Author: Cecilia Smitt Meyer
The Case for Seizing Russian State Assets
This brief examines the legal and economic arguments in the ongoing debate over whether to confiscate Russian state assets frozen in Western democracies and redirect them toward supporting Ukraine’s resilience and reconstruction. It also outlines concrete proposals for how such a measure could be undertaken in compliance with international law and with manageable economic consequences.
At the outset of Russia’s full-scale invasion of Ukraine, substantial Russian state assets held in Western countries were frozen. While not all countries have disclosed precise figures, estimates place the total between $290–330 billion, most of it held within European jurisdictions. These numbers can be put in perspective to the total global support to Ukraine so far, €267 billion according to the Kiel Institute’s Ukraine Support Tracker. A lively discussion has emerged around the legal, economic, and political feasibility of seizing these assets to support Ukraine. As evident, this would constitute a very substantial addition to the support for the country. Thus far, agreement has only been reached on utilizing the returns on the assets to service a $50 billion loan to Ukraine under the Extraordinary Revenue Acceleration (ERA) mechanism. It has been argued that $50 billion should be enough, but Western contributions to the defence of Ukraine have been around €80 billion per year. The ERA is thus only a partial and very short-term financial solution for Ukraine, while a €300 billion fund based on the seizure of the assets would last perhaps 3-5 years. In short, the size of the fund matter and the principal amount is significantly larger than the fund that has been set up based solely on taxing the returns of the frozen assets.
This brief survey’s the main areas of contention and proposes viable pathways forward. It focuses on the legal and economic dimensions, setting aside moral arguments—which are broadly accepted given Russia’s unprovoked aggression and the destruction it has caused. Ultimately, the question is a political one: whether the legal justification and economic trade-offs favour asset seizure over other financing methods.
The Legal Arguments
Opposition to seizure often cites the principle of sovereign immunity. Yet, international law permits exceptions through countermeasures—acts that would otherwise be unlawful but are allowed in response to grave violations by another state. Additionally, asset confiscation may be lawful when enforcing international judgments (other possible legal avenues are for instance explored in Webb (2024), though in the end deemed as less likely to gain traction and legal approval). In both cases, the goal is to induce compliance with international obligations and secure reparations. A further legal basis lies in the doctrine of collective self-defense, which permits states not directly attacked to aid those that are, in response to unlawful aggression (Vlasyuk, 2024).
Critics often note that countermeasures should be temporary and reversible. However, as Vlasyuk (2024) points out, international law qualifies reversibility as being required only “as far as possible.” This implies that in cases of severe violations—where reversible countermeasures have failed—non-reversible actions may be justified. One proposed mechanism ties the frozen assets to future war reparations, allowing permanent transfers only if Russia refuses to comply with a future reparations ruling. Since reparation should go to the victim of Russia’s aggression, it also means that it is Ukraine that has the ultimate claim on the frozen Russian assets. This implies that any decision of confiscation and governance structure for transferring funds to Ukraine should be made with the consent of Ukraine. Put differently; even if the money is in Western financial institutions, there are good reasons to make sure the resources are used according to Ukrainian preferences.
The Economic Arguments
The principal economic concerns surrounding asset seizure are its potential impact on confidence in European capital markets, including risks of capital flight, increased interest rates, and diminished credibility of the euro. There are also fears of reciprocal actions by Russia against remaining Western investments.
These concerns, however, are increasingly overstated. The major shock to financial markets occurred when the assets were first frozen; any anticipated impact should now be fully priced in. Moreover, a viable reserve currency must be supported by convertibility, sound economic governance, and rule of law—features absent in countries like China, Gulf states, or most other emerging economies. The yen and Swiss franc lack either scale or stability. Despite previous sanctions and the 2022 asset freeze, the dollar and euro still account for around 80 percent of global foreign exchange reserves (The International Working Group on Russian Sanctions, 2023). Given the current crisis of confidence in U.S. fiscal governance, the euro remains especially robust.
The extraordinary nature of the situation also diminishes fears of setting a destabilizing precedent. Investors alarmed by this measure may not be long-term assets to Western markets but rather criminal states or individuals that should not be protected by the West’s financial and legal systems. More broadly, it signals to authoritarian regimes that aggressive actions will carry financial consequences. Western firms still operating in Russia have had ample time to disinvest, and those that remain should not constrain public policy.
Importantly, the costs of inaction must be considered. Financing Ukraine through increased public borrowing could raise interest rates across the eurozone and widen yield spreads between fiscally stronger and weaker member states. Seizing Russian assets, by contrast, may be economically safer, more equitable, and legally sound (International Working Group on Russian Sanctions, 2023).
Suggested Approaches
Several proposals aim to facilitate asset transfer in ways consistent with international law and economic stability.
Zelikow (2025) proposes the establishment of a trust fund to lawfully assume custody of frozen assets. This fund—grounded in the legal doctrine of countermeasures—would not represent outright confiscation but a conditional hold. Assets would remain Russia’s property until disbursed to victims of its aggression. A board of trustees would oversee disbursements—for example, servicing ERA loans or financing reconstruction. In this proposal, the fund would broadly define “victims” to include Ukraine and neighbouring states that have borne costs, such as accommodating refugees. This can perhaps help build political support among Western countries for the trust fund, but it has the obvious drawback that it may imply less support to Ukraine. Zelikow (2025) argues that institutions like the Bank of England or World Bank could manage the fund, given past experience with similar arrangements, potentially issuing bonds backed by the assets to accelerate support.
Vlasyuk (2024) proposes a multilateral treaty among coalition states recognizing Russia’s grave breaches of international law. This would provide a unified legal basis for transferring central bank assets to Ukraine via a compensation fund. National legislation would follow—similar to the U.S. REPO Act—tailored narrowly to address such violations. These laws should include safeguards, such as provisions to suspend asset seizure if hostilities end and reparations are paid.
Dixon et al. (2024) propose a “reparation loan” backed by Ukraine’s reparations claims. The EU or G7 would lend to Ukraine, using these claims as collateral. If Russia fails to pay after a ruling by a UN-backed claims commission, the frozen assets could be seized. This approach aligns well with the requirement for reversibility in countermeasures and may also reassure financial markets.
Conclusions
In summary, compelling legal arguments support the transfer or confiscation of Russian state assets under international law. Meanwhile, fears of damaging economic consequences appear increasingly unfounded. Any meaningful support for Ukraine—whether through asset seizure or public borrowing—will carry financial implications. However, using Russian rather than Western taxpayer resources is both morally and politically compelling.
What is now needed is coordinated political will and a practical, legally sound mechanism to operationalize asset transfers. With sound governance, such a step would not only finance Ukraine’s recovery but reinforce the international legal order and deter future aggression. An arrangement that makes sure all resources go to Ukraine—and not toward covering losses incurred by supporting Western countries—should be prioritized.
References
- Dixon, H., Buchheit, L. C., & Singh, D. (2024). Ukrainian reparation loan: How it would work. The International Working Group on Russian Sanctions.
- The International Working Group on Russian Sanctions. (2023). Working Group paper #15. Stanford University.
- Vlasyuk, A. (2024). Legal report on confiscation of Russian state assets for the reconstruction of Ukraine. KSE Institute.
- Webb, P. (2024). Legal options for confiscation of Russian state assets to support the reconstruction of Ukraine. European Parliament.
- Zelikow, P. (2025). A fresh look at the Russian assets: A proposal for international resolution of sanctioned accounts (Hoover Institution Essay). Hoover Institution Press.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Private and Public Sectors in the Belarusian Economy: Where Has the Pendulum Swung After 2019?
The private sector in Belarus experienced dynamic growth in the 2010s and, by the start of the current decade, matched the public sector in its contribution to GDP. However, since 2020, the institutional environment for entrepreneurship has significantly deteriorated. Combined with a reduction in the volume of publicly available official statistics, this has raised concerns about a significant decline in the private sector’s contribution to the Belarusian economy. This policy brief aims to systematize and analyze the dynamics of key development indicators of the private and public sectors in Belarus after 2019. It shows that private businesses have continued to play a crucial role in the Belarusian economy, generating about half of the gross value added in 2021–2024. However, the trend of increasing the share of private businesses in the economy, observed prior to 2020, came to a halt in 2021–2024. The share of state-owned enterprises also remained excessively high, despite being less efficient than private firms. If the status quo persists, sustainable long-term economic growth in Belarus is unlikely.
The Private and Public Sectors Before 2020
After a period of high growth in the 2000s, the Belarusian economy entered a prolonged stagnation period. The annual GDP growth slowed from 7.1 percent in 2000–2011 to 0.7 percent in 2012–2021 and 1.1 percent in 2022–2024. The oversized state-owned enterprise (SOE) sector, extensively supported by the state via credit and other measures until 2015, is responsible for both the rapid growth in the 2000s and the subsequent stagnation (Hartwell et al., 2022).
The low efficiency of the public sector in the 2010s was partially offset by the expansion of more productive private firms. While this was not sufficient for Belarus to achieve high economic growth or close the wealth gap with Central and Eastern European countries, it did help maintain an upper-middle income per capita status – according to the World Bank classification, which Belarus has had since the mid-2000s.
The private sector developed dynamically in the 2010s, largely due to liberalized business conditions (Mironchik & Shcherba, 2022; BEROC, 2023). Labor resources flowed from SOEs to private firms (Chubrik, 2021).
By 2020, the private sector’s contribution to GDP approached 50 percent (Mironchik & Shcherba, 2022), and according to some estimates, exceeded that level — increasing by more than 10 percentage points since 2012 (Daneyko et al., 2022).
In 2020, the Belarusian economy however entered a period of turbulence. The Covid-19 pandemic, socio-political tensions and the government’s reactionary policies, a significant increase in sanctions pressure, and the forced restructuring of production chains significantly altered the business environment (Marozau, 2023). Support for SOEs from the government increased once again (Kalechits, 2024), while the regulatory environment deteriorated.
These changes, combined with a reduction in the volume of available statistics, have raised concerns about a decline in the private sector’s contribution to the economy after 2019. There are no known studies that have examined economic indicators of public and private sectors since 2020. This policy brief aims to close this gap.
Economic Indicators of the Private and Public Sectors in 2020–2024
Employment. The trend of gradual worker loss in SOEs persisted after 2019, while employment in the private sector expanded, even amidst an overall decline in the workforce.
The number of people employed declined by nearly 5 percent between 2020 and 2024 due to unfavorable demographic trends and intensified emigration. Employment dynamics varied significantly depending on the form of company ownership. The number of workers in SOEs and firms with state participation continued to decrease, whereas in the private sector, employment grew by just over 1 percent (see Figure 1).
Figure 1. Dynamics of employment in Belarus
Source: Author’s calculations based on Belstat data.
The share of the private sector in total employment increased from 42.9 percent in 2019 to 45.7 percent in 2024, while the share of the public sector declined from 57.1 percent to 54.3 percent (see Figure 2).
Industrial output and exports. The role of the private sector in manufacturing and exports of goods has remained nearly unchanged since 2019. However, the pre-2019 trend of its increasing role in the economy has stalled.
In 2024, private commercial organizations accounted for 30.5 percent of industrial production, an increase by 3.8 percentage points since 2019 (see Figure 2). Assessing the impact of individual industries on these changes is challenging, as Belarus Statistical Agency Belstat stopped publishing data on production in industrial sectors in 2022. The decline in the share of SOEs in production is, at least in part, linked to oil refining, whose output has not returned to 2019 levels due to the impact of sanctions.
Figure 2. Private Sector Share in Selected Economic Indicators of Belarus
Source: Author’s calculations based on Belstat data.
Note: Hereafter, mixed ownership enterprises (with any share of state participation) are considered part of state-owned enterprises (or the public sector).
The Belarusian industry is export-oriented, with around 70 percent of manufactured goods supplied to foreign markets. Detailed foreign trade data has also been restricted since 2022, but the volume of oil products and potash fertilizer exports can be estimated using mirror statistics, media leaks, and statements from Belarusian officials. According to this, the volume of export of oil products and potash fertilizers has significantly declined since 2019, and their share in total goods exports has decreased from 26 percent in 2019 to 15–20 percent in 2022–2024 (see Figure 3).
Other exports from SOEs have grown significantly since 2019, increasing their share of total goods exports by nearly 9 percentage points (see Figure 3). This has been driven by enhanced industrial cooperation between Belarus and Russia following the tightened sanctions in early 2022. It led to increased shipments of machinery and equipment to Russia, with the defense sector likely accounting for a significant portion.
Private firms also took advantage of vacant niches in the Russian market, increasing their exports after 2019. However, private sector exports grew at a slower pace than SOEs. With the decline in oil products and potash exports, the share of the private sector in total exports remained close to the 2019 level in 2022–2024 (see Figure 3).
Figure 3. Structure of goods exports
Source: Author’s calculations based on data from Belstat, National Bank of Belarus, World Bank, UN Comtrade and various news outlets.
Imports. The private sector has played a crucial role in rebuilding Belarus’s goods supply chains after sanctions were tightened in early 2022.
According to statistics from Belstat, the share of SOEs in goods imports decreased by 9.8 percentage points – from 28.2 percent in 2019 to 18.4 percent in 2024. However, it is reasonable to isolate the imports of oil and petroleum and gas products as the way Belstat classifies ownership may bias these figures. For example, natural gas from Russia is imported by Gazprom Transgaz Belarus – a 100 percent subsidiary of Russian state-owned Gazprom – yet classified in the data as private sector imports.
Adjusting for this, the private sector’s share of non-energy goods imports rose by almost 13 percentage points since 2019, reaching 73 percent in 2024 (see Figure 4). This signifies the private sector’s ability to adapt to the new economic reality, not only recovering but even growing its imports against the backdrop of the supply chain and financial disruptions of 2022–24.
Without the high adaptability of private businesses under drastically changing conditions, the economic downturn in Belarus in 2022 would have been much deeper, and the recovery in 2023 and growth in 2024 significantly slower.
Figure 4. Structure of goods imports
Source: Author’s calculations based on data from Belstat, National Bank of Belarus, World Bank, UN Comtrade, and various news outlets.
Investment and trade. The importance of state-owned enterprises in investments has increased slightly since 2019 but declined in sectors related to meeting consumer demand.
In 2019, 61.4 percent of all investments were generated by SOEs. During 2022–2024, this share fluctuated between 63.6–65.5 percent, while the private sector accounted for nearly 34.5–35.8 percent (see Figure 2). The slight increase in the role of SOEs in investment is linked to government efforts to intensify investment activity. This includes directives and recommendations for enterprises to initiate a new investment cycle.
In retail trade and catering, the private sector strengthened its position after 2019. Its share increased by 3 and 11.4 percentage points, respectively, reaching 86.8 percent and 78.9 percent in 2024 (see Figure 2).
