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Russian Roulette
The Ukrainian Defense Industry and Europe’s Untapped Arsenal
00:42:35
Max and Maria welcome back Elina Ribakova to discuss her latest piece in Foreign Affairs, exploring the Ukrainian defense industry and its potential capacity to help Europe secure its own defense.
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- [00:07]
A
Welcome back. I'm Max Bergman, director of the Stewart center and Europe Russia Eurasia Program at csis.
- [00:12]
B
And I'm Maria Snigavaja, Senior Fellow for Russia and Eurasia.
- [00:16]
A
And you're listening to Russian Roulette, a podcast discussing all things Russia and Eurasia from the center for Strategic International Studies. Hello everyone and welcome back to Russian Roulette. Today we're going to have a fascinating conversation about the Ukrainian defense industry and its potential capacity to help Europe rearm and take greater control of its own security. I think we'll also talk a bit about the Russian economy and where Ukraine stands economically as well because we have a fantastic guest coming back on the pod to help us unpack. This is the great Alina Rybakova. Alina is a non resident senior fellow at both the Peterson Institute for International Economics and Bruegel and she is also the director of the International Affairs Program at the Kyiv School of Economics. Recently, Alina published a new piece in Foreign affairs with Lucas Risinger titled Europe's Untapped Arsenal. Ukraine has forged the defense industry the continent desperately needs. You can find a link to the piece in the episode's show notes. Alina, thank you for joining us and welcome back to the show.
- [01:28]
C
Thank you so much for having me.
- [01:30]
A
So why don't you to maybe start off broadly, what was the peace in foreign affairs about? What sort of prompted you to write it? And maybe you could give us sort of a quick summary of what your argument is.
- [01:40]
C
Well, the piece we thought was very timely precisely because we were talking about air defense in the context of Israel US War with Iran and Iran's retaliation in the neighborhood. How did Iran retaliate by the oftentimes the drone swarm tactics that overwhelm the air defense and make it also not economical to be able to shoot down some of the drones, which may be up to $20,000 with the battery that costs up to 4 million. Right. So that economics very quickly runs out as well as the ability to produce these batteries in time. So that's why we were writing it. And also I was surprised. I was looking through Foreign affairs and other outlets that actually we haven't had a discussion that Ukraine could be Europe's arsenal. Unfortunately, because of the war, it is probably at the forefront of the production specifically of the technologies that Europe is lacking for its rearmament.
- [02:35]
A
So maybe let's go back in time to the Soviet period, the Soviet defense industry, Ukraine is a major part of the Soviet defense industrial complex. How since this war has, you know, how much of that has sort of survived from the Soviet era. Is this sort of old Soviet industries being retooled, or is this just like an entirely new production effort that Ukraine has just sort of conjured in the last four years in constructing drones? Maybe you could talk a little bit about how the drone industry sort of fits with Ukraine's sort of broader defense industry.
- [03:12]
C
So this is a great question. Ukraine was part, very important part of the Soviet military industrial base. And that legacy relationship was Russia continued for many years afterwards. In fact, the little aside, Russia's Eurasian Union, it has in Russian, a funny Urazet kind of abbreviation. When they wrote about Ukraine's accession talks with Europe, their frustrations, they went through different key indicators, and actually none of them really made sense. By all possible indicators, it made sense for Ukraine to join Europe rather than be part of this Belarus, Kazakhstan, Russia Union. But actually, if you go to the appendix of that document, the biggest frustration is the break between the defense industry of Russia and Ukraine. The fact that Russia was drawing some very important components from the military industrial base in Ukraine for its production in Russia, even running into 2014. But this is a story of the past, actually, because this new innovative industry is completely different. Yes, we have the legacy companies, and maybe the budget before 2022 for Ukraine was modest. You know, it was about 1 billion. And industry, a lot of the industry was still Soviet legacy, especially before 2014. Now it has changed dramatically. There's a dramatic decentralization produced by need. And there is this unique sort of ecosystem where soldiers, you know, startups, volunteers, civilians, government agencies, everybody's working together in a very sort of competitive ecosystem to move the innovation forward. And that's why Ukraine has been so successful and much more successful than Russia in terms of innovation. Of course. Unfortunately, Russia is not too far behind. They're good at replicating some of Ukrainian innovation and producing that at scale. So that pushes Ukraine again to continue to stay ahead of the game, to be able to hold the front.
