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  • Writer's pictureThe Paladins

Winning the War in Ukraine, Part #7

In their prosecution of this war we need to face the reality that western donors, and the Ukrainians themselves, are concerned that we are focusing on the wrong things. It is not just a question of whether the US Congress will continue to stall or will approve a further package of military aid to support Ukraine, an issue that is currently up in the air with the recent election of a new speaker in the US House of Representatives that reflects a sentiment within both public and private donor communities in international circles that money be sent to support Ukraine is not being adequately accounted for. This is not just a question of perception that Donald Trump, the former and possibly future US President, is “anti-Ukrainian”. It is a question raised by fiscal conservatives within Washington, DC - and that includes a number of senior and influential people in academic and scholarly circles, within think tanks, within USAID (the development agency of the United States Government) and elsewhere in the halls of the federal bureaucracy within the Beltway - that the quantities of money being used to support Ukraine - in the order of tens of billions of US dollars - are not being accounted for.

These concerns are likewise reflected in Brussels and in capitals throughout the European Union. Underlying the occasional disappointment expressed in Kyiv that Brussels is not doing enough to accelerate the EU accession process. It is right to explain this not by way of reference to reticence on the part of individual member states but rather as a collective concern that the Ukrainian governmental institutions are not in a fit state either to undertake the sorts of progressive public administration reform essential for the EU accession process to begin, pursuant to an EU stabilisation and association agreement; or to absorb the large amounts of European support and assistance money of the kind that Moldova has recently been receiving, for example, to transform Ukraine’s public institutions and infrastructure alike to ready her for EU membership. The problems in both cases are ones of the quality of the Ukrainian government, and the capacity of the government to absorb and spend money responsibly and without waste, mismanagement, negligence or rampant corruption.

The task of developing Ukraine’s public administration in the right direction such that it can absorb international assistance funds, is one that in principle the West - even under a Republican administration in Washington, DC should one come to pass - is willing to provide to Ukraine. There is a common and determined will to assist the country in developing into a modern European state as well as to resist Russian military aggression of a kind every right-minded person in the West abhors. The challenge is that for a number of recent historical reasons the Ukrainian government system has been a shambles. The problems go back to the period before Ukraine’s modern independence in 1991, when in the 1980’s the Soviet Union was undergoing a period of disorganised decay. Successive Soviet leaderships in Moscow felt the relative economic decline of the Soviet Union compared to the supercharging economies of the West, in particular the United States under Ronald Reagan and the United Kingdom under Margaret Thatcher, as these countries initiated a process of deregulation of large sectors of the economy and introduced conservative monetary policies that, after initial substantial economic and political disruptions, generated remarkable results.

The United States in particular committed to outspending the Soviet Union in the so-called “Arms Race”, forcing the Soviet Union to devote ever more of its relatively modest manufacturing capacity to military purposes at just the time Soviet citizens were coming to realise that life in the West involved a consumer culture that granted them substantially higher standards of living. West Berlin in particular was an icon of the West’s economic success within the heart of Warsaw Pact countries, and the comparative impoverishment of East Berlin was news that got back to people around the Soviet Union. The western system of government was simply a better one in terms of material welfare for the average citizen. Furthermore the West became known as a place associated with freedom of ideas, and those dissidents persecuted for their political views or their intellectual writings could and did flee to the West, often via neutral territory of the Socialist Federal Republic of Yugoslavia, to which it was possible to travel as a Warsaw Pact citizen but that also had open borders with Austria and Italy in the West. So the 1980’s Soviet leadership was under pressure to improve people’s lives, as there became an increasing awareness within the Soviet Union of the relative advantages of living in the West; the archaic internal security structures no longer acted with Stalinist ruthlessness to suppress dissent; and yet an increasing proportion of the Soviet economy had to be committed to pointless military spending much of which was in the form of nuclear missiles and warheads that nobody would ever fire, in response to a Reaganite policy of building as many such missiles and delivery systems for the United States’ nuclear arsenal as possible.

Reagan combined this with his own amiably aggressive diplomacy, some of the first steps in which were conducted through his British political ally Margaret Thatcher, as the Soviet leadership installed Mikhail Gorbachev, a reformist Premier, with an agenda to engage in a series of changes that would satisfy the Soviet people and prevent the Soviet Union from breaking up in anarchy under the weight of dramatic social discontent. Nevertheless Gorbachev’s policies of openness and reform were insufficient to maintain the Warsaw Pact bloc under Soviet domination. Firstly the other Warsaw Pact countries had their own democratic revolutions and broke away from Moscow’s influence; then the Soviet Union herself collapsed into a series of constituent republics not because anyone really wanted this in terms of nationalist impulses but rather because Moscow ceased to be able to afford the very significant subsidies it was providing to the various other Socialist Republics including Ukraine. Therefore the collapse of the Soviet Union was really a collapse in the system of centralised subsidies, and the modern Ukrainian nation state, formed in 1991 out of the ashes of Soviet collapse, was born bankrupt.