Assessing the Contribution of the Private and Public Sectors to Gross Value Added There is no available data on the contribution of the public and private sectors to the gross value added (GVA) or GDP in Belarus. To estimate this contribution, an approach proposed by Daneyko et al. (2022) has been applied. This method assumes that labor productivity in the public and private sectors corresponds to overall productivity in the same proportion as wages in these sectors relate to the average wages in the economy.
According to these estimates, the private sector accounted for nearly 50 percent of Belarus’s GVA in 2019, while the public sector contributed slightly over 50 percent (see Figure 5). Between 2020 and 2024, the sectoral shares in GVA fluctuated around 50 percent.
Thus, despite the deterioration of the institutional environment for business after 2020, the significance of the private sector in Belarus’s economy has at least not declined. However, while the private sector’s importance in the economy increased before 2020, this trend did not continue between 2021 and 2024.
Figure 5. Contribution of private and public sectors to Belarus’s gross value added
Source: Author’s calculations based on Belstat data.
The public sector continued to generate less value added per employee than private businesses between 2020 and 2024. However, the gap narrowed from over 20 percent in 2019 to nearly 15 percent in 2024 (see Figure 6).
Figure 6. Efficiency of the public sector relative to the private sector
Source: Author’s calculations based on Belstat data.
Labor productivity growth in the public sector exceeded that of the private sector. However, given the influence of temporary production growth factors (vacated market niches in 2022–2023 and increased demand from Russia), this development is unlikely to be sustainable in the long term. Indirect evidence for this is the lack of a corresponding improvement in the relative efficiency of public sector investments. Between 2020 and 2024, each ruble invested by SOEs in fixed capital generated nearly 45 percent less value added than in the private sector — and this gap has widened since 2019.
Conclusion
The private sector in Belarus continued to generate around half of the country’s GVA after 2019 and remained the most productive part of the economy. Its significance did not diminish, even amid a deteriorating institutional environment and tightened sanctions against Belarus. Private businesses played a decisive role in restructuring supply chains during 2022–2024, following the disruptions in early 2022.
At the same time, the trend of increasing private sector participation in the economy, observed before 2020, has stalled, while the size of the public sector has remained substantial — particularly in industrial production. In turn, the efficiency of SOEs still lags significantly behind that of private firms, especially in terms of investment. If the current balance between the private and public sectors persists, and the conditions that underpin it remain unchanged, Belarus’s long-term economic growth prospects will remain weak once the specific growth factors of 2023–2024 are exhausted.
References
- BEROC (2023). “Development of the private sector. Instead of reforms and for the economic sovereignty of Belarus”. (Ideas Bank). https://ideasbank-assets.s3.eu-central-1.amazonaws.com/Private_Sector_Development_Belarus.pdf (in Russian)Daneyko, P., KEF experts (2022). “Reforming the SOE sector in Belarus: conceptual directions”. (Ideas Bank). https://ideasbank-assets.s3.eu-central-1.amazonaws.com/Public_Sector_Reforms.pdf (in Russian)
- Chubrik, A. (2021). “Back to the future or a short historical note on the Belarusian private sector”. (2021/03, IPM Research Center Discussion paper). https://www.research.by/webroot/delivery/files/english/pdp/dp2021r03.pdf
- Hartwell, C.A., Bornukova, K., Kruk, D., Zoller-Rydzek, B. (2022). “The economic reconstruction of Belarus: next steps after a democratic transition”. (European Parliament coordinator: Policy Department for External Relations. Directorate for External Policies of the Union). https://www.europarl.europa.eu/thinktank/en/document/EXPO_STU(2022)653663
- Kalechits, D. (2024). “Ensuring financial stability in 2023 and tasks for 2024”. (Bank Bulletin Journal, No 1/726).
- Marozau, R. (2023). “Belarusian business in turbulent times”. (FREE Network Policy Brief Series). https://freepolicybriefs.org/2023/10/23/belarusian-business-challenges/
- Mironchik, N. & Shcherba, E. (2022). “What indicators may be useful for monitoring economic security of the Republic of Belarus?” (Bank Bulletin Journal, No 6/707)
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Beyond North Africa: Ukraine’s Agricultural Engagements with Sub-Saharan Partners
In recent years, the global agricultural landscape has shifted dramatically, shaped by intersecting crises of climate change, food insecurity, geopolitical tensions, and technological disruption. Against this backdrop, Ukraine and Sub-Saharan Africa have emerged as two regions uniquely positioned to forge a complementary partnership in the agri-food sector – one that not only addresses immediate humanitarian and trade challenges but also sets the stage for long-term sustainable development. As Ukraine looks to diversify its agricultural partnerships beyond traditional European and Asian markets, Africa represents both a growing consumer base and an investment frontier where Ukraine’s expertise and surplus production capacity can meet critical demand. This policy brief explores how Ukraine and certain African countries can deepen cooperation across the agricultural value chain. Drawing on in-depth regional analyses conducted by the Kyiv School of Economics Agrocenter (Martyshev, Stolnikovych & Piddubnyi, 2024a-d), the discussion considers strategic sectors, regional particularities, and policy innovations necessary for a robust and mutually beneficial partnership.
Introduction
Ukraine is one of the world’s most productive agricultural exporters, supplying significant volumes of wheat, corn, sunflower oil, and other essential staples. Africa, by contrast, is grappling with an array of food production and security challenges. In many regions, agricultural productivity remains stubbornly low, constrained by underinvestment, poor infrastructure, limited irrigation, climate volatility, and outdated farming techniques. Yet, Africa’s demographic trends suggest a rapidly growing demand for food. Urbanization is accelerating, dietary preferences are shifting, and consumers are increasingly looking beyond subsistence crops toward diversified and processed foods. These dynamics set the stage for Ukraine to serve not just as a food exporter, but also as a strategic partner in Africa’s agricultural transformation.
In a series of recent regional reports by the Kyiv School of Economics Agrocenter, all titled Cooperation Between Ukraine and African Countries in Agriculture, (Martyshev, Stolnikovych & Piddubnyi, 2024a,b,c,d), the Kyiv School of Economics (KSE) explored the mutually beneficial opportunities for collaboration between Ukraine and Africa in the agricultural sector. The full reports covering Central, East, Southern, and West Africa are available at https://agrocenter.kse.ua. This brief summarizes the key findings and insights drawn from those reports.
Data and Methods
A standardized analytical framework across four African regions, Central, East, Southern, and West Africa, focusing on three major countries in each region, was applied. The objective was to, through data-drive insights, assess the potential for agricultural cooperation with Ukraine in food security, trade, production systems, and policy environments.
- Food security analysis relies on indicators from FAOSTAT and the World Bank, including prevalence of undernourishment, dietary energy adequacy, and trends in malnutrition from 2000 to 2022.
- Trade analysis uses data from UN Comtrade, ITC Trade Map, Ukrainian customs, and national sources to evaluate import-export flows, Ukraine’s market share, and commodity dependencies, particularly in cereals and vegetable oils.
- Agricultural sector profiling includes employment, GDP contribution, key crop and livestock outputs, and irrigation coverage. Data are drawn from FAOSTAT, national agricultural statistics, and World Development Indicators.
- Infrastructure and technology assessments are based on literature reviews and secondary sources evaluating the state of storage, logistics, irrigation, and mechanization. Attention is given to adoption of modern tools like drones and ICT platforms.
- Policy and institutional reviews focus on national agricultural strategies, trade policies, food security programs, and land tenure systems, using official government documents and donor evaluations.
- For East and West Africa, findings were also informed by stakeholder input from KSE Agrocenter webinars held in 2024, involving local policymakers, researchers, and trade representatives.
This mixed-methods approach enabled a comparative, region-specific understanding of agri-food challenges and opportunities relevant to Ukraine’s engagement in Africa.
Empirical Findings and Policy Recommendations
Trade: A Nascent but Promising Relationship
The trade relationship between Ukraine and Africa, while still developing, shows considerable potential. Based on empirical trade flow data, Ukraine’s primary exports to Africa include cereals like wheat and corn, along with vegetable oils. Imports from Africa, however, are minimal, revealing the one-sided nature of current trade. This asymmetry is due to limited diversification, logistical barriers, and underdeveloped bilateral trade frameworks. Trade activity is concentrated in North and West Africa, while countries in Central, Eastern and Southern Africa receive fewer Ukrainian goods. Engagement with regional trade blocs such as the Economic Community of West African States (ECOWAS) and the East African Community (EAC) presents both regulatory hurdles and strategic entry points.
Based on observed trade gaps, the policy recommendation is to expand Ukraine’s access to African markets by negotiating preferential trade agreements and eliminating non-tariff barriers. Appointing agrarian attachés in African capitals can facilitate market entry, monitor regional regulations, and promote Ukrainian products in regional fairs and business forums.
Joint Investment Opportunities
Based on field-level evidence and investment data, agriculture in Central and East Africa is constrained by severe infrastructure deficits. Post-harvest losses, driven by the absence of proper storage, cold chains, and road networks, are estimated to cost billions in lost output annually. The strategic proposal is for Ukraine to co-invest in building post-harvest systems, leveraging its expertise in grain storage and export logistics. Ukrainian firms could collaborate with African partners on silos, warehouses, and cold storage tailored to tropical climates.
Food processing also represents a high-potential area. Many East African countries impose protective tariffs on processed food imports to stimulate local industry. Based on these findings, the policy recommendation is for Ukraine to establish agro-processing joint ventures that align with local industrial policies. These ventures would stimulate employment, reduce food imports, and strengthen Ukraine’s position in value-added agriculture abroad.
Technology Transfer Potential
Empirical assessments reveal that low mechanization, climate volatility, and limited access to agri-tech remain persistent barriers to productivity in much of sub-Saharan Africa. Ukraine, with its advanced capabilities in precision agriculture, can provide high-impact technologies such as satellite-based soil monitoring, drones for crop surveillance, and automated irrigation systems. For example, in parts of Southern Africa like Zambia and Namibia, where rainfall is unpredictable, these technologies can help stabilize crop yields and reduce risk for smallholder farmers.
The strategic proposal is for Ukrainian firms to develop demonstration farms and pilot projects that showcase these innovations. Based on successful models from Eastern Europe, these pilots could serve as training grounds for local agronomists and as proof-of-concept for scalable investment.
Regional Variability and Context-Specific Cooperation
Central Africa (e.g., the Democratic Republic of the Congo (DRC), Angola, Cameroon)
Based on food security metrics, Central Africa faces some of the highest levels of undernourishment on the continent. In DRC for example, more than one-third of the population is chronically underfed. Political instability and unclear land rights further hinder agricultural investment.
The strategic recommendation is to continue and scale humanitarian programs like “Grain from Ukraine,” while also offering technical support in veterinary services for cattle and poultry sectors, particularly in Angola and Cameroon. Ukrainian expertise in land reform and extension services could also help unlock investment in rural farming.
East Africa (e.g., Ethiopia, Kenya, Tanzania)
Agricultural productivity is improving in East Africa, but gaps remain. Based on infrastructure and yield data, the region struggles with limited access to farm machinery, irrigation systems, and post-harvest technology. The policy recommendation is to focus on joint research, agricultural education, and training programs that address these specific bottlenecks. Ukrainian institutions could work with African universities to design curricula on crop science, data-driven farming, and agri-business entrepreneurship. Mobile extension services and remote learning platforms could further boost rural outreach.
Southern Africa (e.g., South Africa, Botswana, Namibia)
This region has a more developed agricultural sector with export orientation and mechanization. However, environmental and political factors, such as energy shortages and water scarcity, threaten sustainability. Based on these empirical conditions, the strategic proposal is for Ukraine to engage through agri-consulting and technology partnerships. High-value inputs like hybrid seeds and automated irrigation systems can address local constraints, while cooperation on renewable energy solutions for farming could provide long-term stability.
West Africa (e.g., Nigeria, Ghana, Côte d’Ivoire)
According to population and consumption data, West Africa faces mounting pressure on food systems. Despite improving domestic output, infrastructure deficits and policy inconsistency limit food availability. Based on these findings, the strategic recommendation is to invest in logistics infrastructure, such as road and rail links to key ports and warehouses, as well as to diversify the region’s agricultural base. Ukrainian seed companies could introduce crops like barley and legumes, adapted to regional climates, to reduce dependence on cocoa and palm oil.
Conclusion
In conclusion, the partnership between Ukraine and Sub-Saharan Africa in the agricultural sector is not merely a matter of commerce; it is a strategic opportunity with tangible benefits for both sides. Ukraine, as a breadbasket with advanced agri-tech capabilities, can play a pivotal role in enhancing food systems in parts of Africa where food insecurity remains acute, particularly in regions such as the Horn of Africa (e.g., Somalia and Ethiopia), the Sahel (e.g., Niger and Mali) and Central Africa (e.g., the Democratic Republic of the Congo). At the same time, many African nations offer Ukraine access to growing consumer markets, underutilized arable land, and increasing geopolitical relevance in a rapidly evolving global landscape.
To realize this vision, both sides must commit to a comprehensive, long-term strategy built on trust, transparency, and mutual benefit. The road ahead is complex but filled with promise. With smart investments, targeted diplomacy, and collaborative innovation, Ukraine and Africa can co-author a new chapter in global agriculture, one defined not by scarcity and dependency, but by resilience, growth, and shared prosperity.
References
Central Africa
- Martyshev, P., Stolnikovych, H., Piddubnyi, I. (2024a). Cooperation between Ukraine and African countries in agriculture: Central Africa. Center for Food and Land Use Research at Kyiv School of Economics, https://kse.ua/wp-content/uploads/2024/10/Cooperation-between-Ukraine-and-African-countries-in-agriculture-Central-Africa.pdf
- Abia, W. A., Shum, C. E., Fomboh, R. N., Ntungwe, E., & Ageh, M. T. (2016). Agriculture in Cameroon: Proposed Strategies to Sustain Productivity. International Journal for Research in Agricultural Research, 2(2), 1–14.
- Africa24. (2024, January 25). Cameroon reduces state fees for agricultural enterprises by 92%.
- African Development Bank. (2022). Cameroon – Agricultural Production Support Program (PARPAC).
- African Development Bank. (2023). Angola – Agriculture Sector Reform Program (ASRP).
- African Development Bank. (2024). African Economic Outlook 2024: Driving Africa’s Transformation.
- Arsene, M. B., & Mwine Fyama, J. N. (2021). Potential threats to agricultural food production and farmers’ coping strategies in the marshlands of Kabare in the Democratic Republic of Congo. Cogent Food & Agriculture, 7(1), 1933747.
