Ukraine’s economy has greater staying power than Russia’s, but the US mineral deal shows how fragile its advantage is

A recent PeaceRep report on the Russo-Ukrainian War has been featured in The Guardian, where Luke Cooper outlines the difficult terms Kyiv has agreed to in order to keep the US on side. An excerpt is reproduced below. For the full piece, read the original in The Guardian.

Despite Russia’s occupation of its territory, missile attacks on its infrastructure and the enormous human costs of the war, Ukraine’s economy has been impressively resilient. Its effective military resistance against a much stronger adversary is in fact underpinned by this successful economic management. Rather than face institutional sclerosis or even collapse, Ukraine’s state capacity has been strengthened by the conflict. Through a combination of tax revenue collection and substantial networks of voluntary fundraising, the state has dramatically increased the size of its armed forces, invested in defence production and maintained a decent level of public infrastructure.

State spending on soldiers’ wages, infrastructure and logistics – including public sector procurement from private firms – has had a positive knock-on effect, supporting demand in the civilian market economy. Soldiers on the frontline earn well above the national average wage. An innovative military industrial complex, combining traditional state-owned enterprises with an ecosystem of drone startups, has been developed. These policies have stabilised the Ukrainian economy and directed it to the goal of the country’s basic survival.

But while Ukraine must be credited with these successes, it still lacks the resources domestically to meet the enormous costs of the war. External financial support has been vital to keeping the country afloat. Its wartime resilience is in this sense built on a contradiction: state capacity has grown considerably, but it has done so through a fundamental dependence on foreign financial assistance. Ukraine records a negative gross domestic savings rate, for example – an indicator of an economy that is consuming (including military spending) more each year than its annual economic output. This is made possible thanks to financial aid from Ukraine’s allies.

As I argue in my recent report, Russo-Ukrainian War: The Political Economy of the Present Balance of Forces, despite this dependency, Ukraine has made the best of the situation, and Russia’s economic position is less strong than it is often portrayed.

Read the full piece on The Guardian.

Read the report: Russo-Ukrainian War: The Political Economy of the Present Balance of Forces

About the author: Luke Cooper is a Senior Research Fellow at LSE IDEAS and PeaceRep’s Ukraine research lead.