Ralph Clem, Erik Herron, and Matthew Lantzy
The debate over the proper extent of U.S. support for Ukraine in its ongoing war against Russian invaders has now spread in spectacular fashion into American congressional and presidential politics. Most of this coverage focuses on military assistance, not unreasonably given the scale and scope of the fighting. But, as we argue here, it is increasingly evident that Ukraine’s ability to sustain that fight is also in large measure a function of its capacity to begin rebuilding and reorienting its economy in the midst of this war. This means that more support for Ukraine’s defense industrial sector and wider business activities is required to ensure its survival, long-term prosperity, and ability to arm itself.
Indeed, Ukrainians view rebuilding now as a national cause, part and parcel of their desire to liberate their country’s territory. Urgent priorities, such as repairing and upgrading damaged metallurgical plants and housing stock, simply cannot wait for the cessation of hostilities. The problem will only get worse unless action is taken now.
Assessing the Problem
The price Ukraine has already paid since Russia first invaded in 2014 is immense in both human and material terms. Following the much larger attacks commencing in February 2022, the country’s gross domestic product dropped by almost 30 percent in what the World Bank characterized as a “staggering contraction.” In a recent article, we showed that this is primarily because six of Ukraine’s 10 most economically important regions are in the eastern and southern parts of the country where the heaviest fighting has taken place. This is confirmed by our analysis of numbers from the Violent Incident Information from Newspaper Articles project that compiles multi-source incident data in near-real time.
War-related incidents and the pre-war (2021) index of economic importance of regions in Ukraine (Map by Timothy Hoheneder using economic data from the State Statistics Service of Ukraine and the Violent Incident Information from News Articles project through Aug. 1, 2023. Russian occupied areas are as of 2021.)
The Kyiv School of Economics assessed direct monetary damage to material assets from February 2022 to June 2023 at $150.5 billion. That number is much higher now. Russia’s breaching of the Kakhovka dam and hydroelectric power station in southern Ukraine in June created flooding and devastation along the lower reaches of the Dnipro River. Beginning in July of this year, Russia struck grain exporting facilities on Ukraine’s Black Sea coast. Demining vast areas, especially along Russian defensive lines in the southeast, will be a massive undertaking crucial to restoring Ukraine’s huge agricultural sector. But the compounding effects of attacks and resulting destruction on the country going forward are even more problematic in economic terms, as supplier and consumer networks are disrupted, physical plants destroyed, and workers displaced and unhoused.
As has been widely discussed, the challenges involved in remediating war damage are considerable in political, financial, and physical terms. This was already evident after parts of the Donbas region in eastern Ukraine and Crimea were occupied by Russia going back to the 2014 invasion, with the resulting loss of productivity for the national economy. The World Bank now estimates that some $411 billion will be needed over the next 10 years to restore and reconstruct the country’s economy, and that number is growing as fighting continues.
Making matters even worse, social infrastructure such as schools, hospitals, and clinics have been targeted by the Russian military, with effects especially significant on housing stock in the hardest-hit areas. Millions of Ukrainians have been internally displaced and millions more have taken refuge abroad. Despite heroic efforts on the part of Ukraine’s infrastructure workers, civil defense personnel, and ordinary civilians to maintain some sense of normalcy, the country’s economy has been seriously degraded by such attacks. Factories, mines, refineries, and storage facilities have been wrecked, including some of the country’s largest industrial complexes, some of which, especially metallurgy plants, are critical to Ukraine’s war-fighting capability.
Building While Fighting
Even amidst the horrors of this war, Ukrainians have managed to stabilize their gross domestic product, re-start previously damaged factories, and adopt innovative practices from construction to food processing to information technology. The number of newly registered small and medium-sized businesses is up dramatically over the last six months, with most of the new firms located in the more secure central and western regions of the country.
Major problems remain that will impede the rebuilding process, especially the challenge of maintaining power supplies. But there are indications that significant gains are already being made. Audrey Kurth Cronin makes clear that Ukraine has a domestic technology base and “public competency in key skills are vital to the war effort.” Ukraine’s defense industry has been proven very capable of repairing damaged equipment and returning tanks and other armed vehicles to the front. Ukrainian drone attacks deep inside Russia illustrate the ability of defense firms to innovate, construct, and employ technologically sophisticated weaponry.
Western foreign direct investment, although still at a relatively small scale, is already having an impact across a wide range of industries such as modular construction panels and specialized concrete for housing, innovative nuclear energy plants, and renewable power production. European defense companies have already announced plans to open manufacturing facilities in Ukraine despite explicit threats from Russia to attack them.
The degree to which reconstruction is successful will also determine the viability of Ukraine’s pending bids to join the European Union and will have a pronounced effect on European economies themselves. Indeed, Ukraine’s large size and strategic location mean that recovery and future growth outcomes will profoundly shape the geopolitical landscape of Europe and the national defense strategies of the United States and its allies going forward, especially vis-à-vis Russia.
The Time is Now
In the view of some skeptics, the task of restoring and expanding Ukraine’s economy is so daunting as to be a fool’s errand. For others, domestic considerations have made assistance to Ukraine a lightning rod when it comes to funding the U.S. government writ large, causing near paralysis in American political institutions. Despite this dysfunction, major steps have already been taken to shore up Kyiv’s rebuilding efforts. Significantly, the most recent tranche of U.S. aid to Ukraine, announced by Secretary of State Antony Blinken during his visit to Kyiv on Sept. 6, 2023, included substantial humanitarian, rule of law, anti-corruption, and demining funding, all of which relate to rebuilding. Further, the appointment of a U.S. Special Representative for Ukraine’s Economic Recovery represents an important signal that the Biden administration is committed to the rebuilding effort.
Now, new sources of funding should be considered as well, such as more foreign direct investment, Russian asset seizures, the restoration of commodity exports, and much-needed research and development assistance. Addressing these issues will stimulate and expand business activity, helping Ukraine to achieve the degree of economic growth it requires to bolster its military capacity.
Public opinion polling shows that 84 percent of Ukrainians want to continue the war against Russia until all of their occupied territory is retaken. If the demonstrated willingness of Ukrainians to fight, which has been consistently underrated by many Western observers, is any guide for economic recovery, U.S. and allied support can make a vital difference. With just over half of Americans still backing continued aid to Ukraine, raising awareness of the humanitarian and economic dimension is key. Explaining both the scope of the damage, and Ukraine’s success in reversing it, could help to galvanize support for more aid, which in turn will yield real dividends for U.S. and European security.
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