Russia’s war against Ukraine shows no sign of ending, but it is not too early to start thinking about how to ensure the stability, prosperity and security of post-war Ukraine. Two discussions are already taking place: one on the financing of economic reconstruction and the other on the assertion of Ukraine’s foreign security. The problem is that these discussions take place separately, although the issues are closely related.
Reconstruction costs are uncertain because the course of the war is uncertain. Ukraine’s pre-war GDP was about $ 150 billion (£ 120 billion). Considering a capital-to-produce ratio of three, and assuming that one-third of the share capital will be destroyed, we are again talking about $ 150 billion. As always, alternative assumptions provide alternative scenarios, but $ 150 billion seems like a reasonable starting point.
This amount of aid is not impossible for donors. It is one-sixth the size of the NextGenerationEU program that EU states agreed to in July 2020. It is one-twelfth of the US Rescue Plan Act signed by Joe Biden in March 2021.
Still, it seems wrong to ask the US and Europe to repair what Russia has broken. Therefore, it is tempting to suggest that the reconstruction of Ukraine should be financed by seizing Russian assets. With $ 284 billion, the Bank of Russia’s frozen reserves would no doubt fit the bill.
It is true that there is a moral case for reparations: Russia started an unprovoked war and has almost certainly committed war crimes by prosecuting it. There is also an argument based on deterrence. As Volodymyr Zelenskiy said in Davos this year: “If the aggressor loses everything, it definitely deprives him of his motivation to start a war.”
Security guarantees are as vital to economic recovery as they are to the security of the people of Ukraine. Official aid cannot finance the economy forever; private investment will be required. But foreign investment will not come if security is uncertain. In fact, the Ukrainians themselves will not invest either.
The West can strengthen Ukraine’s ability to defend itself by giving it more powerful weapons. But as long as Russia has nuclear weapons and Ukraine does not, the strategic balance will be tilted. A security guarantee from the US and the EU could counteract this Russian advantage, but the West is reluctant, not without reason, to take risks.
The only lasting solution is a Russia reconciled with the political independence and territorial integrity of Ukraine. And repairs are the last thing you need to get done. They would mean additional hardship for a Russian population that is already struggling. With the economy about to shrink by 10 to 20 percent this year, it’s not as if Russia has been discovered.
Undoubtedly, going too easy with Russia runs the risk of calming down. And under no circumstances should Russian President Vladimir Putin be rewarded for his aggression. But there is also the opposite risk. Russia must recognize the political and territorial integrity of Ukraine. Punishing him even more in the course of the peace negotiations will not make it any easier. We want future Russian governments to respect international standards. Invoking these rules to extract every pound of meat will not make it more likely to get it.
There is an obvious analogy with the German reparations after the First World War and the war guilt provision of the Treaty of Versailles. Rightly or wrongly, the Russians now, like the Germans at the time, are not considered solely responsible for the war. The treaty’s war-torn clause gave German nationalist politicians an offense to campaign. The victors’ financial demands provided coverage to German governments for ignoring the disarmament provisions of the treaty and banning the establishment of a customs union with Austria. And the repairs complicated the task of stabilizing and rebuilding the international system. John Maynard Keynes anticipated all this and much more in his predictive Economic Consequences of Peace.
This accusation of post-World War I reparations should not be exaggerated. Repairs alone did not cause the Great Depression, and the German Depression alone did not cause Hitler and World War II. The analogy with current circumstances, like all historical analogies, is imperfect. Still, this experience is a warning story.
There are still other arguments against repairs. The legality of confiscating frozen Russian assets is unclear. Western governments could pass enabling legislation, although then it could be considered that they were doubling the law at their convenience. The UN could create a commission with the power to seize these assets, although countries like China, imagining that one day they could be attacked, would oppose the move. Either way, seizing Russia’s foreign assets will make other governments think twice before investing abroad.
The central point, however, is that the demand for reparations would make it more difficult to imagine a reconciled Russia with the independence and territorial integrity of Ukraine. With a hostile Russia on its doorstep, it will be more difficult for Ukraine to stay secure, let alone maintain strong and stable economic growth.
Barry Eichengreen is a professor of economics at the University of California, Berkeley, and a former IMF policy advisor.
© Project Syndicate