- Binswanger-Mkhize, H. P. (2008). Empowering Rural People for Their Own Development. FAO.
- Boko, M. I., Niang, A., Nyong, C., et al. (2007). Africa Climate Change: Impacts, Adaptation and Vulnerability. IPCC, Fourth Assessment Report.
- CAADP. (2013). Agriculture Investment Opportunities Brief: CAADP Investment Facilitation Programme – DRC.
East Africa
- Martyshev, P., Stolnikovych, H., Piddubnyi, I. (2024b). Cooperation between Ukraine and African countries in agriculture: East Africa. Center for Food and Land Use Research at Kyiv School of Economics, https://kse.ua/wp-content/uploads/2024/09/Cooperation-between-Ukraine-and-African-countries-in-agriculture-East-Africa.pdf
- Achandi, E., Mujawamariya, G., Agboh-Noameshie, A., et al. (2018). Women’s access to agricultural technologies in rice production and processing hubs: A comparative analysis. Journal of Rural Studies, 60, 188–198.
- African Development Bank. (2024). African Economic Outlook 2024.
- Ayenew, M., & Arquitt, S. (2018). Kenya Agricultural Performance and Targets. CCGA Policy Brief No. 2.
- Bekabil, U. T. (2014). Review of challenges in Ethiopia. Journal of Natural Sciences Research, 4(18), 70–77.
- Casaburi, L., Kremer, M., & Mullainathan, S. (2016). Contract farming and agricultural productivity in Western Kenya. In S. Edwards et al. (Eds.), African Successes, Vol IV. University of Chicago Press.
- Charles, G., Jeppesen, S., Kamau, P., & Kragelund, P. (2016). Food-processing sector study. Forum for Development Studies, 44(1), 109–131.
- FAO. (2015–2016). AQUASTAT Country Profiles – Kenya, Ethiopia, Tanzania.
- Government of Kenya. (2007). Kenya Vision 2030.
- Government of Tanzania. (2015). Agricultural Sector Development Strategy II (ASDS II).
- Kashindi, G. (2020). Local agricultural production in Kenya. KAS African Law Study Library, 7.
- Laichena, J., Kiptoo, E., et al. (2022). Kenya agricultural policy profile. IWMI/CGIAR.
Southern Africa
- Martyshev, P., Stolnikovych, H., Piddubnyi, I. (2024c). Cooperation between Ukraine and African countries in agriculture: South Africa. Center for Food and Land Use Research at Kyiv School of Economics, https://kse.ua/wp-content/uploads/2024/10/Cooperation-between-Ukraine-and-African-countries-in-agriculture-South-Africa.pdf
- Acquah, B. K. (2004). In Shaping the Future of African Agriculture for Development. AAAE.
- AgriSA. (2024). Key Issues for South African Agriculture. https://agrisa.org.za
- Bank of Namibia. (2017). Feeding Namibia: Agricultural Productivity and Industrialisation.
- Commission on Restitution of Land Rights. (2021). Strategic Plan 2021–2024.
- Department of Agriculture, Land Reform and Rural Development. (2022, 2024). Agriculture and Agro-Processing Master Plan; State Land Lease and Disposal Policy.
- Department of Rural Development and Land Reform. (2013). NARYSEC Booklet.
- Financial and Fiscal Commission. (2021). Strategic Plan 2020–2025.
- Fortunato, A., & Enciso, S. (2023). Food for Growth: Namibia’s Agriculture Sector. Harvard Growth Lab.
- Giesel, C. (2023). Agriculture Challenges in South Africa. Bizcommunity.
- GIZ. (2020). Sector Brief: Namibia Agriculture.
- Government of Namibia. (2004–2017). Vision 2030, Agriculture Policy, Development Plans, and Cooperative Policy.
- Namibia Statistics Agency & UNICEF. (2021). Multidimensional Poverty Index Report.
West Africa
- Martyshev, P., Stolnikovych, H., Piddubnyi, I. (2024d). Cooperation between Ukraine and African countries in agriculture: West Africa. Center for Food and Land Use Research at Kyiv School of Economics, https://kse.ua/wp-content/uploads/2024/06/COOPERATION-BETWEEN-UKRAINE-AND-AFRICAN-COUNTRIES-IN-AGRICULTURE-WEST-AFRICA-.pdf
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- Diallo, S., Fofana, I., & Diallo, M. (2020). AGRODEP Working Paper 0041. IFPRI.
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- FAOSTAT. (2023). Food, Beverages and Tobacco Data.
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- JICA. (2023). Côte d’Ivoire Country Analysis Paper (JCAP).
- King, C. (2008). Community resilience in agri-ecological systems. Systems Research and Behavioral Science, 25(1), 111.
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- NEPAD. (2003). Maputo Declaration on Agriculture and Food Security.
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Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
A Potential Broadening of the Excise Tax on Food Products High in Sugar and Salt: The Case of Latvia
Overweight and obesity are significant public health issues, contributing to various chronic diseases such as cardiovascular diseases, diabetes, and certain cancers. Latvia’s second-highest share of overweight adults in the EU is a compelling reason for public health measures. These should aim to discourage excessive consumption of high-calorie foods and beverages. Excise tax is one of the tools in a complex approach to encourage a balanced diet and promote positive health outcomes. Motivated by evidence from Hungary, currently the only country in Europe imposing a tax on pre-packaged food products high in sugar and salt, we simulate the short-term impact of the introduction of a differentiated broad-based tax on food products in Latvia. We conclude that to influence consumer behaviour, price increases should be at least 10 percent, which implies introducing tax rates that are at least 1.5 times higher than those in Hungary.
Extremely High Overweight and Obesity Rates in Latvia
Overweight and obesity are serious public health challenges across Europe. Together with an unbalanced diet and low physical activity they contribute to many non-communicable diseases (NCDs), including heart diseases, diabetes and certain cancers (WHO, 2022). For many individuals, being overweight is also linked to psychological problems.
Overweight and obesity rates are extremely high in all EU countries. In 2022, more than half of all adults in the EU (51.3 percent) were overweight (including pre-obese and obese). Latvia has the 2nd highest rate of overweight adults in the EU (60.4 percent). This puts significant pressure on Latvia’s health care system and social resources.
Recognizing that overweight and obesity has multifactorial causes, a comprehensive approach is required to effectively tackle this problem, involving experts from various fields and addressing the issue from multiple angles.
One potential tool in a complex approach is an excise tax on foods and drinks high in sugar and salt since excessive consumption of such foods and drinks represents a major risk factor for NCDs (WHO, 2015a). Such a tax could help to reduce excessive consumption, encourage healthier eating, and improve public health outcomes.
The Intake of Added Sugars
According to data from the EFSA Panel on Nutrition, Novel Foods and Food Alergens (EFSA, 2022), the main source of added sugar intake in almost all European countries is sugar and confectionery. The numbers for adults (18–64 years) range from 20 percent in Austria to 57 percent in Italy (48 percent in Latvia). For children aged 1–18 years, sugar and confectionary contribute to 36 – 44 percent of added sugar intake in Latvia.
In Latvia, other key sources of added sugar are fine bakery wares, processed fruits, and vegetables. The contribution of sweetened soft and fruit drinks to total added sugar intake is only 8 percent for adults (18–64 years) and 3–7 percent for children (1–18 years).
Excise Tax on Soft Drinks
As of 2024, 14 European countries have implemented taxes on sugar-sweetened soft drinks. In Latvia, the tax was introduced in 1999 and was mainly motivated by the financial needs of the state budget.
The evidence from international case studies (WHO, 2023) shows that taxes on sugar-sweetened soft drinks can be effective in reducing consumption in the short term, particularly when the tax leads to significant price increases that reduce affordability. However, the overall evidence on whether these taxes successfully reduce sugar intake is inconclusive. In a review by the New Zealand Institute of Economic Research (NZIER, 2017), the authors conclude that methodologically robust studies show only small reductions in sugar intake, too small to produce significant health benefits, and easily offset if consumers switch to other high-calorie products. On the other hand, studies reporting a meaningful change in sugar intake often assume no compensatory substitution. At the same time, experience from Hungary suggests that a sugar tax imposed on a wide range of products is effective in reducing the overall consumption of products subject to the tax, and in encouraging healthier consumption habits. The impact assessment conducted 3 years after the introduction of the tax in Hungary showed that consumers of unhealthy food products responded to the tax by choosing a cheaper, often healthier product (7–16 percent of those surveyed), consuming less of the unhealthy product (5–16 percent), switching to another brand of the product (5–11 percent), or substituting it with another food item – often a healthier alternative (WHO, 2015b).
The Short-term Effect of a Broad-Based Excise Tax in Latvia
Approach
Motivated by the evidence from Hungary, we simulate the short-term impact of the introduction of a similar differentiated broad-based tax on food products high in sugar and salt using the approach applied in Pļuta et. al (2020). First, we use AC Nielsen monthly data from 2019 to 2023 on sales volume and prices of pre-packaged food products of selected categories in the modern trade retail market to estimate the price elasticity of demand for these products. The selected product categories included:
- Pre-packaged sweetened products (e.g., breakfast cereals, cacao, chocolate bars, soft and hard candies, sweet biscuits, etc.)
- Sweetened dairy products (e.g., ice cream, yoghurt, condensed milk, curd countlines, etc.)
- Salted snacks (salted nuts, salted biscuits, etc.)
- Ready-to-eat and instant foods (e.g., pizza cooled and frozen, frozen dumplings, vegetables and canned beans, etc.)
- Condiments (e.g., dehydrated instant and cooking culinary, dehydrated sauces and seasonings, dressings, ketchup, mayonnaise, etc.)
Second, we simulate different scenarios to assess the increase in price, reduction in sales and budgetary effect using the estimated elasticities and assuming different degrees of tax pass-through rate to retail prices (100 and 50 percent, respectively). Our results represent a short-term or direct fiscal effect, meaning we do not account for any second-round effects that may arise due to changes in domestic production and employment, which could in turn generate additional tax revenues.
The Tax Object and Rates
In defining the scenarios to be considered when modelling the potential broadening of the tax base, we use the Hungarian Public Health Product Tax (PHPT) as a practice example. As a basis, we use the list of product categories under taxation by the PHPT, the two-tier tax system and the PHPT rates as of 2024. In addition, we are also looking at other product categories (such as sugar sweetened dairy products, sweetened cereals and vegetables and beans containered), expanding the tax base even more. In total, we simulated four scenarios for taxing the food products high in sugar and salt. The scenarios consider a two-tier tax system, meaning products with lower sugar or salt content are taxed at a lower rate, while those with higher content face a higher tax. For condiments, only a high rate is applied due to the, usually high, salt content. A differentiated tax rate is expected to stimulate the industry to drive down sugar and salt content in their products, i.e., offering sugar and salt-reduced options. The scenarios differ from each other in the applicable rates.
- Scenario 1: Uses the same tax rates as Latvia’s excise tax on non-alcoholic beverages (as of March 2024) – EUR 7.40 per 100 kg (low rate) and EUR 17.50 per 100 kg (high rate).
- Scenario 2: Uses Hungary’s PHPT rates – in the general case, the low rate is EUR 17 per 100 kg, and the high rate is EUR 54 per 100 kg.
- Scenario 3: Sets rates 1.5 times higher than Hungary’s rates.
- Scenario 4: Doubles Hungary’s rates.
Assumptions
Unfortunately, the retail price and sales time series used in the analysis are not disaggregated into groups according to the sugar and salt content in the product. As a result, we apply assumptions to estimate the potential range of tax impacts.
To calculate the lower bound of the expected impact, we assume that 100 percent of sales in each product category are subject to the new sugar and salt tax, but all products have low sugar and salt content and therefore qualify for the lower tax rate.
To calculate the upper bound, we assume that 25 percent of the sales volume is taxed at the lower rate (due to low sugar and salt content), while the remaining 75 percent of sales are taxed at the higher rate, reflecting higher sugar and salt levels in those products.
Results
According to our estimations, the application of an excise tax on food products high in sugar and salt could lead to a price increase and sales decrease of taxed food products. The magnitude would depend on the type of food product (i.e., average retail price in the country) and scenario assumed (i.e., tax rates). Within each single scenario, the largest impact is expected for condiments. This is because we simulate only the high tax rate applied to them (not a two-tier system), as is the case in Hungary. The tax makes up a larger share of their price, and due to high price sensitivity, the decrease in sales is also greater.
Based on previous research, we conclude that price increases need to reach at least 10 percent to meaningfully influence consumer behaviour. This level of change is achieved in Scenario 3, which assumes tax rates 1.5 times higher than those used in Hungary.
Below we present the obtained estimations under Scenario 3. The estimates for Scenarios 1 and 2 are not included here because the price increase caused by the tax does not reach 10 percent for several product categories. Under Scenario 4 the price changes could exceed 10 percent but this scenario may also provide stronger incentives for manufacturers to reformulate their products (and in this case, the average price increase within a given product category will be lower). The results for Scenario 4 are available in a recent BICEPS report (Pļuta et al., 2024).
Under Scenario 3, with full tax pass-through (100 percent), the estimated reduction in sales volume is:
- 3.0–8.1 percent for pre-packaged sweetened products;
- 3.6–17.1 percent for sweetened dairy products;
- 0.9–4.7 percent for salted snacks;
- 10.4–54.1 percent for ready-to-eat and instant foods;
- 11.0–11.8 percent for condiments.
If only 50 percent of the tax is passed through to retail prices, the sales reductions would be approximately half as big.
The estimated revenue from the excise tax in this scenario would range between EUR 15.0 million and EUR 54.9 million. The resulting change in VAT revenue would range from a loss of EUR 0.7 million to a gain of EUR 1.1 million.
Conclusion
Although overweight and obesity rates are extremely high in all EU countries, Latvia, in 2022, had the second highest rate in the EU. In this brief, we explore the use of the excise tax as one of the tools in a complex approach to discourage excessive consumption of foods and beverages high in sugar and salt and encourage a balanced diet and promote positive health outcomes. Based on findings from previous studies, a price increase of at least 10 percent is needed to influence consumer behaviour. In Latvia, this would require tax rates approximately 1.5 times higher than those applied in Hungary, i.e. in the general case equal to EUR 25.5 (low rate) and EUR 81 (high rate) per 100 kg of product. Under such a scenario, the estimated revenue from the tax could range from EUR 15.0 to 54.9 million. For comparison, in 2024, Latvia’s excise tax on soft drinks generated EUR 15.6 million. To remain effective, tax rates should be adjusted over time in line with growth in disposable income.
Acknowledgement
This brief is based on a study Taxation of the non-alcoholic beverages with excise tax in the Baltic countries. Potential broadening of the tax base to food products high in sugar and salt completed by BICEPS researchers in 2024 (Pļuta et al., 2024). The study was commissioned by VA Government. It was developed independently and reflects only the views of the authors.
