The war in Ukraine that’s been underway for the past 10 months has been the leading political and military story of this year—and also arguably the top economic story. Economic dimensions vary from the destruction of Ukraine’s productive capacity, the question of how it might get reconstructed, and the disputed effects of the sanctions imposed on Russia. The war has also at least partly been responsible for persistent inflation around the world this year.
How have sanctions affected the Russian economy? How is the Ukrainian economy holding up amid the war? And how might Europe change as a result of the crisis? Those are a few of the questions that came up in my recent conversation with Foreign Policy economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity.
For the full conversation, look for Ones and Tooze wherever you get your podcasts.
The war in Ukraine that’s been underway for the past 10 months has been the leading political and military story of this year—and also arguably the top economic story. Economic dimensions vary from the destruction of Ukraine’s productive capacity, the question of how it might get reconstructed, and the disputed effects of the sanctions imposed on Russia. The war has also at least partly been responsible for persistent inflation around the world this year.
How have sanctions affected the Russian economy? How is the Ukrainian economy holding up amid the war? And how might Europe change as a result of the crisis? Those are a few of the questions that came up in my recent conversation with Foreign Policy economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity.
For the full conversation, look for Ones and Tooze wherever you get your podcasts.
Cameron Abadi: Everyone seems to agree that the sanctions imposed on Russia since the start of the war have been unprecedented. But there are differing views about how much the sanctions are actually affecting the Russian economy. Could you synthesize those disparate analyses?
Adam Tooze: I think so far what we’ve learned is that if you don’t blockade, sanction, or boycott a country’s major exports and that country has a huge trade surplus, then financial sanctions by themselves are shocking. They isolate an economy from the world, but they’re unlikely to do real damage unless that country has a really poorly managed financial sector. And Russia doesn’t. Its central bank is very competent. So it basically weathered the storm unleashed by the financial sanctions that were adopted in the first days of the war.
What’s really biting in this first 10-month period of the war is the West’s ability to throttle Russia’s imports—so their ability to purchase our stuff. That hurts our exporters, of course, but it really deprives them of access to key technology, to spare parts for maintaining their aircraft fleet, medication, a whole range of really vital imports. They can still trade with Turkey, India, China, and they’re resorting to smuggling of key substitutes, but this is clearly a deeply inefficient second best from their point of view.
And so what we’ve seen is a dramatic slowdown in the Russian economy. It’s not perhaps the implosion, the kind of heart attack, that many hoped for. But whereas this time last year, in 2021, just 12 months ago, we were still expecting the Russian economy to grow at maybe 2.8 percent this year, it’s probably going to contract by 4 percent this year. And whereas we were, once upon a time, expecting it to grow just over 2 percent in 2023, it’s contracting most likely next year by 4 percent. So it’s not a collapse of the Russian economy by any means. But two consecutive years of negative 4 percent growth is a very serious hit to the Russian economy. Will it cripple them? No. Will it stop the war by itself? No, it won’t. But does it inflict punishment and pain on Russia? Yes. And clearly, over the long run, this is terrible for Russia’s growth prospects because why would any foreign investor invest in Russia at this point?
CA: So Russia is surviving. But how is Ukraine doing at this point? There’s talk of collecting reconstruction money, but is that kind of talk premature?
AT: I think, unfortunately, it really is because if the military campaign of this year has gone overwhelmingly Ukraine’s way in the sense of a succession of defensive victories, on the economic side, it’s a very unequal competition. If we saw a 4 percent contraction in the Russian economy, we’re probably talking about a 30 to 35 percent contraction in Ukraine’s economy. Right now, Ukraine’s economic situation, its social situation, especially in this cold weather, is getting more and more serious—I mean, literally by the week. It’s profoundly precarious, I think, in two basic respects. One is money and the other one is what you might want to call the real economy.
On the money side, inflation in Ukraine is running at over 26 percent. They have struggled to put together a viable mechanism for funding the war effort. They are receiving subsidies from the outside, but that only covers part of the spending. And the best news that we’ve had in the last couple of weeks is that apparently on Dec. 8, the Ukrainian central bank announced a deal under which the private banks that operate in Ukraine will be incentivized to buy government debt as a way of meeting their reserve requirements. What the Ukrainians are trying to do is to create a domestic market for government war bonds, which will then be hoovered up by the Ukrainian banking system. This creates a really dangerous connection between public finances and private finance in Ukraine, but they’re in a dire situation. What they want to avoid having to do, which is what they’ve periodically had to do over the last couple of months, is to simply crank up the printing presses in the central bank and print money to pay for the war, which is a recipe for total financial disaster. So perhaps with these domestic stabilization measures and promises of more money from the outside—the [International Monetary Fund] is trying to patch together a series of deals—Ukraine may be able to stabilize or at least prevent a further descent into chaos on the financial side.
