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Russian Roulette
The Ukrainian Economy Today with Elina Ribakova
00:36:53
Elina Ribakova returned to the show to speak with Max and Maria about the evolution of the Ukrainian economy since February 2022.
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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 Snigavaya, 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. I'm Max Bergman here with my co host as always Maria Snagovaya. And today we're having Alina Rybakova back on the show to provide us an update on the current state of the Ukrainian economy. We've talked a lot about the state of the Russian economy, but I think it's time to look in in some depth at what is the state of the Ukrainian economy, how is the war affecting them and how are they able to proceed going forward in what looks like a conflict that is not going to end anytime soon? Alina probably needs no introduction to many of our listener. She's a non resident senior fellow at the Peterson Institute for International Economics and a non resident fellow at Bruegel. Additionally, she is the director of the International Affairs Program and Vice President for Foreign Policy at the Kyiv School of Economics. Earlier in her career, Alina worked for major banks, the International Monetary Fund and has written extensively on global markets, economic statecraft and economic sovereignty. Alina, thanks so much for joining Russian Roulette and for being back with us.
- [01:29]
C
Thank you. It's always a pleasure.
- [01:31]
A
Great. So let's start maybe a quick overview of where the Ukrainian economy is today, how it's evolved since February 2022. You could sort of set the stage for us. So what have the last few years of war kind of done to the Ukrainian economy?
- [01:47]
C
Well, I think the key important feature is that Ukrainian economy held up. Right. So not only the country held up more than a couple of days, but also Ukrainian economy held up. And I think this is an important testament to reforms that have happened after 2014, invasion and restructuring and all other IMF program. As we know, Ukraine had a history of very difficult IMF programs and sort of being sort of on defense, neither leaning towards Russia way or to European way. Neither they were ever properly invited into Europe either, which I think is one of the key problems with the Ukrainian development. But I think important reforms were done after 2014, particularly financial sector reforms. And I think that's why they are reaping the benefits now. Unfortunately, because of the war we have huge impact and effectively we have a split budget. We have a budget which partially goes to the normal civilian economy and that's the normal revenue generation and expenditure. And then you have almost the same size of a budget, which is the military spending, which is financed largely by external funding, grants and some loans and transfers in kind. And I think that's one of the big challenges we'll be going forward.
- [02:56]
A
You know, one of the major critiques of Ukraine prior to the war and actually, you know, we heard this a lot during the last few years, especially from Republicans in Congress, about endemic corruption in Ukraine and that really holding back the Ukrainian economy. How much of an issue is that? Is that kind of an overstated economic concern or is it something that Ukraine is still really striving and struggling to deal with?
- [03:19]
C
Well, I think it is a concern, right? It is a concern that we experienced with Bulgaria and Romania after the accession to the eu. It is a concern we still experience in Turkey. It is a concern we're experiencing in many other countries as well. So Ukraine definitely had this issue and continues to have some of these issues. I think particularly historically, the reason it was so problematic is because you did have oligarchic structures that were sort of driving the country a bit to be in between. Right. They're sort of dancing with Russia, but at the same time they were too afraid of going too closely to Russia because they know that the bigger fish will eat them up. But at the same time they were trying to steer the country away from European Union because they know that they don't want a higher transparency. So a lot of that also has changed with the war, unfortunately for the country. But some of these people have lost their assets and they don't have as much of an influence as they used to have in the past. And also I think with the wars there's been a lot of focus on exactly refuting this argument. On one hand, during the war you do have challenges with corruption like in any country. But at the same time, I think specifically to make sure that this foreign aid and support that is going to Ukraine from the us, from Europe and other countries, the Ukrainian authorities have focused on making sure that it's very little leakage and there is a full accountability for the resources they're getting because they know that the spotlight is on them and not only from the well wishers, but also from Russian propaganda. So going forward, I think even more so than just focused on this anti corruption institutions that we've been focusing, including in the IMF programs, I think it's important to think about ease of doing business, you know, what other quick fixes can be done to make sure. That companies want to register their businesses in Ukraine. They have an easier way of submitting their tax forms. And also there is transparency of the government procurement. And I think there has been a lot of work has done on all these fronts, but more needs to be done.
