Ukraine – two years later, with no end in sight

Image: Paul


The war continues and predatory capitalism advances

After nearly two full years of war, Russia's invasion of Ukraine has caused staggering losses to the people and economy of Ukraine. Ukraine's GDP fell by 40% in 2022. There was a small recovery in 2023, but now more than 7,1 million Ukrainians live in poverty.

There are various estimates of the number of Ukrainian civilian and military casualties after two years of war. The UN estimates that there were around 10.400 civilian deaths and another 19.000 injuries. Military casualties are even harder to estimate – but probably around 70.000 soldiers were killed and another 100.000 were injured. Russian military casualties are roughly the same magnitude. Millions have fled abroad and many more millions have been displaced from their homes inside Ukraine.

By analyzing the economic and social state of Ukraine and Russia one year after the war, in 2023, I concluded that both sides would be capable of continuing this war for years if necessary. For Ukraine, this depended on getting aid (civil and military) from the West. For Russia, this meant continuing to earn sufficient export earnings from its commodities energetic.

I realized then that Russia could not count on foreign financing to finance the war. However, I considered that it could continue operating in the face of Western economic sanctions, as long as its energy revenues and foreign exchange reserves were not too depleted.

Its domestic economy could not contract to the point of causing social unrest within Russia. Well, that didn't happen. The Russian economy is stable. The war effort is being sustained and Vladimir Putin will win a new presidential term next month (he probably could have done so even without killing all potential opponents).

Ukraine is still completely dependent on Western support. This year, it needs at least US$40 billion to sustain government services, support its population and maintain production. It depends on the European Union for this civilian financing, while at the same time depending on the USA for all its military financing – this is a “division of labor” with imperialism.

Furthermore, the IMF and the World Bank offered monetary assistance, but in this case, Ukraine would have to show that it has “sustainability”, that is, that it would be able to repay the loans at some point. So, if bilateral loans from the US and European Union countries (and they are mostly loans, not full aid) do not materialize, then the IMF would not be able to extend its debt financing program.

In addition, Ukraine also needs to find a way to restructure around $20 billion in international debt this year with sovereign bondholders, whose agreed two-year payment freeze made in August 2022 will soon end.

This is a very difficult fight to face. Despite some recovery in exports, Ukraine's trade balance deficit continues to worsen, as shown in the following figure.

This means that the foreign exchange resources needed to buy imports are disappearing almost as quickly as they are supplemented by Western aid. The following figure shows the situation of Ukrainian reserves.

Ukraine's Finance Minister Serhiy Marchenko said the government hopes to secure foreign financing in full by 2024, but if the war lasts longer, he added that "the scenario will include the need to adapt to new conditions."

Presumably this would mean making cuts to services or having Ukraine's central bank print more money. The first restriction would mean more poverty and a further contraction in living standards; the second would imply the resumption of an inflationary spiral in the double digits (note that inflation had retreated in 2023). It seems that the Ukrainian government is hoping that the loans will arrive or that the war will end in 2024. The first may happen, the second is unlikely.

But will help to prop up Ukraine's economy in 2024 ever arrive? Europe is delivering funds for civilian activities, but it is up to the US to deliver funds for military activities. The last remaining funds for US military assistance have been exhausted by the end of 2023. In total, the US has allocated around €43 billion in military aid since February 2022, which equates to around €2 billion per month.

US funding for Ukraine's military activities remains uncertain, as the US Congress is divided on whether to provide more military aid. The next presidential election, with the possibility of Donald Trump's return in 2025, represents even greater uncertainty.

This brings us back to what will happen to Ukraine's economy if and when the war with Russia ends. According to the latest estimate of the World Bank, Ukraine will need $486 billion over the next ten years to recover and rebuild – assuming the war ends this year. This is almost three times the current GDP.

Direct damages from the war have already reached almost US$152 billion. Around two million housing units – around 10% of Ukraine's total housing stock – were damaged or destroyed, as well as 8.400 km (5.220 miles) of motorways, highways and other national roads; Furthermore, almost 300 bridges were destroyed. As of December 2023, around 5,9 million Ukrainians remain displaced outside the country; internally displaced people numbered around 3,7 million.

And as I explained in a previous post made in mid-2022, what remains of Ukraine's resources (those not annexed by Russia) are being sold to Western companies. For example, the sale of land to foreigners was approved in 2021 under pressure from the IMF and now food monopolies Cargill, Monsanto and Dupont own 40% of Ukraine's arable land. GMA-Monsanto Corporation owns 78% of the land fund of the Sumy region, 56% of Chernihiv, 59% of Kherson and 47% of the Mykolaiv region.

Overall, 28% of Ukraine's arable land is owned by a mix of Ukrainian oligarchs, European and North American corporations, as well as Saudi Arabia's sovereign wealth fund. Nestlé has invested US$46 million in a new facility in the western Volyn region, while German medicines and pesticides giant Bayer plans to invest 60 million euros in corn seed production in the central Zhytomyr region.

MHP, Ukraine's largest poultry company, is owned by a former adviser to Ukrainian President Poroshenko. MHP has received more than a fifth of all loans from the European Bank for Reconstruction and Development (EBRD) over the past two years. MHP employs 28.000 people and controls around 360.000 hectares of land in Ukraine – an area larger than European Union member Luxembourg. It had US$2,64 billion in revenue in 2022.

The Ukrainian government is committed to a “free market” solution for the post-war economy. This would include new rounds of labor market deregulation; wages are expected to fall below even the European Union's minimum labor standards. In other words, working conditions will worsen; cuts will be made to corporate and income taxes; Furthermore, there will be the total privatization of remaining state assets. However, the pressures of a war economy have forced the government to put these policies on the back burner for now as military demands are still dominating.

And Russia? After two years since the invasion, it is clear that the sanctions introduced by Western governments to weaken Russia's ability to continue the invasion have failed. Russia's economy is growing, even if this growth is based mainly on production for the military sector.

Energy prices and export earnings remained strong, with sales to third parties such as China and India comfortably replacing export losses to Europe. According to official data, 49% of European exports to Russia and 58% of Russian imports are under sanctions, but the Russian economy still grew by 5% in 2023 and will grow even more this year.

Yes, $330 billion of Russia's foreign exchange reserves were confiscated by the West, but Russia's foreign exchange reserves remain more than sufficient. The cost of pursuing the war remains enormous, at 40% of the government's budget, but funding is still sufficient without resorting to printing money or cutting civilian services.

In many areas, Russia is self-sufficient in commodities critical assets, such as oil, natural gas and wheat, which helped it resist years of sanctions. Russia can also supply itself with most of its defense needs, even for sophisticated weapons. Therefore, this war may continue for many more years, even if it harms the long-term potential of the economy.

In contrast to Ukraine, Vladimir Putin's regime now aims to grow a more state-controlled economy, where big business works in close coordination with Putin's cronies. But just like in Ukraine, corruption between oligarchs and government will continue to thrive. Meanwhile, the war continues and predatory capitalism advances.

*Michael Roberts is an economist. Author, among other books, of The great recession: a marxist view (Lulu Press) []

Translation: Eleutério FS Prado.

Originally published in The next recession blog.

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