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AI in the Energy Transition – Insights from Energy Talk 2025

Posted on June 2, 2025 | Policy Brief

Wind turbines on rolling hills under clear sky, symbolizing AI Energy Transition to sustainable power.

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?

Posted on May 26, 2025 | Policy Brief

Presidential Palace, Warsaw, Poland - representing the Polish Presidential Elections 2025.

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 1^st, 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 1^st, 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.

Russia’s Counter Sanctions: Forward to the Past!

Posted on May 12, 2025 | Policy Brief

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

Line chart showing the number of presidential decrees in Russia from 2019 to 2024, illustrating an upward trend potentially linked to Russia counter sanctions.

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

Line chart showing Russia’s budget revenues from oil, gas, and non-oil sectors, and expenditures on defense, security, law enforcement, and other areas from 2010 to 2024, highlighting fiscal trends potentially influenced by Russia counter sanctions.

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.
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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
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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

Posted on May 5, 2025 | Policy Brief

Traffic moves along the Kremlin walls in Moscow during winter, illustrating Russia car fleet dynamics amid economic shifts.

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 of which entail quality concerns. Despite state-sponsored loan relief, 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

Line chart showing Russia car dynamics from 2020 to 2023, with sharp decline in sales of other foreign cars, rebound in Russian car sales, and rapid growth in Chinese car sales.

Source: Association of European Businesses. Note: Detailed data for 2024 and 2025 is unavailable.

Russia’s Car Dynamics: 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 have Chinese cars 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

Line chart showing Russia car dynamics in company automobile loans from March 2020 to December 2024, with a 3-month moving average revealing a sharp rise in loan volumes after 2022.

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 is 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, Russia’s car dynamics suggest that the Russian economy is not performing 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

Posted on April 28, 2025 | Policy Brief

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.

From Integration to Reconstruction: Standing with Ukraine by Supporting Ukrainians in Sweden

Posted on April 7, 2025 | Policy Brief

People gathered in Sweden showing solidarity and supporting Ukrainians with national flags.

Sweden has strongly supported Ukraine through both public opinion and government actions, yet there has been little discussion about the needs of Ukrainian displaced people in Sweden. The ongoing war and the rapidly shifting geopolitical landscape have created uncertainty – geopolitical, institutional, and individual. Ukrainian displaced people in Sweden face an unclear future regarding their rights, long-term status, and opportunities, making future planning or investing in relevant skills difficult. This uncertainty also weakens the effectiveness of integration policies and limits the range of policy tools that can be deployed, which hinders participation in the labor market, affecting both displaced and employers. Addressing these challenges is essential, not only for the well-being of Ukrainians in Sweden, but also for Sweden’s broader role in supporting Ukraine. Helping displaced Ukrainians rebuild their lives also strengthens their ability to contribute both to Swedish society and to Ukraine’s future reconstruction and integration into Europe.

The Swedish Approach to Displaced Ukrainians

In response to the Russian full-scale invasion of Ukraine, the Temporary Protection Directive (2001/55/EC) (commonly referred to as collective temporary protection) was activated in March 2022, granting Ukrainians seeking refuge temporary protection in EU countries, including Sweden. This directive provides residence permits, access to work, education, and limited social benefits without requiring individuals to go through the standard asylum process.

However, the practicalities of the Directive’s use differed significantly between countries. Sweden, despite its, until recent, reputation of being relatively liberal in its migration policies, has at times, lagged behind its Scandinavian neighbors in supporting Ukrainian displaced people. To illustrate this, it is useful to compare the Swedish approach to that of other Nordic states, as well as Poland.

Comparison to Other Nordic States

The Nordic countries have implemented the directive in different ways, adopting varying policies toward Ukrainians demonstrating different degrees of flexibility and support. Despite its generally restrictive immigration policy, Denmark introduced some housing and self-settlement policies for Ukrainians that were more liberal than its usual approach. Norway also initially introduced liberal measures but later tightened regulations, banning temporary visits to Ukraine and reducing financial benefits. Finland, meanwhile, has taken a relatively proactive stance, granting temporary protection to over 64,000 Ukrainians – one of the highest per capita rates in the region. Its strong intake reflects a more flexible and effective implementation of the directive, particularly from late 2022, when it surpassed Sweden and Denmark in number of arrivals.