- [05:13]
B
Elena, thank you so much for this important point. And I actually wanted to elaborate on that. On our side, we're tracking the Russian military industrial adaptation. And I know that Alexei Chadayev, director of the scientific research center Ushkunik that's producing the drones in Russia, recently complained, precisely saying that if situation continues as such, Ukraine may get ahead of Russia. So what it is in your opinion, that Ukraine has been able to handle so successfully, unlike Russia that was not fully able to catch up? I will flag that. Our colleague Kate Bonder here at CSS is another excellent report that Just came out recently showing that Russia is actually quite quick to catch up in adaptation of its drones and especially AI application and the use of the more advanced versions of those drones.
- [06:01]
C
Well, I think this is the main difference between the two economists. So one of the economists, Russia, although it's not obviously a Soviet economy unlike many people would like to see it, but it has this sort of legacy companies that are not going anywhere. The state enterprises dominate almost every sector now and most certainly military industrial complex. And as also you show in your research, you have this sort of like cascades of mushrooms almost, you know, it's you know, the Rostech and then there is this sort of like a little cascade of thousands of enterprises that fit into it, you know, and then there are similar stories for other enterprises. And over the years, you know, over the last 20, 30 years you have this sort of big enterprises chewing up everything little small and putting it together and setting up offshore companies, but in reality it's one Soviet style conglomerate, right. And they leave off the budget money that you know, regularly get allocated for production. And especially now with the war with Ukraine, you sort of had a couple of enterprises like that, but instead they moved on to much more competitive, more private sector, innovative driven system. And again Ukrainian economy is by far by no means perfect, but it's definitely has been trying especially over the last 10 years to move towards more market based anti corruption measures, more civilian sort of checks and balances on the industries, on the regulation, you know, we've seen all these stories about anti corruption measures and how people come out on the street and sort of and defend it. So basically this different structures in the economies I think are the most important drivers of Ukrainian ability to be innovative while Russian ability to produce at scale. And, and as you show in your own research, actually the companies in Russia that have been successful in replicating are oftentimes the smaller, almost kind of private companies, not the big, you know, sort of Beckhamus or Cha Balls of the Russian military industrial complex.
- [07:53]
B
Exactly. Or those that were lucky enough to only be consumed by the Russian industrial, Soviet ever legacy companies recently. So they maintained this innovative spirit. And to follow up on that, one of the key problems of Ukraine on the battlefield has been the manpower issue. To what extent do you think its successes with the drones may somehow substitute for these problems? Like basically drones as a substitute for manpower? Is that a solution, long term solution for Ukraine on the front line?
- [08:21]
C
This is indeed one of the areas where economics shines, right. If you don't enough, don't have enough labor you tend to try to substitute with capital or productivity. And that's in a way what's exactly is happening on the front line at the moment. Right. So it's a dramatic change and sort of improvement for Ukraine's ability to hold the front and especially the front is very long. They don't have enough people to be able to do that. They don't do this mid grinder tactics the way that Russian troops do. And that has already paid off. You know, if you look at 20, 25 drones accounted for 80 to 85 of for all frontline strikes. So this is happening by drones, FPV drones, about 500 to 2,000 apiece. And they, you know, they can protect thousands of targets, you know, almost per day in Ukraine. Right. That makes a huge difference. That has changed dramatically the front line. And we've all been seeing discussions about this sort of kill zone that has been established between two forces where it's almost entirely transparent. And then of course Ukrainian innovation has gone further. If you look at the sort of drone manned logistics support that has increased more than five times just over the last year. So where they have missions, you know, maybe ammunition resupply, medical evacuation, you know, moving through the kill zone, this is exactly where they are sort of the jobs or the areas also you could potentially lose a lot of people, but instead you can use drones to be able to save lives and also resolve this woman power issue.
