(civil sector)
economic policy in the conditions of war with Russia

Yerrmolaiev Andrij

philosopher, Strategic Group Sofia

Kyiv, June 2022

War: losses and problems

The civil economy of the war period: consequences and negative trends

II. Anti-crisis approaches (outlines and proposals)

1) Self-government, cohesion, economics of territories.

2) Governmentorders, public-private partnership, cohesion between the state and business, new security.

3) Modernization investment and public-private partnership.

4)"National economic networks": incentives and optimization.

5) Social capital, labor resources and the "digital economy"


War: losses and problems
General statistics from the aftermath of the war as of May 2022:

- the area of territories occupied by Russia is about 125 thousand square meters. km., including the Autonomous Republic of Crimea and Donbass.

- total losses - about 35% of GDP;

- direct losses in monetary terms - about 600 billion euros;

- losses of the country's infrastructure - 35%

- destroyed residential buildings, 32% - roads, 11% - assets of enterprises, 7% - civil airports;

According to various estimates, from 11 to 13 million people were forced to leave their place of residence, of which more than 6 million left the country (about 5 million went to the EU countries).
The civil economy of the war period:
consequences and negative trends
- new deindustrialization. More than 200 industrial enterprises were physically destroyed, equipment was destroyed, and in most cases, the infrastructure of enterprises is destroyed too;

- de-urbanization. Cities and small towns, housing infrastructure, transport communications, and water supply are being destroyed. Given the loss of economic assets, cities and small towns are at risk of losing the economic basis of recovery (enterprises and communications);

- social decapitalization. Spontaneous resettlement to the central and western regions of Ukraine, as well as the migration of Ukrainians abroad, can lead to a significant change in the professional and demographic composition of the affected territories, especially in the once industrial areas of large cities and mono-cities. There is a risk of losing the social capital of entire sectors of the economy and social structures (the system of raising and educating children, the healthcare sector, service, scientific and engineering activities, etc.);

- destruction of industrial and cooperative business ties, which is especially painful for large industrial and agro-industrial groups (loss of tangible assets, disruption of supply chains, blocking of exports, etc.);

- termination or sharp reduction in production volumes of large, small and medium-sized businesses in the affected territories and territories of increased risk of military operations (industrial production, domestic market, transport, services). This has already led to a collapse in revenues to the state and local budgets, an increase in unemployment.

But the economy lives even in conditions of catastrophes. The problem is that as hazards and risks increase, economic activity simplifies to the level of providing for people's priority needs - food, movement and transportation, basic utilities, communications. The exchange system is also being simplified: the economy is "going into the shadows", trying to minimize losses in the face of war risks and low purchasing power of consumers (up to barter and natural exchange).

And if the government solves critical problems that pose a direct threat to security and stability in an operational "manual" mode" (repair of critical infrastructure damaged by hostilities, solving critical shortages - for example, fuel etc.), then the rest of the problems have so far been left to chance.

Complex activities that require equipment, logistics, complex professions, components and market infrastructure objectively appear to be "on the sidelines".