In Sweden the so-called “massflyktsdirektivet“ grants Ukrainians temporary protection until at least March 2025. Its future beyond that, however, remains uncertain, adding to the challenges faced by refugees and policymakers alike. Sweden – considered liberal in migration policies (at least, up until 2016) – has been criticized for offering limited rights and financial support to displaced Ukrainians, making it one of the least attractive destinations among the Nordic countries (Hernes & Danielsen, 2024). Under “massflyktsdirektivet”, displaced Ukrainians were entitled to lower financial benefits and limited access to healthcare compared to refugees or residents with temporary permits. It was only in July 2023 that they became eligible for Swedish language training, and only in November 2024 could they apply for residence permits under Sweden’s regular migration laws – a pathway that can eventually lead to permanent residence.

Figure 1 illustrates significant fluctuations in the number of individuals granted collective temporary protection in the Nordic countries over the first two years following Russia’s full-scale invasion. As Hernes and Danielsen (2024) show in a recent report, all Nordic countries experienced a peak in arrivals in March-April 2022, followed by a decline in May-June. Sweden initially received the most, but aside from this early peak, inflows have remained relatively low despite its larger population (Table 1). Since August 2022, Finland and Norway have generally recorded higher arrivals than Denmark and Sweden. By August 2023, Norway’s share increased significantly, accounting for over 60 percent of total Nordic arrivals between September and November 2023.

Figure 1. Total number of individuals granted collective temporary protection in the Nordic countries

Source: Hernes & Danielsen, 2024, data from Eurostat.

Table 1. Total number of registered temporary protection permits and percent of population as of December 2023

Source: Hernes & Danielsen, 2024, data from Eurostat.

Comparison to Poland

Sweden’s policies and their outcomes compare rather poorly to those of Poland, one of the European countries that received the largest influx of Ukrainian migrants due to its geographic and cultural proximity. A key factor behind Poland’s relatively better performance is that pre-existing Ukrainian communities and linguistic similarities have facilitated a smoother integration. Ukrainians themselves played a crucial role in this regard, with many volunteering in Polish schools to support Ukrainian children. Sweden also had a community of Ukrainians who arrived to the country over time, partly fleeing the 2014 annexation of Donetsk and Crimea. Since these individuals were never eligible for refugee status or integration support, they had to rely on their own efforts to settle. In doing so, they built informal networks and accumulated valuable local knowledge. Nevertheless, after the full-scale invasion in 2022, they were not recognized as a resource for integrating newly arrived Ukrainian refugees – unlike in Poland.

However, Poland’s approach was shaped not only by these favorable preconditions but also by deliberate policy choices. As described in a recent brief (Myck, Król, & Oczkowska, 2025), a key factor was the immediate legal integration of displaced Ukrainians, granting them extensive residency rights and access to social services, along with a clearer pathway to permanent residence and eventual naturalization.

Barriers to Labor Market Integration

Despite a strong unanimous support for Ukraine across the political spectrum, there is less public debate and fewer policy processes in Sweden regarding displaced Ukrainians, most likely attributable to the general shift towards more restrictive immigration policies. The immigration policy debate in Sweden has increasingly emphasized a more “selective” migration, i.e. attracting migrants based on specific criteria, such as employability, skills, or economic self-sufficiency. This makes it puzzling that displaced Ukrainians, who largely meet these standards, have not been better accommodated. Before the full-scale invasion, Sweden was a particularly attractive destination among those who wanted to migrate permanently, especially for highly educated individuals and families (Elinder et al., 2023), indicating a positive self-selection process.

When large numbers of displaced Ukrainians arrived after the full-scale invasion, many had higher education and recent work experience, which distinguished them from previous refugee waves that Sweden had received from other countries. Despite a strong labor market in 2022, their integration was hindered by restrictions imposed under the Temporary Protection Directive, which limited access to social benefits and housing. At the same time, Sweden explicitly sought to reduce its attractiveness as a destination for migrants in general, contributing to a sharp decline in its popularity among Ukrainians after the war escalated.