- [09:55]
A
To go back to your piece, you I think have highlighted something I think is really interesting, that Ukraine has excess capacity that is not being activated. You write that Ukraine holds an estimated 25 billion to 40 billion in defense related production capacity that sits idle for lack of capital investment. That strikes me as, oh my God, let's try to supercharge Ukraine's defense industrial production. And I'm curious if you can maybe unpack that. And are you sort of pointing to what we've seen from Denmark, which describes what they call the Danish model, quote unquote, that instead of buying or investing in European production or Western European production, give money to Ukraine, you give money to Ukraine, you're building Ukraine's production capacity. So maybe you could talk about that a bit.
- [10:43]
C
Well, so this idle capacity is a very important part of the conversation. Whether we estimate it correctly or not. This is sort of an estimate how much Ukrainian military industrial complex could produce more, given they would have adequate capitalization, basically adequate inflow of investment. Right. So this is a very sort of fraud estimate. You know, it's 20 billion, 40. It's probably potentially much Higher now anyway, but we try to stay at the lower bound. And this estimate has been done a few years back already. So what does it mean? Well, until recently, Ukraine had a de facto export ban on the military industrial product exports. Right. There wasn't an official ban, but it was use of an old legislation that required certain checks and approvals. And what was happening on the ground that approvals actually were not being given easily. So basically it will get stuck in de facto. Almost nobody could really export. And that was largely driven by the thought process that if we allow these companies to export, we will not have enough equipment for our own front. And I think the discussion of them, of having this idle capacity has changed a lot the way the authorities think now about the industry. Because you think about it, you know, by not allowing exports, you're not allowing inflow of capital because most of companies will not be able to invest into something when there is no medium term outlook. What happens if the war ends? What happens? How can I scale up? What if the government's demand just from Ukraine is not enough for me to be actually, you know, to deliver and invest into big productive capacity? So that is changing gradually. And I think you're very right to point out about the Danish model, which is much more about investing in Ukraine. But at this stage, post European and Ukrainian side need to make changes and some changes already happening with the opening up to the exports. To be able to have this proper joint venture flourishing between European companies and
- [12:41]
A
Ukraine is one of the challenges here for Ukraine production inside of Ukraine. I mean, the Russians presumably are looking to target Ukrainian productive capacity with drones, missile strikes. Also the reliability of the energy grid. How does that come into play? And so, you know, is it. Should we also be thinking about how Ukrainian companies maybe could start producing some of their equipment outside of Ukraine in Europe? Is that, is that one path as well that we start seeing Ukrainian companies partnering with European companies producing in Poland or Germany or wherever else?
- [13:18]
C
Yes, indeed, we're seeing early signs of Ukrainian companies producing abroad. And of course we have seen investment coming in to Ukraine as well. If you just look in a very simple way on the incentives of both sides. So Ukrainian companies would love to just have all investments in Ukraine and produce domestically, mostly maybe with some exception in order to protect themselves from Russian attacks. If you look at the European companies, they would just like to get the know how and be done with it and produce in their own countries and show that they're spending money locally and creating jobs there. Right? None of these two scenarios are realistic. They have to meet somewhere in between. And I think that's what we've been working on. And recently at Kiev School of Economics, where published exactly a paper like that, looking at the interviews of number of government officials, industry participants, sort of members of the also some of the members of the drone production companies. They're all anonymous interviews, but they all sort of give feedback on how we can improve. Then the question is also what is so unique about Ukraine at the moment? Of course about the skills, the ability to innovate. But it's also unfortunately because of the circumstance, what's so unique is the feedback loop itself, which is very hard to replicate anywhere else. So if you look at the way how this drone innovation process works, if a drone underperforms, it can be pulled within days from the frontline. Nobody has to wait for months and months or even weeks. It happens within days. Oftentimes drone operators that sit close to the front line, they can actually tweak small adjustments on the spot, right? And then they ship it, they give the feedback back. And then there are more sort of serious changes made within the territory, protected territory. The brigades run their own repair shops and they have their own 3D printers to be able to change things or to print the parts. So unfortunately, because of this war, you have this very unique innovation network that is very hard to replicate anywhere else.