And that matters because a collapsing monetary economy, a collapsing financial economy, will, in the not very long run, undermine the viability of your real economy. And the real economy is under huge stress anyway. I said already they’ve suffered somewhere between a 30 and 35 percent implosion of GDP. That is an absolutely savage contraction. It’s as though the world’s lockdown measures of early 2020 had gone on into the second half of the year and there had been no offsetting subsidies. It’s thought that only about 60 percent of Ukrainians remain in the jobs that they had at the beginning of the war. About 40 percent have either become refugees or have lost their jobs and are looking for work. And the crucial thing, of course, is that Russia has finally begun to target Ukraine’s energy infrastructure, without which no modern economy can function. At various points recently, up to about 50 percent of Ukraine’s energy infrastructure has been knocked out. If those Russian attacks continue, then the situation of Ukraine’s economy becomes extremely serious—perhaps early next year. And I think it’s really telling that [Ukrainian President Volodymyr] Zelensky has asked Ukrainian refugees not to come home, to stay out of the country. When a state is literally asking its citizens to remain abroad because it cannot provide basic infrastructure services for them at home, that is a truly kind of existential statement.
CA: Do you think this is something that outsiders can help with? The metaphor of a Marshall Plan that’s often cited—implying that Europe and the United States can sort of step into this crisis you’re describing in Ukraine—do you think that’s apt?
AT: The Marshall Plan is a bad metaphor. The Marshall Plan was two years after the end of World War II. What we’re really talking about is the sort of relief that, say, military engineering services do on the ground in Germany and the rest of Europe during crises. Because what Ukraine is struggling to do, and with brilliant improvisational talent, is to maintain basic services in the middle of a war. That’s really the priority here. So sending maintenance personnel and equipment training to the Ukrainian electricity system is, I think, the absolute priority. Presumably providing them with anti-aircraft weapons with which to shoot down the rockets and drones that their systems are being attacked with should be an even higher priority. All of this requires an open-handed spending policy to sustain Ukraine’s war effort. And we’re not talking in the end about huge amounts of money. Even according to the Ukrainians own estimates—which are no doubt not lowballing—if they had $5 billion a month, it would see them through.
CA: Do you think the war in Ukraine has made it easier or harder for Ukraine to integrate with the rest of Europe? Will this experience of war produce a kind of mismatch with the political culture and the political and economic priorities of the rest of Europe?
AT: As recently as the beginning of the year, I think conventional opinion in Europe, certainly Western Europe, would have laughed at the idea that Ukraine was imminently going to be invited to join the [European Union] or begin the process of applying for and qualifying for EU membership. But that’s exactly what happened in the first six months of 2022. It’s staggering also from a deeper historical perspective in that Ukraine has been involved in very long-running conflicts, not just with Russia but, of course, with its other neighbors, most notably Poland, with which it actually fought a war shortly after World War I. Modern Poland and modern Ukraine are made out of the redistribution of territory which has been variously argued over by both sides. And one of the effects of the war is to have actually forged a remarkable alliance between Polish parties of all stripes and Ukraine. And what unifies them is an anti-Russian stance. So really in the space of 12 months, the entire question has been turned on its head such that now bien-pensant opinion in the EU is quite firmly committed to not just treating Ukraine accession as serious but Georgia potentially as well. The Balkans are also embarking on, remarkably, an entire second wave of Eastern expansion of the EU.
And you can’t do that without contemplating the question that you pose, which is how does one imagine reconciling the politics of Eastern Europe with the political culture of the rest of Europe. And I think the answer of those pushing hard for this expansionary agenda is they aim to change the political culture of the EU. Could you square it with the old Franco-German axis and the remarkably condescending comments that you would get from both the Germans and the French about the old and the new Europe? Under those premises, this wasn’t ever going to work. But clearly, the ambition of the Baltics, of Poland and the Nordics as well is in fact to reconceive the EU. And once we get past the war stage, the question is where that will lead. Concretely, of course, actually organizing the accession of a war-damaged Ukraine to the EU—and raising it to the standard that would allow having Ukraine in the labor market of the EU, which would require wages there to rise to levels which would not be vastly lower than the rest of Europe—is a huge undertaking. It involves the mobilization, at the very least, of hundreds of billions of euros. The challenge is gigantic.
Once this happens though, it totally changes the balance of the EU. Because between them, Poland and Ukraine would have, broadly speaking, essentially the same voting share as Germany. The consequence of this going forward: We’ve stumbled into a truly dramatic reconceptualization. So much has happened so quickly this year that historic shifts have just shot past without anyone really pausing to consider what’s going on. When [German Chancellor] Olaf Scholz gave his speech in Prague in the fall, he took a position that would have been unthinkable a year ago, namely that Germany should embrace wholeheartedly a dramatic Eastern expansion of the EU and NATO. The dust, it will take years to settle. It begs the question of what a potential final deal with the Russians would look like and begs the question of what America’s relationship with Europe is going to be like because both Ukraine and Poland are far more focused on the military and national security alliance with America and, frankly, are not very interested in developing European structures of security because they don’t trust them. What they trust is American power.
