By Laura Pitel in Ankara and Max Seddon in Tel Aviv, Financial Times, 7/22/22
…Under the deal, which aims to restore grain shipments to prewar levels in the coming weeks, Ukraine and Russia have agreed not to attack merchant vessels, civilian vessels or port facilities covered by the agreement, according to a senior UN official.
It represents a “de facto ceasefire”, the official said, but added: “It doesn’t mean to say that parts of those ports which are not engaged in this mission are protected.”
It remains unclear how the deal will be enforced and what will happen if either side is accused of violating it.
Turkey, a Nato member with close ties to both Kyiv and Moscow, has agreed to send monitors to the ports along with UN representatives. But a senior Ukrainian official involved in the talks said Kyiv still had serious reservations. Without a binding mechanism to hold Russia to its commitments, the other parties essentially have to accept Moscow’s words on faith, the official said: “[There is] no enforcement, just promises.”…
Ukraine has agreed to facilitate the passage of wheat exports, through the Black Sea, to global markets, the New York Times, reported on Friday, citing three government sources in Kiev.
UN Secretary General Antonio Guterres has added that Kiev has agreed to remove “only a few” of the mines which have been blocking naval traffic since Russia launched its military offensive in February.
Under the proposals, Ukraine’s Navy and Coast Guard would steer grain ships to international waters, the report explained.
Wheat shipments from Ukraine, a major exporter, were disrupted after Russia launched its military operation in the neighboring country in late February. Both sides blame each other for hampering the exports.
According to the report, foreign crews would take the ship to Istanbul, Turkey, where they would continue on to other destinations. A control center would be set up in Istanbul to oversee operations, while Turkish officials would check the ships to assure Moscow that they aren’t used to deliver weapons to Ukraine.
Two senior European officials were quoted as saying they were optimistic that a deal would be struck at the UN-sponsored talks in Istanbul on Friday.
Western politicians accused Russia of deliberately blocking grain exports from Ukraine by blockading Black Sea ports. Moscow says the deliveries are not possible due to Ukrainian naval mines. The Russian Navy has offered to safely escort all grain ships.
A Ukrainian serviceman stands on the top of an infantry mobility vehicle Kozak-2 in Kramatorsk, Eastern Ukraine, amid the Russian invasion of the country, on July 14, 2022. (Miguel Medina / AFP via Getty Images)
Peter Korotaev writes on political movements, class relations, and economic policy in Ukraine.
In a 2020 lecture, Canada’s former ambassador to Ukraine said that after Euromaidan the country had become a laboratory for ideal-world experimentation. In other words, the economic liberalization unacceptable at home could instead be tried out in Ukraine.
But how is this “experiment” dealing with conditions of total war? And if such a situation generally pushes states toward economic interventionism, is Ukraine following suit?
Ukraine’s Financial Needs
First is the problem of Ukraine’s rising debts. According to the Ukrainian Finance Ministry, from January to June the state budget recorded $35 billion in expenditures and $21.8 billion in revenues. This situation has been worsening. June’s $1.5 billion in revenues, down from $2.5 billion in May, only covered 19.4 percent of expenditures.
Over January to June 2022, $19 billion of the total revenues came from various forms of credit and foreign aid. Over half, $11.8 billion, owed to state bonds, while $7.6 billion (35 percent) was simply money printed by the national bank and given to the Finance Ministry. The remaining $7.2 billion came from various foreign credits and grants.
Finance minister Serhii Marchenko has repeatedly stated that without an immense increase in aid, Ukraine will be forced to further cut nonmilitary spending within months. The strain has already made itself felt on state employees. Workers at the state railway company, who have been playing an important and dangerous role in saving the lives of millions of civilians, receive their wages with delays of seven to ten days, and when they do receive them, they are cut by a third, leaving about $150 a month. Many teachers and university professors haven’t received wages for months. At ports, workers who used to earn $260 a month now earn a little over $50 and that with delays.
Despite much talk of Western generosity, in May Ukraine only received one-third of the $5 billion it needs in aid. By mid-May the Economist reported that Ukraine had run up a fiscal shortfall of $15 billion and received only $4.5 billion worth of foreign grants. The Finance Ministry reports that fully 21 percent ($7.3 billion) of all January-June budget expenditures were dedicated to payments on state debt. The situation will only worsen, with Bloomberg calculating that Ukraine will face a $1.4-billion debt-repayment deadline in September.
The extent of Ukraine’s external public debt (the Ukrainian government also recently announced that it hopes for $200-$300 billion in Western credits for postwar reconstruction) means that it will have even less ability to refuse the policy demands imposed by Western creditors. The finance minister and the director of taxes have constantly reiterated throughout the war that Ukraine will continue servicing its sovereign debt, underlining their willingness to follow creditor demands.
Corruption and Nationalization
Since 2014 — but with renewed vigor in recent days — Ukraine’s Western partners have pushed Ukraine to “fight corruption.” This “struggle” has many important economic effects. Generally, states at war tend to nationalize key sectors of the economy to maximize armaments production and stabilize the civilian economy, both to prevent chaos in the rear and feed the army. Strangely, this has not taken place in Ukraine, despite what the government declares a “total war” situation. Remarkably, a law was even passed in late June that aims to “restart privatization of state assets on a new level.” Some politicians have critiqued this approach — Vadym Denysenko, assistant to the interior minister earlier in the war, urged a turn toward “direct state management of the economy.” But so far, his call has gone unheeded.