So called "centers of power" gaining key importance. They regulate and control economic activity. Among them are (1) the state (administrative vertical, under martial law - military-administrative), (2) local self-government, and (3) "shadow sector", "informal economies" (Crime, centers of local economic power - "agro-barons", owners of retail networks and gas stations, owners of enterprises and infrastructure). The main functions of these "centers of power" are the regulation of relations, security, credit and "power" support. Due to the weakness of the state apparatus and the actual "neutralization" of self-government (with the exception of city mayors as natural "centers" on-site), shadow circles and influential local businesses came to the fore.
Among the systemic problems of the civil sector in wartime, especially in the territories affected by military operations and spontaneous evacuation (resettlement) of the population:
• "shrinkage" of the domestic market, a sharp decline in the number of jobs and simplification of areas of activity, a drop in demand for "difficult professions". As a result - a sharp drop in people's incomes, low purchasing power, limited only to essential items and services. This "vicious circle" threatens to further intensify the social crisis and a new migration "wave" both in the current and post-war periods;
• changes in the business structure of local economies due to business evacuation, loss or relocation of remaining assets to another territories. As a result, there is a shift in the employment market, loss of social capital, the emergence of new "deficits" in domestic local markets, and in the future, the threat of the loss of entire structures (for example, in industry), which will that will hit the labor market, education, and the general social structure of the territory like a boomerang;
• Due to destruction and loss of business, spontaneous business evacuation, the structure of the old export-import balance is being disrupted. Especially - in the food group of products. Refining is increasingly focused on small volumes of local markets. All possible volumes of unprocessed raw materials (grain, seeds, nuts, etc.) are sent for export. The emerging deficits are covered by new imports of finished goods (including through such "hybrid" imports as "humanitarian aid", part of which is provided in the field of sales). As a result, the volumes and assets of those industries that could become "drivers" of recovery are decreasing – processing, light industry, food, etc.;
businesses, especially those affected by hostilities or forced evacuation, faced a shortage of free capital to "restart". The overall proportion of the active business class is shrinking. A spontaneous "re-profiling" of business began in order to find justified and profitable industries (that is: simplification, reorientation to domestic local markets), or business emigration decision and curtailing one's business in the national economy. Result: a sharp decrease in the share and influence of the Ukrainian business class (business) on domestic economic processes, a decrease in the share of "civilized business" in the economy and concessions to the "shadow sector", loss of established ties and business schemes, clusters and cooperation in the domestic market, "social decapitalization" of the business itself (in other words, degradation);
• The first three months of the war revealed the weakness and incompetence of the economic bloc of government, which limited itself to publicly promoting the demand for constant multi-billion dollar assistance to the budget from donors, without proposing a clear anti-crisis program of its own actions. The variant of management according to the "bedside safe" model, where the revenue part consists mainly of external and internal loans and assistance, has led to the degradation of the instruments of state influence on the economic sector itself. A gap has emerged between the government and the "real sector", a vivid confirmation of which was the growing fuel crisis. The instruments of state capitalism (for example, a state-owned company as one of the key suppliers and sellers of fuel) began to be discussed only in the midst of the crisis, and even then suggestions came from managers of state-owned companies («NaftoGaz of Ukraine»), but not from the economic bloc of the government. The same problems with the loss of connection with the economy also manifested themselves during the period of dynamic business evacuation from the territories affected by the war: business problems were mainly dealt with by local authorities and volunteers; Government ideologists confuse the tools of state capitalism with administrative economics (for example, the discussion of the initiative to "nationalize" profitable enterprises because of the war), and this may soon lead to the deepest "crisis of confidence" between the government and the business class;
ideological mobilization on patriotic basis and on the topic of defense does not solve the practical issue of "everyday cohesion" - at the local, regional and national levels. The problem of cohesion means intelligibility and coordination of actions not only in relation to assistance to the army and refugees, but also in business activities, solving local economic and infrastructure issues, adequate assistance and administrative support of local authorities. The power vacuum in solving non-military, civilian problems is now palpable both vertically and horizontally. The formula "nothing but war" is, in fact, destructive to the cohesion and reconstruction processes in the country.
• General conclusion: in wartime Ukraine formed a hybrid model consisting of the economy of "shadow economic anarchism" and administrative capitalism "from above" - the conflict between them is inevitable.
Anti-crisis approaches
(outlines and proposals)
Anti-crisis policy and recovery projects are needed now, in wartime. Postponing recovery issues "until later" is a huge mistake that can lead to crises and conflicts in society, even in times of war.

The most important socio-economic question: what forces and institutions are capable of becoming "drivers", active subjects and stakeholders of such an anti-crisis policy in the civilian economic sector in a period of direct military risks?

The most prepared and productive can be (1) local authorities (self-government) at the level of a city, district, and (2) business, the "business class", especially its most experienced and trained part - big business (industrial, agro-industrial and trade and financial groups).

The maximum involvement of these entities in the anti-crisis policy in the conditions of "martial law" will allow maintaining a manageable, legal and civilized "framework" of economic processes, ensuring the co-organization and cohesion of a society experiencing "waves" of internal migration, unemployment and "new poverty", to minimize the influence of spontaneous centers of the "shadow sector" of the economy on these processes.
The proposed anti-crisis approaches can become a catalyst for the development of the civilian sector of the economy during the period of active hostilities in part of the territory of Ukraine, and will allow:
• restore a number of sectors of the economy, stabilize GDP losses from the war during the war itself;
• Involve hundreds of thousands of Ukrainians in economic activity, those who found themselves in the position of migrants and temporarily unemployed;
• to restore the controllability of economic processes in the face of constant force majeure and new economic risks associated with the war;
• to minimize the influence of "shadow anarchism" and informal centers of power on economic life, to strengthen the trust of the authorities and the "business class";
• and, most importantly, to ensure a new cohesion in society in times of war.
1. Self-government, cohesion, economics of territories.
Self-government has the main thing - a local managerial resource, horizontal connections, the ability to dispose of local resources and public utilities (enterprises, land, infrastructure). In addition, self-government bodies are closely tied to solving the problems of refugees from other territories, victims of hostilities. In the current conditions, self-government is experiencing two deficits - a deficit of finances (revenues have simply collapsed, as in the state budget) and a "deficit of confidence" from government agencies (the government). It is no coincidence that the practice of creating military administrations under martial law is spreading more and more. But - the bureaucratization of local life, the monopoly of officials on state subsidies, the secrecy of management - only exacerbate the crisis and increase the uncontrollability of local processes.