- [05:10]
B
Elena, you're a great expert not just on Ukraine, but also on the Russian economy. Could you please comment on the comparative advantages or disadvantages of the economic models they adopted since the start of the full scale invasion of Russia specifically. Right. It's described as military Keynesian economy in both cases. But what are the differences, especially perhaps those associated to their regime type or perhaps specific conditions in which both countries find themselves? That would be really interesting.
- [05:35]
C
Well, I think, you know, you're making a very important comparison here. Right. You're asking a very important question. So I think first important difference is that Russia and here you are the political scientist. So I don't want to feel, you know, you'll correct me if I'm wrong, I. But I think Russia has decisively moved into more autocratic regime while Ukraine still has a democratic system. And I know we have some people, including here in the US who say that, well, but there haven't been elections. There is a war. You know, there are plenty of countries will not have elections because you do not have access to the big chunks of your territories. You do not have an opportunity to have the transparent, open, well monitored elections in the big chunks of the countries. For the large share of the population, then it's very hard to have a legitimate election. So I know some people in the US say, well, we had elections even during the war. Well, maybe that was not a good idea. Always. Right. So in many countries you actually do have this normal periods when you don't have access. You need to think what is the best way to continue with this democratic process. But you know, very different to Russia, Ukraine does have a democratic process. It still has investigative journalists, it still has think tank community that is independent and can voice their concerns. So I think these are the two big principal differences. The second difference is much more on the economics front. Russia still has a big share of natural resources. It's a dominant player in energy and some other natural resources as well. And that's why the pressure between spending on the civilian economy and on the military economy in Russia's case is just not that important as we would like it to be. Right. If we're talking about the classical Keynesianism of being forced to fully retool your economy to the war economy and therefore not being able to produce for export or for domestic civilian goods. In Russia, that confrontation between the two economies is not so significant because there are many other countries, including in Europe and in the US In Europe mostly buying Russian energy and continue to do so and gives Russia extra resources. Ukraine also has some natural resources and we'll talk about it later, but at the same time, they're not as significant as in the case of Russia. So what has happened as a result? Ukraine, I think, is still trying to maintain regular economy, civilian economy, which is not fully going towards militarization, because they know that once the war is over and hopefully you know, that they will come sooner than later, Ukrainian economy will have to revive because of their creativity and natural resources, higher productivity and not just rely only on the natural resources. In Russia case, it seems that they are thinking about putting it all into the war economy because they have the natural resources and they can afford to do it at the moment. And they're not thinking about the future in the future. We'll think about it later, what, when and if. And that's why I think, again, this is partially linked to the political system in Russia, where the regime is not democratically elected. So maybe there would be people, if there would be normal voting process, who will vote for other choices, but they don't have a choice, don't have the ability to express that view in Ukraine. I think that's also why Ukraine is so reliant on external support.
- [08:47]
B
And then, of course, I cannot bypass the question of the minerals deal. In your opinion, is that just a symbolic development between the United States and Ukraine and on Ukrainian side to demonstrate its willingness to abide by the demands of the United States, or do you think there might be, indeed the opportunity to attract some investment? Just a reminder that there was a joint investment fund established by the US And Ukraine recently that gave the United States advantageous access to Ukraine's mineral wealth according to expectations and demand by the US President Donald Trump. Ukraine contributes all capital from the new mineral licenses. And it's understood that it's broadly like a payment for the lethal aid that the United States has been providing to Ukraine. So do you think it will have an economic impact and potentially beneficial one?
- [09:34]
C
Well, I think it's a combination of the two. Right. Ukrainian does have some of the natural resources which are resources which are important for the green transition. And we see Europeans, of course, decisively continue to move with the green transition despite all the geopolitical pressures that they're experiencing. And they're also thinking more about strategically diversifying where they're getting some of these critical resources. Even before the discussion with this Trump administration by Ukraine, Ukrainian authorities have been thinking, how can they integrate into European economy of the future, how they can have more green production of metals and mining, how can they reevaluate their resources that they have and also the processing abilities that they might want to develop in the future in Ukraine. So this conversation is not new. However, partially because of what you mentioned, discussions with the Trump administration, I think Ukrainian authorities wanted to find a constructive way to engage with this administration in the US and that's how this mineral resources deal came along. I think going forward, it's important to understand whether this deal will preclude constructive cooperation with European Union, because at the end of the day, Ukraine is sitting close to European Union, has aspirations of going into European Union. We cannot have the situation where US Deal will preclude constructive cooperation with European Union or countries of European Union. And then I think other technical analysis has to be made. You know, some of the surveys that establish that there are reserves of these critical materials in Ukraine, they need to be updated. And then one needs to think about the processing. As we know, it's not enough to just have these minerals in your country, but a lot of processing happens, for example, in China. Ukraine at the moment doesn't have that capacity. And some of that processing industry can be actually very bad for the environment if done in the old fashioned way. So these are the issues that Ukraine needs to resolve. So we're very much at the early stages. You know, this is just the memorandum agreement that has been signed. But there are many other technical aspects that need to be resolved and also legal aspects.