Calling for nationalization, Denysenko noted that “it is no longer time for the National Anti-Corruption Bureau of Ukraine (NABU).” He said this because over the past eight years, a flurry of “anti-corruption organs” — NGOs, state organs, and in-between — have focused on eliminating state intervention in the economy.
Set up by Ukraine’s liberal “civil society,” the United States Agency for International Development (USAID), and the Open Society Foundation, such organs have created websites such as Prozorro (“transparency”), which handles Ukrainian state purchases. The mayor of Dnipro has harshly criticized Prozorro in recent months, due to the government’s decision to require all purchases of military equipment to go through this program. He insists that such public transparency in military affairs and the bureaucratization of urgent military tenders is only helping the Russian army.
The website, tellingly, has no function for ensuring domestic localization of state purchases. According to Prozorro and its allies, domestically localizing state tenders is in the interests of a corrupt “oligarchy” that depends on state rents rather than efficiency. And anyway — as Ukraine’s liberal press never tires of reminding us — why buy a lower-quality Ukrainian product if it can be bought cheaper elsewhere?
The requirement that state tenders be made with a minimum amount of domestic suppliers is common in most countries, and its absence in Prozorro was called “extremely strange” by the new economy minister in 2021. As a result of this neutralization of the “corruption risks” presented by the domestic localization of state purchases, around 40 percent of Ukrainian state purchases are from foreign producers. By comparison, the United States and European Union (EU) countries make around 5 and 8 percent of their state purchases abroad respectively. The imperatives of “stopping corruption” take priority over Ukraine’s economic development.
When Ukrainian legislators tried to pass a bill in 2020 ensuring localization of state purchases, the anti-corruption bureaus (as well as the EU and the United States) frantically tore it down, citing the “possibilities for the corrupt use” of this patently ordinary measure. The law was eventually passed — but amended, so that localization restrictions were only applied to non–EU or North American nations. In short, Ukraine’s vast anti-corruption ecosystem is a control mechanism that keeps its economy perpetually open to decimation by foreign exporters who often enjoy preferential treatment from their own governments. The idea that “corruption” is the greatest barrier to development is a fiction used to justify trade liberalization in which the stronger Western capitalists inevitably win, to the detriment of the Ukrainian economy.
Largely a result of this valiant “anti-corruption” struggle, Ukraine has dramatically deindustrialized over the past eight years. From 2013 to 2019, exports of aerospace production declined by 4.8 times, of train wagons by 7.5 times, of metallurgical products by 1.7 times, and of chemical products by 2.1 times. The situation was particularly bad in the military-industrial complex, with Soviet Ukraine’s once-great shipbuilding and rocket complexes essentially disappearing. Not a budget passed by without grandiose — and costly — purchases of Western military equipment. Over 2018 to 2021, $1 billion was even spent to buy 110 French helicopters for the Ukrainian police, despite Ukraine possessing an excellent Soviet helicopter factory, albeit one falling into disuse due to the preference for foreign purchasers. This immense deindustrialization, even if in the service of such admirable ideals as “European civilization,” haven’t served Ukraine well in a war decided by the size of each army’s rocket and heavy-artillery stocks.
The various scandalous personalities of the anti-corruption courts have, since the beginning of the war, remained under the radar in relatively peaceful Lviv, or simply left for Paris. Several famous such figures, such as Artem Sytnyk, have even been convicted in court of corruption but are not removed from their posts due to the direct demands of the United States and the International Monetary Fund (IMF). Sytnyk was revealed to have received $30,000 in severance pay from one anti-corruption organ in the early months of the war, before being given a new post at a different one. Receiving the highest wages of all state employees, $83 million of the 2021 Ukrainian budget was dedicated to the three biggest anti-corruption organs, though they are often criticized for failing to make any large-scale arrests for corruption. While ordinary state workers have seen their wages decrease to absurd levels, Ukraine’s overstrained budget finds space for such “essential workers.”
These courts have very unclear juridical status, and the method by which their managers are chosen was even ruled unconstitutional by the Constitutional Court in 2020, following which Volodymyr Zelensky unsuccessfully (and illegally) tried to sack the constitutional judges. Unsurprisingly, one of the EU’s biggest demands, repeated in recent days, is for Ukraine to “reform” this court, which has also ruled against such symbols of EU integration as the privatization of agricultural land. Wartime has provided the opportunity for the distasteful judges finally to be pushed out.
The EU has already begun demanding that Ukraine continue giving the anti-corruption organs unimpeded control as one of the conditions for its “European integration” (or rather, the granting of a conditional EU candidate status). The “struggle against corruption” bodes ill for any wartime attempts to increase state economic intervention, though anti-corruption organs have already done enough to eliminate any dirigiste politicians in Ukraine over the past eight years. When finance minister Marchenko listed off what terrible things the government might be forced to do without sufficient aid, he listed “nationalization” alongside catastrophic budget cuts.
Instead of large-scale nationalizations of crucial sectors, there has been a mix of failed nationalizations, “nationalization” by Ukraine’s most liberal figures, and takeovers by neoliberalized state companies. In terms of failed nationalization, the past months have seen several attempts to regulate prices on petrol, short in supply due to targeted bombing campaigns. Given the lack of state capacity, this regulation has generally failed, and the government regularly switches between temporarily regulating the price or letting it float. Speculation-driven shortages have intensified once again in recent days.
Meanwhile, some fanfare has been made in Ukraine over the “nationalization” of Russian (or “pro-Russian”) assets. This fund of seized assets is controlled by Tymofey Mylovanov. A former minister of economic development and director of the Kyiv School of Economics, he is famous for his ultraliberal views, holding that privatization is the solution to any problem.