References
- EFSA Panel on Nutrition, Novel Foods and Food Alergens. (2022). “Tolerable upper intake level for dietary sugars”. Requestor: European Commission, Available: https://doi.org/10.2903/j.efsa.2022.7074
- NZIER.(2017). “Sugar tax: A review of the evidence”. A report for the Ministry of Health. https://www.nzier.org.nz/publications/sugar-taxes-a-review-of-the-evidence
- Pļuta A., Krumina M., Sauka A. (2024). “Taxation of the non-alcoholic beverages with excise tax in the Baltic countries. Potential broadening of the tax base to food products high in sugar and salt”. https://biceps.org/2024/12/17/exploring-the-potential-for-expanding-excise-taxes-to-products-high-in-sugar-and-salt/
- Pļuta A., Hazans M, Švilpe I.E., Zasova A., Sauka A. (2020). “Excise tax policy in the Baltic countries: alcoholic beverages, soft drinks and tobacco products”. https://www.sseriga.edu/study-excise-duty-policy-baltic-states-alcoholic-beverages-soft-drinks-and-tobacco-products
- WHO. (2015a), “Fiscal Policies for Diet and Prevention of Noncommunicable Diseases”, https://www.who.int/docs/default-source/obesity/fiscal-policies-for-diet-and-the-prevention-of-noncommunicable-diseases-0.pdf?sfvrsn=84ee20c_2
- WHO. (2015b). “Public health product tax in Hungary: an example of successful intersectoral action using a fiscal tool to promote healthier food choices and raise revenues for public health: good practice brief”. World Health Organization. Regional Office for Europe. https://iris.who.int/handle/10665/375098
- WHO. (2022). “WHO European Regional Obesity Report 2022”. Copenhagen: WHO Regional Office for Europe ISBN: 978-92-890-5773-8. https://www.who.int/europe/publications/i/item/9789289057738
- WHO. (2023). “Global report on the use of sugar-sweetened beverage taxes.” ISBN: 978-92-4-008499-5 https://www.who.int/publications/i/item/9789240084995
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
AI in the Energy Transition – Insights from Energy Talk 2025
As flexibility needs and energy security concerns grow, artificial intelligence (AI) is playing an increasingly central role in managing, optimizing, and securing energy systems. At the 2025 Energy Talk: AI and the Future of Energy, organized by the Stockholm Institute for Transition Economics (SITE) in collaboration with Energiforsk, several key experts and innovators showcased how AI is shaping the energy system, from household-level optimization to national infrastructure forecasting and regulation. The discussions highlighted AI’s potential to enhance efficiency, resilience, and user responsiveness, while also raising critical issues around data governance, cybersecurity, and value distribution. This policy brief summarizes the main takeaways from the event.
AI as an Actor in Energy Networks
AI is now embedded in everything from electricity generation forecasts to district heating systems and real-time price optimization. As Chloé Le Coq, Research Fellow at SITE and Professor at Paris Panthéon-Assas University, noted in her opening remarks, this marks not just a technological upgrade but a systemic shift in how energy systems operate. Where systems were once reactive, AI opens the door to adaptive, self-learning networks that can respond dynamically to demand and supply. Examples shared at the 2025 Energy Talk showed how this transformation is already underway across Europe.
In the Baltic region, AI is contributing to a broader transformation of the energy system. Dzintars Jaunziems, Advisor for Energy and Climate Policy at Latvijas Banka and Assistant Professor at Riga Technical University, explained that the region has undergone several major transitions over the past three decades by building liberalized market economies and opening energy markets. More recently, the Baltics have halted energy imports from Russia, fully disconnected from the BRELL grid, and completed synchronization with the EU electricity network.
Against this backdrop, AI is now supporting the Baltics’ transition from fossil fuels to renewables. In grid operations, AI is used to assess overhead lines and remotely monitor systems in real-time. It also optimizes transmission capacity and supports renewable energy forecasting, particularly for solar generation. In district heating, digital twin technologies are being introduced, while in the mobility sector, AI helps manage electric vehicle (EV) charging and route planning. The region has one of the highest smart meter penetration rates in Europe, although full-scale utilization is still pending.
In Ukraine, AI plays a crucial role in managing the energy system—both in daily operations and in maintaining resilience during wartime. Andrii Starzhynskyi, co-founder and CEO of a-Gnostics, presented several examples of how AI is already deeply embedded in the sector. Since 2018, machine learning has been used to forecast electricity consumption and generation with over 98 percent accuracy. This fully automated system also enables predictive maintenance by detecting failures in critical equipment such as transformers. One example is an app that analyses the sound of machines to detect faults early and prevent breakdowns.
AI also supports automated decision-making around electricity flows—for instance, whether to buy, sell, or store solar-generated electricity. At a-Gnostics, multiple AI models—primarily based on time series data—are used to manage and coordinate forecasts across different applications. According to Starzhynskyi, these solutions are already used daily by customers in sectors such as mining, agritech, energy production, and energy trading.
AI is also being used at the household level to enhance energy system efficiency. Björn Berg, CEO of Ngenic, presented how their system integrates AI in real time to control and optimize heat pumps, using live data rather than historical averages. Reported benefits include over 20 percent energy savings, fewer boiler starts, and reduced system losses. Berg noted that if optimization were scaled to one million heat pumps, the aggregate impact could exceed the output of Sweden’s three nuclear reactors—highlighting the potential of household-level AI integration at scale. At the same time, he pointed to current forecasting limitations, referencing a recent two-gigawatt prediction error as a reminder that learning models still need improvement.
Infrastructure, Governance, and Cybersecurity
The shift in how energy systems operate today also adds complexity. As energy systems become more decentralized, with growing integration of intermittent sources, and data volumes expand rapidly, new governance challenges emerge. Key questions include: Who owns the data and the algorithms? How can we ensure fairness, accountability, and cybersecurity?
Filip Kjellgren, Strategic Initiative Developer Energy at AI Sweden, shared how interactive visualization tools are making future energy needs more accessible to individuals. Traditional methods, such as static bar charts, often fail to engage. In contrast, tools like the so-called Behovskartan allow users to explore different demand scenarios and, visualize, and test assumptions such as reduced fossil fuel use. Kjellgren emphasized that while solar and wind installations are expanding rapidly due to falling costs, public resistance to local infrastructure remains strong—often stronger than for other infrastructure projects. In this context, AI-driven visualizations can help bridge the gap between energy system planning and public acceptance, improving both actual and perceived fairness and facilitating green transition.
Figure 1. Behovskartan
Source: Printscreen from behovskartan.se
Similarly, Michael Karlsson, Programme Coordinator Heat & Power at Energiforsk, introduced the organization’s newly launched AI cluster—an initiative designed to disseminate research and applied insights about AI in the energy sector through webinars, seminars, and other outreach activities. He also highlighted the limited involvement of energy economists in AI projects and called for greater interdisciplinary collaboration to close that gap and broaden the field.
These highlighted initiatives set the stage for a panel discussion focused on the broader policy and structural questions facing AI in energy systems. As AI becomes embedded in critical infrastructure, concerns have been raised about the controls over data and algorithms that drive energy decisions. Speakers warned against relying on proprietary “black-box” models, calling instead for open-source alternatives and domestic oversight. The discussion also highlighted the importance of building national capabilities to avoid overdependence on international actors with limited public accountability and at times questionable agendas. Legal frameworks were seen as lagging technological development—particularly regarding new forms of data, such as sound recordings from equipment, which are not clearly covered in existing regulations.
Cybersecurity and system resilience emerged as recurring themes. AI can help detect anomalies, anticipate grid stress, and support decentralized energy configurations. One example illustrates how AI can detect abnormal behavior in connected devices—so-called Internet of Things (IoT) components—by analyzing how equipment behaves in real-time, rather than relying solely on code-level protections. Several participants stressed the need to build resilience into infrastructure design. In the case of cyber-attacks or physical disruption—like those experienced by Ukraine—systems should be capable of switching to “island mode”, operating autonomously during crisis. Others pointed to privacy-preserving data architectures, where AI models are deployed to the data, avoiding the need to centralize sensitive information—an approach already used in sectors like healthcare and finance.
The panel also raised the question of fairness: Who benefits from AI in the energy sector? While large industrial users are already reaping the rewards, such as a farm that significantly lowered its electricity costs using AI-based forecasting, it remains unclear whether smaller consumers are seeing comparable gains. In regulated systems, efficiency improvements may translate into lower tariffs; however, several speakers noted that public acceptance of AI will depend on whether consumers can clearly perceive and share the benefits. Ultimately, the long-term legitimacy of AI will depend on how these gains are distributed in practice.
Concluding Remarks
The 2025 Energy Talk AI and the Future of Energy made clear that AI is no longer a future consideration—it is already transforming how energy is produced, distributed, and consumed. From national-level forecasting to household-level optimization and strategic planning, AI is increasingly present in every part of the energy system. Yet, as participants emphasized, its rapid deployment has outpaced both regulation and public awareness. Successfully integrating AI into the energy system requires a broader policy dialogue—one that goes beyond the technical regulation to address economic and social matters. The Energy Talk brought these intersecting areas into focus and highlighted the need for broader conversations on AI in energy.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
The Polish Presidential Elections 2025: Can the Democratic Coalition Complete Their 2023 Victory?
It is safe to say that the outcome of the second round of the Polish presidential elections, scheduled for June 1, 2025, will determine the potential for significant structural reforms in the country in the coming years. The two candidates are: Karol Nawrocki, officially declared as a ‘civic candidate’ (though for all practical purposes associated with the previous government’s Law and Justice party, Prawo i Sprawiedliwość – PiS), and Rafał Trzaskowski representing the main coalition party in the current government, the Civic Platform (Platforma Obywatelska), which came to power after the parliamentary elections in October 2023. In the first round of the 2025 presidential election, which took place on May 18, 2025, Rafał Trzaskowski came first with 31.4 percent of the votes and Karol Nawrocki second with 29.5 percent. This policy brief explores the mechanisms through which the Polish President can influence current policy, using past economic initiatives as illustrative examples. It also examines the results of the first round of the election in greater depth and highlights key areas where reforms would likely face significant obstacles, were Karol Nawrocki to win the decisive second round.
What Can the Polish President Do?
Although elected in a popular vote, the Polish President’s power in terms of influence on policies is highly limited. The President acts as the Supreme Commander of the Armed Forces of the Republic of Poland and is officially responsible for representing Poland on the international arena. However, most of the executive power in Poland lies with the government, which in turn requires the support of the Parliament.
That said, the past ten years of Polish politics—the years under the outgoing President Andrzej Duda—have shown that a government with only a narrow parliamentary majority can be highly dependent on the President. Its effectiveness may be either enhanced by a cooperative President or significantly constrained through the use of the presidential veto on legislative initiatives.
Andrzej Duda, who was picked as a surprise candidate to represent the Law and Justice party—in a similar manner to Karol Nawrocki today— won the elections in 2015. He facilitated a series of destructive reforms in the areas of the judiciary, education, and the labor market in the years Law and Justice party headed the government; later he blocked many of the current government’s efforts to reverse those policies.
The outcome of the vote on June 1, 2025, will therefore be crucial for the prospects of a clear return to democratic standards in Poland, and for the deeper structural reforms needed to place the Polish economy on a long-term development path. The winning candidate will also either facilitate coordinated efforts in international policy and joint European initiatives, or act to obstruct the current government’s actions in this area—including key policies related to support for Ukraine.
The President’s Influence on Economic Policy: Electoral Promises vs. Implementation
The limited executive power of the Polish President does not stop the candidates from coming forward with rich electoral programmes. These cover many areas outside of the President’s direct sphere of influence, including economic policies.
Using Andrzej Duda’s presidency as an example, it seems that while some of these are eventually implemented (although typically not without political frictions involving the Parliament) others tend to be more of electoral slogans than areas of real concern:
In 2015, Andrzej Duda campaigned on two major economic initiatives: lowering the retirement age and substantially increasing the main income tax allowance. In the first case, he came forward with a legislative proposal to the Parliament almost immediately after being elected, aimed at restoring the lower retirement age of 60 for women and 65 for men. Although the government had campaigned on the same reform before taking office, the Parliament froze Duda’s initiative for a year in an effort to introduce less drastic changes to pension eligibility criteria. Eventually, political considerations and the weight of the 2015 electoral promises prevailed. As a result, Poland is the only EU country with as big as a five-year gap in the retirement age between men and women. The electoral tax reduction proposal was, however, quickly abandoned. As shown in a recent commentary (Myck et al. 2025a), Duda not only failed to deliver on this promise but, over his ten-year presidency, largely ignored tax policy altogether—both in terms of initiating legislation and engaging in public debate on fiscal matters.
Initiatives by earlier presidents also show that while Polish presidents are always dependent on the Parliament, they can exert some influence over economic policy. For example, Bronisław Komorowski (in office 2010-2015) put forward a legislative initiative to change tax regulations for families with children, which the government later took on board. While the government’s implemented regulations differed from Komorowski’s proposal, they were still in line with his objectives (Myck et al. 2013).
These examples clearly illustrate that the success of any initiative from the president’s office ultimately depends on the parliamentary majority the President is able to mobilize. Based on the electoral promises of this year’s top candidates, such a majority seems highly unlikely regarding one of the major electoral promises of Law and Justice’s candidate, Karol Nawrocki. Nawrocki has proposed a substantial income tax reduction for families with 2 or more children, designed in a way that would heavily benefit the richest families (Myck et al. 2025b). The reform is estimated to cost about 19bn PLN (0.5 percent of GDP) per year, with over 60 percent of the total amount benefiting families in the top income quintile. Such a measure is extremely unlikely to gain support not only from the current government, but also—given its distributional consequences—from within Nawrocki’s own political base. One way to interpret this is that much like the deep tax cuts proposed by Andrzej Duda in 2015, Nawrocki’s tax proposal bears the hallmarks of a simple and appealing campaign slogan that is likely to be forgotten, whether or not he wins the election.
The First Round Results and Final Vote Prospects
While Rafał Trzaskowski placed first in the initial round of voting on May 18, 2025, the difference between the top two candidates came down to only 1.8 percentage points. This suggests a very close race in the second round and intensive electoral campaigning in the days leading up to the election. How close the runoff will be depends on the split of votes among those who supported other candidates in the first round, as well as their participation levels in the second round.
In the first round the top seven candidates collected 96.1 percent of the votes in total. Two candidates representing the current coalition parties received 5.0 percent (Szymon Hołownia) and 4.2 percent (Magdalena Biejat) of the votes, respectively. Two other main right-wing candidates collected a combined 21.2 percent: Sławomir Mentzen (Konfederacja party) received 14.8 percent, and Grzegorz Braun (Wolność party) received 6.3 percent. Adrian Zandberg, representing the left-wing opposition (Razem party), received 4.9 percent.