- [11:35]
A
One of the major issues for Ukraine seems to be the demographic challenges. That's oftentimes talked about in terms of how Ukraine mobilized men to go fight on the front lines. But there's been, I think, roughly 7 million Ukrainian citizens that left the country since the war began. Now we're well into the third year of the war, meaning that a lot of mothers and children that have left, those kids are now, if they're in school in the UK if they're in Germany or in Italy or have learned Italian, it becomes harder and harder to then come back. What is the demographic situation like in Ukraine? How challenging is it, and what does that mean for Ukraine's sort of broader economic prospects?
- [12:19]
C
Well, this is one of the critical issues for recovery, indeed, because the demographic situation was already worsening on the margin before the war. And indeed, as you point out, the war has pushed out about 7 million or so people that left the country and many of them haven't come back. There is pressure on the fiscal side, obviously and there is also pressure on the macroeconomic on the growth side as well. So the critical issues here whether Ukraine can shift to more productivity driven growth, higher labor productivity, high overall economic productivity, rather than just relying on your old fashioned factors, investment and labor. Because indeed bringing people back will be challenging. People will come back if there are employment opportunities and people will come back if there is solid social infrastructure, there is education opportunities for kids, there are kindergartens, you know, there is a social network there to support. Otherwise Ukraine will have to rely on remittances from this population that has immigrated. And I have to say, sometimes we get very obsessed about the return and I think it's important that we bring back as many people as possible. But at the same time, as we experienced during the COVID crisis, and to the surprise of many, remittances is among the most stable ways of financing an economy. Right. It is in many cases for emerging and frontier markets has surpassed fdi. And during COVID FDI fell, obviously portfolio investment fell, but remittances remained very stable, especially when there was an easy way of transferring money from one country to another. And then again some people say, like look, remittances is not great because it's just sort of subsistence payments to your grandparents in the country that is not exactly accurate. Oftentimes remittances are used to start a business. So this is your like seed financing to do something else. So it's not just social support, but it's also financing with maybe other types of finances like venture capital or ease of borrowing from the banks is not available for you to start a business. So remittances should not be just looked down upon. And they used to be very high for Ukraine before. They continue to be high and most likely they will expand as people got the work permits very quickly in Europe and they already integrated in many countries in Europe.
- [14:28]
A
That's fascinating that the emigre population actually is a source of economic vitality and strength for Ukraine. Something I hadn't thought about Moldova, if.
- [14:35]
B
I'm not mistaken, and some other countries of Eurasia. Right. It's actually a significant contribution to gdp.
- [14:41]
A
And one of the things we've also seen doing some work in Greece and a lot of people left during the economic crisis, during the economic depression. But then as the economy starts to grow, people want to return. And I think Ukraine will probably attract a number of people back if and when we finally get to a reconstruction phase. But that leads to kind of another big question that kind of. I think what I sort of see is the military elephant in the room, but maybe also the economic elephant. And that's the role of United States in providing assistance to Ukraine. And we've talked a lot on this podcast about US Military assistance to Ukraine, how it's really vital, how the challenges for Europe to backfill if the United States stops providing that military aid. But, you know, when the US Roughly this time last year, finally passed a Ukraine assistance bill, half of that money was economic assistance. And I think the US has provided roughly half of the economic assistance to Ukraine, around $50 billion. So given that, it's very unlikely that the United States under this administration, is going to go back to Congress to ask for more funding for Ukraine to support Ukraine's budget and its economy, how big of a challenge is that? And is this something, you know, a bill that the Europeans are just going to have to pick up and they're just going to have to start spending double? How do you kind of see the financial, economic assistance side of the equation here?
