In the early morning of Feb. 24, Ukraine and the whole of Europe changed forever. The largest war on the continent since World War II began with a barrage of Russian missile strikes against Ukrainian cities, airports and military installations. A ground invasion by Russia followed and is still ongoing. Several things became clear fairly quickly.
First, the myth of Russian military competence and superiority was shattered. Russia clearly aimed for a rapid blitzkrieg intended to take Ukraine’s capital Kyiv in a matter of days – and it failed miserably. At the time of writing this article, most of Ukraine’s territory remains free from Russian troops and only one large city – Kherson in the South – has fallen to the invaders. The Armed Forces of Ukraine have put up spirited resistance, dealing huge casualties to the Russian army.
Second, while the free world did not dare to counterattack Russia militarily, it did impose devastating economic and financial sanctions. Russia currently holds the dubious title of the nation with the most sanctions imposed on it in history. The Russian financial system has been battered and its economy essentially doomed. In the 21st century, a country cannot have any kind of normal economic life with such conditions. Perhaps then it is only a matter of time until the Russian economy, society and political system degrade and sink into turmoil.
Third, while the Russians still try to score a military victory in Ukraine, they are increasingly shifting towards a strategy of attrition. They are bombing and shelling Ukrainian towns, besieging them and creating humanitarian catastrophes, damaging infrastructure and doing whatever they can to disrupt the normal way of life in Ukraine. More than 2 million refugees have now left the country, with the number growing steadily every day. About half of all Ukrainian enterprises have stopped functioning and a myriad of logistical problems have beset the country, starting with the acute lack of fuel.
Thus, the longer the current Russian-Ukrainian War continues, the more it will become a war of attrition – as all prolonged military conflicts do. And such conflicts are won not by sheer military might, but rather by the ability to hold out for longer than the other side.
For Ukraine, this requires a motivated population ready to face hardships for victory, a well-functioning military, and most importantly – a strong war economy. Ukraine is certainly not lacking in terms of motivation and military muscle. To ensure victory, it now needs to create an economy that is geared up for war.
Let’s take a look at what we have (and don’t have) in this regard at the moment.
In terms of finance, Ukraine has a history of being plagued by financial crises, resulting from never-ending monetary and fiscal irresponsibility. It is thus quite ironic, that during a large-scale war, the financial system and the government budget have become our economic strongpoints. A number of factors have contributed to this:
- Good macro financial policies of the post-Maidan era, which allowed Ukraine to accumulate more than $30 billion of FX reserves combined with manageable government debt and budget deficit parameters;
- Smart financial policies introduced immediately when the war started, including a fixed currency rate, well-thought through restrictions on financial flows and limitations on public spending beyond funding the war effort and the state’s obligations to the population (mainly, salaries and pensions); and
- Significant financial support from various partner countries of the free world.
Thanks to these factors, the currency rate has remained stable, the banking system functions more or less smoothly, and the budget has enough money to pay for the war (in fact, it even turned a surplus in the early days of the conflict).
Next let’s look at logistics – the blood circulation of a country at war. Ukraine’s transport system has been disrupted heavily by the invasion. Air traffic has been closed and Russia has blocked the seaports – traditional arteries for exports and imports. Belarus, which used to supply Ukraine with about a third of its gasoline and diesel, is allied with Russia and has ceased supplies. Ukraine is now totally dependent on its Western borders to supply the country’s imported goods and for internal transportation networks to distribute them from the West to the other regions. The multitude of checkpoints that have sprung up all over the country spontaneously since the start of the war – often created by local territorial defense without any centralized coordination – do not help, as vehicles are constantly required to stop.
Fortunately, efforts are being made to resolve the current logistical issues. Railways – always a backbone of commodity transportation in Ukraine – have proven to be a reliable and robust means of transporting both goods and people on a massive scale. Large private-public logistical initiatives between big business, volunteer organizations and government agencies have been created in the Western regions, providing logistical hubs and transportation services to supply the besieged cities to the East with humanitarian aid. The checkpoint system is being centralized and put under the control of the military-civil administrations of the regions.
Nevertheless, logistics (both military and civilian) remain a major issue in need of constant attention, which will likely continue until the end of the war. A clear system of supplies of critical goods from abroad needs to be established, starting with fuel and energy resources that cannot be produced locally in sufficient quantities. The emphasis should be made on the organization and management of physical supply chains by the state and local governments, rather than simply setting the rules and letting the market handle things, as is usually done during peace time.
Finally, the weakest point in dire need of attention – production. Industry has been disrupted on a massive scale by the war, with about half of Ukrainian enterprises ceasing trading. Millions of people have been displaced and need to be re-employed. Even in Ukraine’s West, a lot of businesses have closed due to fear of war and many people have ceased coming to work, preferring to engage in local territorial defense (even though there is no fighting in these areas) or simply being afraid of possible bombings by Russia.
Whole industries need to be restructured and geared towards producing goods necessary for the war effort – both military, dual-purpose and humanitarian. They need to work 24/7, without weekends and holidays, until the war is over. While efforts are clearly being made in this regard – like the enterprise evacuation program launched by the government or the announcement of a large-scale state procurement program for critical goods – they have yet to bring tangible results.
A war economy is by necessity a planned economy, with market forces clearly subjected to the needs of the state. Creating one is a huge and complex task that requires competent and effective administration at all levels of government – traditionally a problem for Ukraine. Nevertheless, now is exactly the time to create such an administration since the future victory and the very survival of our nation depends on it.