In addition to the restrictiveness and numerous policy shifts over time, the temporary nature of the directive governing displaced Ukrainians – rather than the standard asylum process – creates significant policy uncertainty. This uncertainty makes it difficult for Ukrainians to decide whether to invest in Sweden-specific skills or prepare for a potential return to Ukraine, whether voluntary or forced, complicating their long-term planning. It also hinders labor market integration, increasing the risk of exploitation in the informal economy. Another key challenge is the unequal distribution of rights, as entitlements vary depending on registration timelines, further exacerbating the precarious situation many displaced Ukrainians face in Sweden.

A survey of 2,800 displaced Ukrainians conducted by the Ukrainian NGO in Sweden “Hej Ukraine!” in February 2025 provides key insights into their labor market integration (Hej Ukraine!, 2025). Survey results show that, currently, 40 percent of respondents are employed, with 42 percent of them holding permanent contracts while the rest work in temporary positions and 6 percent being engaged in formal studies. Employment is concentrated in low-skilled sectors, with 26 percent working in cleaning services, 14 percent in construction, and 12 percent in hospitality and restaurants. Other notable sectors include IT (11 percent), education (8 percent), warehousing (7 percent), elderly care (5 percent), forestry (3 percent), and healthcare (3 percent). The lack of stable permits, access to language courses (until September 2024), and financial incentives for hiring displaced persons have complicated their integration.

As mentioned above, the Swedish government has over time introduced several initiatives to facilitate the integration of displaced Ukrainians. However, assessing their effectiveness is crucial to identify persistent challenges and to formulate targeted policy solutions.

The Role of the Private Sector and Civil Society

The business sector, civil society and NGOs have also played a role in supporting displaced Ukrainians, filling gaps left by the public sector. This includes initiatives aimed at creating job opportunities that encourage voluntary return. However, broader systemic support, including simplified diploma recognition and targeted re-skilling programs, is needed to enhance labor market participation.

Moreover, there is a lack of information among displaced, potential employers and public institutions (municipality level) about the tools and programs available. For example, a community sponsorship program funded by UNHCR, which demonstrated positive effects on integration by offering mentorship and support networks, was only applied by five municipalities (UNHCR, 2025). Similar programs could be expanded to address structural barriers, particularly in the labor market. Another example is the Ukrainian Professional Support Center established to help displaced Ukrainians find jobs through building networks and matching job seekers with employers (UPSC, 2024). The center was funded by the European Social Fund, and staffed to 50 percent by Ukrainian nationals, either newcomers or previously established in Sweden, to facilitate communication. Experiences from this initiative, shared during a recent roundtable discussion – Integration and Inclusion of Ukrainian Displaced People in Sweden, highlighted that between 2022 and 2024, about 1,400 Ukrainians participated in the project, but only one-third of participants found jobs, mostly in entry-level positions in care, hospitality, and construction. Restrictions under the temporary protection directive, along with the absence of clear mechanisms for further integration, posed significant challenges; the lack of a personal ID, bank account, and access to housing were considered major obstacles. The uncertainty of their future in Sweden was also reported as a significant source of stress for participants.

Implications and Policy Recommendations

The lack of clarity surrounding the future of the EU Temporary Protection Directive, as well as its specific implementation in Sweden, leaves displaced Ukrainians in a precarious situation. Many do not know whether they will be allowed to stay or if they should prepare for a forced return. This uncertainty discourages long-term investment in skills, housing, and integration efforts.

Uncertainty also affects Swedish institutions, making it difficult to implement long-term policies that effectively integrate Ukrainians into society. To address these issues, the following policy recommendations are proposed.

Extend Temporary Protection Status Beyond 2025: Clear guidelines on the duration of protection are necessary to provide stability for displaced Ukrainians
Improve Labor Market Access: Introduce targeted programs for skill recognition, language training, and financial incentives for businesses hiring displaced Ukrainians
Enhance Civil Society and Private Sector Collaboration: Support mentorship and community sponsorship programs that facilitate integration
Acknowledge and Utilize displaced Ukrainians as a Resource: Recognizing displaced Ukrainians as potential assets in rebuilding Ukraine and strengthening European ties should be a priority.
Increase Public and Policy Debate: There is a need for greater discussion on how to integrate Ukrainians in Sweden, as an important complement to the policy priority of providing aid to Ukraine.