- [15:18]
B
In your great piece, you also flag a very concerning situation in Europe that unfortunately is nowhere near where it's actually supposed to be right now with the production in terms of especially drone manufacturing, artillery shell production, missile stockpiles, and especially the NATO military exercises last May actually highlighted a really shocking unpreparedness of Europe for a possibility of Russian attack against once the Baltic states. Could you perhaps elaborate a little bit on this? How is that? That four years into the war, the western countries, and not just Europe, but also the United States, given the performance in the war with Iran more recently, continue to be so far behind in the drones race. And our impression also, at least my impression has been that when Ukrainian colleagues are coming to dc, they don't and they're willing to share the experience. Right. They're not necessarily finding a lot of interest still. And I think you also flagging that in your own article, how is this possible and do you think there's ways to maybe turn this around?
- [16:23]
C
Well, I think there are legacy companies in the US and in Europe that are very strong at trying to hold on to their power. They have very strong government relationships. They have huge government relationship offices. They have ongoing contracts that they've had from the history, they are very good at doing very highly skilled, bespoked, multi billion dollar projects for the government. Nobody else can do it the way they can do it. Right. And that takes years to be able to produce something. You know, if you probably know better than me, you know, patriots could actually, you know, it's not that us is willing or not willing to share. There's one part of the question. Another one is actually they can't produce it probably as fast as everybody would need. Maybe it would take year or two even. I, you know, I've heard in some research to be able to produce what is needed. Right. So these companies have a certain lifestyle, they have stock traded, they have their shareholders. They need to protect their interests. And we have seen, I think it was Ryan Metal who said that Ukrainian drone industry, what is it? Wives printing drones at home, in the garages or in the kitchens? Well, it's not surprising. And we have seen similar stories, for example, innovation versus the banking system, banking system versus the smaller banks versus crypto and versus other sort of breaking of the industry mold kind of companies. So that is not entirely surprising. So I think this legacy company is one of the big issues. The second one, I think while there appears to be consensus in the defense industry about the risk that Russia presents and you've seen since 2022 and NATO documents, you have seen that Russia put forward in the documents, in their communiques as the most important threat for Europe. There is disbelief that Russia indeed could be a threat. You know, we didn't quite believe it when it was happening before 2022, the attack on Ukraine. There is a long standing relationship. There is still a lot of influence and there is still sort of, you know, even sort of relationship between the think tanks and the business community. And it's just under the surface. And of course that has a lot of influence in Europe as well. And that's why you have some countries that are considered to be alarmist. You know, the Baltic states, Poland, you know, Finland, Sweden, sort of the Nordic Baltic bloc versus the countries that feel much more inland, you know, which are sort of more ambivalent. Maybe Germany and France, although that has been changing. And of course the absolute extremist Spain and Italy, where they sit so far and they oftentimes benefit from Russian money, where they say, oh, why should we even bother with any preparedness? And NATO, of course as a block is a very complex animal, you know, complex infrastructure. Now especially jerked around by the U.S. lack of commitment during the first Trump communication presidency, the second one. And so, long story short, as we will come back to where we started. You know, what happened is during the military exercises in Estonia, and it's fantastic that I'm sure Estonians brought in NATO into their territory and Ukrainians as well, to actually to drive the point home. Basically a very small Ukrainian drone team effectively wiped out two NATO battalions in a single day. Two NATO battalions gone. There were just a few people from the Ukrainian side. NATO didn't even have time to get their drones in there. So they never even. And you've seen. I've seen it. I have not seen it much in the press. So if you should go back and Google and see that coverage. But I think it is indeed striking and it's. But I hope it will not be a preview of what's to come if Russia were to choose to double down and become much more aggressive with Europe and not only with Ukraine.
- [20:06]
B
That's an excellent and highly important point. Thank you so much for flagging it. It's specifically what I wanted to explore a little bit further. So I see in the military analytical community two ways to look at this situation, right? One of them saying that Russia historically attacks weaker targets, or at least those they deem to be weaker. Even if like we've seen with Ukraine repeatedly, they often are mistaken about it. And so historically in the post Soviet period, we have not seen Russia to challenge a conventional superior threat, at least like NATO. So why bother? You know, they will still probably continue some hybrid operations against Europe, but not really dare to go against NATO. But then of course, there is an alternative viewpoint that looks at, as you flagged, the Russian military industrial buildup, the scale of production, not just drones, which is absolutely horrifying, but also missiles, navy and aircrafts that are specifically probably targeted, targeted against Europe, right? The, this refurbishment, so to speak, the reorganization of the Leningrad district, et cetera, et cetera, et cetera. How do you see this? Like, where is, what is, what are we missing? Which story is right? Is Russia really capable of attacking NATO despite NATO's conventional superiority? And are we maybe missing something? This analysis I specifically wanted to flag, perhaps the economic aspects of it. So how is Russia going to be fighting this? And is it even realistic to imagine that they will dare to, to take such a bold step?
