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Understanding the Real Value of U.S. Financial Aid to Ukraine

Economic support is just as important to Ukraine’s freedom and independence—and America’s interests—as guns and ammo.
November 22, 2022
Understanding the Real Value of U.S. Financial Aid to Ukraine
A view of a Ukrainian flag and the Svobody Square - Freedom Square as Ukrainians gather to celebrate the liberation following Russiaâs withdrawal from Kherson, Ukraine on November 14, 2022. (Photo by Andre Luis Alves/Anadolu Agency via Getty Images)

“Under Republicans, not another penny will go to Ukraine,” Rep. Marjorie Taylor Greene thundered at a Trump rally in Iowa before the midterm elections. While her position is extreme—and unpopular with the American public—many congressional Republicans share Kevin McCarthy’s hesitation over giving Ukrainians a “blank check” worth tens of billions of dollars. They are wrong. America’s generosity toward Ukraine is not a matter of charity. Military assistance to Ukraine keeps Russian aggression away from NATO’s borders. A Ukraine overrun by Russian forces would have made the alliance’s eastern flank more dangerous and costlier to defend.

Far from being a frivolity or, more nefariously, a transfer from Western taxpayers to Ukrainian oligarchs, America’s financial aid to Ukraine is just as important as artillery and ammunition. Keeping the country afloat economically is necessary both for Ukraine’s success on the battlefield and for the country’s prospects of becoming an asset to our alliances after the war—rather than a liability.

Because of the conflict, Ukraine’s economy is expected to shrink by 35 percent this year. The International Monetary Fund estimates that Ukraine needs roughly $3-4 billion a month to cover its financial needs, which Ukraine’s government is clearly unable to borrow at market rates. The U.S. commitment of $15 billion alongside $18 billion pledged by the European Union for next year, and smaller amounts of bilateral aid from other countries, as well as assistance from international financial institutions, will do much to close the budget gap.

This international financial assistance has a twofold effect. For one, it helps Ukrainians avoid extraordinary measures that are otherwise common in wartime economies. Those would irretrievably damage Ukraine’s transition to a normal, European-style market economy. The assistance also provides Western donors with powerful levers to accelerate that progress, both during and after the war.

One of the economic hardships Ukraine is avoiding with international help is massive seigniorage. If it weren’t for Western financial assistance, Ukraine would have to print huge amounts of money to bankroll its public finances—with potentially catastrophic economic and social effects, including crippling inflation. Additionally, the war effort would require a much greater use of industrial planning, government takeovers of industry, rationing, and price controls. In short, Ukraine would have to roll back most of the economic reforms it initiated since 2014—including the phasing out of wasteful energy subsidies and the cleaning up and privatization of the banking sector. Even if it emerged victorious from the war, it would feature a much stronger nexus between politics and big business, further entrenching the country’s oligarchs.

Economic policies introduced during wars are not easy to roll back and often leave a lasting damage on economic performance decades into peacetime. The United Kingdom saw a period of economic decline compared to its continental neighbors in the 1950s and 1960s. This was a direct result of an antiquated system of industrial relations characterized by craft control, multi-unionism, legal immunities for trade unions, strong but decentralized collective bargaining, price controls, and extremely high marginal tax rates (over 99 percent) introduced as necessities during the war but only fully dismantled following the country’s accession to the European Economic Community.

None of this is to paint a rosy picture of Ukraine’s economy and or its economic policies in the present day. Thanks to external aid, the previously well-capitalized banking sector has remained stable. Yet, the government nonetheless had to introduce capital controls, guarantee bank deposits, and suspend a variety of payments—taxes, mortgages, and others. Necessary as they might be to cushion the immediate social impact of the war, such policies all but guarantee a financial crisis once the war is over.

Even more worryingly, a degree of government control over the economy has crept in. Five “strategic” companies were seized by the state from private hands in early November, in an eerie echo of corporate raids that were ubiquitous in pre-Maidan Ukraine, where oligarchs used law-enforcement tools to steal assets. In a move that the government painstakingly denied was a nationalization, the state took over the largest oil producer in the country, Ukrnafta, and Ukrntatnafta, the leading refinery, which was damaged earlier in a Russian strike. (Both companies are owned by Ihor Kolomoyskyi, an oligarch sanctioned by the United States). It also seized the airplane and helicopter engine manufacturer, Motor Sich (owned by Vyacheslav Boguslaev, charged with treason for evading sanctions on Russian sales); the truck producer, AvtoKraz; and Zaporizhtransformator, a company manufacturing components for Ukraine’s electrical grid.

Were these justified takeovers of economically distressed but strategically important corporations, attacks on corrupt oligarchs, or simply bailouts? Whatever the reason, similar ad hoc takeovers of private property should remain an exception rather than the rule, even in wartime. That means the Ukrainian government will need to buy these companies’ products with cash, which they will need from foreign sources.

It is understandable that Volodymyr Zelensky’s government wants to deflate the economic power of the oligarchs, as it signaled with legislation it adopted last September, which barred oligarchs from holding offices of state and participating in privatization of publicly owned assets. The war too seems to have diminished Ukraine’s oligarchic figures—after all, there is less to steal from government coffers. Moreover, unlike in peacetime, stealing is tantamount to treason.

Western donors, including the United States, ought to insist that the best defense against unscrupulous oligarchs regaining excessive economic power is to implement the strictures of Western-style antitrust policy and to ensure that markets on which oligarch-owned companies operate are both open to competition and not connected to government budgets. The closer Ukraine gets to its post-war reconstruction—and the recent news from Kherson provides grounds for optimism—the more important it will be to accompany financial assistance with guarantees that the money will be spent well, both in the interest of American and Western taxpayers and in the interest of the Ukrainian people.

It is reasonable to demand stronger oversight of U.S. assistance, including by Congress. Several Republicans introduced bills earlier this year seeking to set up a special inspector general for Ukraine modeled after the special inspector general for Afghan reconstruction. Serious engagement with such efforts is a small price for the administration to pay to ensure that support for Ukraine remains bipartisan.

For the sake of Ukrainian people—and for the sake of bipartisanship on an issue critical for the United States—it is important to get the economic and financial side of our commitments to Ukraine right. But that does not mean adopting a short-sighted, crudely transactional view of the war.

Ukraine’s struggle is our struggle too, and its success would be a massive win for the United States and our global alliances. The United States is supporting Ukraine’s military to defeat the Russian military, but supporting Ukraine’s economy to create a strong, free ally.

Dalibor Rohac

Dalibor Rohac is a research fellow at the American Enterprise Institute in Washington, D.C. Follow him on Twitter @DaliborRohac.