By implementing these measures, Sweden can provide displaced Ukrainians with greater stability, enabling them to engage in the formal labour market rather than being pushed into informal or precarious employment. This not only benefits Ukrainians by ensuring fair wages and legal protection, but also strengthens Sweden’s economy through increased tax revenues and a more sustainable labour force.

As Sweden continues to support Ukraine in its fight for sovereignty, it should also recognize the value of displaced Ukrainians within its borders, fostering their contribution to both Swedish society and Ukraine’s eventual reconstruction.

References

Hernes, V., & Danielsen, Å. Ø. (2024). Reception and integration policies for displaced persons from Ukraine in the Nordic countries – A comparative analysis. NIBR Policy Brief 2024:01. https://oda.oslom et.no/oda-xmlui/handle/11250/3125012
Hej Ukraine! (2025). Telegram channel. https://t.me/hejukrainechat
Elinder, M., Erixson, O., & Hammar, O. (2023). Where Would Ukrainian Refugees Go if They Could Go Anywhere? International Migration Review, 57(2), 587-602. https://doi.org/10.1177/01979183221131559
EUROSTAT. Decisions granting temporary protection by citizenship, age and sex – monthly data. Dataset. https://ec.europa.eu/eurostat/databrowser/view/migr_asytpfm__custom_15634298/default/map?lang=en
Myck, M., Król, A., & Oczkowska, M. (2025, February 21). Three years on – Ukrainians in Poland after Russia’s 2022 invasion. FREE Policy Brief. Centre for Economic Analysis (CenEA). https://freepolicybriefs.org/2025/02/21/ukrainians-in-poland/
Ukrainian Professional Support Center (UPSC). (2024). https://professionalcenter.se/omoss/
United Nations High Commissioner for Refugees (UNHCR). (2025). Community sponsorship. UNHCR Northern Europe. Retrieved [March 6, 2025] from https://www.unhcr.org/neu/list/our-work/community-sponsorship

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.

Human Capital Loss Among Belarusian and Ukrainian Migrants to the EU

Posted on March 31, 2025 | Policy Brief

Silhouettes of construction workers on scaffolding at sunset, symbolizing underemployment among human capital migrants in the EU.

This policy brief examines the underutilization of human capital among involuntary migrants from Ukraine and Belarus in Poland and Lithuania. Focusing on those who migrated after 2020 (Belarus) and 2022 (Ukraine), the brief investigates the factors influencing the conversion of their pre-migration skills into gainful employment in their host countries. Our findings show that despite many migrants possessing high levels of education and professional qualifications, structural barriers and low convertibility of their skills, hinder their full labor market integration. This skill underutilization not only limits migrants’ professional growth and earning potential but also deprives the host countries of valuable skills and potential economic gains.

Effective labor market integration substantially benefits both host and sending countries and migrants themselves. For host nations, successful integration can alleviate critical skill shortages, boost productivity, and drive economic growth (Boubtane, Dumont, & Rault, 2016; Boubtane, 2019; Engler, Giesing, & Kraehnert, 2023; Bernstein et al., 2022). Conversely, inadequate integration leads to underemployment, diminished potential, and economic inefficiency. Countries of origin can benefit from remittances, the return of migrants with enhanced skills, and strengthened international economic ties. However, poor integration risks an uncompensated “brain drain” (Reinhold & Thom, 2009; Barrett & O’Connell, 2001; Iara, 2006; Barrett & Goggin, 2010; Co, Gang, & Yun, 2000). For migrants, the ability to continue their careers means higher earnings and less stress from the acquisition of a new profession, while the non-utilization of existing skills results in their depreciation, potentially causing permanent wage reductions even upon return to the home country (Bowman & Myers, 1967).

Migrants can be broadly categorized into voluntary migrants or forced migrants. Voluntary migrants assess labor market prospects beforehand and often possess convertible human capital – one that can be used in a new labor market. This group often includes professionals like IT specialists and scientists and those in low-skilled but highly transferable professions. Forced migrants, on the contrary, may be utterly unprepared for changes in jurisdiction and possess skills of limited transferability. For example, even highly specialized professions requiring extensive training and substantial human capital, such as lawyers, officials, and teachers, often prove “non-convertible“ (Duleep & Regets, 1999). These individuals’ skills are frequently country specific.

