Economic integration

Making Russia Pay for Ukraine’s Western Economic Integration

Summary. The cost of rebuilding Ukraine could reach $1 trillion and take decades. Western taxpayers have generously donated tens of billions of dollars to support Kyiv against Moscow’s aggression, but Russia must fund the costs of what it has destroyed. Reconstruction offers Ukraine a historic moment to disassociate itself from Russia and deepen its integration with its neighbors in Central and Eastern Europe. The prospect of a more populous, economically dynamic and security-conscious Eastern Europe will best guarantee long-term regional prosperity and geopolitical peace with Russia.

Russia’s brutal military assault on Ukraine has destroyed vast swathes of the country and dispersed millions of its inhabitants. Estimates to rebuild damaged infrastructure, industrial, government, residential and commercial buildings could eventually reach $1 trillion and take decades.

The West provides Ukraine with tens of billions of dollars in military, humanitarian and economic aid. In May, the US government approved a $40 billion aid package and the Biden administration is expected to ask Congress for billions more this summer. Even as the war continues, preparations are underway to create global mechanisms to fund Ukraine’s reconstruction. President Volodymyr Zelensky set up committees to assess war damage and draw up plans for reconstruction. Europe is setting up a solidarity trust fund to provide short-term humanitarian cash and reconstruction aid. The International Monetary Fund has established a multi-donor administered account for Ukraine and similar arrangements are under way at the World Bank and the European Bank for Reconstruction and Development.

But taxpayers, particularly in the United States, are already bristling at having to borrow billions more to fund Ukrainian government salaries, pensions and social services as they face growing economic hardship in their country due to high inflation, rising interest rates, stagnant wages, and shrinking retirement accounts. The failure of reconstruction efforts in Iraq and Afghanistan has undermined US support for another large-scale aid adventure.

As the debate over who will pay for Ukraine’s reconstruction continues, the West has a historic opportunity to break Russia’s geo-economic hold on Ukraine. Now is the time for Ukraine to strategically plan its economic future in a way that promotes its unalterable integration with the West and dissociates it economically from Russia.

RUSSIA MUST PAY

President Zelenskyy is adamant that Russia “will fully repay us for everything you have done against our state, against every Ukrainian”. The West should refrain from its reflexive habit of responding to every global crisis by throwing big money at it and instead commit to responding to Zelenskyy’s just demand. Vladimir Putin will deny yet there are international mechanisms available to make Russia pay regardless of what he wants. Making Russia pay for rebuilding Ukraine would relieve Western taxpayers of an exorbitant price and, in turn, help maintain continued military support for Ukraine.

First, the European Commission seized more than $30 billion in assets belonging to Russian oligarchs whom it individually sanctioned for their nefarious ties to Putin (the US Treasury Department seized another $1 billion in private assets Russians). Yachts, real estate, works of art, bank accounts and other valuables are expected to be sold and the proceeds from the sales go to finance the budgetary needs of the Ukrainian government. These funds can kick-start the reconstruction of schools and hospitals and restore basic services in areas that Ukrainian forces have liberated from Russian occupation, especially around Kyiv, and signal to Ukrainian refugees that they can return. at their home.

Second, there are over $600 billion in Russia’s foreign exchange reserves, half of which are frozen by G7 central bankers. These reserves represent a substantial source of potential funding for Ukraine’s current and future financial reconstruction needs. The German Finance Minister declared himself “politically open to the idea of ​​seizing the foreign assets of the Russian Central Bank”. Last month, Estonia, Latvia, Lithuania and Slovakia called on Brussels “to apply an international mechanism of war compensation, using Russian assets to finance the reconstruction of Ukraine”. Support is gaining ground among other G7 finance ministers. The Biden administration is standing in the way, however, fearing such a move would violate international law. This White House would rather American taxpayers foot the bill for Putin. The US Congress must demand it and make all necessary legislative corrections to deny the administration any more excuses for dragging its feet.

Third, Russian energy exports may be taxed to fund war reparations to Ukraine and must be part of any negotiated settlement. The Brussels-based Wilfred Martens Center for European Studies argues for a ‘Solidarity with Ukraine’ tax on European energy imports from Russia, which could be passed on to Russia on the basis of the rebate current 35% discount it currently offers nervous energy buyers. Russia can afford to finance the reconstruction of Ukraine. With energy prices soaring over the past year, Russian oil revenues are now a third higher than a year ago, at $20 billion. per month. Although Europe is ending its oil purchases, it will continue to import large volumes of Siberian natural gas on which it can impose a reconstruction tax by taking advantage of its near gas monopsonism with Russia. Energy dependency works both ways.

AID MUST SHIFT UKRAINE’S ECONOMIC INTEGRATION WESTWARDS

Regardless of political decisions about who pays for Ukraine’s reconstruction, Russia’s brutal invasion has accelerated Kyiv’s political orientation westward. Putin’s naval blockade of Ukraine’s grain exports via the Black Sea and the occupation of southern Ukraine had the salutary effect of increasing Poland’s regional economic cooperation southward to Romania, which offers Kyiv alternative routes to reach global markets. Reconstruction plans should prioritize strengthening these emerging regional economic ties and consolidating the road, rail, energy, industrial, telecommunications and port infrastructure needed to establish stronger and more permanent trade and investment links between the Ukraine and the rest of Europe. This trend will deprive Moscow of future opportunities for economic blackmail.

Tying its economic future to Eastern Europe brings other benefits to Ukraine. Kyiv has struggled to overcome its Soviet legacy of endemic corruption, loss-making state enterprises, a weak judiciary and lax property laws – the exact opposite of what Ukraine needs if it wants to stabilize politically and economically decouple from Russia. The capitals of Warsaw, Tallinn, Prague and Bucharest are far better options than Brussels or Washington D.C. for advising Ukraine on executing free market reforms that will unleash the cross-border private sector energies and capital that must be at the center of Kyiv’s post-war strategy. The war has forged a strong common purpose within Ukraine and a solidarity from its neighbors that can translate into accelerated regional integration. Trade and private investment, not aid, create wealth. Poland alone attracted $4 billion in greenfield foreign direct investment last year, the fifth-best in the world, giving Ukraine a repeatable playbook. Paradoxically, the more free money Western donors offer Ukraine, the more likely it is to remain poor, unbuilt and vulnerable to further Russian sabotage.

For the United States, the prospect of a more populous, economically dynamic and security-conscious Eastern Europe to offset the penchant of Western Europe, especially Germany, to ignore Russian misbehavior in exchange for cheap energy should be good news. Westward regional integration will alleviate the current global food crises. Washington, DC could then fully face its main geostrategic threat, communist China. Whatever reconstruction aid is provided by the US government, it should be narrowly focused on promoting Ukraine’s integration into Eastern Europe.