Meanwhile, the gas sector has become monopolized by the infamous state-owned gas company, Naftogaz. Its head, Yuri Vitrenko, enjoys regaling sacked energy-sector workers with lessons from Adam Smith, as part of his explanation for why they should simply go work in Poland instead of Ukraine’s superfluous uranium refineries. Nevertheless, the company “canceled the gas market” by taking control of 93 percent of the sector in March–May.
In May, Naftogaz announced a 300 percent increase in gas prices for suppliers. The government quickly assured the public that consumer gas prices would not increase anymore during the war thanks to Western financial help. But what about after the war, when Naftogaz will face no competitors? One of the IMF’s most constant demands has been the liberalization of the gas market such that its price converges with that in German markets. Though the Ukrainian government was often forced to regulate gas prices due to protests, in 2021 it signed a memorandum with the IMF, where a first $700 million loan was conditional on the agreement that by May 2022, 50 percent of the gas market would be sold at (European) market prices, and by 2024, 100 percent. This would mean increasing consumer gas prices by more than 400 percent. Since Ukraine became dependent on IMF credits in 2014, consumer gas prices have already increased by 650 percent. Given Ukraine’s growing dependency on the IMF, it is difficult to imagine that it will continue freezing consumer gas prices at a low level thanks to Western aid.
In short, though this move toward nationalization of the energy sector in wartime is certainly better than the alternative of letting the market decide prices, and the decision to ban export of coal, gas, and fuel in wartime is praiseworthy, the fact that Naftogaz has a history of being more interested in profits than public good makes it difficult to be optimistic about any postwar future. Many energy experts also doubt that Naftogaz has the capacity to deal with taking control of the entire Ukrainian energy system. Had Ukraine not been so preoccupied with building a “Euro-integrated gas market” over past years, it could have been better prepared.
Liberalization of Labor Law
Aside from gas prices, Ukrainian workers will have even more reason to head to Poland, as their bargaining power vis-à-vis bosses declines due to liberalized labor laws. Over the past three decades, almost every year has seen new legislation to liberalize the labor code, and in May the most maximalist version yet was passed. Instead of the provision of unified labor rights for all and the ability to create collective agreements, workers at enterprises with under two hundred employees (i.e., most workers) will now only have the “option” of individually agreeing to rules proposed by the employer — effectively canceling legislative coverage for most workers. These reforms allow businesses to fire workers at will without even nominal consultation with trade unions and removes employers from the obligation to pay wages for workers mobilized to the front. While this model had often been proposed in Ukraine, it was generally softened due to trade-union protests. Wartime — with its mass unemployment and suppression of labor activism — was the perfect time to pass it.
The politicians who created this legislation did so under the auspices of a USAID program. Rich Western countries have always been eager to push such laws in Ukraine. IMF reports on Ukraine often reference the need for more labor-market liberalization, and sometimes this was even the condition of further IMF loans. In 2021, leaked documents emerged of the British Foreign Office organizing workshops for Ukraine’s Economy Ministry explaining how best to convince voters of the need for such laws.
Given the dependence of the post-Brexit UK economy on low-paid Ukrainian migrant workers — with 67 percent of its farmworker visas in 2021 going to Ukrainians — it is no wonder that the British Foreign Office sponsors such deregulation in Ukraine. A worsened labor market in Ukraine would push even more Ukrainians to work in the UK for wages far below British levels. Since the war has seen Ukraine become increasingly indebted to the IMF and the EU, it is also entirely likely that part of the motivation in passing this legislation was to show the EU Ukraine’s fidelity to the “reform path.”
Fiscal Policy
At the start of the war, Ukraine’s government canceled import taxes and tariffs. This was great news for auto dealers, with thousands of cars crossing the border for far lower prices than they would usually sell for. But it was bad for Ukraine’s budget, which lost around $100 million a month. It also worsened Ukraine’s fuel deficit as petrol trucks were halted by the immense traffic jams at the border. As a result, the National Bank of Ukraine (NBU) and the finance ministry lobbied hard for the return of this tax, finally succeeding in late June.
Although the government displays some willingness to restore basic taxes, it otherwise does not consider increased taxation of big business necessary. In a Bloomberg interview, “Marchenko reiterated that he does not favor amending the taxation system in any form, either through easing or tightening it.” Wartime Ukraine’s fiscal policy has hence not departed from the post-Euromaidan consensus that sees decreased taxation as the key to growth and prosperity. Indeed, by canceling so many taxes and mainly speaking of postwar reconstruction in terms of tax-free export zones, the war has paradoxically seen an intensification of this fiscal model.
Meanwhile, what tax revenues are received, of course, are not being used to build up the state sector. The closest to what might be called Ukrainian economic interventionism so far has been the prime minister’s announcement of a 1.3 billion hryvnia ($44 million) program sponsoring IT workers to improve their qualifications. Here, as elsewhere, wartime has seen a continuation of the prewar liberal economic model — a country founded on the export of a small bundle of agricultural goods, a small but vocal urban class of IT specialists, and remittances from millions of migrant laborers.
Monetary Policy
One of the most important and constant demands made on Ukraine by the IMF and other Western creditors since 2014 has been “central bank independence.” This means choosing NBU figures approved by the IMF, who ensure that it obeys the strictest of orthodox liberal logics, considering “inflation targeting” through monetary means the only acceptable form of state intervention. Business can’t get credit and the country deindustrializes, but at least the currency is stable. In Ukraine, the NBU is certainly “independent,” though some analysts joke that this really means that it is independent of Ukraine’s interests altogether. This has been particularly starkly illustrated by the NBU’s wartime decisions.