Low convertibility of skills generates significant negative consequences. Highly educated professionals, for instance, may find themselves relegated to low-paying, unskilled jobs, unable to leverage their expertise. This hinders their professional development and deprives host countries of valuable skills and potential contributions to economic growth. Addressing these mismatches is crucial for maximizing the benefits of migration for stakeholders in both home and host countries.

Forced Migration from Belarus and Ukraine

The political crisis in Belarus, starting with the contested 2020 presidential elections, led to widespread repression and significant forced migration. Belarus’s role in supporting Russia’s 2022 invasion of Ukraine exacerbated this situation, resulting in approximately 300,000 Belarusians seeking refuge in the European Union (Eurostat). This number accounts for a substantial proportion of the country’s 9 million population and its approximately 5 million-strong labor force (Belstat).

Russia’s full-scale invasion of Ukraine triggered the most significant wave of migration in Ukrainian history, with over 6 million of the pre-war 44 million population fleeing to the EU (UNHCR). About 90 percent of the initial refugees were women and children due to a mobilization law preventing most men aged 18 to 60 from leaving (UNHCR).

Online Survey and Migrant Differences

To better understand the situation of migrants, their integration into the EU labor market, and to develop data-driven recommendations for improving their conditions, the CIVITTA agency, in partnership with BEROC, conducted an online survey in the summer of 2024. This brief is based on the survey results. The survey includes responses from 616 Ukrainian nationals who migrated to Poland or Lithuania after Russia’s full-scale invasion of Ukraine in 2022, as well as 173 Belarusian migrants who left their home country after 2020. The research focuses on individuals aged 28 to 42, providing insights into their experiences and challenges in the labor market in their host countries. While we acknowledge the sample’s limitations in terms of representativeness, we believe the findings provide valuable insights into the specific challenges faced by involuntary migrants and their adaptation strategies in the new labor market.

Key differences characterize these migration waves. Ukrainian migration comprises of more women, while Belarusian migrants show a more balanced gender distribution, with 47 percent women in our sample versus 62 percent for Ukrainians. Family separation is also notable, as 91 percent of married Belarusians live with their spouses, compared to only 75 percent of Ukrainians (due to the mobilization law).

Survey respondents from both groups possess high levels of human capital with 60 percent of Ukrainians and 90 percent of Belarusians holding higher education degrees. Among Belarusians, 94 percent had over five years of work experience before migration, with and 79 percent of Ukrainians stating the same.

Ukrainian return intentions are split: 38 percent plan to return, 19 percent will not, and the rest are undecided. An end to the war and changes in Russian foreign policy would increase return rates to 70 percent. For Belarusians, 35 percent plan to return, 38 percent will not, and the rest are undecided. Education level is key, as less-educated Belarusians are more likely to stay abroad. An end to repression would increase the share of those Belarusians who want to return to 70 percent, and a regime change would increase this percentage to 82 percent.

Factors Conditioning Human Capital Loss

As expected, due to the involuntary nature of migration of the two groups in focus, a large fraction of survey participants reported losing their profession after migration. As Figure one shows, 48 percent of Belarusians and 63 percent of Ukrainians in our sample reported full loss of their prior careers. The lower percentage of Ukrainians fully retaining their careers (23 percent) compared to Belarusians (44 percent) could be attributed to several factors, including the more recent and disruptive nature of the Russo-Ukrainian war leading to more significant displacement and challenges in finding comparable work. The higher percentage of Ukrainians starting their careers from scratch (49 percent compared to 29 percent among Belarusians) also supports this idea.

Figure 1. Preservation of careers in the EU

Source: Authors’ computations based on survey data.

To foster an evidence-based discussions on the smooth integration of migrants into the EU labor market and the prevention of human capital loss, it is crucial to examine the individual factors that influence career continuity for Belarusian and Ukrainian migrants. We therefore utilize a logistic regression model to identify key predictors that increase the likelihood of migrants remaining in their profession after relocating to Poland and Lithuania.