- [21:39]
C
That's an excellent question. And I sort of debated daily, especially before I go on vacations to my home country in Latvia. So let's start indeed from economics. If you look at the Russian economy at the moment, it has stalled. It's not necessarily dropping 10 or 20%. It's not going immediately in a tail spin or CRIS, but it has definitely stalled. The way they produce positive GDP numbers, to me it's a miracle. I think we have should have seen more quarters with negative growth and we should probably see more negative growth this year. But it's very possible with the national accounts, you know, in an emerging market to produce plus minus 1 percentage point of GDP growth, you know, negative. It's, it's, you know, anybody can do that, right? Especially the size of the country. You don't even have to be malevolent about it. It just happens by chance. So in any case, you know, the economy has stalled. It's, it's, it's very weak at the moment. If you look at the industrial production, that has also stalled. If you look at any other sort of key contributors to output, you know, agriculture, you know, demand, they also have fallen significantly. If you look at the investment goods, that is almost 25% down relative to where we were in 2024, that is substantially down. Construction is down, There is some domestic demand, but that is being met through imports because of the overvalued ruble. So the long story short is not good story for Russian economy at the moment. However, the war in Iran is giving you an important respite and the longer that lasts, the better the Russian budget feels temporarily. So I could make an argument as the authorities in Russia saying that, look, if I want to get more adventurous, if we go back to opening up of the Strait of Hormuz, the war ends, I'm actually facing only decaying economy. It's like a Titanic. You know, it's sort of, it's going to be rusting, rusting and eventually it's collapse. You know, it's not going to maybe hit the iceberg, but it's actually is definitely collapsing. Right. So I'm not facing good news and I'm not prepared for that because I've run out of most of my reserves. I wasted them on the war in Ukraine. But if I want to be adventurous this year, if the war in Iran lasts about six months, I'm going to get extra US$150 billion in additional oil and gas revenues, which is equal to my official military defense security budget for this year for 2026. So basically I could effectively double my expenditure this year and maybe also fix some problems here and there. So if I do want to go and double down from the weak position, now is the right time. You know, waiting another sort of year or two years might not be the right time because commodity prices could come off. Europeans could wake up and prepare better. You could have maybe elections in the US So I can definitely make that scenario where Russia could, or especially President Putin, I cannot read his mind, but could decide to double down and go somewhere else. And then let's also think very quickly about NATO. Right. NATO is a very big alliance. It's not that automatic. I'm going to defend you. Yes, There is Article 5 which says that, you know, attack on one is the attack on everybody. But the measures, there can be a lot of measures, not necessarily militarily response. Right. And given that's very complex structure, which for the operations and command is highly dependent on the US by design since the Second World War, how exactly how efficiently it will be able to respond if you have an intrusion in one of the sort of states facing Russia, you know. So I can see both sides of this argument and economics is not necessarily in favor of saying that Russia will not be able to do anything.
- [25:35]
B
This is fascinating point. Thank you so much for flagging, especially coming from you as an economic expert so called declining power conundrum, when actually for declining power, so to speak, it's more advantageous to attack sooner rather than later. In a lot of ways that's likely what has prompted Putin to attack Ukraine in 2022. He also is not going to live forever, although he's definitely trying to. I want to also to follow up on the domestic impact of this economic situation because also last week we have seen a number of publications appearing regarding Russia's domestic situation, also prompted by the regime's crackdown on the left or whatever is left of the Internet freedoms and some independent channels. There was also no mobile Internet available apparently for some time in center of Moscow, other regions of Russia. And so all of that seems to have created some discontent. Even official pollsters published decline in points approval about like 7 percentage points varies by the survey. And we've seen even some of the traditional Putin's loyalists, including the Victoria Borneo, who is a reality TV star who actually resides in Monaco. But she has like millions of followers among Russians. Very popular personality, completely political, political loyal suddenly started speaking up in the sense that, you know, the classic Russian tradition, the Tsar is not aware of the bad boyars who are doing all these bad things to the Russian Internet. So I wonder what are you making of this? Is that indeed a sign of certain turmoil shaping, boiling in Russia or is it just, you know, temporary phase that will pass just like many of them before?
