War liberalism in Ukraine - fighting corruption, one state purchase at a time
If you like what you see on my substack, consider donating to my patreon - https://www.patreon.com/eventsinukraine?fan_landing=true
This is the first of 3 articles analyzing the economic ideas that are being implemented and proposed in conditions of war.
Politically, it is obvious that the war is resulting in an increase in the importance of security concerns and figures associated with it. ‘Pro-russian’ parties have been banned, about half of which were nominally socialist. Meanwhile, avowedly rightwing groups like the Azov Batallion, represented politically by the party ‘National Corpus’, have greatly grown in political popularity (based on my observations on social media and talking with my Ukrainian friends and family) due to their large role in the war effort, particularly in the besieged Mariupol. It is also more and more popular on facebook to call to stop speaking in Russian, since ‘that’s why Putin invaded’. This increase in the popularity of rightwing, ethnonationalist groups following the war will take place alongside a displacing of nominal democratic rights in favor of a strong presidential government (a process which was already happening before the war throughout 2021). As Zelensky recently said, Ukraine will look like a ‘greater Israel’ after the war and ‘it will not be completely liberal and European’ because ‘the issue of security will be the number one priority for us in the next ten years’.
But what kind of economic regime will there be in Ukraine? Israel is not only ethnonationalist, it is also economically nationalist, in contrast to the hyperliberal, deindustrializing and depopulating Ukraine of the past years. Government figures have recently said that the war has cost over 1 trillion USD in economist damages. 10 million people have left their homes and most often their jobs, 5 million have left the country, most jobs are offering wages 10-15% lower than before the war, two-thirds of the staff of small and medium businesses have been laid off or sent on unpaid leave, 30% of businesses have closed. The biggest retail company in the country, rozetka, has sacked almost all its employees and is on the edge of bankruptcy.
If political nationalism is rising, what about economic nationalism? What is the state reaction to this economic situation?
The Ukrainian war economy
Plenty of Ukrainian economic analysts such as Alexey Kusch have argued for more state intervention in the economy in conditions of war. It is obviously reasonable for a country at war to increase state intervention in the economy, to maintain and increase domestic armament production cycles and to ensure food security.
So far, Ukraine has remained faithful - even intensifying - to the prevailing hyper-liberal orthodoxy. Wartime economic measures have included removing or decreasing basically all taxes and removing tariffs for imports from all countries except Russia and Belarus. No nationalizations of strategic enterprises have been taken place.
Vadym Denisenko, the advisor to the interior minister, has criticized this approach. In his words, decreasing taxation is ‘fine, but it's only the icing on the cake. All these liberal stories will not work in current conditions. Tax incentives are for a calm country, when everything is fine and you plan 10 years ahead, which is fine. But at a moment when you have to think in terms of the next day, such indulgences simply will not have an effect on the economy’.
According to Denisenko, the immense economic challenges that Ukraine faces – 20% decrease in GDP, the destruction of cities and infrastructure, Russian blockade on Ukrainian exports through the black and azov sea, and war-related difficulties with the 2022 harvest – mean that ‘It is time for Ukraine to move to a wartime economy as soon as possible. In practice, this means a temporary abandonment of lengthy tender procedures and a transition to a regime of state manual control.’
On this topic, Denisenko has critiqued the ‘anti-corruption agencies’ for their role here. These peculiar institutions were created in the droves following Euromaidan by domestic NGO luminaries and sponsored by USAID and Transparency International. The ruling ideology became one where the enemy of economic progress and human rights generally was state intervention, which could be best tackled through well-paid NGOs and independent organs.
I have written here about the role of these anti-corruption NGOs and organs in vetoing progressive pro-industrial policies for their supposed ‘corruption risks’. ‘Prozorro’, the online mechanism created and funded by transparency international to monitor Ukrainian state purchases for corruption risks, has been criticized by Ukrainian politicians for its lack of concern for industrial localization parameters. NABU (National Anti-Corruption Bureau of Ukraine) has the ability to freeze the assets of any figures it is investigating for corruption, which is sometimes criticized for such non-constitutional powers and the likelihood that such investigations have political aims.
Denisenko noted how the leaders of these institutions (that have remained at their very well-paid posts for years despite innumerable scandals due to IMF and US demands) have hidden in Lviv in secret apartments during the war, while still not relaxing their restrictions on state purchases.
“All the countries of the world that went through something similar spent some time in manual control mode - without all these conventions in the form of our Prozorro, tenders, etc. Unfortunately, we are still living in a situation where we are talking about “what will NABU say, how will the inspection bodies look at it, why haven’t they made any purchases through Prozorro”… But we don’t have time for this. The situation in the country is changing every minute. Every day we live in fact in a new state. Our task now is to switch to the rails of manual control”,
As Denisenko said, in conditions of war it seems more reasonable to worry about making sure that the army has the supplies it needs (constant state purchases) rather than any ‘corruption risks’ that might flow out of state involvement in the economy. Nevertheless, no attempts to clear up the ‘red tape’ of the anticorruption agencies in wartime Ukraine have taken place.
Business as usual for the state foreign debt
The Ukrainian state has been deeply in debt to western financial institutions such as the IMF, WB, and the European Investment Bank for a long time. At the same time, the ‘collective west’ has been loudly shouting about how much it is committed to supporting Ukraine in its war against Russia, through basically all means short of a direct military intervention against Russia. Given these conditions, it would seem that the Ukrainian government would be well placed to demand a restructuration of its debt commitments given such an unexpected ‘force majeure’ as the war.
But it hasn’t. Here’s a translation of a post from the 7th of April by Kusch:
Two messages from our Ministry of Finance.
First, Ukraine is entering the peak period of public debt repayment. In April-June 2022, 167 billion UAH ($5.68 billion USD) will have to be paid.
Second, in the context of the budget crisis, social spending will have to be reviewed in May.
According to any normal logic, the combination of the first and second gives the only correct answer - debt restructuring.
After all, war = force majeure.
When people have nowhere to live and no money to buy even a minimal set of products, debts are not repaid.
All resources should be directed to defense, the social system and the stabilization of the economy, including through tax cuts.
Give the economy a tax incentive for UAH 167 billion - save the real sector, not creditors.
Paying off government debt now and not carrying out restructuring is financial looting.
And there is no need to write that Ukraine must repay its debts to the last Ukrainian, maintain its reputation and that the IMF will not give us new loans in case of restructuring.
I have debunked such myths hundreds of times.
In addition, by paying off debts, the Ministry of Finance simply neutralizes international assistance: in March, Ukraine received 3.5 billion dollars from the IMF, EIB (European Investment Bank) and WB. and now must give away the equivalent of 5.68 billion!
I take it that pro-creditor lobbying can no longer be eliminated.
But pause it.
For the duration of the war.
Conclusion
The liberal character of the Ukrainian ruling class has not changed, nor have its foreign creditors shown economic generosity. The latter have increased military supplies but have not cancelled Ukrainian debts. When you need to pay debts, you enact austerity, and only engage in economic activities that will bring foreign currency. It’s hard to understand how this is consistent with the demands of a wartime economy.
The post-2014 ideology was one of emulating western liberal ideas and doing what western creditors said. Even in wartime, this economic model has continued and even intensified. Military support from the west has certainly increased, but serious economic assistance and development has not.
The later articles in this series will examine:
the consequences of a hypothetical situation where Ukraine joined the EU
the likelihood of a ‘Ukrainian marshall plan’
the relevance of the ‘South Korean economic miracle’ analogy to Ukraine
why such a self-destructive hyperliberal model has developed in Ukraine, despite it being ‘the eastern bulwark against the forces of Evil’