The finance minister created special war bonds upon the invasion, hoping to receive around 400 billion hryvnia ($13.5 billion) by appealing to “patriotic citizens.” But after two months, only 57 billion ($2 billion) had been raised through these war bonds on the open market. The national bank was forced to step in, buying 70 billion hryvnias’ worth. But the NBU instantly started worrying because of the tendencies toward inflation and currency devaluation, worsened by its printing money to buy war bonds. By late June, the NBU had bought $7.5 billion of bonds — some 17 percent of Ukraine’s prewar budget. As Bloomberg notes, its printing of money has lowered Ukraine’s gold reserves by $3 billion, with $25 billion left, while inflation has risen to 20.1 percent.
Citing these monetary dangers, on June 1 the NBU hiked interest rates from 10 to 25 percent. This had two aims — first, hoping to stop inflation and currency devaluation by tightening the money supply for business and consumers; and second, to allow the finance ministry to make more money to cover the budget, since its war bonds would be pushed by NBU rate competition to increase its yield rate, thereby attracting more buyers.
Alexey Kusch, a popular Ukrainian economist, published a long Facebook post about the decision, writing that it made him “have doubts for the first time since the start of the war, not in victory, but in the possibility that after it our country might start developing in another way” than the liberal course he has always critiqued. He cited the adoption of a fixed exchange rate, the creation of war bonds, and certain controls on capital exports at the war’s beginning as signs of the emergence of a wiser and less liberal economic policy in Ukraine. In contrast, the NBU’s decision was an orthodox monetarist solution totally inadequate to the wartime context.
First, this is because no interest rate is high enough to convince foreign capital to invest in Ukraine, given the military risks and devastation. Kusch cites the fact that Ukrainian Eurobonds with a September maturation rate (Ukrainian war bonds have a thirty-year maturation rate, making them even less attractive) were being resold on the secondary market with a yield of 250 percent. The government has misplaced faith in private investors’ desire to save a war-torn state.
Second, because inflation in Ukraine is caused by supply-side factors such as the global energy crisis, petrol shortages due to Russian military attacks and border traffic jams, and so on. This means that the standard monetarist solution of cutting demand will have little effect in stopping inflation. There instead needs to be state intervention at the level of supply.
Third, because the fixed exchange rate a priori prevents any monetary attempts to influence the exchange rate. In Kusch’s words, if the national bank plans to float the exchange rate, “then things are really bad.” He recalls the 2014–15 currency liberalization, when the hryvnia went from eight to around thirty to the US dollar. This floating rate allowed elites to massively withdraw capital from the country while the population became impoverished, with over 80 percent of Ukrainians on under $5 a day in 2015.
Back then Ukraine had a port system — now, nothing can leave the ports because of the war, and exports have dropped to no higher than 40 percent of prewar levels. Kusch hence prognoses a dramatic devaluation of the currency if importers are allowed to buy foreign currency on an active interbank market.
Unfortunately, things “really are bad.” This move toward a “market-driven” floating currency is precisely what was announced by the NBU several days after its interest rate hike. Exchange rates have begun increasing, although inflation rates, as Kusch predicted, have continued increasing. In July, the NBU removed currency restrictions on various import goods, further increasing the devaluation of the currency. “The main beneficiaries” of the NBU’s interest rate hike and inevitable exchange rate devaluation, Kusch writes, “are structures that want to withdraw their capital from the country.”
As for war bonds, Kusch predicted that there would be little interest in buying them even if the yield is increased, because the limit of Ukrainian domestic savings for this purpose has already been reached. Furthermore, the uncertainty of future Ukrainian exchange rate behavior makes such an asset even less attractive. What would be bought would have to have a very high, 30-percent-plus rate and would only interest short-term domestic and foreign speculators. Meanwhile, to pay for this, the budget hole would become even vaster. According to an NBU statement in July, the Ukrainian state budget has received less from its sale of bonds than it has had to pay the bond owners.
For this reason, the finance ministry refused to increase the rate of yield of its war bonds to the astronomical height demanded by the NBU’s interest rate. This was why purchases of war bonds hit a record low of $79 million in the three weeks following the rate hike, as other assets became relatively much more attractive. The first auction on state bonds in July brought in little over $4 million.
The fact that the NBU interest rate is higher than that of the yields on the bonds sold by the finance ministry creates another dangerous possibility — the collapse of Ukraine’s “bond pyramid.” This scheme — popular throughout the post-2014 period but particularly during the COVID lockdowns, when interest rates were especially low — consisted of buying NBU credits at around 5-6 percent and using them to buy higher-yielding finance-ministry bonds with around 11 percent yields. This gave Ukraine’s banks easy profits, with the two biggest Ukrainian banks investing almost 40 percent of their capital in this financial pyramid. But this all falls apart if NBU interest rates are higher than NBU bond yields. All but two of Ukraine’s banks depend in some degree or other on NBU credit: such credit makes up 20-85 percent of almost a third of all Ukrainian banks’ repayment obligations.
The last time the NBU hiked interest rates, in 2015, the so-called “bank-o-fall” began, with over 60 percent of Ukraine’s banks going bankrupt and disappearing over the next two years. While the IMF praised this closure of “corrupt ghost banks,” many depositors lost their money, and credits for business and consumers became very hard to come by. It only took a day for the NBU’s latest interest hike to destroy one bank, leaving sixty-eight remaining.