- [27:13]
C
Well, I'll start Responding to your question backwards. I think finding scapegoats is a traditional sort of approach. You know, not only in Russia, right. If you look at the previous Crisis, maybe even 2008 crisis, you know, later, you know, whenever something really bad starts happening, you know the very top the sort of the tsars start talking about changing regional governance. You know there's always something that the regional governors are guilty or they start talking about the technocrats that not doing their job and sort of that that tune continues. Most recently we have seen I think last year a few years back on the St. Petersburg Economic Forum where you know this was very quote unquote controversial panel where the chair of the Dumas I think Economics committee was asking questions to the Minister of Economy, Minister of Finance and the central bank governor. Aye. You know, Putin sort of ask you to do certain things and why are you not doing them right. So but let's not forget they're all part of the same mechanism. It's not that there's somebody's independent, you know, they're all linked that it's all sort of arms of the same of the same machinery. So I think we're likely to continue some of that strategy and and this blog I think makes a very, very good point of that. Right. We're going to find some of the scapegoats. It's also interesting that some of the pro clement bloggers are having the most problems because they're audience are less likely to install VPNs and try to find alternatives way to access so they're actually following has been dropping significantly like Margarita Semanian also for personal reasons but you know also for this reason. So they also not very happy. But now moving on I think people were indeed shocked and surprised how long that had lasted, you know that how little sensible information communication they received from the government and they were struggling to read into it what is it? Is it indeed a sort of crowd control technique? You know whether they're trying to test new ways of locking people away from the information. You know, in the extreme in Iran during the demonstrations they fully tried to shut down the country, right. To be not for people not to be able to coordinate and I'm sure you know that much more than I do. And maybe I'll ask you a question about it. Well, so maybe you know it's a way of sort of test driving that system or is it my government so incompetent that they have to shut down the full Moscow's Internet to be able to repeal some of Ukrainian drones So definitely that is not looking good for the authorities. But the question is to you, actually for me, you know, from that to any resistance or action from the people, you know, how do we make that bridge? I don't know if you can comment on that precisely.
- [29:47]
B
Yeah, to be honest. Thank you so much, Elena, for excellent comment and the question, yeah, I'm quite skeptical, to be honest with you. It's just that in general, I think one of the major issues within the Russian society is the collective action problem. And people just generally not that they are unable to get together to organize effectively for certain common goal. You can see even within the liberal community, constant struggle and mutual attacks against, even in this situation, all of them being in exile and really have limited chances of coming getting any power in Russia. Even in this situation, they continue attacking each other instead of building a common cause, fighting for the common cause. That is also true of Russia. Domestically. Z bloggers are even more prone to attacking each other. That's just the political culture that's very binary polarizing. But of course that is even more complicated by people's even lack of perception that they have any agency. And this is something I remember very clearly from the times when Becca lived in Russia. Just to give you an example, more recently I've seen a blog comment by a certain woman in Russia who was just complaining to a Ukrainian person that of course you're lucky to have Zelensky because he's doing everything for you. He's fighting, imagine he wasn't fighting against Russia. What would you think about that? So in her view, the Ukrainian resistance is entirely conditioned by Zelenskyy's actions. While in reality, as we know, Zelenskyy's actions to large extent have been shaped by Ukrainian society's willingness to resist Russian aggression continue consistently. And not just Zelensky, but all of the politicians in Ukraine of different colors to a large extent in Russia, unfortunately, the perception is everything that happens only has to do with Putin and basically, unfortunately, the totalitarian legacies. And we can discuss the origin of it. I don't think people have been able just to break out of that shell. And so the response, so the state is perceived as some sort of natural phenomenon. So the hurricane rain starts falling, you're not going to be complaining against the rain. You're just going to get an umbrella trying to avoid the rain. And that's how they react rather than changing the situation they avoided, which is so called sabotage. The usual form of Russian resistance. Even that I would argue is beneficial for Ukraine. So in that sense, it's good news if more people, for example, are getting VPNs installed and circumvent the restrictions, try to access true information about how things are. But unfortunately, we are still miles away from actual resistance and protest building in Russia.
