On A New Marshall Plan For Ukraine

As Russia's aggression against Ukraine enters its third month, the losses suffered by what was once the most industrially developed former Soviet republic appear to be enormous. The World Bank estimates Ukraine's physical damage at $60 billion,[1] while the Ukrainian government estimates that the country's restoration after the war will cost more than $560 billion,[2] and some Ukrainian politicians suggest that the country will lose a trillion dollars.

Even if the last figure seems to be an exaggeration, any of the above-mentioned estimates appear to be catastrophic for a nation that prior to Russia's invasion possessed a $200 billion nominal GDP and lost around ten years of economic growth due to the annexation of Crimea in 2014 and occupation of its eastern regions since 2014-2015.

The Russian military destroyed up to 13 percent of Ukraine's road network,[3] closed 21 percent of the industrial capacity and more than 72,000 private houses and apartment buildings, including up to 340 hospitals and 1,000 schools and colleges,[4] and forced around 5,200,000 people to flee Ukraine and 7,700,000 to relocate inside the country, in most cases losing their permanent jobs.[5] The European Bank for Reconstruction and Development recently assessed Ukraine's GDP drop for 2022 at 20 percent,[6] and the World Bank put the figure at 45 percent[7] – meanwhile the atrocities continue and it seems that neither the Russian nor the Ukrainian side possess a will to negotiate the termination of the conflict.

Considering all these factors, international experts and policymakers (almost immediately after the war broke out) started to talk about a massive global effort aimed at the post-war reconstruction of the Ukrainian economy – often labelled "a new Marshall Plan for Ukraine." I would like to remind the reader that I, together with my co-author, late Professor and Russian State Duma Deputy Valery Zubov, coined this term in February 2014, well before the occupation of Crimea and Donbass, insisting that the West should have been considering this option immediately after the Revolution of Dignity.[8] The very idea behind such a project seems obvious, especially if one compares it to the success of the original Marshall Plan, which mobilized around $12.4 billion (around $120 billion in today's dollars) for a great post-war reconstruction of Europe[9] and was first laid down exactly 75 years ago (after a long fight in Congress the plan was signed into law by President Harry S. Truman on April 3, 1948).[10] But there are huge differences between the two plans as well.

(Source: Twitter)

Little Chances For A "New Marshall Plan"

First, in 1948, the Soviet Union, which had moved its armies to Berlin and Vienna and commanded million-strong Communist parties in different parts of the world, was considered the major existential threat to the Free World. Hence, the reconstruction of Western Europe was seen as essential – but today Russia looks like a regional power, with its army unable to reach even Dnieper River, much less the Elbe.

Second, the amount of funds provided for struggling Europe equaled approximately three percent of the combined GDP of the receiving countries for 1948-1951,[11] while Ukraine claims to need no less than 300 percent of its recent GDP.[12]

Third, the 1948 Marshall Plan presumed that U.S. forces controlled almost all territories that received the American investments, while in 2022 Ukraine is not even a candidate to join the European Union (with EU politicians actively questioning its chances to become a part of the bloc), never mind that it has no prospects of being admitted into NATO.

Last but not least, the trade bonds between the "collective West" and the Soviet Union did not exist in the late 1940s, while today, Europe's dependence on Russian commodities remains quite significant.

All these points make me believe that there is little chance that a "new Marshall plan" will be implemented. By the end of April 2022, the major Western donors allocated around $40 billion in overall aid to Ukraine, but only a small part of these funds was released to the Ukrainian government directly (the $13.6 billion U.S. aid package mostly benefited American companies and especially defense sector companies;[13] €17 billion worth of EU aid went to help Ukrainian refugees in Europe,[14] and has not been fully disbursed as of the time of writing), only $2-4 billion in direct cheques went to the Kyiv authorities.

Recently, the Ukrainian government appealed to the G7 leaders for a $50-billion rescue package, but only $24 billion was promised (although not yet released).[15] The 1948 Marshall Plan cost 4.7 percent of the U.S.'s nominal GDP – if the European Union and the United Kingdom were to embark on an enterprise of that magnitude today, it would amount to roughly $1 trillion – but with the EU annual budget of €166 billion and the gross public debt-to-GDP ratio in all European nations hitting record highs after two pandemic years, I doubt that getting around $100 billion per year until at least the end of the 2020s for the reconstruction of Ukraine is a realistic task.[16]

Another source of funds might be reparations that the aggressor country, Russia, should pay for the damage inflicted by its military forces. I would point out a quite recent case of the Iraqi-Kuwait war, in the aftermath of which the United Nations established a Compensation Commission that just recently finished its 31-year service administering the last Iraqi payment to Kuwait on February 9, 2022.[17] The overall value of reparations repaid stood at $52.4 billion and, it seems, was a fair compensation for a rather not-too-destructive seven-month occupa­tion of Kuwait by Iraqi forces. But this path looks not too realistic since the international community possesses no levers with which to press Russia to pay for the cost of its war.