Both because of competition with the NBU’s new rate and faced with the burden of repaying NBU credits involved in the enormous “bond pyramid,” banks have harshened conditions for debtors, resulting in a wave of complaints from business and the broader population. Interest rates increased by 15 percent overnight for many businesses; consumer and business credit rates are predicted to rise toward 25-40 percent, whereas before the interest rate hike they were closer to 15 percent.
In the weeks following the invasion, the trade and industry chamber recognized the war as force majeure: a special law (No. 2120-IX) was passed that prohibited banks from placing fines or penalties on debtors. Yet banks are getting around this by simply increasing the rate of interest. One refugee from the Kharkiv area reported that the biggest Ukrainian bank started using his pension funds to repay his credit debt. Others who have lost their jobs due to the war complain that banks refuse to give credit holidays. The best deal that banks are giving so far — only to people in territories currently controlled by Russia — is canceling 30-40 percent of the owed amount but with the rest still paid at a lower interest rate. There are reports of harsh negotiations where banks threaten to block access to assets in areas controlled by Ukraine to businessmen who have lost their assets in areas no longer controlled by Ukraine and hence cannot pay. For its part, the NBU was quite clear about which side it was on when law 2120-IX first came out, recommending individuals come to an individual agreement with their bank about credit rates.
The situation for debtors continues worsening, with one of Ukraine’s biggest banks announcing on June 7 that it is returning credit rates to prewar levels (doubling the present rates), citing the rise in the national bank’s interest rate.
Future Promises
Faced with such an array of economic crises, worsened by the liberal treatment of them, the Ukrainian government has stuck to what it does best: promising that foreign donors will resolve these problems. It has promised that foreign aid will subsidize the 300 percent increase in gas prices while Russia’s seized foreign assets will be used to rebuild housing and pay for credit subsidies. Even aside from the question of how realistic it is to assume that the West will pay for the monopolization of the Ukrainian gas market, the Wall Street Journal and the Swiss government each tell us that seized Russian assets are highly unlikely to end up in Ukraine’s hands.
We’ve seen that Western aid is already insufficient in covering Ukraine’s budget deficit, forcing the state to embark on inflationary printing of currency. Now even that financial assistance seems to be under question: the Ukrainian finance minister has confirmed Western media reports that Germany is blocking a €9 billion EU loan to Ukraine.
The most likely result will simply be that, lacking foreign aid, Ukraine will declare low taxes in various war-torn regions and wait for investors to come and build — a solution already proposed by various mayors. No doubt, Western countries’ promises to rebuild Ukraine will also bring some impressive show projects. To give an example of how serious these proposals look, Estonia has promised to rebuild Zhytomyr region, which is only 33 percent smaller than Estonia itself.
This perspective was made explicit on July 7, when Ukraine’s government unveiled its plan for how a hypothetical $750 billion could be used to reconstruct the economy. Apparently, $200-$250 billion will come from foreign grants and $200-$300 billion from foreign loans. Further, $250 billion will come from private investors, who the government clearly believes will be desperate to invest in a country destroyed by war that is spending only $5 billion of its reconstruction fund on education. The fact that another $5 billion will be spent on “improving the business environment” (further liberalizing labor law?) and $200 million on anti-corruption organs and the “corporatization of state enterprises” further goes to show the depth of the government’s faith in the power of the free market.
While the plan does involve rebuilding infrastructure, nothing is said about any state-led reconstruction of Ukraine’s industrial complex. No doubt, it is assumed that “efficient private investors” will accomplish this with gusto. If they don’t, Ukraine’s final transformation into a deindustrialized source for agricultural goods and labor power is simply natural — and in accordance with liberal principles of each nation’s comparative advantage.
Instead of effective wartime interventions, the government sticks to its old formula of justifying present sacrifices in the name of promised EU prosperity. Worsening labor conditions, the “Europeanization” of gas prices (but with Ukrainian wages), the central bank’s “independence” from “its” country’s national interests — all this is justified in the name of the shining European Future, or rather, possibly receiving the marginal status EU-candidate country Turkey has had for decades. Ukrainian and international media never cease to remind us that this war is being fought in the name of Ukraine’s “European Future” — and what are these economic sacrifices compared to all the blood being shed for this “grand ideal”?
The EU has plenty of interest in keeping up the illusion of Ukraine’s “European integration.” In the global context, the EU is increasingly economically vulnerable, with high wages and much higher energy costs due to sanctions on Russia. Many European countries have in recent decades become increasingly reliant on Ukrainian migrant workers, many of them driven out of Ukraine precisely because of the unemployment and low wages created by the EU’s wise reforms. According to Poland’s central bank, 11 percent of Poland’s GDP growth from 2015 to 2020 owed to Ukrainian migrants. Unsurprisingly, Poland has always been among the most active in encouraging Ukraine’s “Western civilizational choice,” with Polish diplomats being the first at Maidan Square in 2013. Interestingly, the Ukrainian government’s $750 billion reconstruction plan includes a high-speed train from Ukraine to Poland.
Much of US lend-lease aid is going toward preparing the EU to accommodate Ukrainian migrants. By paying for housing, language education, and budget benefits, many of the refugees will choose to stay and work in the EU. What this means is that this aspect of aid “for Ukraine” is subsidizing the integration of a cheap, educated workforce that will not return to or earn money in Ukraine. Unlike previous migration to the EU, where a single family member left and sent back taxable money to Ukraine, this form of migration involves entire families that are becoming taxpaying citizens of foreign countries. While the national bank facilitates the flight of money capital, the “Western partners” do their best to facilitate the flight of human capital.