Self-government should be entrusted with the right to be a real "center", which is able to establish economic life within its competence and territory. Local projects can link the surplus labor force, give people a place of residence and income, perhaps with the prospect of obtaining housing. This may strengthen confidence in the actions of the authorities. Respected and effective self-government in times of war is a powerful consolidating factor.

Support sources and mechanism:

- budgetary Regional Development Fund (RDF) + authorized state banks - projects for the community, district, city;

- allocation of resources: in the proportion of 40% - from RDF; 30% - a loan from the state bank; 30% - share of participation of local government (finance, land or infrastructure for the project);

- the procedure for allocating funds from the RDF should be simplified as much as possible and shortened in time (3 months);

- a loan from an authorized state bank is allocated upon the approval of the project. The obligatory participant-executor of the project must be a responsible public utility company;

Project areas:

construction of road infrastructure and social facilities;

trade-consumer and production-consumer cooperation - markets, wholesale food purchases from households and small farmers, processing;

local production - processing, light industry, food;

Territory infrastructure - warehouses, logistics centers, transshipment, etc.

When implementing projects, models of communal-private equity partnerships at the local level can be used (the competence of the local self-government body).

There may be a limit on the funds allocated by the Regional Development Fund - for example, 100 thousand - 50 million uah / 1 project.

Organizational work can be carried out within the framework of the established Congress of Local and Regional Authorities under the President of Ukraine. As well as the subsequent coordination of work on the preparation, promotion and support of projects.

Sources of replenishment of funds of the state RDF: part of the funds - from external financial assistance to Ukraine; additional funds - through European programs to support regional development and other similar ones. This direction requires systematic fundraising work on the part of the RDF and the government. Even 1 billion euros, attracted to local projects through the Regional Development Fund, supplemented by loans from state-owned banks (authorized, for example, UkrExImbank or Oschadbank), will create a cumulative effect of investments that provide jobs and load production by 3-4 billion euros already up to end of 2022.
2. State order, public-private partnership, cohesion of the state and business, new security.
Revival of the State Agency of the Reserve of Ukraine (GosReserve). The State Reserve can and should become one of the key operators in the markets in times of crisis and shortages. In addition to financing critical reserves (fuel, food, building materials, etc.), the State Reserve should also provide prompt anti-crisis intervention in the context of breaking supply chains and preventing speculation on critical goods.

Stimulus and stabilization is the main effect of the public procurement for industrial and food products, where the order and payment become an important source of financial support for the contractor's business, and the order structure should be focused not only on raw materials (for example, wheat, buckwheat), but also on high value-added finished products (equipment for energy, mobile generation, infrastructure maintenance, engineering products, etc.), which can become an additional source of recovery financing for the industrial sector.

Programs of orders and public procurement should be considered as programs for the restoration of entire sectors of the economy.

The work of the State Reserve should be based on joint procurement planning and order placement with the National Tripartite Socio-Economic Council (employers-trade unions-government). This will make it possible to take into account the position of producers in the regions, the workload and availability of enterprises.

State Reserve budget and development of its infrastructure is provided from the state budget. But the potential of this structure, its ability to perform the market function of a market stabilizer and a critical exporter will make the State Reserve an effective market agent that manages dozens of state-owned profitable enterprises.
3. Modernization investment and public-private partnership.
At the heart of modernization investment is the national policy of "new industrialization" of Ukraine, which should be prepared now, in the conditions of war.

The risks associated with the war significantly limit the actions and plans of private outside investors. In Ukraine, there are high hopes for plans for assistance from outside (USA, UK, EU, China, Japan, etc.), but so far assistance is limited to support from the government (NBU, budget) and the public sector. At the same time, for the Ukrainian business class, for large industrial businesses, it is important to get support and additional investment opportunities for restarting, restoring and creating new assets (mining and metallurgical complex, chemical industry, energy, engineering, transport and infrastructure, ...).

Modernization investment could become the optimal mechanism for attracting external investors to the Ukrainian economy even in conditions of high risks and "martial law".

It is based on the creation of a mechanism of state guarantees of the partner country for its investor company, which is ready to work in Ukraine independently or in partnership with Ukrainian business (the real sector).

The government of the partner country provides guarantees to the investor on the basis of an interstate agreement with the government of Ukraine on the provision of assistance in the form of a state guarantee, and provides these guarantees to its investors. This practice can be offered to all partner countries of Ukraine, and the amount of guarantees can amount to tens of billions of euros.

To ensure the effective operation of the modernization investment mechanism, a "National Industrial Council" (association, etc.) should be created from among the largest industrial and agro-groups of Ukraine, which could offer external partners reasonable projects for the recovery or construction of new projects in Ukraine, offering their capabilities, developments, territorial and logistical solutions.

