Warfare as the Illness of the State: Economic Dogma in Russia’s War on Ukraine (Marcellus Policy Analysis)

By Noah Schwartz, Spring 2023 Marcellus Policy Fellow

The dominant approach to economic statecraft vis-a-vis a post-conflict Ukraine has prioritized the role of the market in distributing resources and de-emphasized state involvement. In line with the U.S.-led policies of ‘shock therapy’ in former Eastern Bloc countries, this approach to state reconstruction has created a series of states either hostile to U.S. interests or totally reliant on the U.S.-security umbrella. These policies, best summarized as the application of ‘stabilization, liberalization, and privatization’ to states either recovering from war or deep economic crises, have resulted in a marked decline in living conditions. As a former member of the Soviet bloc, Ukraine already endured a privatization round in the 1990s.

Throughout its history as a free and democratic state, the country has been forced to undergo further structural adjustment campaigns that seek to curtail state involvement in the economy and reduce social spending. These structural adjustment policies are typically undertaken to access International Monetary Fund (IMF) loans and Western capital. This situation produced a deeply uneven society, even before the brutal Russian invasion in February 2022.

The war revealed a state that was hamstrung by neoliberal economic dogma. As manufacturing output slipped from 2000 to 2022, Ukraine was left to rely mainly on Western aid. Despite the historical tendency of state involvement in the economy to expand during wartime, Ukraine has been slightly reluctant to undergo a nationalization campaign, typical for countries in its position. Rather than viewing the war as an opportunity to create a post-war society with a more generous social safety net and robust defense sector, as the United States did after World War II, some Ukrainian lawmakers have used the wartime state of exception to crack down on organized labor and introduce further privatization measures. The Western think tank and NGO sectors have largely supported these efforts.

This has created an unusual situation while Russia is faring horribly on the battlefield but surviving the Western sanction regime better than expected, primarily due to high oil and natural gas prices. Though the focus is understandably on Ukraine achieving military success and regaining stability, as well as ultimately finding an end to the conflict, Ukraine emerging from the war in an economic recession and the weakened by war could lead to a permanent regime of U.S. aid to the country or a similar sense of embitterment and wounded nationalism that permeated 1990s Russia. This could potentially sow the seeds of future conflicts.

To build a strong, independent post-war Ukraine, the United States should lead the way in providing debt forgiveness measures, loans free of structural adjustment guarantees, and promoting industrial policies.