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For me, one of the most intriguing aspects of the unprecedented levels of propaganda beclouding the ongoing Ukraine War are the incessant claims, from the very beginning, of the alleged strategic, tactical, and logistical ineptitude of the Russian military.
The theme of the bumbling Russians was clearly preconceived and coordinated, and commenced in earnest within the first 24 hours of hostilities. It is also apparent, to me at least, that it has emanated almost exclusively from the CIA/MI6 analyst/think-tank complex.
CIA/MI6 fronts like Oryx, Bellingcat, and ISW have pumped out this narrative so relentlessly that it has now been ubiquitously enshrined as “received wisdom”, even to the point of entering into the body of assumptions embraced by many who I expected to be more discerning.
It has given rise to countless evidence-free myths, from the #FakeNews downing of two IL-76 jumbo transports packed with Russian paratroopers, to hundreds of armored vehicles allegedly abandoned for mechanical failure, lack of fuel, or other logistical failures.
One of the more inexplicable narratives included in this disinformation package has been the allegation that Russian troops are poorly trained conscripts, who are thrown into the meat grinder with antique weapons, little ammo, and so little food they are literally starving.
These tall tales are then woven back into the main strand of the narrative: the Russian army is a disorganized mob of demoralized “orcs” whose only real talent is plundering household appliances, raping young women, and randomly gunning down old folks on the streets.
Attached to this constant refrain are repeated comparisons to the allegedly incomparable professionalism, organization, training, and weaponry of US/NATO forces. The implication is that any company of American soldiers would be a match for an entire battalion of Russians.
I’ve concluded this unrelenting narrative must have as its aim the persuasion of the public and policy-makers in NATO countries that western militaries are so vastly superior to their Russian counterparts that no one should have reservations about making war against them.
And thus we continue to hear calls for immediate NATO intervention into the war; the establishment of a “no-fly zone” over Ukraine, and “boots on the ground” to teach the presumptuous and inept third-world Russian army a lesson it will not soon forget.
Never mind the numerous reports from western mercenaries and foreign legion volunteers who managed to escape back to their home countries after brief and terrifying “tours of duty” in Ukraine, all of whom relate similar accounts.
They talk about encountering overwhelming firepower for the first time in their military careers, and they soberly warn anyone else thinking of embarking on a “safari” to kill Russians that it was “nothing like Iraq” and they feel very lucky to have made it out alive.
Never mind also the fact that, to my knowledge, there are few if any conscripts among the Russian forces in Ukraine, and few if any reports in Russian independent media sources of demoralized, under-supplied Russian battalions in any theater of the war.
Quite to the contrary, every indication I have seen suggests that Russian morale is sky high, both among the soldiers doing the fighting and the Russian public at home. To be sure, there have been Russian casualties: best estimates are ~5000 RF and ~8000 DPR/LPR KIAs.
These numbers pale in comparison to the western propaganda mill fantasies of ~100k total Russian casualties, including 35k – 50k KIAs, which, were it true, would be unmistakably reflected both in the morale of the army itself and the public at home – and it clearly is not.
Nor is any of this manufactured narrative consistent with constant Ukrainian appeals for massive replenishment of lost heavy weaponry, and repeated mobilization of territorial guard troops and expansion of the conscript window to include 18 – 60 year-olds and even women.
On the other side, Russian troops rotate out and back in to the battlefield, rested and refitted. Russia has not ordered a general mobilization, and has about the same number of soldiers in the theater that they started with (175k – 200k).
So I leave the reader to judge the facts of the matter in terms of Russian military ineptitude and massive logistical failures.
And with that preface, let’s turn to the primary question: could NATO fight and win a war against the Russians on this same battlefield?
My answer is an emphatic NO, and for three distinct but equally disqualifying reasons:
1) There is zero evidence that NATO soldiers are superior to Russians.
2) Sufficient NATO forces could NEVER be assembled and equipped to defeat the Russians in their own backyard.
3) Even the attempt to concentrate sufficient US forces in the region to take on the Russians would result in the disintegration of the global American Empire and rapidly accelerate the already-in-progress transition to a multipolar world.
As to point #1 above, it bears repeating what I have argued multiple times in recent weeks: this war has seen the Russian military quickly evolve into a battle-hardened and surprisingly nimble and quick-to-adapt fighting force. The US has not faced such a force since WW2.
Many believe the US is a “battle-hardened” force. This is utter nonsense. Of the many thousands of troops in current US combat units, only a minute fraction has experienced ANY battle, and NONE have experienced high-intensity conflict such as is taking place in Ukraine.
I submit that one of the inadvertent and unforeseen byproducts of this war is that, even as the NATO-trained and equipped Ukrainian army has been devastated, the Russian army has been transformed into the single most experienced army on the planet.
Needless to say, this is NOT what US/NATO strategists intended to achieve. But it does explain why we now see them doubling-down on efforts to prolong this war – both to (hopefully) degrade Russian capabilities, and to buy time for themselves to determine what to do next.
You see, if NATO had to go to war today against Russia, and all their troops and equipment could be magically teleported to the battlefield, they simply could not sustain high-intensity conflict for more than about a month, as this analysis shows:
The dim-witted will undoubtedly reply: “But muh awesome American air power would destroy them from the sky.”
The average Call of Duty warrior believes such nonsense, but I guarantee very few in the Pentagon harbor such delusions.
To the contrary, they understand perfectly well that Russian best-in-class air defenses would savage attempted US/NATO airstrikes. It would be a massacre, the results of which after even the first 48 hours would see wiser heads calling for an immediate ceasefire.
