Ukraine’s other battleground: the economy

This is an audio transcript of the Rachman Review podcast episode: ‘Ukraine’s other battleground — the economy’

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Gideon Rachman
Hello and welcome to the Rachman Review. I’m Gideon Rachman, chief foreign affairs commentator of the Financial Times.

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This week’s podcast comes from Ukraine. I spent last week in Kyiv, which was fascinating in many ways I hadn’t expected. There’s no doubt there’s a war going on. The central stations thronged with soldiers in uniform heading east to the battlefront. Step out of the station, and you see a skyscraper with many of its windows still blown out after a Russian missile attack. But, in other ways, life now seems surprisingly normal at pleasant cafés and restaurants doing good business. As the morning rush hour in the parks, people are out taking their dogs for walks. So in this podcast, I thought it’d be interesting to focus on the economic and social side of the war. My guest is Hlib Vyshlinsky, director of the Centre for Economic Strategy, a think-tank in Ukraine. So, how resilient or fragile are Ukraine’s economy and society?

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Missiles and armed drones do still occasionally hit Kyiv. Some landed while I was in the city last week. But as I discovered, most residents now tend to ignore the frequent air raid alarms.

News report
Police search for fragments of the missile that hit this residential neighbourhood in Kyiv. Dozens upon dozens of apartment windows were shattered in the blast. Residents and workers immediately started to clear up.

Gideon Rachman
Russia’s effort to knock out the infrastructure and electricity in the capital have basically failed, but the war is still ever present. As one government official put it to me, most people have contacts on their phones who cannot answer anymore because they’re dead. There are still many civilian men on the streets of Kyiv, but, potentially, they’re all liable to be called up. And with a big Ukrainian counter-offensive looming, the death toll in the war — already shockingly high — will rise once again. Yet at the same time, life in Kyiv is stabilising a little bit. Some refugees are returning and last week the curfew was eased. It now runs just from midnight to 5am. So I began my conversation with Hlib Vyshlinsky by asking how he explains the apparent normalcy of life in the Ukrainian capital.

Hlib Vyshlinsky
Kyiv currently is rather well-defended. Certainly it was not like a year ago when you still had Russians outside of the city. But also it is much better defended in terms of air defence. So there were already waves of people returning to Kyiv in late spring last year, then in summer before these large-scale missile attacks on energy infrastructures that stopped this process . . . 

Gideon Rachman
That was in October.

Hlib Vyshlinsky
This was in October and November, yeah. And now I see some sort of another wave after everybody understood that we overcame the winter. Now we will have no issues with heating. No issues with electricity.

Gideon Rachman
Yeah, I mean, it’s quite striking, isn’t it, that the lights are on basically, and there don’t seem to be any power cuts. And although the Russians still seem to be trying, because there were attempted drone attacks last night, something did land in the city earlier this week. But their attempt to destroy the electricity infrastructure of Ukraine, has that failed?

Hlib Vyshlinsky
I think it failed nationally and in most regions and local entities in Ukraine, there are some very localised issues now. We were saved the first by a very significant share, before the war it was 50 per cent, of power generation base, in nuclear stations.

Gideon Rachman
So they can’t shell those, obviously . . . 

Hlib Vyshlinsky
They could, but it is too much even for the Russians. They could try to shoot like transformers’ connection of nuclear power stations to the grid, but it was also risky. And so people such as our experts are saying Russians were able to close autobahns in the energy grid. But Ukraine, fortunately, being a very industrialised country, especially in Soviet times with a lot of spare capacity which was not used now, we had a lot of village roads and we were able to use these village roads while repairing autobahns. And then in early February, Russians understood that they are sending missiles that are not having the ability to have severe disruption, and they stopped it. So I think that small majority of strikes, they are, as it was before October, they are against some military or related to military targets.

Gideon Rachman
Yeah. And in terms of the economic figures, I don’t know how much they tell you, but they say that last year Ukraine’s economy shrank by 30 per cent when Russia shrank by maybe 2 per cent, 3 per cent, but that it’s stabilised now, that having had that 30-per-cent hit, you’re going to have maybe even mildly positive growth. Is that how you see it?