- [16:00]
C
Well, first I'll say something that we need to change our framework of thinking about Ukraine, right? Especially in Europe. So we need to stop thinking what can we do for Ukraine. We also need to think what Ukraine can do for Europe because you bring up defense, right? And the biggest threat for European defense at the moment is Russia, right? There are hybrid threats that may be coming from China. There is sort of worsening of transatlantic relationship with the U.S. even this administration. But in terms of risk of kinetic war in Europe and already have one war in Europe, in Ukraine, the biggest threat is Russia. So the country that has most experience, unfortunately resisting Russia's invasion, it is Ukraine at the moment. So then what are the challenges with European defense? And I know you asked about Ukraine. We'll get to it. So the challenges with European defense is that there are lots of national champions, so to say, but they will work on a small scale and they produce different things. So if you think about, I mean, you max know much more than I do on this, right? You know, they produce different type of tanks, they produce sort of a few different types of houses, different types of ammunition, right. And none of that is easily scalable. And it also has a big question of interoperability, right? So now let's think about Ukraine. If you are unfortunately fighting in Ukraine, you have figured out that operability, right? You know, somehow you connected some wires and you made all these different products work together. So you can give technical assistance to Europeans on how to strengthen their interoperability. Right. At the same time, you figured out how to produce cheaply a whole bunch of products, even tanks sometimes, or particularly in the modern warfare of drones, right. You have this certain technological advancement where you can update your drone technology every six months, you can test it and you can improve it, and you can bring it back to the battlefield. So again, in terms of innovation, Ukraine can help Europe on that front. And finally, unfortunately, just like we talked about the training of Ukrainian soldiers, of using some of this modern technology, at the moment, it's more likely that European soldiers might be going to Ukraine to train in this new modern kind of warfare. So again, so yes, the financial needs will be significant. And the current BRA account, this sort of, this partially Russian, but basically the money that has so far been locked in from the European Union should be enough for Ukraine to continue financing the gaps. But the challenge is there. Ukrainian defense spending is about $70 billion per year. Right. It is a very significant amount of money which Ukraine by itself will not be able to carry. And if we think about it only as donation, European Union can easily carry it because it's a very small percentage of their gdp. But if you think about it as cooperation on common defense, then it's beginning to make more sense. And it also can produce some productive spillovers for the rest of Europe, not only for Ukraine.
- [18:53]
A
Right, Right. So investing in the Ukrainian defense industry in some ways is the way Europeans should go about trying to support Ukraine's war effort in addition to ramping up their own defense production. But instead of Germany trying to produce a million drones, and the Ukrainians are already doing that, maybe just get them to scale up even more. So, no, I think that that's a fantastic point. Maria, over to you.
- [19:15]
B
Some observers, Elena, based on the publications in the media, actually are concerned about the pending patterns in Ukraine, especially Ukraine's budget deficit, which is increasing. And the gross domestic savings rate went negative into 2022. I was wondering what is your take on that and what in particular should maybe our audiences know about Ukrainian financing?
- [19:40]
C
This is an excellent question. It is indeed a very challenging situation. So when for a country Ukrainian size, you have about 70 billion spent on defense every year, it is almost impossible to carry on your own. Right. There is no way that the domestic economy can generate revenue sufficient to cover that. And especially before Ukrainian had a typical emerging market tax structure post Soviet, sort of it moved on from the Soviet system and had a developed VAT system, corporate personal income tax exercises. It's not that one of the, for example, some of the frontier economists in Africa, where Your revenue to GDP is 11%, well then you can make some effort and double that revenues in a couple of years. Right. Just because indeed the administration is so poor. Maybe tax policy is still relatively new, relatively underdeveloped, but this is not the case in Ukraine. In Ukraine, they do have an established tax system, tax policy, it's impossible to double those revenues and it's not possible to do it, especially without damaging severely the economy. So you do need external financing. And in this respect, it is critical what the IMF will be doing forward because they are at the moment doing exceptional financing. But they need to have scenarios where the country's fiscal is on a sustainable path. Right. So it is possible that especially with the ceasefire or sometime this year, the IMF will continue to reevaluate whether that is still the case, where there is still a scenario where you have sustainable fiscal and external accounts. For now, the IMF is committed to Ukraine. We know the current program is ongoing. We also have the money from the World bank. We have the money from the EBRD and European Union. So with that, in the next year or two is just about enough. However, I think European authorities, because they are the closest to the conflict, unfortunately, they have to start thinking more progressively about the use of Russian reserve assets. You know, we've had this sort of twisting ourselves in a pretzel of trying to use the proceeds. But I think the issue has to be put back on the table. Shall we seize the whole amount, given the damage that Russia has done to Ukraine and give the opportunity for Ukrainian authorities to use this money? Because in the end of the day, it is the damages that caused to the country and this money belong to Ukraine. So that's how it would go forward.