Not only that, but even attempted, but catastrophically failed NATO airstrikes against Russia would result in a massive series of counterstrikes against NATO bases and warships at distances never seen in previous wars. It would be a no-holds-barred affair.
Staging areas in Poland and Romania would be hit hardest, but strikes would almost certainly range over all of Europe and the Mediterranean. Russian missiles and submarines would sink several ships within hours, including, almost certainly, a US carrier.
This, of course, is the nightmare scenario – one which very conceivably risks an escalation to nuclear war.
But it also assumes that Russia would stand idly by as NATO concentrated forces in the region sufficient to launch a war.
In my estimation, the Russians would NOT sit back and watch the US/NATO methodically conduct a Desert Storm-style buildup over the course of a year (or more) – which is how long it would take to assemble a force large enough to launch a war against Russia.
Just as they preempted Ukrainian designs to retake the Donbass and Crimea, they would likewise strike NATO forces long before they reached a level of strength sufficient to conduct operations against Russia. (This pertains to point #2 above, in tweet #19.)
One final observation on this whole notion of the US/NATO making war against Russia:
People neglect to consider the fact that US forces are dispersed all around the world, in over 800 foreign bases of varying sizes and strategic importance.
In other words, most fail to appreciate the fact that US military might is *highly diluted*, and the only way to possibly concentrate a force sufficient to take on the Russians would be to literally evacuate almost every significant US base on the planet.
Japan, Korea, Guam, Syria, Africa, Turkey, etc. A massive power vacuum would be created all around the world, and would constitute an irresistible temptation for “hostile powers” to exploit.
It would spell the end of American global empire and hegemony.
When Russia pulled its forces out of areas in northern Ukraine, Moscow said it would focus on the “liberation” of the breakaway Donbas republics, known as the Donestk People’s Republic (DPR) and the Luhansk People’s Republic (LPR). Lavrov’s comments are the first time a high-level Russian official acknowledged Moscow’s war aims extend beyond that region.
Lavrov said that geographical realities changed after Russian and Ukrainian negotiators failed to reach a breakthrough at talks that were held in Istanbul back in March. “Now the geography is different, it’s far from being just the DPR and LPR, it’s also Kherson and Zaporizhzhia regions and a number of other territories,” the Russian foreign minister said.
During the peace talks in March, Russia demanded that Ukraine recognize the DPR and LPR as independent and drop its claim to Crimea, which Russia has controlled since 2014. Before Russia invaded on February 24, Moscow wanted Kyiv to fulfill the Minsk accords to end the war in the Donbas, which would have granted the DPR and LPR autonomy, but they would have remained part of Ukraine.
As the war drags on and Russia continues to make more gains, Ukraine stands to lose more territory. Russia already controls most of the Kherson and Zaporizhzhia Oblasts, and Russian-installed leaders in those regions have said they’re planning to hold a referendum on joining the Russian Federation. Lavrov said that Russia could push even further into Ukraine if the US and its allies keep pumping longer-range weapons into the country.
“That means the geographical tasks will extend still further from the current line,” Lavrov said. “We cannot allow the part of Ukraine that Zelensky will control or whoever replaces him to have weapons that will pose a direct threat to our territory and the territory of those republics that have declared their independence.”
The US shows no sign of slowing military aid to Ukraine. The Pentagon pledged on Wednesday that Ukraine will receive four more High Mobility Artillery Rocket Systems (HIMARS) as part of the next weapons package that will be announced this week. The HIMARS are a mobile multiple rocket launch system that have a range of 50 miles.
Ukrainian Foreign Minister Dmytro Kuleba responded to Lavrov’s comments and said it shows Russia isn’t interested in negotiations. “By confessing dreams to grab more Ukrainian land, (the) Russian foreign minister proves that Russia rejects diplomacy and focuses on war and terror. Russians want blood, not talks,” he said.
Lavrov said that peace talks don’t make sense at the moment because Western governments are leaning on Ukraine to keep fighting and not negotiate. Ukraine has maintained that its goals in the war are to push Russia out of all Ukrainian territory, including Crimea. President Biden has said the US is prepared to support Ukraine for “as long as it takes” for Kyiv to win the war, and his administration has abandoned diplomacy with Moscow.
New Deputy PM and Putin’s Daughter to Kickstart ‘Import Substitution’
Rumors were flying all last week about an “extraordinary” session of the Russian parliament, with predictions about what would be discussed ranging from a declaration of war to a new prime minister. In the end, the news was relatively minor: the State Duma convened Friday to promote Trade and Industry Minister Denis Manturov to deputy prime minister. This is apparently one of the ways in which President Vladimir Putin hopes to accelerate import substitution and make Russian industry self-sustaining (a Kremlin ambition since at least 2014). Another way Putin is trying to make this happen is with his own daughter. It was announced last week that Katerina Tikhonova will play a leading role developing import substitution at the influential Russian Union of Industrialists and Entrepreneurs (RSPP).
The unscheduled meeting of the State Duma was announced last Sunday, just four days after the close of the regular session. The apparent urgency sparked speculation about general mobilization, the closure of Russia’s borders and even talk of a government reshuffle. Independent media outlet Meduza, for example, cited sources saying that Prime Minister Mikhail Mishustin was going to be replaced by Alexei Kudrin, the head of the Audit Chamber.
