• The Paladins

Ukraine: an essay on the economics of the refugee crisis

This essay begins with a piece of intelligence about Russian military intentions in southern Ukraine. The source of the intelligence is not Ukrainian or western, but instead more than one eastern countries whose relations with Russia are altogether different from the west. It takes a specific eastern perspective to understand the intentions of the Russian Federation in this complex war: both why they started it, what they hope to get out of it and what strategy they are pursuing to achieve their objectives.

Russia intends to take all the cities of the south and many of the cities of the East, up to the Dinepr river and along the entirety of the Black Sea. A lot of the remainder of the war is mere posturing or distraction; it is far from clear whether Russia has yet decided to take Kyiv. The strategy is to seize rural areas, small towns and roads to create a logistical architecture for Russia's massive army (that hence requires massive logistics); then to surround the key cities that Russia intends to seize in order to obtain her strategic objectives; then to open humanitarian corridors for the exit of civilians; then to close those corridors and to occupy the cities by streetfighting. As an alternative, the Russian army will give the civilian leadership of those cities the opportunity to cooperate in the Russian takeover so that the cities may fall without substantial bloodshed or destruction. If street fighting is necessary, then the city will be reduced to rubble. Kherson is an example of a strategic city that was occupied through cooperation of the civilian authorities, and there was no significant refugee flow from the town. Mariupol was an example of a strategic city in which the civilian authorities were overrun with Ukrainian nationalist defenders, and hence no cooperation was possible. Therefore the city has been fully occupied through street fighting and it has been mostly razed to the ground.

The strategic goals of Russia in this war include (a) creating a land bridge from the Donbas and Luhansk steel industry regions, now incorporated permanently into Russian territory, to annexed Crimea; (b) this to include total control of the Sea of Azov to prevent that sea from being used by interests adverse to Russians; (c) to close Ukrainian access to the Black Sea; in order that (d) Ukraine can be disciplined through control of her sale of grain using Black Sea ports. It follows that the next principal cities to be taken in order to achieve these strategic goals are (1) Nikolaev; and (2) Odessa. The balance of the south has now been achieved with the fall of Mariupol. Once those cities are taken, Russia will control the entirety of the south of Ukraine in a corridor adjacent to the Black Sea and the Sea of Azov; and Russia will have borders with Romania and Moldova.

Much of the rhetoric read in the western press about Russian setbacks in her invasion of Ukraine is therefore misleading, because it assumes that Russian strategy in the war remains total domination of Ukraine and that whatever those goals are, they are incapable of movement. However because Russia is a country that controls her internal media message and political dissent fairly closely, she is capable of about-turns in war strategy in fairly short order in a way that many countries might not be able to. Moreover the logic of war is usually dramatically different from the logic of peacetime aggression. Russia may once have contemplated using Blitzkrieg tactics to topple the government in Kyiv; but once that appeared not to work, Kyiv ceased to be a priority as the city has now been relegated from the role of strategic prize to the position of hobbled capital of rump state dependent ever more upon aid from the West once her access to the Black Sea, her principal means of international trade, has been cut off.

This means that the logic of refugee flows may turn out to be substantially different from that contemplated so far. To date many of the estimated 10 million refugees that have apparently fled Ukraine have in fact moved west from the capital region and other major northern cities such as Kharkiv and Dnipropetrovsk, whereas those cities are not currently priorities for the Russian army and while they may have been partially encircled by Russian forces there will be no imminent attempt to take them using street fighting supported by shelling of the kind seen in Mariupol. Instead the next action will be in the cities to the west of Mariupol, that to date appear to have been relatively quiet.

There are a number of ominous indicators. The first is that the southwest of Ukraine is becoming increasingly lawless. Prisons have let out their inmates, who have acquired firearms (already widely available as all Ukrainian males of fighting age are provided with military equipment) and are now running amok. This is creating an increasingly unsafe and unstable environment for civilians trying to provide for themselves in a wartime environment, and are pressed ever further to remain indoors to shield themselves from casual violence.