If those who voted for the government coalition candidates fully shift their votes to Trzaskowski in the second round, he could count for about 40.6 percent of the vote – still far short of the necessary majority. To secure the win, he would need to collect some support from both the left and the right. However, it is unlikely that voters in either of these cases unilaterally shift support to one of the top candidates.
As shown in Figure 1 below the main candidates will have to make strong appeals to the youngest voters (aged 18-29), the majority of whom supported Mentzen (34.8 percent) and Zandberg (18.7 percent). Trzaskowski is more likely to attract support from women and better educated voters. Based on the results of the first round, Nawrocki, can count on voters with less than tertiary education and on slightly more votes from men. While Biejat and Hołownia have already publicly endorsed Trzaskowski, the other candidates have so far refrained from making any declarations of support.
The public debate ahead of the second round is likely to focus on military and economic security, migration and support for Ukraine (including its refugee population in Poland). The final round of the 2025 presidential race in Poland is likely to be extremely close and highly polarising.
Figure 1. Poll results from the first round in the Polish Presidential Elections 2025, by demographics
Source: TVP info. Note: Late poll results by IPSOS, based on the results from 90 percent of the polling stations.
Completing the 2023 Parliamentary Victory
The democratic, pro-European coalition that won a parliamentary majority in October 2023 has so far only been partly successful in restoring the rule of law and a functioning system of checks and balances after their dismantling by the previous government. Other electoral promises from 2023—such as the liberalization of abortion rules, legislation on same-sex partnerships, and reform of the public media—remain to be implemented. The government implemented some important changes in the public media and judiciary, but broader reforms were either vetoed by President Duda or postponed due to the likelihood of his opposition.
On a number of occasions Duda also used a procedure called ‘preventive control’. Under such procedure, legislation is sent to the Constitutional Tribunal before the President decides whether to sign it or not. Since the Constitutional Tribunal has been central to controversies over judicial reforms introduced by the previous government, such decisions are simply another form of delaying the implementation of new legislation. There is thus little doubt that Rafał Trzaskowski’s victory on June 1st, 2025, is essential for the current government. It would enable reforms crucial for the return of the rule of law, for bringing back the Polish legal system in line with decisions of the European Court of Justice, and for advancing other major reforms in public media, women’s and minority rights, and more. From this point of view Karol Nawrocki’s win on June 1st, 2025, is key for the parties of the previous government, to stop these fundamentally important reforms.
The current government is facing important challenges in many policy areas and effective cooperation with the new President will be fundamental. Given the current level of government debt and high budget deficits, it will have to take significant steps to consolidate public finances. At the same time, it has committed to increasing spending on healthcare and education, while maintaining one of the highest levels of military spending among NATO countries. The government must also handle the challenges of demographic ageing and migration flows – all in the context of the continuing Russian aggression in Ukraine, and the overall global uncertainly. Even with strong presidential support, tackling all these issues will be challenging.Facing them under an antagonistic Head of State—in the case of Nawrocki’s victory—would not only make the government’s task significantly harder, it with also have serious implications for medium-term political stability in Poland and potentially other European countries.
References
- Myck, M., Krol, A., Oczkowska, M. (2025a) “What the President promised, what the government introduced” (“Co obiecał Prezydent, co wprowadził rząd”), CenEA Preelection Commentary 07/04/2025, in Polish.
- Myck, M., Krol, A., Oczkowska, M. (2025b) “Campaign tax promises of Karol Nawrocki” (“Kampanijne deklaracje podatkowe Karola Nawrockiego”), CenEA Preelection Commentary 14/04/2025, in Polish.
- Myck, M., Kundera, M., Oczkowska, M. (2013) „The President’s proposal to modify family support within the Polish tax system” („Prezydencka propozycja modyfikacji wsparcia rodzin w ramach systemu podatkowego”), CenEA Commentary 06/06/2013, in Polish.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Georgia’s Growth Dilemma: Structural Transformation, Inequality, and the Future of Inclusive Development
This policy paper examines Georgia’s economic growth and labor market developments between 2017 and 2023, with a focus on structural transformation and income distribution. While growth has been strong and absolute poverty has declined, challenges remain in labor reallocation, wage inequality, and regional disparities. Redistribution mechanisms, particularly social transfers, have played an important role in mitigating poverty; however, the pace of inclusive structural change has been limited. Key policy priorities include fostering productivity growth, expanding employment opportunities, and addressing inequality through targeted labor market and social policies.
Georgia’s Economic Rebound: Growth Beyond Recovery or Superficial Expansion?
In recent years, Georgia’s economy has demonstrated remarkable resilience and dynamism. Following a sharp contraction of real GDP by approximately 6.8 percent in 2020 due to the Covid-19 pandemic, the economy rebounded strongly, posting a growth rate exceeding 10 percent in 2021. This robust performance was maintained also in 2022 and 2023. The recovery was among the fastest in the region, fueled by a combination of strong private consumption, booming external demand, and exceptional inflows of remittances and capital.
According to national accounts data, output in 2023 not only recovered the losses sustained during the pandemic but significantly surpassed pre-pandemic levels. Georgia’s real GDP is on a trajectory above its previous trend, with potential output estimates also being revised upward (see Figure 1). Potential output — the level of economic activity the country can sustain without triggering inflation — is not directly observable and was estimated using a statistical technique known as the Kalman filter. This method uses historical GDP data and economic patterns to produce a smooth estimate of potential output over time, allowing policymakers to assess the gap between actual and sustainable growth. The economy’s output gap, which turned sharply negative during the pandemic, gradually closed by 2022 and moved into slightly positive territory by 2023, indicating that output had surpassed its estimated potential level as the recovery matured.
Figure 1. Output Growth, Output Gap, and Potential Output in Georgia
Source: Geostat. Author’s calculations.
Georgia’s recent economic growth is largely propelled by geopolitical factors linked to the Russo-Ukraine war. The sharp increase in remittance inflows from Russia — which soared by 403 percent to $2.1 billion in 2022 — provided a major boost to domestic consumption. At the same time, the relocation of capital, businesses, and skilled individuals intensified, with over 30,000 Russian-owned firms registered and nearly 115,000 Russian migrants arriving between 2022 and 2023, significantly stimulating investment and labor market activity. In addition, the rapid expansion of re-exports — particularly of motor vehicles and machinery — further accelerated external trade, with re-exports to Russia, Armenia, Kazakhstan, and Kyrgyzstan rising 6.6 times in 2024 compared to 2019, which strengthened the logistics and transport sectors.At the same time, substantial fiscal stimulus during the pandemic years, followed by a gradual normalization of fiscal policy, helped support aggregate demand without triggering immediate macroeconomic instability. Monetary policy remained broadly accommodative, while inflationary pressures — although pronounced — were largely kept under control relative to peer economies.
Despite these positive developments, the underlying composition of growth raises important questions. High headline growth figures do not automatically translate into widespread improvements in living standards or reductions in inequality. Growth that is driven by consumption booms, remittance surges, or temporary trade redirection may lack the deep, productivity-enhancing underpinnings necessary for long-term sustainability. Without broad-based sectoral upgrading and inclusive labor market outcomes, there is a risk that economic expansion will remain concentrated in a few dynamic sectors while leaving large parts of the population behind.
Moreover, the post-pandemic growth episode coincided with rising concerns about external vulnerabilities, including Georgia’s dependence on remittances (17.5 and 13.5 percent of GDP in 2022 and 2023, respectively (NBG, Geostat)) and commodity prices, as well as regional political risks. If these external drivers were to weaken, maintaining high growth rates without deeper structural changes could become increasingly difficult.
Therefore, while Georgia’s recent economic record is impressive by regional standards, it is crucial to assess whether this growth has been accompanied by meaningful structural transformation — namely, a reallocation of labor from low to high-productivity sectors, rising labor incomes, and reduced inequality. A deeper analysis of sectoral dynamics and employment patterns is required to determine whether Georgia’s economy is evolving toward a more inclusive and sustainable growth model.
Structural Shifts of the Economy: Progress Without Transformation?
The structural transformation of Georgia’s economy between 2017 and 2023 (see Figure 2) reveals both encouraging and concerning trends. The analytical framework used to assess structural transformation in Georgia between 2017 and 2023 draws on the methodology developed by McMillan and Rodrik (2011). This influential study emphasizes the role of labor reallocation across sectors as a key driver of aggregate productivity growth in developing and transition economies.
The analysis of the change in sectoral employment shares against relative sectoral productivity shows that, broadly speaking, labor reallocation has followed a growth-enhancing direction. The fitted trend line across sectors exhibits a positive slope, suggesting that workers have been moving, though slowly, away from low-productivity sectors and toward relatively higher-productivity activities. However, the shallow gradient of the trend line indicates that the pace and quality of this transformation have been modest. The most significant dynamic during this period is the continued exit of labor from agriculture. Agriculture remains a highly unproductive sector, with a large share of labor in subsistence agriculture, and experienced a substantial decline in its employment share—a positive signal for economic modernization. Nevertheless, much of the displaced labor appears to have been absorbed by mid-productivity services such as construction, retail trade (wholesale and retail trade; repair of motor vehicles and motorcycles), accommodation and food service activities, and transportation. These sectors have seen rising employment shares but remain relatively close to or below the economy-wide average in terms of labor productivity. Consequently, while labor mobility is evident, the migration has largely been into sectors that do not substantially enhance overall economic efficiency.
Figure 2. Structural Transformation and Productivity Alignment in Georgia, 2017–2023
Source: Geostat. Author’s calculations. Note: Each bubble represents a sector, with its position determined by the change in its employment share (horizontal axis) and its relative productivity level (vertical axis). Bubble size corresponds to the sector’s share of total employment in 2017. The positive slope of the fitted trend line indicates modest progress in reallocating labor toward more productive activities, although the shift remains shallow and incomplete.
In contrast, high-productivity sectors, notably information and communication, financial and insurance activities, and real estate, have exhibited strong relative productivity but absorbed very limited shares of the labor force. These findings point to persistent barriers in accessing higher-value employment opportunities, likely stemming from skill mismatches, limited educational attainment, and structural rigidities in the labor market.
Public administration, education, and health — traditionally labor-intensive sectors — have maintained relatively large shares of employment while operating below average productivity levels, reflecting a lack of dynamism in these essential public service areas.
Overall, the observed pattern suggests that Georgia’s recent economic growth has been accompanied by low-quality structural transformation. Although there has been a reallocation of labor from extremely low-productive sectors, the transition has not been sufficient to significantly lift aggregate productivity or to broaden access to high-wage, high-skill employment.
These trends underscore the critical need for policy interventions aimed at improving the quality of labor mobility. Investment in education and vocational training to match labor supply with demand in high-productivity sectors is essential. Moreover, facilitating entrepreneurship, promoting innovation in services and manufacturing, and supporting labor market flexibility could help ensure that future structural changes generate more inclusive and sustainable economic growth.
Labor Market Dynamics: Recovery in Numbers, Challenges in Structure
Following the period of sectoral shifts and structural transformation outlined above, it is equally important to examine how the Georgian labor market has evolved in recent years. Labor market dynamics provide critical insight into the inclusiveness and sustainability of economic growth. Between 2017 and 2023, the number of employed individuals exhibited a general upward trajectory, particularly after the sharp decline during the Covid-19 pandemic in 2020 (see Figure 3). Employment numbers, which fell significantly in 2020 and 2021, recovered steadily in the following years, reaching approximately 1.33 million in 2023. Preliminary assessments suggest that this recovery is expected to continue into 2024, further consolidating the labor market’s post-pandemic rebound.
Figure 3. Employment and Unemployment Trends in Georgia
Source: Geostat. Author’s calculations.
This recovery has been accompanied by notable improvements in Georgia’s wage dynamics. After a period of stagnation in nominal and real wages between 2018 and 2020, the economy experienced a sharp acceleration in wage growth, beginning in 2021. Average nominal wages rose rapidly, while real wage growth, which accounts for inflation, also turned positive after years of stagnation (see Figure 4). These wage dynamics indicate that the labor market tightening contributed to upward pressure on wages, suggesting better bargaining conditions for workers in certain sectors.
Figure 4. Nominal and Real Wage Dynamics in Georgia
Source: Geostat. Author’s calculations.
At the same time, unemployment rates declined significantly. The unemployment rate, which had hovered between 17 and 20 percent prior to the pandemic, began a gradual downward trend from 2021 and onwards, falling to approximately 14 percent by 2023 (see Figure 3). This suggests that job creation in the recovery phase was relatively strong. However, the persistently high levels of unemployment earlier in the period underscore structural issues that remain unresolved.
Nevertheless, despite these positive headline trends, several deeper challenges persist within Georgia’s labor market. Employment growth has been concentrated primarily in low- and mid-productivity service sectors, as indicated previously. Informality remains high, particularly in agriculture and small-scale services, and labor underutilization (32.1 percent) — including underemployment and discouraged workers— continues to affect a significant segment of the workforce.
Moreover, the share of labor income relative to GDP provides important additional context (see Figure 5). As shown in Figure 5, the wage share of GDP fluctuated throughout the period, declining during the pandemic years and rebounding sharply in 2023. While this recovery is promising, it may however partially reflect inflationary effects or nominal wage adjustments rather than deep, productivity-driven gains.
Figure 5. Share of Wages in GDP and Economic Growth
Source: Geostat. Author’s calculations.
Taken together, recent labor market developments in Georgia reflect a cyclical recovery reinforced by external demand and domestic consumption. Yet, the underlying structure of employment, informality, and the relatively slow reallocation of labor into high-productivity sectors suggest that the labor market’s transformation remains incomplete. Sustainable improvements in labor incomes and employment quality will require addressing skills mismatches, boosting formal sector job creation, and ensuring that future growth translates into widely shared labor market opportunities.
Despite the improvements in employment and wage dynamics, it remains critical to assess whether these labor market gains have translated into broader improvements in income distribution and living standards. Strong aggregate indicators do not necessarily imply that growth has been inclusive or that inequality has diminished. The following section examines how the distribution of income has evolved in recent years, focusing on wage structures, inequality measures, and the extent to which economic growth has been shared across different segments of the population.
Income Inequality and Distributional Shifts: A Fragile Middle and Growing Extremes
Following the developments observed in the labor market, it is crucial to assess how economic growth and labor dynamics have translated into income distribution outcomes. Understanding the evolution of income inequality provides deeper insight into whether the benefits of growth have been broadly shared or have remained concentrated.