The system of government itself did not really change in Ukraine overnight; one would not expect it to do so. The country still had a centrally planned economy, albeit that the very large subsidies previously directed from Moscow to Kyiv suddenly dried up. In the face of such immediate penury, and the associated and catastrophic international floating on the markets of a new Ukrainian currency, the ill-fated Coupon, the bottom fell out of the Ukrainian economy. People’s savings were wiped out overnight and the government’s coffers were empty. The Soviet system of government had traditionally provided pensions and minimum salaries to people in the employ of the state (that is to say, everyone) and now the only way they could maintain those payments was to print more money and hence those payments turned out to be worthless. Ukrainians fell into widespread poverty and the government could not raise money to spend on social welfare or even on the maintenance of basic infrastructure. The country was in free-fall. Foreign development economists with good intentions but without an understanding of the structural peculiarities of the Soviet economy decided that an effective way to reinvigorate the Ukrainian economy would be to engage in voucher privatisation of state-owned industries: that is to say, to issue to the workers in those industries shares that represented a share in the ownership of the industries that, in some structural sense or other, had to be sound.

After all, Ukraine did have a functioning economy based in large part around agriculture (“the Bread Basket of the Soviet Union”, as she had often been referred to), light and heavy industry, and power - in particular hydroelectric and nuclear energy. With those shares, the a market economy could be produced and the impoverished people of Ukraine could be given something of value so as to better their financial position notwithstanding the devaluation of the sums in their bank accounts. Unfortunately these foreign economists did not realise that the concept of share ownership meant nothing much to Ukrainians in a society which hitherto had no experience of rule of law as we in the West understand the concept - and indeed still has extremely low standards of rule of law. To Ukrainians, what they were being given were just worthless pieces of paper with associated “contractual rights” that they barely understood but assumed to be worthless because the court system in the Soviet Union had never really been associated with anything other than oppression. So they exchanged their share certificates in exchange for loaves of bread to keep themselves alive, during a period of crisis that threatened to be a second Holodmor as the systems even for distribution of basic foodstuffs broke down because nobody could afford to buy food anymore.

The Oligarchs, a handful of malicious criminals, came to dominate the economy and inevitably the politics of Ukraine, by buying up the share certificates issued by the workers for paltry sums so that ordinary Ukrainians could eat. They then amassed the share certificates to take majority control over Ukraine’s key industries, asset-stripped Ukraine’s state-owned companies of their assets that were divested into offshore companies, pledged the physical assets to western banks in exchange for substantial hard currency loans that the western banks were keep to lend as new markets for the investment of capital (unaware that the pledges and mortgages they had accepted as collateral were essentially worthless because Ukraine had no functioning legal system), and then defaulted on the foreign loans that were diverted to offshore bank accounts, and Ukraine became an international pariah by the mid to late 1990’s that nobody would invest in Ukraine anymore. The Oligarchs became enormously rich but Ukraine’s infrastructure and companies were left without the essential funding they required to maintain Ukraine’s manufacturing base and whole factories and industries were left fallow. The people of Ukraine remained in dire poverty and her infrastructure deteriorated in the absence of either Soviet-era subsidies or foreign investment. The same things took place in Russia in about the same period, but this sort of deterioration was substantially reversed upon the elevation to office in 2000 of a Russian President by the name of Vladimir Putin, who understood all too well the wanton economic destruction wrought by the Oligarchs and quietly declared to them all that their assets were now his assets and he then gradually redeveloped the international creditworthiness of Russian through his own private personal fiat. If Oligarchs used their newly found wealth to challenge him politically, Mr Putin would imprison them or murder them, using his extensive connections in the FSB, Russia’s internal security services. And So Russia’s economy was partially rebuilt.

Ukraine did not have the questionable pleasures of Mr Putin’s distinctively ruthless style of managing the Russian Oligarchs and therefore the Ukrainian Oligarchs used their wealth and influence to engage in a delicate balance-of-power exercise in Kyiv, keeping the President and the public administration as their puppets and buying elections, judges and politicians with their ill-gotten gains. In such circumstances, Ukraine actually became more corrupt than Russia because it was a free-for-all between the Oligarchs, of which there were only a handful, jostling for power in endless political games involving the lavish expenditure of corrupt money. Eventually all this became too much for Mr Putin, who relied upon elements of the Ukrainian economy to support the Russian economy, in particular the Russian military base in Crimea and the coal and steel industry in Donbas, came to find the political manoeuvrings of the Ukrainian Oligarchs far from his taste. He decided that he ought to bring the same sort of ruthless discipline he had applied to the Russian Oligarchs to the Ukrainian Oligarchs, and his determination to discipline the Ukrainian Oligarchs was ultimately a major factor, or even the most important factor, in the initiation of the Russian invasion of Ukraine. Because the Ukrainian Oligarchs were not doing what Mr Putin instructed them to do, he was going to re-nationalise their assets - using the Russian Armed Forces.