Actually, a package of such projects could form the basis of an economic revival programbased on the interaction of Ukrainian and foreign capital, and taking into account the already changed economic space in Ukraine (new spatial-territorial planning of the economy and distribution of productive forces).

Among the possible projects - new product pipelines, refineries, mining and metallurgical enterprises, energy companies, roads and transport hubs, agricultural processing enterprises, etc.
4. "National economic networks": incentives and optimization.
Two groups of capital - trading and banking-financial - have extensive service networks in the country. Trading networks of large operators of food products, household goods and household appliances (ATB, Silpo, Novus, Fora, Epicentr K, Foxtrot, etc.) have the opportunity not only to support network sales, but also localize bulk purchases, act as a customer for the production of certain groups of goods for Ukrainian producers in the widest range (from food to building materials).

Spontaneously, this process was already developing in the pre-war period, and retail operators became, in fact, customers and investors of new business projects. Now this direction requires state (managerial and logistical, first of all) support and coordination.

A coordinated policy of orders and local investments of retail operators can become an incentive for manufacturers of finished products (with localization by regions and districts), electrical equipment and building materials. Retail networks can become another "catalyst" for reviving the economy of households and small businesses.

This model requires:

• administrative and logistical support for operators: communication with production, localization of orders, interaction with local authorities;

• support by the state (authorized state banks) of consumer lending schemes according to the nomenclature of Ukrainian-made goods (!), approved by the Cabinet of Ministers of Ukraine, related to the household economy and small businesses (primarily building materials, chemical products, electrical equipment, etc.);

Coordination and harmonization of this work can be carried out through the National Tripartite Socio-Economic Council (employers-trade unions-government) and UUIE (Ukrainian Union of Industrialists and Entrepreneurs).
5. Social capital, labor resources and the "digital economy"
Military operations in the northern, eastern and southern regions of Ukraine set in motion a huge mass of the population. Millions of spontaneous migrants and emigrants have left their place of residence. The vast majority of emigrants are women and children. Men of military age who do not participate in the Armed Forces of Ukraine, territorial defense and law enforcement agencies have moved to the central and western regions of Ukraine.

The main drawback of the evacuation policy (February-May 2022) is its spontaneity, poor logistics and poor coordination. Essentially, there is no accounting and registration of displaced persons as a skilled labor force. But we are talking about professions, skills and entire "ways of life" that are temporarily "turned off" from the economic system. Skilled workers and experienced businessmen are forced to change their profession and areas of activity to simpler ones that are not related to their experience and capabilities.

Among the emigrants, spontaneous dequalification, a change of profession and sphere of activity is also already taking place.

The loss of social capital (skills, ways of life, experience) and human capital (labour resource) can become critical. Already now, according to preliminary demographic and statistical estimates, the unemployment rate reaches about 5 million jobs, in six months it may reach more than 7 million. Some losses - for example, engineering and design schools, qualified personnel from industry, education, medicine, - may be irreplaceable.

There are no easy recipes. Much depends on the success of the anti-crisis policy, the "revitalization" of the civilian sector of the economy in war conditions, the preparation and launch of new projects both at the local and national levels.

The existing mechanisms of the Employment Service and "labor exchanges" cannot cope with this.

We need more organized and targeted mechanisms.

Right now, it is necessary to organize work on registration, creation of professional cadastres and ensuring communication with those who have lost their qualified jobs, changed place of residence and/or traveled abroad.

A platform for such registration and creation of professional cadastres could be the National Digital Platform "Diya".

Work with registrants, as well as with data from professional cadastres, can be carried out by a new Service (agency) under the Ministry of Digital Transformation of the Cabinet of Ministers of Ukraine, which could provide connection and communication of registered specialists with business structures, organizers of new projects and business programs.

It is also important that people who have lost their homes, jobs and changed their place of residence would receive real "feedback" from the state and could count on an invitation to a new job, possibly with a new permanent place of residence.

Such an approach will reduce the loss of social and human capital, restore human resources for the economy, and, most importantly, strengthen social cohesion, restore people's hope for a successful solution to their problems caused by the war.

In practical terms, this proposal still needs to be worked out and detailed.
The directions, instruments and mechanisms of economic policy for the civil sector in wartime involve the rational use of scarce financial resources of the state budget and state banks, maximizing the attraction of loans and grants from external creditors, attracting funds from the European Union, the EBRD, the IBRD, investment funds, etc.

The proposed approaches require additional calculation and economic justification, with the involvement and participation of international partners - potential creditors, investors and participants.
Підпишись на наш Telegram канал чи Viber, щоб нічого не пропустити
Made on