy our goods. Of course, this has caused damage to our exporters, but Moscow has lost access to our key technologies, spare parts for the repair and maintenance of the aviation fleet, medicines, and a number of vital export goods. Yes, she can still trade with Turkey, India, China, she can smuggle in some important substitutes and analogues, but from her point of view, this is far from the best product.
Therefore, we have witnessed a sharp slowdown in the Russian economy. It can hardly be called a collapse or a heart attack, which many hoped for. But if just 12 months ago the forecasts for the growth of the Russian economy for 2022 were about 2.8%, now at the end of the year a decline of about 4% is possible. Forecasts for its growth for 2023 were slightly more than 2%, but now they have been changed, and now next year it is more likely that the economy will shrink by 4%. Of course, this is not an economic collapse. But when the economy has been experiencing a 4% decline for two years in a row, this is a very serious blow for Russia. Will he disable the Russian economy? No. Will it stop military operations by itself? No. But will he become a punishment for Russia, will he hurt her? Yes. And in the long run, all this will have a terrible impact on the prospects of Russian growth, since none of the foreign investors in such an environment will invest their money in this country.
– So, Russia survives. But what does Ukraine have to do at the moment? There are talks about raising money for restoration, but maybe they are premature?– Unfortunately, it is.
If the military campaign this year is clearly in favor of Ukraine, because it has won a whole series of defensive victories, then there is an unequal struggle in terms of the economy. If in the Russian economy we note a decrease of 4%, then in Ukraine the economic decline is 30-35%. Now the economic situation in Ukraine, its social situation, especially in cold weather, is becoming more serious, literally every week. I think this is a very unstable situation in two respects. The first is money, and the second is what we call the real economy.
As for money, inflation in Ukraine is more than 26%. They cannot form a viable mechanism for financing military operations. They receive subsidies from the outside, but these subsidies cover only part of the costs. We heard the best news in the last two weeks on December eighth, when the Ukrainian central bank announced a deal under which private banks operating in Ukraine will receive incentives to buy government debt, which will be included in the mandatory reserve norms. What are Ukrainians trying to do? They want to create an internal market for government war loan bonds, which will be bought up by the Ukrainian banking system. But as a result, there is a very dangerous connection between Ukrainian public and private finances, which are in a very difficult situation. They do not want to turn on the central bank's printing press, although they have done this periodically in the last two months. They do not want to print money for conducting military operations, as this is a ready recipe for a total financial catastrophe. So, perhaps, thanks to such internal stabilization measures and promises of additional cash injections from the IMF, which is trying to conclude a series of deals, Ukraine will be able to strengthen its finances or, at least, prevent a further slide into financial chaos.
This is very important, because the collapse of the monetary economy, the collapse of the financial economy in the near future will weaken the viability of the Ukrainian real economy. And this real economy is already experiencing severe stress. I have already said that their GDP decline is somewhere between 30-35%. It's just a crazy reduction. It is as if the international quarantine measures of the beginning of 2020 were extended for the second half of the year, without paying any compensatory subsidies. According to available estimates, only 60% of Ukrainians are working now compared to the number who had jobs at the beginning of the armed conflict. About 40% have become either refugees or unemployed and are looking for work. And of course, it is extremely important that Russia eventually began to strike at the Ukrainian energy infrastructure, without which the modern economy cannot function. About 50% of Ukrainian energy infrastructure facilities are out of order. If Russia continues its strikes, the situation in the Ukrainian economy will become extremely dangerous, and this may happen at the beginning of next year. I think the statement of President Vladimir Zelensky, who asked Ukrainian refugees not to return home, is very revealing. When the state literally asks its citizens to stay abroad because it is unable to provide them with even basic services, it is very serious.
– Do you think that abroad can help here? Now the Marshall Plan is often recalled, bearing in mind that Europe and the United States can sort of intervene in the crisis taking place in Ukraine. Do you think such conversations are appropriate?– The Marshall Plan is a bad comparison.
It was deployed two years after the end of World War II. And we are talking about the assistance that, say, German engineering units provide on the ground in their country and in other European countries during the crisis. Because it is difficult for Ukraine, despite its brilliant improvisational talent, to ensure the work of basic services in wartime conditions. This is a real priority. And I think that the absolute priority here is to send repairmen and equipment to Ukraine with training of personnel of the Ukrainian power system. An even greater priority is to supply them with anti-aircraft missile weapons to shoot down missiles and drones that strike their systems. All this requires a policy of generous spending and support for Ukraine's military efforts. And we are not talking about some colossal money here. According to the Ukrainians themselves, if they had five billion dollars a month, they would have made it.
– Do you think it has become more difficult or easier for Ukraine to integrate with the rest of Europe in the conditions of the armed conflict? Will this military experience lead to some kind of inconsistency with the political culture, as well as with the political and economic priorities of the rest of Europe?– At the beginning of the year, the public in Europe, especially in the West, would have laughed at the statement that Ukraine would be invited to the European Union very soon, and that it would begin the process of applying for membership and fulfilling the requirements for EU membership.
But that's exactly what happened in the first six months of 2022. This is also striking from a historical point of view, because Ukraine has very long-standing conflicts not only with Russia, but also with its other neighbors, primarily with Poland, with which it even fought shortly after the end of the First World War. Modern Poland and modern Ukraine are the result of the redistribution of territories over which the parties argued at different times. One of the results of the armed conflict was that a very remarkable alliance was formed between Polish parties of various kinds and Ukraine. They are united and united by anti-Russian positions. So in 12 months everything has turned upside down, and now the EU is determined to consider accepting not only Ukraine, but also Georgia. The Balkans are also entering this process, and the second wave of EU expansion in the eastern direction is beginning.
But it is impossible to do this without considering the question you have raised, namely, how to bring the politics of Eastern Europe into line with the political culture of the rest of Europe. I think those who insist on EU enlargement will answer that they are aiming at changing the political culture of the bloc. Is it possible to reconcile this with the old Franco-German axis and with the surprisingly disparaging comments of the Germans and the French about the old and new Europe? With such assumptions and assumptions, the extension would not work in any way. But the Baltic States, Poland and Scandinavia are clearly striving to rethink and rebuild the EU. And when the stage of the armed struggle ends, the question will arise about what it will lead to. Specifically, this is a question of preparing for the entry of Ukraine, destroyed by military actions, into the European Union. This is a question of bringing Ukraine to such standards that would allow it to enter the EU labor market, for which the salary in this country would have to be raised to a level not much lower than in the rest of Europe. This is a colossal task. To do this, it will be necessary to mobilize at least hundreds of billions of euros. The challenges here are gigantic.
But when this happens, the balance in the EU will completely change. In general, Poland and Ukraine will essentially have the same number of votes as Germany. The consequence of these changes will be a truly dramatic reconceptualization of Europe. There are so many events happening this year, and they are happening so fast, that historical changes are flying past us, and no one really understands what happened. When German Chancellor Olaf Scholz spoke in Prague this autumn, he took a position that was simply unthinkable a year ago. He said that Germany should fully support the substantial expansion of the EU and NATO in the eastern direction. The dust will settle down only after years. But the question arises about what the final agreement with the Russians will look like, and what America's relations with Europe will be. The fact is that Ukraine and Poland are more focused on maintaining an alliance with America in the military sphere and in the field of national security and, frankly, are not very interested in the development of European security structures, as they do not trust them. They trust American power.