It is believed that the uneasy truce in Nikolaev, in which Russians are taking off their uniforms and going shopping in the centre of the city, is about to break, with Russian orders for a full onslaught. This will cause floods of refugees west towards Odessa, the only direction. The Russian shoppers are more likely than not GRU (Russian military intelligence) units collecting GPS coordinates for public buildings that will then be used to guide into targets laser-guided shells once the full onslaught upon Nikolaev begins. Nikolaev being an exclusive Russophone city, it is particularly easy for GRU units to infiltrate the domestic population amongst various pretexts. The public buildings they are scouting for will be chosen indiscriminately, as has been seen in Mariupol: little difference is observed between the treatment of a military barracks and a public school, theatre or government building. The Krasnopol Russian laser-guided artillery system is for the most part based upon fairly old technology, and the GRU military units are collecting GPS coordinates manually while standing in front of such buildings. That is the level of sophistication we have seen during the conflict in Mariupol.

Presumably once the onslaught upon Nikolaev begins, after the Russians have finished their mopping-up operations in Mariupol, a humanitarian corridor will be opened but the only direction of permitted movement will be west, the road to Odessa which at the time of writing remains relatively untouched. As with Mariupol, if you don't get out during the period that the Russian military states the humanitarian corridor to be open, then the city will be sealed in order for it to be taken with street fighting supported by heavy shelling of public buildings, in much the same way as has been followed in Mariupol (and in much the same way as was followed in Grozny and other cities in the Second Chechen War; and in much the same way as was followed in Donetsk and Luhansk). If the citizens of Nikolaev have any doubts as to what will happen to them, then the Russian Army has a plain and consistent track record of how it moves from one city to the next in the pursuit of its strategic objectives. The Russian Army does not need to be in a hurry. It can take a long time to achieve what it wants, because it is large and for this reason errors can be reversed whereas for a smaller army such as the Ukrainian Army it much harder to do so because they will run out of resources.

The Russian attack on Odessa will inevitably follow the encirclement of Nikolaev, which can be expected in the next few days. This will create a mass of refugees west to Moldova and in particular the Republic of Pridnestrovia (Transniestr). Odessa is one million residents. Let us assume that half the population of Nikolaev (250,000) people manage to escape before final Russian encirclement, and they plus half the population of Odessa flee west after Odessa is encircled in a similar fashion. That is 750,000 people fleeing to Pridnestrovia, a mostly rural area of some 470,000 people. Catastrophe awaits. Tiraspol, capital of Pridnestrovia, is 100km from Odessa. Therefore a healthy person under threat of shelling, starvation, inclement weather or other imminent means of death can walk it in two days, to plus whatever other transport options are available. Minibuses and private cars will soon run out, if they have not already done so. We are looking at an appalling refugee crisis in Pridnestrovia (Transniestr).

The precise boundaries of Russia's strategic intentions are of course unknown, in all likelihood particularly to her. Russian foreign policy tends to involve continuing to push until she is stopped; she has learned this pragmatic strategy through centuries of warfare with shifting boundaries, particularly with armies based to her west. The prospect that Russia may not stop until the entirety of Moldova (a small, mostly impoverished nation wedged between Ukraine and NATO member Romania) has been absorbed into her territory has been the subject of speculation by at least one credible American news source.

In major civil conflicts, typically 50 per cent of the population flees from an urban civil conflict scenario in which death is highly likely, such as the Siege of Mariupol or the impending invasion of Kyiv. 50 per cent remained in Mariupol after Russia closed her 48-hour humanitarian corridor. 50 per cent of the population of Kyiv remains after Russian encirclement of the city with a 40 kilometre-long armoured column, possibly the longest armoured column in the history of warfare. Of those who remain, life expectancy is highly likely to drop substantially. This depends how old you are. Older people can have less cut short from their lives, and therefore they are more likely to stay. Children have most to lose and therefore more likely to become refugees. The death of those who remain may not be caused directly by fighting but instead through starvation, lack of access to medical attention, lack of heating, or breakdown in urban civilisation as the hungry, cold and homeless go on the rampage with the remaining weapons looking for the means to survive. Men of fighting age are most likely to stay and most likely to have more cut from their lives than any other category.