Hlib Vyshlinsky
This figure of 30 per cent is slightly misleading. It is slightly misleading even for domestic audience because the government is not explaining this well enough. When you look on the military map, you understand that a significant part of Ukraine is still under occupation and even larger chunks were under occupation during some parts of 2022. So if parts of the economy are under occupation or under active hostilities, like you could not have economic activity there or you could not have economic activity there that is part of economy of Ukraine.

Gideon Rachman
So they occupy 20 per cent of the country in a sense . . . 

Hlib Vyshlinsky
Less than 20, but you could say now maybe 12, 15 per cent are just territories which are not under control of the government or are under active hostilities, and you could not have economic activity there. So then you look on the refugees. We did a study at our think-thank trying to understand what is the real number of refugees. There is no single government, quasi-official even, figure on how many refugees we have, but we used all sources that we could have, including those used by the government. We come with estimate of 5 to 6mn people. And before the war, the government estimate was that Ukraine had a population of 37mn. Not taking into account these older Donetsk and Luhansk areas that were not controlled by the government. So then, if you divide five or six by 37, you come with additional 15 per cent who are not consuming, who are not producing and who are not paying taxes. And then we conducted the survey of Ukrainian refugees abroad, and we saw that generally the proportion of adults to children is 1 to 1, so only half of them could produce something.

Gideon Rachman
So you’ve lost about 3mn adults of working age due to . . . 

Hlib Vyshlinsky
Yeah. If another three are children then certainly there are mothers, some of them were not working even before the war because they had babies, et cetera, but still they are economically active population, theoretically. And some certainly were working before the war. In summer we had a webinar where we had HR director of one of the largest banks in Ukraine, Raiffeisen Bank, and she said on that point, 15 per cent of bank staff who were on payroll and working were working from outside of Ukraine.

Gideon Rachman
So turning to the issue of refugees, I know that you think that it was almost after the Russian army, the second biggest threat to the future of Ukraine that so many people have left. And whether they come back — because some of them will be out of the country for, you know, close to a year now — and if they don’t come back in the next year or two, maybe they put down roots overseas and you lose a significant chunk of the population and a young chunk of the population and children and so on. Give me a sense of how you view that issue.

Hlib Vyshlinsky
Generally, it’s a very complicated issue because it is absolutely not clear for two specific issues. The first: what to do with military aged men? Because on the very first day of full-scale Russian invasion, there was a decision taken that men aged 18 to 60 are not allowed to leave the country. And it means that on one side you have a mobilisation pool. On another side you have men that could work in the Ukrainian economy because they could not work anywhere else. And also you have some women and children who are also staying or returning because they want to live with their husband and father. So it is like one very complicated decision. If the war drags on, what is more important for the country: having this full pool of men 18 to 60 or to have happy families living together where they want to live and when they are not directed to leave by the government?

Gideon Rachman
Do you feel that there’s a risk of family breakdown?

Hlib Vyshlinsky
Absolutely. Fortunately, we are in 2023 where you have video conferencing etc. At least a father could see his child. But still, certainly it not a normal life. And certainly there are many, many cases of men using the illegal ways to leave the country because they got a job abroad, which is also a very big issue for IT industry in Ukraine that was expected to grow 20 to 30 per cent in dollar terms in 2022 but currently it is struggling. Customers do not want to hire Ukrainian developers because they consider risk of getting them drafted to the army or another electricity cut too high. And for example, if you’re a senior developer who wants to get good job but he could get this good job on the outside of Ukraine, then some people are patriotic and say, OK, I will work on the jobs, which is less qualified, get less money, but I will be in my country and help my economy. But some are not as patriotic. And secondly, very complicated decision is a decision for host countries. You want to help those Ukrainians that are refugees in your country and you do not want them to sleep under bridges. You do not want university professors to clean toilets. You want to have life as good as possible for them. If you’re a pragmatic country like Germany or Poland, for example, you have your own deficit of labour and then you see Europeans — good, educated, young — coming like a wave to your country, willing to work, maybe some of them with children, but OK sooner or later children will grow and you will have full-time workers in your economy. But on another side, it is a friendly country . 