Wage income distribution patterns between 2017 and 2023 show a complex trajectory. The wage distribution curve (see Figure 6) reveals that while average earnings have increased over time, the overall shape of the distribution has also evolved significantly. The peak of the distribution has become sharper and shifted toward higher income brackets, particularly around the 1200–2400 GEL range. However, the right-hand tail of the distribution has simultaneously elongated, suggesting the emergence of a relatively small group of very high-income earners.
Figure 6. Wage Income Distribution Curves, 2017–2023
Source: RevenueServices. Author’s calculations.
This dual movement — a general upward shift combined with increasing dispersion — is captured through key statistical measures:
First, the standard deviation of incomes, which reflects the average distance of individual incomes from the mean, increased notably (57 percent) between 2017 and 2023. An increasing standard deviation indicates that income differences within the population have become more pronounced, with greater dispersion around the average wage. In simple terms, not only are people earning more on average, but the spread between low and high earners has widened substantially.
Second, the changes in skewness and kurtosis provide further depth to this picture. Skewness measures the asymmetry of the income distribution. In 2017, the distribution had a skewness of about 1.74, indicating a moderate right-skew, with income values concentrated around the lower and middle ranges and a gradual tapering toward higher incomes. By 2023, skewness had increased to 3.81, suggesting that the income distribution has become much more asymmetrical. A few individuals or households are earning disproportionately high incomes compared to the rest of the population. The visible downward shift in the 2023 wage distribution curve at the lower income ranges likely reflects two reinforcing trends. First, persistent inflation during the post-pandemic recovery years eroded the real value of wages, effectively pushing nominal incomes upward and compressing the lower tail of the distribution. Many workers who previously occupied the lowest wage brackets may have moved into higher nominal categories without corresponding improvements in purchasing power (average real wages declined until 2021, after which they began to recover, rebounding steadily through 2023 following the Covid-19 shock (See Figure 4)). Second, due to low rate of job creation, Georgia has experienced a high rate of labor emigration in recent years, especially to the EU and the U.S., particularly among low-skilled workers. This outflow of labor likely reduced the number of individuals earning wages in the lowest income ranges, further contributing to the observed contraction of the left side of the distribution curve. Together, these factors help explain why the red curve in 2023 dips below previous years in the lowest wage intervals.
Kurtosis, meanwhile, captures the “tailedness“ or the concentration of extreme outcomes. Georgia’s wage distribution moved from a kurtosis of about 5.16 in 2017 to 15.75 in 2023. Higher kurtosis indicates that extreme deviations (very low or very high incomes) have become more common relative to a normal distribution. In Georgia’s case, it points to an increasingly peaked distribution with fat tails: most people are concentrated around a modal income, but extreme earnings at the high end have become more significant.
In parallel, the Lorenz curves for 2017 and 2023 (see Figure 7) offer a graphical representation of these dynamics. The curve for 2023 lies slightly closer to the line of equality than that of 2017, reflecting a marginal improvement in income equality in the early part of the period. However, the difference is modest, and the curve’s arched shape hints at a persistent structural inequality. It should be mentioned that the calculations are based on household expenditures and therefore reflect the redistributive effects of government fiscal policy on income inequality. The Gini index, a summary statistic derived from the Lorenz curve, plots the cumulative share of income held by cumulative shares of the population. It measures income inequality on a scale from 0 (perfect equality) to 1 (perfect inequality) and thus provides a concise way to track changes in distributional dynamics over time.
In the case of Georgia, the index supports the discussion regarding the Lorenz curve. Between 2017 and 2021, the Gini index declined from 0.3711 to 0.3090, suggesting a reduction in income inequality during these years, likely influenced by pandemic-driven wage compression, social transfers, and temporary labor market adjustments. However, from 2021 onwards, inequality began creeping upward again, reaching 0.3271 in 2023. This suggests that the initial equalizing effects of crisis responses were short-lived and that structural disparities in income distribution have reasserted themselves as the economy recovered.
Figure 7. Lorenz Curves (2017 and 2023 comparison)
Source: Geostat. Author’s Calculations.
Together, these metrics paint a coherent picture: the Georgian economy experienced nominal wage growth and a partial strengthening of middle-income segments during the recovery phase, however, this was accompanied by greater income dispersion, higher asymmetry (favoring high-income earners), and an increased concentration of wealth at the very top.
Thus, although the average worker is better off in absolute terms compared to 2017, the relative disparities within the labor force have widened, especially after 2021. Growth has been unevenly distributed, increasingly favoring highly skilled, capital-intensive, or well-connected sectors and workers.
Poverty trends during 2017–2023 (see Figure 8) add an important additional dimension to the analysis of income distribution. Over this period, Georgia achieved a substantial reduction in absolute poverty, with the share of the population unable to meet basic consumption needs falling from 21.9 percent in 2017 to 11.8 percent in 2023. This sharp decline reflects real improvements in living standards for a significant portion of the population and indicates that economic growth, combined with social policy interventions, had a meaningful impact in alleviating extreme deprivation. However, developments in relative poverty tell a more nuanced story.
Relative poverty, which measures economic disadvantage in relation to the median income, declined only modestly from 22.3 percent to 19.8 percent over the same period. The persistence of relative poverty, despite improvements in absolute poverty, suggests that while more people were able to meet basic needs, the income distance between lower-income households and the median population did not significantly narrow. This implies that, although economic growth has lifted many out of extreme poverty, underlying income inequality has remained largely intact. Crucially, redistribution plays a central role in shaping these poverty outcomes. Although Georgia’s tax system is largely regressive and heavily reliant on indirect taxes, fiscal transfers — particularly the old-age pension — play a powerful equalizing role. The pension system alone is estimated to reduce the national poverty rate by up to 18 percentage points, highlighting the critical role of targeted redistribution in mitigating deprivation. These fiscal tools are especially important in the absence of highly progressive taxation, and they help explain why absolute poverty declined so markedly despite ongoing structural labor market weaknesses. At the same time, the relatively limited change in relative poverty underlines the limits of redistribution in addressing inequality in the absence of more inclusive labor market outcomes and equitable income growth.
Figure 8. Evolution of Absolute and Relative Poverty Rates in Georgia, 2017–2023
Source: RevenueServices. Author’s calculations.
An important part of the labor market story is the role of public employment initiatives, particularly those targeting the labor market. While government employment programs have had a visible impact on official labor statistics (see Figure 9), particularly in peripheral regions, a closer examination reveals critical concerns regarding the quality and sustainability of the jobs created. Many of the positions facilitated through this program are characterized by very low wages, limited or no skills development opportunities, and lack of formal career advancement paths. Rather than serving as a bridge to stable, productive employment, these jobs often appear to fulfill administrative or social functions, providing basic income support without contributing meaningfully to workers’ long-term economic mobility.
Figure 9. Share of Social Service Agency (SSA) Program Employment in Total Regional Employment (2023)
Source: Social Service Agency, Geostat, Author’s Calculations. Note: Bars represent regions in Georgia.
Moreover, there is evidence that the expansion of employment facilitated by the government program has, in some regions, been used as a tool for political management, particularly at the municipal level. By creating a network of publicly funded low-skill jobs tied to local government structures, employment program may inadvertently reinforce patronage systems and political dependence, particularly around electoral cycles.
This raises important concerns about the role of public employment programs in structural transformation. While temporary income support can be vital for vulnerable populations, overreliance on low-productivity public sector jobs can entrench regional stagnation and undermine incentives for private sector dynamism. For employment programs to contribute positively to structural transformation, it is essential that they be reoriented toward genuine skills development, pathways into productive sectors, and integration with broader labor market activation strategies.
Taken together, these trends suggest that while Georgia’s economic growth has lifted many individuals out of absolute poverty and improved average incomes, it has also led to greater wage dispersion, increasing concentration of incomes at the top end, and significant concerns about the depth and quality of labor market transformations. Without deliberate policy efforts to promote inclusive structural change, Georgia risks entrenching a dualistic economy, where prosperity coexists with persistent inequality and regional marginalization.
Conclusion and Policy Recommendations
In light of the findings discussed above, a set of targeted policy actions is proposed to foster a more inclusive, sustainable, and equitable economic transformation in Georgia. These recommendations aim to address the structural weaknesses identified in the labor market, income distribution, and regional economic development, ensuring that future growth benefits a broader cross-section of the population.
The findings of this policy paper highlight the need for a more deliberate approach to structural transformation in Georgia. While recent economic growth has been strong, labor reallocation toward high-productivity sectors remains incomplete, income distribution dynamics point to persistent inequalities, and improvements in living standards have not been evenly shared. To ensure that growth translates into broad-based prosperity, the following policy actions are recommended:
Georgia must accelerate the movement of labor from low-productivity sectors, particularly agriculture and informal services, into higher-productivity activities. Policymakers should prioritize sectoral strategies that support emerging dynamic industries — such as ICT, logistics, manufacturing, and modern services — while also upgrading traditional sectors like agriculture and tourism to enhance productivity and employment absorption.
Addressing skill mismatches is essential to enable labor mobility toward productive sectors. Investment in vocational education, digital skills training, and sector-specific workforce programs must be intensified, especially targeting young people, rural workers, and displaced labor from declining industries.
While public employment programs can play a stabilization role, the primary engine of sustainable job creation must be the private sector. Georgia should focus on creating an enabling environment for small and medium sized enterprises, supporting entrepreneurship, streamlining business regulations, and improving access to finance, especially outside of the capital Tbilisi.
Reducing regional disparities is critical for equitable growth. Targeted infrastructure investment, decentralized support for business development, and place-based labor market policies are needed to ensure that structural transformation benefits all regions, not only urban centers.
Promoting formal labor relations through fiscal incentives, simplified compliance procedures, and stronger enforcement can raise job quality and income security. At the same time, reinforcing social protection systems can mitigate inequality without discouraging labor market participation, helping to build a more resilient workforce.
Ongoing reforms must be informed by robust, high-frequency data. Strengthening labor market information systems, expanding coverage of income and employment surveys, and integrating administrative data into policymaking will enhance the government’s ability to monitor progress on structural transformation and distributional outcomes.
References
- McMillan, M. S., & Rodrik, D. (2011). Globalization, structural change and productivity growth. NBER Working Paper No. 17143. National Bureau of Economic Research.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Russia’s Counter Sanctions: Forward to the Past!
Since February 2022, Russia has introduced a series of counter sanctions in response to the international sanctions introduced following the country’s full-scale invasion of Ukraine. These measures aimed to counteract external economic pressure while shielding the domestic economy from further destabilization. However, their broad implementation has led to mixed effects across various sectors while simultaneously increasing the administrative burden. This policy brief argues that Russia’s countersanctions reinforced state control over key industries, worsened market competition and fiscal sustainability, which contributed to a systematic move towards a planned economy.
Russia’s Counter Sanctions and the Expansion of State Control
Since February 2022, Russia has introduced a series of countersanctions in response to the international sanctions imposed following its invasion of Ukraine. A broad range of economic, financial, and trade restrictions have been implemented, including nationalization of foreign assets, price control, capital flow restrictions, export bans, and state-directed subsidies – all aimed at mitigating external economic pressure while reinforcing state control over key industries (Garant, 2025).
While it is widely accepted that, in times of crisis, governments may intervene in the economy to provide necessary support, such intervention should remain limited in scope and duration. Prolonged state involvement, particularly through subsidies and market controls, can distort price signals, crowd out private investment, and erode the foundations of competitive market dynamics (Friedman, 2020).
In the case of Russia, intensive government economic interventions, specifically after 2022, have led to mounting inefficiencies, increased inflationary pressures, and weakening long-term growth prospects (SITE, 2024; SITE, 2025). This policy brief discusses how the recent surge in presidential decrees, the sharp expansion of targeted subsidies across nearly all sectors, and the tightening of price regulations reflect the Kremlin’s strategic use of counter sanctions as a means of consolidating economic power and reinforcing centralized control.
An Expansion of Presidential Control
Since 2022, presidential decrees account for 25 percent of all anti-sanctions legislative measures, indicating a significant consolidation of executive control over economic policymaking. The trend of expanding presidential control through issued decrees is illustrated in Figure 1. As shown in the figure, the total number of presidential decrees has nearly doubled since 2019, amounting to 1131 in 2024. The largest share of this decree increase, however, occurred post February 2022.
Figure 1. Number of Presidential Decrees in Russia
Source: ConsultantPlus, 2025.
Beyond the expansion in the number of decrees, what is particularly noteworthy is the breadth of topics they cover. They range from significant interventions on nationalization and economic control to quite detailed low-impact orders.
Among the highly impactful presidential decrees, Decree No. 79 (February 28, 2022) should be mentioned. The decree introduced a mandate that Russian residents engaged in foreign economic activities sell 80 percent of their foreign currency earnings. Further, Decree No. 302 (April 25, 2023), allowed the Russian state to seize foreign assets from “unfriendly states” if necessary for national security or in retaliation for asset confiscations abroad. Global companies from Germany (Uniper), Finland (Fortum), France (Danone), and Denmark (Carlsberg) are among those affected by these expropriations (Garant, 2025). Seized foreign assets were transferred to state-controlled entities, which drastically reduced competition and increased inefficiencies within key Russian industries.
Similarly, Decree No. 416 (June 30, 2022) on the Nationalization of Sakhalin-2, transferred oil and gas projects from foreign operators (Shell, Mitsubishi and Mitsui) to a Russian-controlled legal entity. Moreover, foreign companies from “unfriendly” countries were required to sell their Russian assets at a minimum 50 percent discount when exiting the market. Additionally, they were obliged to pay a “voluntary contribution” to the Russian federal budget at 15 percent of asset value (Garant, 2025).
At the same time, numerous presidential decrees have been adopted to address very specific low-level administrative issues. While their economic impact has been quite limited, they have largely contributed to a growing micromanagement and regulatory complexity (for instance, Decree No. 982 (December 22, 2023) on Temporary State Control Over a Car Dealership, Decree No. 1096 (June 17, 2022) on Transport Credit Holidays etc.).
Apart from the potential negative effects of direct government intervention in the economy, there are several issues with Presidential Decrees. Most importantly, presidential decrees, unlike statutes or other forms of legislation, are not subject to parliamentary approval. Thus, they are bypassing legislative debate and accountability, which makes them less transparent and balanced. Presidential decrees serve as tools to avoid legislative resistance since the Russian judiciary rarely challenges presidential authority, meaning decrees are difficult to contest or reverse through legal means. Further, they often overlap with other legislation, thus duplicating the functions of other legislative (and executive) authorities, leading to regulatory uncertainty. This, in turn, undermines implementation and expands bureaucratic oversight, further increasing inefficiencies and costs (see for instance, Remington, 2014; Pertsev, 2025).