Those who flee and become refugees are relatively unlikely lose person-years. Refugees tend to be the top tier of a population and hence move and cope with new conditions well, find new lives and work, etc. The wealthy in particular do well, because they leave first. The number of people who return depends entirely upon the settlement terms of the conflict but the evidence suggests that those who do return fare comparatively badly. Becoming a refugee is rationally a one-way business. The good news for refugee receiving countries is that while there is typically a gross initial high cost to accepting refugees, there is a net economic benefit as lots of clever people move to recipient countries and perform economically useful activities. Aggressor states tend to pay extremely high economic penalties, because they lose their own economically productive people as well as acquiring through their aggression territory from which the bulk of the economically productive people have left. One of the best recent examples of this is the Russian annexation of Crimea - a retirees' place to live, in which there is relatively low economic activity and there always was. There is just a substantial proportion of the population who are reliant upon state subsidies.

In under a month of war, some 23pc of the Ukrainian population (10m people) have become refugees or IDP's, according to UNHCR. This is consistent with the standard that about 50pc of wartorn countries' populations become refugees. The cost of 22 million refugees is USD220 billion per year, based upon an estimate of USD10,000 per person per year. That is USD500 per EU resident (not per taxpayer or per voter) per year. The mean EU pre-tax salary is EUR14,000 per year. Proportion of employees is about 73 per cent. Now the mathematics becomes a little more complex, but assuming non-progressive taxation, an average EU employee will be paying five per cent more of their salary in taxes for this war. There are many assumptions hidden in this calculation; but it is modest not onerous. You won't pay less than five per cent. Five per cent is a decent working assumption. If you live in the EU or an associated common market country or other country expected to share in the costs of the Ukrainian refugee crisis, your tax bill will go up by five per cent due to this war, just by reason of the cost of the refugees. Unless your country borrows to hide the expense, in which case you will pay it later and suffer inflation now.

It took three and a half years of war in Bosnia, similarly destructive proportionately but on a far smaller scale - over three years of this destructive economic cycle - to persuade the West to intervene militarily in Bosnia and Herzegovina and act using force to bring the warring parties to a conclusion. In that war there were only two million refugees or internally displaced persons, not the 10 million we already have in Ukraine or the 22 million we are expecting statistically on the basis that 50% of civilians become refugees in the circumstances of all-out war in which multiple cities are fought over for the parties' varying strategic reasons. Russia calculates that this war hurts the West more than it does her, irrespective of the barrage of sanctions imposed upon her by the countries of Western Europe; the relative cost of absorbing the monumental number of Ukrainian refugees, that move west en masse as the war continues, is smaller. That is one of the reasons why Russia is calculating that compared to Western Europe, she will emerge from the war in a relatively strong position. Realists in international relations theory teach us that states seek relative gains in their encounters with other states or blocs of states, not absolute ones, because a relative gain will render a state less likely to attack in the future. Although Russia will emerge from the war in Ukraine in a position of an absolute loss, she will be relatively stronger than the European Union (for example) because the EU will have lost more and therefore she will be less able to attack Russia in the future. This is the driving and irrefutable logic of Russian military actions in Ukraine. If you don't believe that this logic is driving current Russian military policy, then you do not understand the logic of the Kremlin and Russia's perspective upon the war in Ukraine as seen from Moscow.

The main driver of the European Union's relative losses is the massive costs, some USD10,000 per year of war, of looking after the biggest flow of refugees seen since the end of World War II. If in barely a month the refugee flow from Ukraine is five times what it was in the entirety of three and a half years of the Bosnian war, the last major European refugee crisis, then the costs are going to be colossal. No answers are provided in this essay as to what to do about this problem of gargantuan proportions. Nevertheless we cannot hope to solve the problem until we state it with sufficient precision, which is what this essay has hoped to do.