The only option here might be the uncertain possibility of appropriating for this purpose some funds the Western governments have already seized from Russian agencies, companies, and individuals. As of the end of April 2022, these include between $300 and $350 billion in frozen Bank of Russia foreign exchange reserves[18] and up to €30 billion in private assets blocked and arrested in many European countries since early March 2022.[19] The Ukrainian officials expressed their huge enthusiasm for recovering these funds, but there are many problems preventing this from happening. The Bank of Russia already announced the start of judicial procedures aimed at recovering its reserves,[20] and Western authorities are reflecting about using some of these funds not for Ukraine's reconstruction but for covering the debts Russia and Russian companies owe international lenders. Therefore, I would say this strategy may fail along with the previous one.

A Third Way

I believe there is a third way to deal with the problem. The Western nations still depend on Russia's oil and gas supplies. The most dependent countries are those European nations that paid Moscow more than $189 billion for coal, oil, oil products, and natural gas in 2021,[21] and were able to ban only the coal shipments from Russia (which will be outlawed on August 1).[22] According to the now famous words of Josep Borrell, EU High Representative for Foreign Policy, since the start of the war, Europe has paid Russia more than €35 billion for its hydrocarbons, thus keeping Putin's regime afloat.[23] Yet, EU leaders still oppose the full embargo since it will cost them a lot: the estimates vary from €100 billion per year for the entire EU to €220 billion in two years for Germany alone.24]

Countries like Germany and Austria, experts say, will plunge into a recession with the full embargo that would force them to buy energy from other sources at prices 40 to 80 percent higher than current ones. Furthermore, if the EU nations decide to ban Russian oil and gas, their prices may well rise to around $14 per barrel for oil and $1200-1600 per trillion cubic meter for natural gas, thus forcing Europeans to overpay around $40 per barrel for oil and $500-800 per billion cubic meter for gas compared with current price levels.[25] So why not adopt a strategy of continuing purchases of Russian oil and gas but imposing – for example – a 25 percent custom duty on Russian hydrocarbons that could be channeled into a special Ukraine reconstruction fund?

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The proceeds from such a tax might reach $60-80 billion a year, or up to $500 billion in six to eight years when the Russians would be unable to redraw the map of their energy supply (without the Western technology they cannot keep increasing their LNG production capacity while they will need years to build new gas and oil pipelines to China – I am not talking about the limits of the Asian markets). The "Ukraine duty" might be imposed on all other Russian goods the EU, UK, and US are now buying or try to avoid buying (from timber to steel). This strategy would consolidate significant funds for the future Ukrainian reconstruction, while, in case of a full embargo, Europe would pay even more to the Gulf royals, becoming even more constrained in their efforts to assist Ukraine. If Russia becomes "toxic," cooperation with it should cost some money.

A version of the same strategy was already proposed by several experts proposing to buy Russian energy "without paying for it." EU officials, as Brussels has said in recent weeks, are considering the establishment of escrow accounts into which the bloc could funnel at least some of its energy payments – and this idea was welcomed by both the President of the European Commission Ursula von der Leyen and the U.S. Treasury Secretary Janet Yellen.[26] I would argue that this proposal seems unrealistic from the very outset since the Russian government would do better to cut its supplies to Europe altogether (I believe Russian President Vladimir Putin has made enough moves to consider himself a man not governed by economic logic) than to pump oil and gas abroad without paying for them. But Russia would have no voice on any surcharges Europeans may add to the selling price for oil and gas if Moscow gets the money it is looking for.[27]

The proponents of the Ukrainian cause would insist that in this case Russia would still get money that allows it "to finance the war." Yet, this is a misleading point. It would be true if Russia bought all its armaments and ammunition from abroad and was fully dependent on foreign borrowing, but this is not the case. The sales of armaments, dual-use applications, and defense products was put under Western sanctions long ago – so now one should take for granted that the Kremlin pays its troops, its armament suppliers, and its employees in rubles, which might be either borrowed on the domestic market or even "printed" by the Bank of Russia in trillions (that would account only for 3-5 percent of Russia's GDP but would at least double the military budget without any significant effect on the consumer prices or ruble exchange rate). To my mind, it would be much more effective not to ban the Russian oil and gas supplies to Europe, but rather to expand the sanctions regime on many kinds of goods and services vital to the Russian economy. I would remind the reader that the Russian economy is now hurt more by the voluntary moves of the Western companies that terminate their business in the country or discontinue their supplies than by the sanctions themselves.

Conclusion

Victory over Russia will not be achieved by undermining the Russian economy. Russians these days are too indoctrinated by the imperialistic propaganda and too frightened by the State's repressive machine for massively dissenting with their rulers. If they wish to bring their country back into the 19th century, no one may be able to prevent this from happening. However, what the West can – and should – do is take Ukraine aboard and to do its best to finance its reconstruction after the Ukrainian servicemen and volunteers defeat Putin's army. This can be achieved by a complete new edition of the "Marshall Plan," and some alternative measures – like the one described above – should be considered.

*Dr. Vladislav Inozemtsev is MEMRI Russian Media Studies Project Special Advisor