Altogether, the surge in presidential decrees in Russia contributes to increasing institutional instability, an increasing administrative burden and a centralization of power. However, the full impact of these measures on the macro level is yet to unfold.
Targeted Subsidies and Industry Dependence
A key tool in Russia’s counter sanctions strategy is the expansion of state subsidies. Since 2022, substantial subsidies have been directed toward the energy sector; industrial and technological development – including aviation, pharmaceuticals, electronics, and shipbuilding; agriculture and food security; transportation and infrastructure; the banking sector; housing; and consumer lending. The scale of these subsidies indicates growing imbalances and escalating fiscal risks in the Russian economy (Garant, 2025).
However, estimating the total resources going to subsidies is quite challenging. Precise subsidy figures are only explicitly stated in few legislative acts. Most legislative documents mention the form of subsidy without specifying the amount or the source of financing. Nevertheless, some estimates have been made by both Russian and Western experts.
For instance, Russia spent approximately 12 RUB trillion (126 USD billion) on fossil fuel subsidies in 2023 (Gerasimchuk et al., 2024). Subsidies to the agricultural sector were estimated at 1 trillion RUB between 2022 and 2024 (Statista, 2025). Since 2022, Russia has allocated approximately 1.09 trillion RUB (12 billion USD) in subsidies to the aviation sector to maintain operations (Stolyarov, 2023; Garant, 2025). Around 100 billion RUB were allocated to support the tourism industry during 2023–2024 (Ministry of Economic Development of the Russian Federation, 2024; Garant, 2025).
To understand the order of magnitude, it’s worth noting that, for instance, budget revenues from oil and gas amounted to 8.8 trillion RUB in 2023 and 11.1 trillion RUB in 2024 (Figure 2).
Figure 2. Budget revenues and expenditures
Source: SITE, 2025.
In addition, state subsidies for mortgages nearly doubled since 2022, with the total amount reaching 1.7 trillion RUB between 2022 and 2024 (CBR, 2024). Thus, the Russian mortgage market has become heavily dependent on state support, with subsidized mortgage programs accounting for nearly 70 percent of the growth in mortgage lending in early 2024 (CBR, 2024). Although the so-called standard preferential mortgage program was terminated on July 1, 2024, its discontinuation does not remove the substantial fiscal burden created by earlier subsidy schemes.
Moreover, the Russian government has expanded subsidized lending programs to support both businesses and individuals. For instance, preferential loans and credit holidays have been granted to small, medium and large enterprises (see for instance, Presidential Decree: No. 121, March 2022, Federal Law 08.03.2022 No. 46-FZ, and others (Garant, 2025)), further straining the government’s finances.
In many cases, subsidies allocated to state-owned enterprises double as a mechanism for off-budget military financing. For instance, defense-industrial conglomerates like Rostec not only receive targeted support but play also a pivotal role in facilitating military acquisitions and production activities outside of the formal federal budget framework (Kennedy, 2025). This not only obscures the true scale of budget expenditures but again increases the long-term fiscal burden.
As such, these measures have fostered a heavy reliance on state funding, resulting in the accelerated depletion of financial reserves and contributing to increased fiscal risks.
Price Controls, State Regulation and Planned Procurement
As mentioned earlier, the set of countermeasures recently implemented by Russia also indicates a shift toward a planned economy, with hallmark features such as price controls gradually re-emerging as policy tools. As in Belarus, where state-led economic management has long been the norm, the Russian government’s direct intervention in price-setting mechanisms, particularly for essential goods, erodes market signals.
Since 2022, a series of decrees have introduced price controls on essential goods and services to cushion households against rising costs amid inflation. These measures include caps on fare increases for public transportation, limits on tariffs for heating, water supply, and wastewater services; price limits on essential medicines, and staple agricultural products (Garant, 2025).
By limiting the price growth of necessities, these interventions aim to support households in the short term. However, prolonged price controls may entail distorted market signals, increased subsidies dependency for producers, and higher administrative costs for control enforcement.
The deviation from market mechanisms has been even more amplified in procurement, through Federal Law No. 272-FZ (July 14, 2022), which compels businesses to accept government contracts if they receive state subsidies or operate in strategic sectors. In practice, companies cannot refuse government contracts if their products or services are required for so-called counterterrorism and military operations abroad. Refusal to comply with procurement orders may result in criminal liability, as non-performance can be interpreted as economic sabotage under this law.
In addition, the Russian government provides up to 90 percent of procurement contracts in advance (Government Decree No. 505, March 29, 2022). This arrangement weakens the role of contracts, prices, and competition, while increasing the fiscal risks. In effect, it reinforces a central planning logic and undermines competitive procurement, where outcomes should be driven by performance and value rather than access to state funding.
With Russian companies cut off from foreign investment and other external financing due to sanctions, large-scale government support has become even more critical – intensifying dependence on state subsidies and, by extension, state control. The legal changes outlined above have turned procurement into a key instrument of political control over businesses. The scale of these subsidies is contributing to a damaging shift toward a centrally planned system, restricting competition and undermining long-term growth potential.
Fiscal Sustainability at Risk
The extensive use of subsidies, preferential loans, and government-backed financial interventions has placed an increasing burden on Russia’s fiscal system. While these measures were introduced to mitigate the effects of international sanctions, stabilize key industries and support households, they have led to significant structural imbalances, growing budget deficits, and rising financial risks.
State-subsidized loans have surged across multiple sectors, including construction, IT, housing, energy, infrastructure, and agriculture. The result has been a sharp increase in corporate and consumer debt, with unsecured consumer loans growing at an annual rate of 17 percent as of April 2024. Overdue debt on loans to individuals reached 1.34 trillion RUB by February 2025, signaling mounting financial distress for households despite the support measures (CBR, 2025).
The high concentration of corporate debt has further destabilized the financial system. By early 2024, the debt of the five largest companies accounted for 56 percent of the banking sector’s capital, indicating systemic vulnerabilities (CBR, 2025). In addition, the government has implemented new policies that exacerbate the risks connected to state interventions in banking operations. For instance, in March 2022, it introduced a moratorium on bankruptcy proceedings, effectively delaying the official declaration of businesses as insolvent or financially distressed. At the same time, the Central Bank required commercial banks to restructure loans rather than classify them as defaults – masking financial distress and exacerbating long-term risks to the banking sector (Garant, 2025).
Moreover, a growing share of Russia’s war-related spending now flows through off-budget channels – such as state-owned enterprises and regional programs – rather than the federal budget. According to a recent analysis, as much as one-third of military and strategic expenditures bypass formal budget reporting altogether (Kennedy, 2025).
These hidden expenditures distort the actual fiscal position, reduce transparency, and increase the long-term burden on the public sector by masking the true scale of liabilities – raising further questions about the sustainability and accountability of Russia’s fiscal policy.
Conclusions
Since February 2022, Russia’s counter-sanctions measures have markedly shifted its economic governance toward greater state control and elements reminiscent of Soviet-era central planning. Large-scale subsidies, administrative pricing, and deep state involvement in production and procurement have suppressed market competition and efficiency. These interventions have distorted incentives and curtailed the role of market signals, contributing to growing inefficiency across key sectors.
Looking ahead, the long-term economic outlook for Russia is increasingly negative. While the counter-sanctions measures may have softened the initial blow of international sanctions, they have entrenched structural vulnerabilities, reduced fiscal flexibility, and amplified systemic risks, particularly in the financial and real estate sectors. Moreover, by undermining innovation and productivity, Russia’s counter sanctions are accelerating its trajectory toward deeper economic isolation and a centrally managed model, with severe implications for sustainable growth.
References
- Central Bank of Russia (CBR). (2024). Mortgage lending market statistics. https://www.cbr.ru/statistics/bank_sector/mortgage/mortgage_lending_market/
- Central Bank of Russia (CBR). (2025). https://www.cbr.ru/statistics/
- ConsultantPlus. (2025). https://www.consultant.ru/
- Friedman, M. (2020). Capitalism and freedom (40th anniversary ed.). University of Chicago Press.
(Original work published 1962). 272 p. - Garant. (2025). Anti-sanction measures 2022-2025 (special economic measures and measures aimed at supporting businesses and citizens) (in Russian). https://base.garant.ru/57750630/
- Gerasimchuk, I., Laan, T., Do, N., Darby, M., & Jones, N. (2024). The cost of fossil fuel reliance: Governments provided USD 1.5 trillion from public coffers in 2023. International Institute for Sustainable Development (IISD). https://www.iisd.org/articles/insight/cost-fossil-fuel-reliance-governments-provided-15-trillion-2023
- Kennedy, C. (2025). Russia’s hidden war debt: Full report. Navigating Russia. Retrieved March 5, 2025 from https://navigatingrussia.substack.com/p/russias-hidden-war-debt-full-report
- McFaul, M. (2021). Russia’s road to autocracy. Journal of Democracy, 32(4), 11–26. https://www.journalofdemocracy.org/articles/russias-road-to-autocracy/
- Ministry of Economic Development of the Russian Federation. (2024). About 100 billion rubles have been allocated for the national project Tourism and Hospitality Industry in 2023–2024. https://en.economy.gov.ru/material/news/about_100_billion_rubles_have_been_allocated_for_the_national_project_tourism_and_hospitality_industry_in_2023_2024.html
- Pertsev, A. (2025). Auditing the auditors: Does Putin trust anyone now? Carnegie Endowment for International Peace. https://carnegieendowment.org/russia-eurasia/politika/2025/03/russia-putin-elites-control?lang=en
- Remington, T. F. (2014). Presidential decrees in Russia: A comparative perspective. Cambridge University Press.
- Statista. (2025). Annual value of subsidies in the agricultural industry in Russia from 2015 to 2025. https://www.statista.com/statistics/1064082/russia-agricultural-subsidies/
- Stolyarov, G. (2023, December 21). Russia splashes $12 billion to keep aviation sector in the air. Reuters. https://www.reuters.com/business/aerospace-defense/russia-splashes-12-bln-keep-aviation-sector-air-2023-12-21/
- Stockholm Institute of Transition Economics (SITE). (2024). The Russian economy in the fog of war. https://www.hhs.se/en/about-us/news/site-publications/2024/russias-economic-imbalances/
- Stockholm Institute of Transition Economics (SITE). (2025). Financing The Russian War Economy. https://www.hhs.se/contentassets/2ca16d102eed4a1c8ff24b59c9db7c25/site-russian-economy-spring-2025-update.pdf
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Russia’s Car Fleet Dynamics – and Why They Matter
Russia’s car imports have evolved dramatically since its full-scale invasion of Ukraine in February 2022. The invasion and subsequent sanctions have led to a shift away from mainly Western car imports to domestically produced cars, and especially Chinese cars, both entailing quality concerns. Despite state sponsored loans reliefs, the heightened inflation pressures in Russia and increased financial burden on households is catching up to the car market – in the first quarter of 2025, the sales of new cars decreased by 25 percent compared to 2024. This policy brief uses the developments in the Russian primary car market as a lens to examine the spending power of Russian households and highlight the limitations of state interventions under sanctions and inflationary pressure.
From Western Dominance to Domestic Car Sales
Prior to February 2022, imports of American, European, South Korean and Japanese (hereafter called western) cars stood for about 60 percent of all new car sales in Russia. Domestic production took up most of the remaining 40 percent market share (SITE, 2024). In 2023, the number of western car sales was almost zero as most of these automotive firms exited the Russian market following the country’s war on Ukraine. Collaborations between European and Russian automotive companies, such as between Renault and Autovaz, as well as production of western cars in Russia, were also largely abolished. The mass exodus severely impacted the production levels in the Russian automotive industry; in 2021 around 1 350 000 cars were produced in Russia, dropping to around 450 000 in 2022, and increasing to only about 750 000 cars in 2024. However, the sales of new Russian cars fell in the immediate months following the invasion and subsequent sanctions but managed to bounce back to initial levels in 2023 (Figure 1).
Figure 1. New car sales in Russia
Source: Association of European Businesses. Note: Detailed data for 2024 and 2025 is unavailable.
The Chinese Import Surge
While the sale of Russian cars rebounded following the invasion, the key market player post-2022 is China. As illustrated in Figure 1, in 2023, the sales of newly produced Chinese cars in Russia were eight times the 2020 figures.
Although the imports of Chinese cars made up for a large part of the massive withdrawals of western cars post-invasion, new issues have arisen. Chinese cars are considered unfit for Russian weather conditions, and spare parts are also considered to be of low quality. Additionally, Chinese cars are reported to survive shorter total mileages (about half, compared to many western brands), and to have poor electronic and ergonomic systems. Still, prices for a Chinese car are generally higher than for a Russian car, mostly due to taxes and import tariffs. To dampen the recent Chinese expansion on the car market (in 2025 accounting for 63 percent of the market), Russia in March 2025, hiked the import tax on Chinese cars from nearly $6000 to $7500. Furthermore, the price of Chinese cars is expected to increase in 2025, following a depreciation of the ruble against the yuan.
High Prices, Large Loans
Not only Chinese cars have met criticism when it comes to quality and price. In summer 2022, Autovaz declared that the 22 model of the classic Lada Granta would be void of air bags, an ABS braking system and a brake assist system, due to a scarcity of imported components. A subset of the model has since been equipped with a driver-seat air bag. Despite such major shortcomings, prices for new Russian-made cars have increased by 67 percent since the onset of the war. These price increases are mirrored on the secondary market where the price for a used foreign car have increased by 60 percent since 2022.
Another feature of the Russia automotive market concerns the large increase in automobile loans granted to businesses and entrepreneurs over the last four years (Figure 2).
Figure 2. Volume of companies’ automobile loans
Source: Rosstat.
While the near doubling in the loan value for companies’ car loans seems large, its growth is small compared to that for individuals. Since the onset of the war, the volume of private car loans has grown more than fivefold. This increase is arguably spurred by the preferential loans scheme for the purchase of new cars, introduced mid-July 2022 and granted to Russians with at least one child under 18, new car owners, people employed within health and education, military personnel and their close relatives, and disabled people. The so-called loan (projected to be in place up until 2027) applies to car purchases in Russia of a maximum 2 million ruble and discounts the price by 20 percent (25 percent for cars sold in the Far East Region). Under this scheme, car loans constituted almost 6 percent of all consumer loans in mid-2024, a sixfold increase in just a year (see Figure 3). This trend has not waned off since 2024. In December 2023, 70 percent of all cars bought in Russia were financed by borrowed funds. The size of an average car loan also grew substantially, around 20 percent, between 2022 and 2023. At the same time, the share of risky borrowers increased. In October 2024, 60 percent of the borrowers had a Debt Service-To-Income (DSTI) Ratio of over 50 percent, indicating that a large segment of car buyers will potentially be unable to repay the debt (CBR, 2024).