- [32:20]
C
There is someone sent me from Russia a poster supposedly in the government in some official office. I'm not sure if it's not AI, but it says today you install the vpn, tomorrow you're going to surrender to NATO forces.
- [32:36]
A
I think one positive here, though, is that if you view this through the lens of Ukraine, the way Ukraine wins this war is ultimately Russia sort of decides it's not worth it and that there's some sort of agreement that is reached. Any sort of pressure, strain, stress in the society. You know, that's something that Putin has to pay attention to, even if there's not, you know, we're not expecting sort of a liberal revolution inside of Russia. I think he is quite nervous about regime stability and things that look like maybe we're getting on shakier ground. And Alina, I think what you're pointing to is that the Russian economy, you know, is starting to really feel some stress. And I'm curious to maybe bring this back to Ukraine. What's the war in Iran doing to the Ukrainian economy? Are you nervous about sort of inflationary effects on energy and other issues? How are you seeing the war impact Ukraine?
- [33:29]
C
Well, first of all, Ukraine survived a very difficult winter. You know, again, we've had this, I think a few years back, we've had the same conversation. My goodness, how Ukraine is going to survive. And yet it did. And our current forecast for in case of economics for 2026 is for growth of 2.3%. You know, the original forecast was about three and a half, 3%. So it is a reduction to growth, but it's not a collapse in growth. We actually, we have seen Ukraine economy actually demonstrate healthy growth after the original 30% collapse in 2022. Inflation indeed is going to be a bit higher. Inflation is going to be about 9% this year. That's our expectation. Again, a few percentage points higher from the earlier forecast of about 7%. So again, I'm not giving you dramatic changes. Yes, it's having an impact, but the monetary policy is at 15% policy rate. It's the same as in Russia. And the economy is actually showing some resilience. Of course, there are other issues and I think here that's where the partners of Ukraine make such a dramatic difference. Difference. Ukraine wouldn't be able to finance this war and social obligations of the government without external support. And that's why you have this large trade deficit, because you have structural imports that are needed for the war. You have big fiscal deficit and doubling of military expenditure that no normal country can do from domestic resource mobilization in a healthy way. And that's why I think this big win in Europe, Orban sort of being voted out and stepping down, not looking for ways to sabotage the results of the elections, I think definitely unlocked further cooperation with Ukraine, the 90 billion that is critically needed and that will definitely help Ukraine. So so far NBU managed to accumulate some reserves. They were prepared to lose reserves in the second half of the year. The money was sort of slow to come and not to come. They were ready to manage the exchange rate devaluation. It was impact on inflation and all the consequences. But they're actually managing rather well.
- [35:37]
A
I wonder what your take was or thoughts on Zelensky's visit to the Gulf, sort of to bring us back to your foreign affairs piece. Because it does strike me that there, the Gulf states, while currently fighting a war, I think are desperate for more air defense. The real vulnerabilities were exposed by Iranian shaheed drones that were fired at Dubai and other cities in the Gulf and other sites in the Gulf. And these were drones that weren't as sophisticated as the ones that Russia has been launching at Ukraine. And that Ukraine's ability to multi layered air defense system strikes me as something that the Gulf states really need. So is this an opportunity for Ukraine to really tap into what are still huge pools of resources from the Gulf that could maybe inject some more capacity into Ukraine's defense industry? How do you see the Gulf states playing into kind of Ukraine's industrial development?