- [22:02]
A
So maybe we could get a little wonky, Alina, and talk about the Ukrainian Central Bank. We've talked, I think, a lot about the Russian Central bank and the kind of amazing job that they have done in sort of keeping the Russian economy afloat through thick and thin. How would you assess the Ukrainian Central bank and what has it done to keep the Ukrainian economy going despite a massive war being fought on its soil and missiles raining down on Kyiv almost every night?
- [22:30]
C
I'm glad you're bringing up this question because when we talk about economics and central bankers, we often talk about them separately from everything else. Right. And there are many central banks globally that would like to continue seeing the world this way. And that's why the conversation, for example, on reserve assets sometimes appears to be almost schizophrenic. Where on one side you have the political will and sort of legal arguments made and financial stability arguments made, but on the other side, the community around central bankers often serves as. But we cannot be involved in geopolitics, right? It's impossible. And if you remember, after 2014, indeed Nebula got the Euro Money award of the year for managing so well the crisis. But let's not forget how the crisis came around by Russia beginning invasion of Ukraine. And we somehow in the community of the central bankers just sort of were agnostic to the world outside. So indeed, the central banks are not separate from wars or geopolitics. But I do have to give huge credits to the NBU in the way that they've handled this crisis. And again, what we started talking about here is that's what we have come back to. The reforms they did after 2014 were critical to be able to withstand this kind of times. If you have somewhat corrupt central banks, maybe some inefficiencies, maybe even owning some summer house and the medical center, I think then we used to own all kinds of from the old Soviet times. So if the times are more or less okay, maybe it's not such a big trauma, right? You can still sort of muddle through and things happen, right? But if you have the war that we have seen now and you still have to make sure the payments are processed, there is conversion to the foreign currencies that people can use their cards when they're traveling abroad and when they actually are refugees and have to leave the country when you have through the banking system has to remain stable and the credit keeps on going. And by the way, also there are occupied and deoccupied territories. We also have huge issues for people to have access to finance, right. When the territories get deoccupied. So all these things have happened since the war. And I think this is huge credit to NBU's reforms after 2014. Not everything was perfect before the 22 invasions. We had signs that some of those reforms were being eroded. And we have seen some unwelcome changes at the central bank. Even in the beginning of the war, we have seen some indecisiveness at the central bank where they should have, I personally think, hiked rates much sooner. But I think since then they had learned their lesson and they have been very strong in enforcement and implementation of the banking, financial supervision and the monetary policy. And by the way, last year the Central bank of Poland, together with national bank of Ukraine had the first conference post Covid post the beginning of this war in person in Kyiv. It was extremely well attended. Conference in mid June and there will be another conference coming up in mid June as well. So I do suggest that everybody who can should dial in and listen to the wonderful presentations.
- [25:26]
A
That's great, great. Advertisement I want to maybe turn to the question of reconstruction. You know, I think initially in 2022, there was a lot of discussion about reconstruction as kind of happening after the fighting stops. And then, you know, Ukraine will win, we'll go in the west and reconstruct Ukraine. But we're now in year three of this war. We don't really see an end in sight. It's going to continue. Ukraine has had to rebuild a lot of its infrastructure on the fly, had to figure out how to keep electricity and power going to its citizens. How do you think of the concept of reconstruction in the ongoing conflict? Is this still something that really things will rev up after the war, or is this something ongoing now and then? Maybe a second aspect of this is that part of what's also happened over the last three years is there's been a lot of focus in Ukraine on European Union membership in trying to align itself with the eu, with the thousands of pages of laws of the equi communitaire to join the European Union. And we've seen other countries that has been a big accelerant of economic growth, countries like Spain, Poland, skyrocketing in economic terms because of membership of the eu. Is that a crucial part of Ukraine's economic strategy now? How do you kind of see that in terms of reconstruction? So two big broad questions. First, maybe to unpack reconstruction in the context of an ongoing war. And the second one is what is the role of EU membership playing in helping Ukraine's economy, if at all?