Gideon Rachman
So they understand the risk of taking the best and brightest of Ukraine.

Hlib Vyshlinsky
Absolutely. Because on one side, it is good for them and good for the people from Ukraine. But in the long-term dimension, it is bad even for those countries because it undermines the stability of Ukraine in the future because the less active entrepreneurial people you have in the country, which is under the constant threat of aggression from this, the weaker this country will be, and the more waves of risks could come for this country.

Gideon Rachman
So in some ways — I mean, obviously everybody, for humanitarian reasons, wants the war to end quickly; for social reasons, for economic reasons, the longer it goes on, the more the damage is. And yet striking when I hear almost nobody says let’s do a peace deal or a ceasefire. They all say we’ve got to keep fighting because they’re scared of the threat from Russia and don’t believe the Russians would stop or you can trust them. But is there a case for, you know, looking at the economic, social and humanitarian grounds for trying to get a ceasefire?

Hlib Vyshlinsky
No. And a very clear explanation for this no is just in texts and speeches of Putin. And from what he says, which was very clear, until Putin is alive, there is a close to 100 per cent risk of another aggression from him. For those fathers in Ukraine who are waiting for their families to come back, what is the reason for them to ask for a ceasefire to see their families, if just in a year they will need to send their families to another place without having accommodation there, without everything their families already have in the host country and having the sort of second episode of this series. So either there should be security guarantees that will prevent it. There is this concept of a hedgehog, when Ukraine is so strong that no Putin in his mind will attack Ukraine, but realistically understand that there are still four times more population in Russia than in Ukraine. They have a very big military arsenal and I think that the only real case when I could sleep well and do not expect the second episode is when tomorrow in the morning I read that somehow Putin is dead because of some extreme case of illness coming to him overnight or there is some abrupt change that will bring a real policy change in Russia. The most radical people in Ukraine will say that you need to break up Russian empire, and I agree with that. But for me to sleep well, it will be enough to hear from Moscow that some new leader says special military operation, as they call it, was a mistake. We need to concentrate, as Navalny says, for example, on our domestic Russian issues as we have a lot and make Russians really happy, not thinking about restoring spheres of influence and everything else.

Gideon Rachman
That’s very clear. I mean, that can’t really be a trustworthy peace with a Putin that’s still in power. So everybody here is focused, and internationally, on this much discussed counter-offensive which people expect in the next couple of months. I know you’re not a military guy, but everybody talks about this all the time. What realistically do you think Ukraine can hope for? Is there a risk that there’s so much built up in this counteroffensive that, you know, if it doesn’t go well, there’ll be a loss of morale or loss of international support?

Hlib Vyshlinsky
I am really not a military guy, like I understand what is critical, for example, for economic scenarios. In fact, what we are working on, we work on trying to understand what will be the impact on economy of different military scenarios. And we understand that if we have really a successful break through Russian ranks in Zaporizhzhia region, such will result in this land route from Russia to Crimea under at least fire control, then it will be a significant factor that could press Putin into coming for real negotiations. And then, it could also have an impact on his regime, for example. And at least, it could be an option that could undermine Putin domestically, like make him the sort of lame duck, as like, you could have a concept of lame duck in authoritarian regimes, but at least it could give Ukraine some space to get the security guarantees. And also, — which is important from our viewpoint — having not only enough guarantees for families to come back, but getting enough guarantees to money to come to Ukraine because currently for a year already you’re just hearing about this big reconstruction of Ukraine. We could not see real money except some rather small amounts from US government, for example, 1.5bn, even find money on fast recovery, so-called fast recovery, which was not like these big plans of new cities rebuilt in a green way in the place of old Soviet-type inefficient cities, but just take those small residential houses in Bucha and restore them so that people could live there, put new plaster in schools so that children could learn there and getting the people who have no other places to live, like returning back to their homes.