- [36:36]
C
Well, I think Ukrainian authorities did a great job of taking advantage of this very bad situation. Right. So you think on the surface Russia is getting this 150 billion doubling of the, the defense spending ability just because of this war. It's cooperating closely with Iran. It's still getting sanctions really from the US So it looks like, oh my goodness, Russia is winning across the board. But it is not true because the countries in the region are progressively frustrated or rather absolutely annoyed by what Iran is doing. It had sort of certain quiet, sort of, I wouldn't say partners. But some countries in the region were sort of quieter against Iran. They were, you know, maybe agnostic about, you know, Iran's, Iran's hybrid wars. But now when their livelihood is being undermined, you know, if you look at the data center centers In UAE tourists as a tourist destination or for people to live in in uae. Right. They're basically having the economic rug being pulled from under them. And it's very pragmatic attitude to go to the country that knows how to defend itself best. They would like to go to the US but US is not reliable. US is not capable of producing what is needed. And whatever US will be able to do will be way too expensive, economically disproportionate. As we talked earlier, to use a 4 trillion interceptor against 10, 20 hundred thousand even drone. That doesn't make any sense. So I think Ukrainian authorities did a great job. President Zelenskyy starting going there, you know, explaining what they can do. Ukraine produces about 10 million drones per year. US produces about 100,000. Europe is not far behind. So that would. And also together with the changes from January 2026, what Zelenskyy has announced about the sort of more outwards exports of Ukrainian production, ability of Ukrainian companies to set up abroad, that sort of came at the perfect timing and I thought, I hope the situation also helped President Zelensky and the administration to clarify their mind on the issue of this sort of de facto export controls, the lingering concerns about removing it.
- [38:47]
A
So we're just about of time but maybe just one sort of final wrap up question. It seems like you're quite optimistic about where Ukraine is presently in this conflict. Russia's having trouble. Ukraine is. It feels pretty sturdy. Its defense industry is vibrant. What's your outlook for 2026 for Ukraine in general, both in the conflict and economically? It feels pretty stable, feels positive. Would you agree with that?
- [39:15]
C
I'm an economist, so I will tell you glass is half full and half empty. Right. So as an economist I want to tell you that it is an ongoing struggle. We shouldn't say that Russian authorities are always incompetent. No. They have talked about top technocrats that are working on the macro economy. Yes, they have what Maria pointed out. They have innovative companies that are. Although maybe they have been eaten up by now by the large bismos. But they're still doing something. Russia has a history of setting up offshore companies just in case thousands, hundreds, thousands of them to avoid sanctions or to be able to hide their revenues. So we shouldn't underestimate Russia's ability. But for now, Ukraine has consistently shown itself being a bit more innovative, being a little bit more creative, having much more involvement from the civil society and having a stronger, more reliable partner, which is Europe. Russia's partner is China, Iran, North Korea. These are not necessarily partners that will really stand behind Russia and its war in Ukraine. While let's hope that if Europe continues to stand behind its values and Ukraine and will continue to internalize that protecting Ukraine is also a way of protecting Europe. That to me is definitely a very positive sign for this year. And then of course I don't want to say that Ukrainian economy is not without flaws. We do need to all as an international community and also as Ukrainians to pay attention to what's happening on the anti corruption front. What are the best ways to do it? Sometimes this IMF checkboxes, which I've done myself in the past, are not always the best. You know, sometimes it's about having universities, you know, explain procurement system deliver, you know, new types of judges, you know, new kind of training to bring up the new generation of people that will be able to go on the independent courts and will have completely different culture towards bribe taking. Right. And that will take time. But this is something where so far Ukraine has shown itself as capable of doing it despite the fact that we have this very unique situation where the current government is is staying in power just because of the inability to run elections for this long.
- [41:26]
A
Alina, I want to thank you so much for the tour de force through Crane's defense industry, its economy as well as Russia. Thank you so much for joining us once again on Russian Roulette.
- [41:36]
C
Thank you so much for having me. It's always a pleasure.
- [41:46]
B
You've been listening to Russia Russian Roulette. We hope you've enjoyed this episode and tune in again soon.
- [41:51]
A
Russian Roulette releases new episodes every two weeks and is available wherever you get your podcasts. So please subscribe to our show, share our episodes online and give us a five star rating. Also, be sure to check out our sister podcast, the Europhile, where we talk Europe through a Washington lens. This show is made possible by a grant from the Carnegie Corporation of New York.
- [42:11]
B
Also, don't forget to subscribe to the CSIS channel on YouTube for live and recorded video events featuring leading experts. Finally, you can read all the latest analysis by the Europe, Russia and Eurasia program at the center for Strategic and International Studies website csis dot org.