- [26:58]
C
This is a great question because reconstruction is happening now, right? If people have to go back sort of to the territories that were destroyed, you do need a hospital, you do need a school, you need for people to live. And a large proportion of the estimated damages is indeed housing stock, right? So people have to live somewhere. So the reconstruction is ongoing. But the way we should think about reconstruction is thinking about economy of the future. Whether it's economy of the future of Ukraine, economy of the future of Europe. There is no point of thinking about Ukraine as if it were Poland 20 years ago. That is not going to deliver the productivity improvements for Ukraine to be able to boost growth, especially at the time when we're talking indeed about potentially lower population growth or people who are very slow to come back. Right. So then you need to think what will Europe, which is the closest neighbor with a strong single market, what will Europe need 5, 10, 20 years from now, to the extent we can evaluate it, and where Ukraine can plug itself in. And I think here, Poland might be a good example in a sense that in some 20 or 10 years ago, Poland was thinking about electric batteries. You know, like there will be electric vehicles and maybe we need the batteries and maybe we should have a factory like that. So this is the examples of things that Ukraine should be thinking about. And that's why looking at the objectives of Europe, whether it's in defense, green technologies, AI it, innovation, logistics, critical raw materials, that's where Ukraine should try to plug itself in. Now, looking more in terms of the domestic factors, of course, the critical sectors are energy, agriculture, transport and logistics, but then also critical raw materials development. We talked about defense and digital productivity. So Ukrainians can think about this critical big sort of pillars of their economy of the future and see how that integrates into Europe and do reconstruction not only as a day to day activity which is happening now, but also with the view of this medium term goals.
- [29:02]
B
May I just follow up on that real quick, Alina, and ask you about the security guarantees? Right, because one of the issues pertaining to the investment in Ukraine right now, but also going forward, that even if there was technically a ceasefire achieved on the front line, there's little to stop Russia from violating it, especially by attacking consistently continue these air attacks, as we have seen more recently with missiles and drones. What is the way to structure the investment in Ukraine going forward? You know, to secure the investment that Ukraine needs in order to continue with the reconstruction?
- [29:35]
C
I mean, I think Europe has to take a critical role in supporting Ukrainian defense. It might take time for it to fully materialize because Europe has its own issues with coordination of defense action with materials that were talked about. But without solid security guarantees, which are not just on paper but also in practice, it will be very hard, I would say almost impossible to come up with the right insurance product which will assure companies to come back to Ukraine. And indeed, there have been a lot of think tanks and researchers working and business practitioners working on these various insurance products. But in the end of the day, if you can have invasion any moment and Russia can reach certain parts of Ukraine easily, it is very hard to contract that with an insurance product. So going forward, I think it is first for Europe to take defense of its own borders and Ukraine more seriously. And I think that will provide meaningful support. The Second one is innovation. Russia cannot reach all of Ukraine, right? There are hubs where Russia struggles to reach and maybe the hits are much less frequent. And there are also ways of either having distributed or decentralized networks, for example, for recovery of energy infrastructure. There is no longer it's not meaningful to recover and rebuild old post Soviet infrastructure which is highly centralized. Maybe it makes sense to have hubs in different places or even doubling the capacity in certain cases. In other cases, Ukrainian entrepreneurs have already been doing some things are mobile, some things can be done on the railway tracks, even on the railway wagons. So this is the different sort of innovative solutions that can be adapted. And finally education. Once alongside these two defense innovative solution, then you can do education of the companies where they can gradually come in or expand operations. There are companies that are still operating in Ukraine. You know, there are big agricultural foreign companies. There are even metals and mining companies that are still operating within Ukraine. And they have gotten used to it and they find a way to work so we can educate other companies. These are certain risks. These are certain places might be easier to work in. This is the solution we can offer you. And gradually they can scale up or dial up their investment in Ukraine.