Figure 3. Private Automobile Loans
Source: CBR (2024). Note: Figure based on approximation from CBR figure.
Household Strains and Financial Risks
Over the last five years gasoline prices have gone up by about 17 percent (standard petrol), alongside substantial price increases for nearly all major consumption goods in Russia – driven by the rampant inflation. In fact, the price of the Russian consumer basket nearly doubled between February 2022 and August 2024. Progressive income taxes have been introduced for about 3.2 percent of the working population – increasing taxation from 13 percent up to 22 percent. Furthermore, in July 2024, the subsidized mortgages for newly built apartments were scrapped such that all buyers now face a 16-20 percent rate (SITE, 2025). While real wages did increase by 8 to 9 percent in 2023 and 2024, real pensions did not. Furthermore, reported inflation figures are likely severely understated, with actual inflation being around 20, rather than the reported 9.5 percent. If so, the actual real wage growth would be about 0 percent (SITE, 2025).
This undermines the spending power of Russian households, which is now being reflected on the primary car market. There has been a sharp drop in car sales – 25 percent in the first quarter in 2025, and car prices are also on the decline. This, combined with the growing reliance on credit, signals that many consumers are no longer able to make large purchases despite the state driven support scheme – pointing to major affordability issues. Given that the preferential loans scheme will be in place only up until 2027 and that Chinese cars will likely become more expensive, demand may dwindle even further in the years to come. In such situation, the government could be forced to expand their preferential scheme to artificially keep up demand levels, taking on greater financial risks and associated costs. They may also increasingly close off the inflow of Chinese cars, which leave consumers with no options outside of domestically produced cars.
The falling demand for cars may also be considered an indicator of household’s beliefs about the economic conditions to come. That is, the demand for cars could be a signal of consumers understanding that the economy is, or will shortly be in a recession (Attanasio, Larkin, Ravn and Padula, 2022). While the Russian war time economy is not currently displaying recession signs, its persistent issues with rampant inflation, rapidly growing household mortgages and changes in the credit to GDP ratio signals its financial stability is at risk. As discussed in the report “Financing the Russian War Economy”, these are key indicators correlated with banking crises (SITE, 2025). If declining demand for cars is a sign of consumers perceiving the economy as increasingly fragile, this perception could amplify existing vulnerabilities.
Conclusion
The automotive sector offers comparatively timely data, making it a useful window for assessing the financial situation of Russian households. In the current automotive landscape in Russia, buying a new car is becoming increasingly expensive. This has forced not only private buyers but also businesses to increasingly take up loans to cover the payment of a new car – often despite reduced quality and limited choice. The demand for new cars is partly driven by state intervention, particularly the preferential loan scheme. This not only places a growing financial burden on the state but also carries rising risks of borrowers defaulting. At the same time, the current trends in the sector illustrate the growing limitations of both import substitution and state-backed credit schemes as tools for maintaining consumer demand. The recent drop in new car sales, despite state support, may reflect a growing reluctance among households to make large purchases, exposing how Russian households’ purchasing power are eroding in the Russian wartime economy. Importantly, this drop may point not only to affordability issues but also to a broader perception that the financial system is increasingly unstable.
Overall, the dynamics in the automotive sector suggest that the Russian economy is not doing as well as officially claimed, adding support for the effectiveness of sanctions and company withdrawals from the Russian market.
References
- Attanasio, O., Larkin, K., Ravn, M. O., & Padula, M. (2022). “(S)Cars and the Great Recession”. Econometrica, 90(5), 2319–2356.
- The Central Bank of Russia (CBR). (2024). “Financial Stability Review No. 2. Q2-Q3, 2024”.
- Stockholm Institute of Transition Economics (SITE). (2024). “The Russian Economy in the Fog of War”.
- Stockholm Institute of Transition Economics (SITE). (2025). “Financing the Russian War Economy”.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Complementary but Different: The Politics of Green Industrial Policy and Carbon Pricing
Sweden, historically a global leader in carbon pricing, has recently made a significant shift in its climate policy towards green industrial policy. It has moved away from environmental taxation – reflected in reduced transport fuel tax rates and increased emissions from the transport sector – towards a state-driven energy policy centered on nuclear power. To support the planned construction of ten new nuclear reactors, the Swedish government has proposed loan guarantees and state loans of up to $40 billion (Persson, 2022). By lowering transport fuel tax rates while simultaneously offering state support for nuclear energy, Sweden is treating carbon pricing and green industrial policy as substitutes rather than complements. This policy brief challenges that approach, arguing that carbon pricing and green industrial policy should be seen as complementary climate policy instruments. However, their political economies differ significantly, making industrial policy more politically feasible. Yet, the two key challenges with green industrial policy are how to finance it and how to “pick winners” – choosing which technologies and companies to support. We use the recent bankruptcy of Swedish battery manufacturer Northvolt as a case study to illustrate these challenges.
Two Climate Policy Instruments
Over the past decade, climate policymaking has undergone a significant shift. Governments in Europe, USA, and China have increasingly adopted green industrial policy as a central strategy to reduce carbon emissions, moving beyond the traditional focus on carbon pricing.
Green industrial policy serves both environmental and economic purposes. It mobilizes government efforts toward decarbonization while fostering the development of zero-carbon technologies and domestic firms to drive employment, innovation, and growth in green sectors (Rodrik, 2014). Common policy tools include subsidies, loan guarantees and state loans. Sweden’s emphasis on loan guarantees and state loans to support nuclear energy is not unusual, as these are among the most widely used industrial policy instruments in rich countries (Juhasz, Lane, and Rodrik, 2023). A historical parallel can be found in France, which relied on state loans and loan guarantees in the 1970s and 1980s to support its nuclear energy expansion (Andersson and Finnegan, 2024).
Carbon pricing, on the other hand, focuses solely on emissions by putting a price on the negative externality of carbon emissions. By equalizing the private and social cost of releasing carbon, carbon pricing leaves it to the market – firms and households – to decide how to most effectively reduce emissions. While carbon pricing is a form of government intervention to correct a market failure, it is technology neutral, and the state is not actively steering the economy toward specific pathways of decarbonization in the same way that green industrial policy does.
Complements Rather Than Substitutes
At its core, decarbonization requires shifting the cost advantage from fossil fuels to the zero-carbon alternatives of wind, solar, and nuclear. The key factor is the relative price between the two energy categories. This shift can be achieved by increasing the cost of fossil fuels through carbon pricing or by lowering the cost of zero-carbon energy via industrial policy.
The cost of energy production – particularly electricity – can be divided into three main components: capital investment costs, operation and maintenance, and fuel costs (IEA, 2005; 2020). While operation and maintenance costs are typically a minor share of the (levelized) cost of electricity for all energy sources, there are large differences in investment and fuel costs between fossil fuels and zero-carbon alternatives. The cost of fossil fuels is sensitive to fuel prices, which often account for more than half (coal), to around 80 percent (natural gas), of total costs in most regions. Wind and solar, on the other hand, have zero fuel costs but are highly dependent on capital investment costs, making them particularly sensitive to interest rates. Nuclear energy, though requiring some fuel costs, is also predominantly capital-intensive (IEA, 2015).
Because of these differences in cost structure between the energy categories, carbon pricing and industrial policy work as complements rather than substitutes. Carbon pricing raises the variable fuel costs of fossil fuel-based energy, making it less competitive, while industrial policy can reduce the fixed capital costs of zero-carbon technologies, improving their affordability. A well-balanced climate strategy may employ both approaches to achieve decarbonization. A revenue-neutral model could even use carbon pricing revenues to fund industrial policy, balancing cost burdens and investment incentives.
Figure 1 illustrates how the two policy instruments of carbon pricing and industrial policy are complements when it comes to climate policy as they both shift the relative price in favor of zero-carbon energy sources.
Figure 1. Decarbonization and relative prices
Source: Authors’ illustration.
Differences in Their Political Economy
Despite their complementarity, the political economy of carbon pricing and green industrial policy differs significantly, making the latter more politically feasible.
First, carbon pricing and green industrial policy differ in how they distribute costs and benefits across time and geography. Carbon taxes impose short-term, localized, and visible costs on consumers and producers while generating long-term, globally dispersed benefits. Because the costs and benefits are unevenly distributed over time and space, the households that bear the costs are likely not the same as those that receive the benefits. In contrast, green industrial policy can create immediate and visible local benefits for households and businesses, while spreading the costs more broadly. These costs can be distributed nationally using general taxation, internationally through global climate funds, or shifted into the future via deficit spending.
Second, carbon pricing generates a first-mover disadvantage, as the implementing country will incur higher energy prices for producers and consumers and thus potential deindustrialization and unemployment as firms relocate to countries with less stringent climate policy and lower energy costs. Green industrial policy inverts this narrative by incentivizing low-carbon firms to relocate to countries offering substantial state support. As a result, the first country that adopts generous green subsidies will put political pressure on other countries to do the same for fear of job loss and diminished competitiveness. This dynamic has been in play over the last couple of years with European leaders fearing the impact on European competitiveness of the Inflation Reduction Act in the U.S. – the largest climate bill ever implemented in that country – and green industrial policy in China. In this sense, subsidies offer a first-mover advantage, encouraging early adoption.
Combined, these two important political economy factors make green industrial policy more politically feasible by increasing public and political support compared to carbon pricing.
The first-mover advantage of green industrial policy also has important implications for global climate policy. The advantage, coupled with increasing opportunity costs of non-adoption (loss of competitiveness), can result in an equilibrium where the largest economies, such as the U.S., China, and the EU, all adopt similar green industrial policies. The first country that adopts green industrial policy pressures other nations to follow suit, fearing job losses, diminished competitiveness, and market-share erosion, creating a domino effect that results in a global implicit carbon price. This outcome is an equilibrium since none of the “players”, observing the choices made by others, have an incentive to withdraw their state support and subsidies for the green sector.
In contrast, a globally imposed carbon price using taxes, such as through international agreements like the Paris Agreement, does not constitute an equilibrium. Countries under such an agreement continuously face incentives to defect by repealing their carbon taxes to gain competitive advantages and free-ride on the ambitions of others. To transform such an agreement into a stable equilibrium, there must be credible punishment mechanisms – such as border carbon adjustments that penalize imports from defecting countries – to reduce incentives for free-riding (Nordhaus, 2015). Yet, such a global agreement with credible punishments has remained elusive, reflecting the complexities of international cooperation.
Two Key Challenges
While politically more feasible compared to carbon pricing, governments face two key challenges with industrial policy: how to finance it and how to select the right technologies and companies to support. These challenges are not just theoretical – they have real-world consequences. The recent failure of the Swedish battery manufacturer Northvolt highlights the potential risks governments face when using industrial policy.
Founded in 2015, Northvolt aimed to supply batteries for electric vehicles and energy storage, positioning itself as Europe’s main competitor to dominant Chinese manufacturers. With a rapid expansion of factories, the company struggled with production delays, mounting losses, and an inability to secure additional capital investments, ultimately leading to its bankruptcy. The Swedish government has provided some economic support but was unwilling to match the kind of large-scale state subsidies that China provides to its battery industry (Ekström och Mikaelsson, 2024). Likely, the level of financial support required for Northvolt to compete globally would need to come from the EU level, rather than national funding alone (Milne et al., 2025). The Northvolt case emphasizes one of the main challenges for green industrial policy: financing. Unlike carbon pricing, which generates revenue, industrial policy requires substantial government funding. High fiscal costs may limit its feasibility outside of large economies like China, the U.S., and the EU.
Furthermore, even if Sweden had provided stronger financial support – similar to its proposed subsidies for nuclear energy – Northvolt may still have failed due to technological competition. Experts suggest that Chinese competitors will be reluctant to acquire Northvolt’s Swedish factory, as Chinese investors believe it’s not correctly constructed for battery manufacturing (Nordensson, 2025). This underscores the second risk of industrial policy: governments may invest in technologies and companies that ultimately fail to compete.
Conclusion
Carbon pricing and green industrial policy are complementary tools for climate mitigation, but their distinct political economies make industrial policy more politically feasible. However, with green industrial policy, governments are faced with the risks of “picking winners” and how to finance the policy.
Sweden faces these two risks with its nuclear energy strategy. For instance, the levelized cost of nuclear energy has risen over time (Bilicic and Scroggins, 2023). Today, nuclear is the most expensive source for new grid capacity, while wind and solar are the cheapest. By 2045, when Sweden’s planned ten new reactors are expected to be operational, renewables may be so cheap that nuclear power struggles to compete, leading to financial losses and high electricity prices (SVT, 2024). In this sense, Sweden’s focus on a single zero-carbon technology may turn out to be a costly mistake.
Sweden should use green industrial policy as a complement to, rather than a substitute for, its previous carbon pricing strategy. Furthermore, to reduce the risks of not picking the “winners,” it should diversify its support across multiple zero-carbon technologies – including electric vehicles, battery manufacturing, solar, and wind – rather than focusing narrowly on nuclear power.
References
- Andersson, J. and Finnegan, J. (2024). Industrial Policy and Decarbonization: The Case of Nuclear Energy in France. Working Paper.
- Bilicic, G. and Scroggins, S. (2023). 2023 Levelized Cost of Energy+. Lazard.
- Ekström, J., and Mikaelsson, C. (2024). Därför nobbar regeringen Northvolt. Svenska Dagbladet. October 6, 2024.
- IEA. (2005). Projected Costs of Generating Electricity: 2005 Edition. International Energy Agency. Paris.
- IEA. (2015). Projected Costs of Generating Electricity: 2015 Edition. International Energy Agency. Paris.
- IEA. (2020). Projected Costs of Generating Electricity: 2020 Edition. International Energy Agency. Paris.
- Juhazc, R., Lane, N., and Rodrik, D. (2023) The New Economics of Industrial Policy. Working Paper 31538, National Bureau of Economic Research.
- Milne, R., Johnston, I. and Bounds, A. (2025). Boss of bankrupt Northvolt urges Europe to invest in homegrown battery sector. Financial Times. March 13, 2025.
- Nordensson, B. (2025). Expert: Inga utsikter driva Northvolt vidare. Svenska Dagbladet. March 12, 2025.
- Nordhaus, W. (2015). Climate Clubs: Overcoming Free-riding in International Climate Policy. American Economic Review, 105(4), 1339–1370
- Persson, I. (2022). Allt du behöver veta om ’Tidöavtalet. SVT Nyheter. 14 October, 2022.
- Rodrik, D. (2014). Green Industrial Policy. Oxford review of economic policy 30 (3):469-491.
- SVT Nyheter. (2024). Kärnkraften kan bli nära dubbelt så dyr som regeringen trott. SVT Nyheter. January 25, 2024.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.