All this means that the Ukrainian system of public administration has been left in tatters. One net positive effect of the various Russian military incursions into Ukraine has been to weaken or even eliminate in its entirety the influence of the Oligarchs in Ukraine. Virtually all of them have now fled the country; had their assets nationalised in some way or other; or are in prison or house arrest. These are all good things, because Ukraine suffered terribly from a period of almost 30 years of government by the Oligarchs and they created a political culture premised upon nothing but the corrupt flow of dirty money. Hence it is now easy to understand why ordinary Ukrainians have no confidence in government and why the institutions of public administration in Ukraine are so diabolically bad. A resurgence in national pride and honour amidst the common national determination to resist the Russian military invasion of Ukraine has started to improve Ukrainian public administration at the edges but the reality remains that after decades of Oligarch-dominated governance, in almost every pore the Ukrainian government is used to sluicing huge amounts of cash around for various corrupt purposes, and not at all use to the sort of abstemious expenditure and oversight procedures that western donors and those in Brussels and elsewhere who decide upon the rate of Ukraine’s EU accession procedures are concerned about.

The war in Ukraine is liable to grind on for several more years, simply because wars with Russia always do and it is in Mr Putin’s interest that this war continues. It deflects from latent domestic problems in the Russian economy, the excruciating question of his succession (Mr Putin is 70 and with no obvious successor) and because with elevated global hydrocarbon prices and India and China refusing to impose sanctions on Russia, she can afford to continue perpetuating the invasion of Ukraine with increased oil and gas sale revenues. The front line has not significantly moved since the Russian evacuation of Kherson in early November 2022 and it is not likely to move significantly during the winter season. Indeed absent a dramatic change of tactics on the part of the West, supplying Ukraine with vastly more ammunition and a sufficient airforce to achieve air superiority in the Kherson and/or Zaporizhzhia regions, the front line appears unlikely dramatically to move in the foreseeable future. The challenge facing the West in increasing military supplies to the extent necessary to make a difference on the ground is that the public institutions of Ukraine, including the relevant government ministries engaged in military and defence operations but not only them, are not ready to absorb the necessary increased expenditures. The vagaries of US Presidential elections aside, the principal objective reason holding up both further aid and assistance to Ukraine and the EU accession process Ukrainians so desperately crave is the paucity of the Ukrainian governmental system, ruined by three decades of Oligarch-driven corruption.

This must change, and the imperative now ought to be to initiate those changes notwithstanding the fact that the country is at war. Although conditions in wartime Ukraine are uncomfortable in substantial part and below European standards, the country is not for the most part dangerous to be in except in certain critical front line positions. What Ukraine needs is an army of external public administrators, accountants, lawyers, financial services personnel and experts in public administration reform to drive root-and-branch reforms in every corner of the Ukrainian government. This is a mammoth effort but it has been done elsewhere. Poland has an equivalent population to Ukraine and the European Union, admittedly over a period of several years, managed to undertake such comprehensive reforms. The Ukrainian government must be ready to accept changes of this kind, with the detailed and intrusive oversight that is an inevitable corollary of the sort of institutional reform needed. But there are plenty of carrots and sticks to persuade the Ukrainians to go in the right direction. If Brussels and Washington cooperate, then Washington can make Ukrainian assistance contingent upon acceptance of EU-driven institutional reforms.

That is how we make Ukraine an ever better country notwithstanding the continuation of war, and it is how we persuade donors to continue to intercede in the country’s development. We cannot afford to take the view that Ukrainian economic and political development is on hold pending conclusion of the war and all we can do is throw buckets of money at the problem that go who knows where. Instead we must accept that the war will continue for an indefinitely long and unpredictable period of time; in the intervening period the front line is relatively stable; Ukraine is a reasonably safe if periodically uncomfortable place for foreign civilian personnel to operate; and the relevant international expertise is needed in substantial quantities, starting now, to reform Ukraine’s abysmal governmental systems now that the corrosive influence of the Oligarchs has been expunged from the political landscape. This determination to persevere with the development of government even though we are in the midst of a war of indefinite duration is a more rational economic and political strategy than the current uncertainty, and would demonstrate the sort of resilience to the Russian threat shown by the West in the Cold War. Winning the war in Ukraine requires a comprehensive strategy of transforming Ukraine into a modern European state with the political institutions to match, and this will involve a commitment spanning an indefinite period into the future. We have no choice. Faced with Russian aggression of this kind, nothing less than the future of Europe is at stake.


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