- [31:53]
A
Alina, maybe one final question. We focus on Ukraine, but I have to ask you about Russia as well. I mean, my takeaway from this conversation is that this war from an economic perspective has become sustainable for Ukraine, that Ukraine has figured out how to economically sustain its war effort with international help, of course, and that's vital, but that it's not on the cusp of having an economic collapse. It can sustain this effort going forward. So if Putin wants to keep going, Ukraine can keep going. You know, part of the notion of these negotiations that the administration has tried to pursue is that Russia's economy is increasingly looking shaky. And I think there are some signs of that. We have a new report that is going to come out any day soon that shows real problems in the Russian economy, but it also shows a degree of sustainability to Russia's war effort and that it may not be on the cusp of crisis and collapse as we think. But Alina, maybe if I could ask you for your take on where Russia is in its current economic situation.
- [32:51]
C
Well, I'm very much looking forward to your report. I'm sure everybody should read it because I think it will be a great report that gives a summary of economic as well as war effort and scenarios. But where Russia is, unfortunately, I think prolongation of the war is the objective. You know, many people ask, but what Is the objective of Putin in these negotiations? What can Ukraine or Europe or US do to be able to negotiate and find this sort of common ground? And every time they're met with very maximalist demands. And I think this is not a negotiation strategy where Russia comes out with maximalist demands and then it decides to scale back. No, this is a way of preventing a solution being reached. Because if Russia were to stop the war, it is almost like pricking a bubble. And you remember Greenspan conversation in the U.S. nobody likes to. To prick bubbles. Right. We have seen what happens with the global financial crisis when that bubble bursts itself eventually. So Russia has a similar situation. It's become very sort of militarized economy, where the sectors that are growing have been growing and recovered over the last three years. Other ones that are related to the government purchases, procurement plans for the military, other sectors have stalled. If anything has begun to decrease in the first quarter of this year, the Central bank of Russia, in order to be able to reduce inflation, because the economy clearly has hit its capacity constraints on labor, on investment, on other factors of production, the central bank is trying to increase rates, but the rates affect only a subsection of the economy, which is not military, of course, so that is getting squeezed even further while the military continues to grow. So for Russia, and this situation has also created a unique social lift for people who didn't have that social lift. And here I will also plug in and we're writing a paper on Russian regions with colleagues with Yuri Grudnychenko and Niko Kakkonen. Exactly. Showing that. That these people have not had a social lift for almost a decade. You had the 2000s when you had a pickup, and then since 2014, it completely stalled. And now finally they're also having a pickup. So it will have not only economic, but social, economic impacts if Putin tries to stop this war. So Russia appears to be stuck. You know, they want to continue the war. And then the final thing, what I will say, something we've been looking into more Skyevsko Economics colleagues, is it appears that the types of weapons that Russia has been focusing on in recent production, it's not only the types of weapons or the amount of ammunition needed in Ukraine. So it seems that Russia is potentially maybe preparing for other incursions. We don't want to speculate, but looking from the economic side, it seems that they are more and more committed to the weaponization of the economy or war economy, rather than thinking about it as a temporary period where they go back to other productive activities. Shortly after the ceasefire well, Alina, it.
- [35:44]
A
Has been a real pleasure to have you. Thank you so much for enlightening us about the Ukrainian economy and your take on the Russian economy is very well taken. I think that's going to be reflected in the report that we have coming out. But Alina, thank you so much for joining us. Unfortunately, we're going to have to leave it there. As always, a huge thanks to you Alina for being with us and to our listeners for tuning in. If you haven't already, please be sure to subscribe to our show and give us a five star rating. And also be sure to check out our sister podcast, the Europhile, wherever you get your podcasts and we will see you next time.
- [36:15]
C
Thank you so much for having me.
- [36:23]
B
You've been listening to Russian Roulette. We hope you enjoyed this episode and tune in again soon.
- [36:29]
A
Russian Roulette releases new episodes every two weeks on Thursdays and is available wherever you get your podcasts. So please subscribe and share our episodes online.
- [36:38]
B
And be sure to check out all the latest analysis by the Europe, Russia and eurasia program@csis.org.