Gideon Rachman
So obviously, it’s a very delicate moment because the war could go in either direction over the summer. It’s very hard to look beyond the battlefield. But it strikes me that, this has been a very tragic year for Ukraine and so many people killed, and so much destruction. But also there’s a strange, optimistic side to it as well, that Ukraine now has an international recognition and respect that it hasn’t had for a very long time. And also, this prospect of joining the European Union, I don’t know how realistic you think it is. But, do you think that Ukrainians have a sense that if they can get through this, that there really is a better future on the other side?

Hlib Vyshlinsky
I think it shows the feeling of momentum. Really, it was a momentum that’s shown that, okay, we are a smaller mid-sized country fighting the second army in the world, and somehow it works. Even our country to some extent despised our military, not because we were thinking that Ukrainians are not a nation that is good in fighting, which is not the case. If you read about Ukrainian history like Cossacks, that were the sort of mercenaries to some extent of their age. But we never invested enough in the military. We never reformed the military enough to expect them to be a real army of the country of this size. And then we saw that, no, in fact the country, has enough potential. And so we saw momentum there. We saw momentum in preventing in fact Russian attacks on anything to be successful, like energy, not successful; economy disruption, economy financial system, payment system, not successful at all, like no disruption at all for 13 months; military, not successful like certainly not like Kyiv in three days. But even now, everybody’s talking about Ukrainian counter offensive, not Russian, a new and finally successive offensive. And they could not even take this Bakhmut, 70,000 people before the war, for I don’t know how many months. So, the second part is what you said about membership in the EU that I believe is absolutely a realistic idea. Maybe not two years as Ukrainian government wants, but our friends from other think-thanks who are better experts in EU intricacies say that five years is a realistic term technically. And I could say because for decades we saw that really the west was absolutely underestimating us, saying they are corrupt. We don’t want to know anything about them. Technically, they are in Europe and they’re part of a broader European family. But they’re some strange people. And nowadays, they see us as people. Dutch diplomat said, a lot of cafés and hotels you go to in Amsterdam and then you somehow find Ukrainian waiters, Ukrainian baristas, Ukrainian receptionist working there and without asking some direct questions, you even could not imagine from the first signs that they’re Ukrainians not Dutch. So, it in fact broke these misperceptions . . . 

Gideon Rachman
What, they were these post-Soviet, backward people?

Hlib Vyshlinsky
Well yeah. Because for many people, unfortunately, Ukrainians were living on the streets where bears are going in winter in the same way like they thought about Siberia.

Gideon Rachman
So, Ukraine’s image has been transformed internally as well as externally. But on the other hand, it’s been at a terrible human cost. Somebody said to me, every Ukrainian knows somebody has been killed at the front. I don’t know whether that’s literally true, but there must be, yeah, a sort of sense of mourning in the society as well.

Hlib Vyshlinsky
It is a very mixed state. On one side, you come to Kyiv and you see that like restaurants are full. People are moving as normal with mobile phones, resolving some business issues etc and sometimes even going to concerts. If you want to listen to classical music or jazz or go to theatre you could go and do this. And you want to maintain this part of normalcy because it is like, what in fact brings more resources to continue what you could do the best in times of war. But on another side, yes, your simultaneously mourning. I don’t know personally anybody from the military who was killed, but I know, for example, Masi Nayyem, very famous lawyer who lost his eye, who is disabled person. Fortunately, doctors saved his brain, saved his life, but I could say that in many cases civilian losses are even more tragic because maybe you could expect people who are in the military they could die. But if you hear about a child who died sleeping at night with Russian missile coming in through some multistorey building, like it was in Dnipro, for example, in January. For me, it was much more like morally strong. So yes, it’s just complicated for the nation, but it does not change the perception of the need to win. And you could see it from the surveys. Share of Ukrainians who support fighting til this war ends on Ukrainian terms is not falling. And fortunately, in fact, Russians do not have additional tools to change it. They tried with this first wave, it didn’t work. Then they tried with energy, it didn’t work. What else? They don’t have anything more in their arsenal except nuclear strike. Now, not tactical but large-scale against Ukraine. And then what? And Ukrainians are smart people. Maybe they are not reflecting on this as analysts, but they feel that there is no reason to say, OK, let’s stop.