All the speculation was wide of the mark. It emerged Friday that the Duma was gathering to rubber-stamp a new ministerial appointment — and one likely planned before the invasion of Ukraine (one of The Bell’s sources described it in detail before the war). Manturov was promoted to deputy prime minister and handed responsibility for the defense industry (in addition to civilian manufacturing). Deputy Prime Minister Yury Borisov, previously in charge of the defense sector, will head state space agency Roscosmos. That meant the Elon Musk-baiting former Roscosmos chief Dmitry Rogozin was left without a job — although his credentials as an aggressively anti-Western official means he’s unlikely to be out of action for long.
The special Duma session was required as a result of 2020 constitutional reforms. The main aim of the reforms was to extend Putin’s presidential term through 2036, but for appearances’ sake (and in the interests of a balance of power) parliament was also given the final say over deputy prime minister appointments. The reason Manturov’s promotion wasn’t confirmed during regular parliamentary time a week earlier was, apparently, that the Kremlin forgot.
Newspaper Kommersant, known for its good relationship with Mishustin, reported that the aim of the new appointment was to give Manturov the tools to speed Russia’s path toward import substitution. Manturov has been involved in Russia’s attempts to reduce its dependency on Western-made goods since 2014.
But Manturov’s appointment wasn’t the only high-profile one related to import substitution last week. Media outlet RBK reported Wednesday that Putin’s daughter Katerina Tikhonova will soon start in her first official role by taking charge of coordinating the council for import substitution at the RSPP, an association bringing together Russia’s billionaires. The Bell’s sources at the RSPP could not explain how Tikhonova’s presence will help wean big business off Western imports. But it may well be harder to say “no” to the president’s daughter than a government minister.
An unsuccessful battle with import dependency
Before the annexation of Crimea in 2014 and the start of Russia’s conflict with the West, the Russian government barely gave a thought to reducing imports.
Putin himself has frequently expressed public skepticism about import substitution. “We often say that one of the demands of industrial modernization is import substitution. However, I think import substitution should not be a criterion, otherwise we will have to rely on our own strength in the manner of the [North Korean] Juche idea,” he said in 2007.
All that changed when the annexation of Crimea brought the first Western sanctions and the Kremlin realized that, in the event of a conflict, the West could deny Russian industry access to key technologies. Then-Prime Minister Dmitry Medvedev stated that imports were needed for 90% of machine tool construction, 80% of the civil aviation industry, 70% of heavy engineering, 60% of the oil and gas industry and 50% of energy equipment.
Later that year, Putin identified import substitution as one of Russia’s economic priorities and called for the market to “return to our national producers.” Over the next eight years, import substitution became an article of faith. Special government commissions were created, 20 government programs were approved, and almost 3 trillion rubles ($50 billion) was approved to support Russian companies moving away from Western imports. But no results were ever officially announced and, in 2019, the program end date was pushed back to 2024. And, despite the invasion of Ukraine and new Western sanctions, the government has not announced a new import substitution strategy.
“The end of further illusions”
There is no single metric to measure the success of import substitution. However, studies by the CMASF think tank — linked to Deputy Prime Minister Andrei Belousov — suggest success has been limited. In 2019, CMASF summed up the results from five years of import substitution. It concluded that in 2014 and 2015, in the immediate aftermath of Western sanctions, there was some progress. However, between 2015 and 2019, imports actually increased. “We can speak with confidence about import substitution only in the manufacturing sector, and not in the economy as a whole,” wrote the report’s author, economist Vladimir Salnikov. “Even then, we are talking only about a short period in 2014-15.” He has not changed his mind since: he told The Bell on Friday that import substitution has only been a success in the agriculture, chemical and defense sectors.
Analysts at the Gaidar Institute, a Moscow think tank, independently reached the same conclusion. From mid-2015 through 2018, the number of companies intending to implement some form of import substitution dropped to just 10 percent, according to a Gaidar Institute survey of executives. “The scale of import substitution was not great and over time it began to fade,” a subsequent report stated. In 2019, the think tank ceased monitoring all together “due to the clear picture we obtained and the end of further illusions.”
After the war started in February, CMASF reviewed imports from countries officially labeled ‘unfriendly’ by Moscow and found that imports from these countries made up 48.2% of Russia’s pharmaceuticals, 44.7% of chemical products and 32.2% of vehicles.
There are still sectors where import levels have barely changed from the numbers Medvedev announced in 2015. For example, Russian-made radio-electronics products have just a 12 percent share of the domestic market, equipment for producing baby food is at 3 percent and automatic gearboxes are entirely imported.
CMASF chief analyst Dmitry Belousov (brother of Deputy Prime Minister Andrei Belousov) reached a paradoxical conclusion in a report published last week about import substitution: while Russia is attempting to reduce dependence on imports to produce goods that can compete internationally, it finds itself completely dependent on imports. “As a result, during the import substitution program, our technical dependence in our most successful industries has actually increased,” he concluded.
Why the world should care: Russia’s biggest economic problems since the invasion of Ukraine are not connected with Western-imposed restrictions on exports (it’s clear that, at least for the moment, the Kremlin is earning more money from exports than before the start of the war), but result from bans on the high-tech imports without which Russian industry cannot function.
Putin evidently continues to believe in import substitution — so much so that he has even thrown his daughter into the struggle. “We need to be one step ahead, creating our own competitive technologies, goods and services that can set new world standards,” he claimed last month at the St. Petersburg International Economic Forum. But the paradox noted by Dmitry Belousov suggests the opposite: Russia cannot build competitive industries without competition. All that remains is for the country to fall back on outdated ideas of economic autarky — exactly what Putin said he did not want to do a decade and a half ago.
Peter Mironenko, Julia Starostina
Translated by Andy Potts
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