Gideon Rachman
You mentioned corruption and this image of corruption, but obviously, with more than image, there was a big problem. And those people in the west who are still sceptical about helping Ukraine, say that. They sometimes point to that and say this is a society that is corrupt, etc. How much has Zelenskyy or the war been able to take on those issues? Do you think there is a prospect that the Ukraine that emerges at the other side would have been able to deal with some of those issues?

Hlib Vyshlinsky
I think that unfortunately we haven’t done all the homework. And Zelenskyy, personally, could have done much more. I could give just one example that is discussed everywhere from ministers to civil society experts, which was the case of deputy head of Presidential administration Oleh Tatarov, who was spokesman of the minister of Internal Affairs under Yanukovych times when these special police forces were beating people in Maidan. And then he was working in private sector and he has a national anti-corruption bureau case against him on the case of construction and development, related to development companies. But he’s still deputy head of presidential administration. People from all walks of life including the government are saying that he’s the most critical impediment. Certainly, you could not resolve all corruption issues in the society overnight, but you could show the political will. And not firing Tatarov is a very clear sign of not showing political will.

Gideon Rachman
Why do you think Zelenskyy hasn’t done it?

Hlib Vyshlinsky
The general explanation of why Ukrainian presidents — and it was not just Zelenskyy; it was the same as Poroshenko — why Ukrainian presidents are not leaving these ways, even when it is bad for them and for the country, they really believe that if you’re not controlling these independent institutions yourself, they will be controlled on the very same day by the political opposition. And even in a situation like we have now in Ukraine, when there is no real political opposition to Zelenskyy, not because of authoritarianism. You are in Kyiv, you could see that we have a lot of independent media. TV is somewhat controlled. But still on TV, like you have independent channels. It is certainly not a government-controlled news space. But still, my explanation could be that he believes that the moment he loses control over courts and this control is going to another people, and people like Tatarov are continuation of his hands into controlling these systems. But when you look on corruption as something that you could somehow try to quantify, generally, it is not as prevalent in Ukraine as it was in Yanukovich times. Most of the petty corruption was in fact eradicated by digitalisation of public services. This was done very fast in the time of Zelenskyy as president because he put a lot of focus on digitisation of public services. He put a very strong vice prime minister from the very beginning, Fedorov, who is doing a lot of things. So, and even before them, like a lot of digitisation was done as well.

Gideon Rachman
Yeah. So it’s a very digitised society. I was struck that you never get a paper menu in a restaurant. And somebody was saying to me, if you get a parking ticket, it comes on your phone, pay from your phone . . . 

Hlib Vyshlinsky
Yeah, yeah. You could even pay in restaurants via Google Pay or Apple Pay directly from QR code on your table in the restaurant. So yeah, it was true. And that was true for public services as well. And that help was, they could say, not just controlling corruption but controlling against corruption. There is a whole coalition of civil society organisations in Ukraine working with the minister for reconstruction on creating a big electronics system of management of reconstruction. This will have the sort of interface for watchdog organisations. So we already heard from all international partners that we want to help in reconstruction, but how you could prove to us this will be corruption-proof and the government is coming with these solutions. And independent organisations, non-profit organisations, think-tanks, we understand that this is our watchdog role here as well. I could say, honestly, that this corruption is not beating us. We are beating corruption. And even with a lot of money coming there will be a lot of misspending not because of corruption but because of inefficiency. But currently we have much bigger problem of not enough money coming even to steal, not because Ukrainian government was sluggish.

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Gideon Rachman
That was Hlib Vyshlinsky of the Centre for Economic Strategy in Kyiv, ending this edition of the Rachman Review. Thanks for listening. Please join me again next week.