In our quantitative analysis, an outcome binary variable for staying in the profession is equal to 1 if an individual either “continued career started in a home country (in the same position)” or “remained in the same profession but started working in a position lower than the one held before emigration.” As predictors, we consider a set of sociodemographic variables reasonably related to the probability of staying in the profession and dummy variables for the most common spheres of employment (see Table 1).

Table 1. Overview of model variables

Who Maintains Their Career After Emigration?

Based on the regression coefficients in Table 2, we can identify characteristics related to losing career-specific human capital. In our regression, we control for both home and host country factors. One noteworthy finding is that, while Ukrainian migrants in our sample report significantly higher rates of career loss than Belarusian migrants, nationality itself does not emerge as a significant predictor of career loss once other characteristics are accounted for.

Our results also show that the probability of staying in a profession is higher among men, those with more extended work experience and higher income before emigration, and those who were invited to a host country by an employer. The same holds for entrepreneurs, those who do not plan to return, and those employed in the fields of Architecture & Engineering and Information and Communication Technologies.

Table 2. Results of regression analysis

Note: *** Significant at the .001 level. ** Significant at the .01 level. * Significant at the .05 level.

Conclusion

Several conclusions and policy advice can be derived from the survey results.

The higher likelihood of entrepreneurs staying in their profession suggests that supporting migrant entrepreneurship can be a valuable strategy to retain human capital. This can be done, for example, by:

Providing access to resources, mentorship, and funding for migrant entrepreneurs.
Streamlining the procedures for migrants to start and operate businesses.
Facilitating access to capital for migrant-owned businesses.

The research highlights the disproportionate impact of human capital loss on women. Therefore, policies should include gender-specific programs that address women’s unique challenges in integrating into new labor markets. This could include:

Skills retraining and certification programs: Designed to align women’s existing skills with the demands of the host country’s labor market, with consideration for childcare needs and other barriers women may face.
Connecting women migrants with established professionals in their fields to facilitate knowledge transfer and career guidance.
Language training programs: Tailored to the specific needs of women, potentially incorporating childcare support to enable participation.

The study highlights the positive role of international companies in supporting employee relocation. Respondents who were invited by an employer demonstrated the most successful integration into the new labor market. To enhance and strengthen these networks, policies may focus on:

Encouraging corporations to hire and train migrant workers, potentially through tax breaks or other incentives. This could include partnerships with migrant-serving organizations to connect companies with qualified candidates.
Developing digital platforms that connect migrants with diaspora networks, potential employers, and relevant resources.

In addition, policies should address the non-recognition of foreign qualifications, simplifying and expediting the procedures for recognizing foreign degrees and professional certifications. Initiatives to create targeted training programs could complement such policies and allow migrants to quickly acquire any missing skills or certifications required by the host country’s professional bodies. These policy measures would enhance the utilization of migrants’ human capital, benefiting both migrants and host countries while also supporting sending countries. This could be achieved by fostering a successful diaspora or facilitating productive reintegration in the case of return migration.

References

Barrett, A., & Goggin, J. (2010). Returning to the question of a wage premium for returning migrants. National Institute Economic Review, 213, R43–R51. https://doi.org/10.1177/0027950110389752
Barrett, A., & O’Connell, P. J. (2001). Does training generally work? The returns to in-company training. ILR Review, 54(3), 647–662. https://doi.org/10.1177/001979390105400403
Bernstein, S., Diamond, R., McQuade, T. J., & Pousada, B. (2022). The contribution of high-skilled immigrants to innovation in the United States (No. w30797). National Bureau of Economic Research. https://doi.org/10.3386/w30797
Boubtane, E. (2019). The economic effects of immigration for host countries. L’Economie politique, 84(4), 72–83. https://doi.org/10.3917/leco.084.0072
Boubtane, E., Dumont, J.-C., & Rault, C. (2016). Immigration and economic growth in the OECD countries 1986–2006. Oxford Economic Papers, 68(2), 340–360. https://doi.org/10.1093/oep/gpv024
Bowman, M. J., & Myers, R. G. (1967). Schooling, experience, and gains and losses in human capital through migration. Journal of the American Statistical Association, 62(319), 875–898. https://doi.org/10.2307/2283723
Co, C. Y., Gang, I. N., & Yun, M.-S. (2000). Returns to returning. Journal of Population Economics, 13, 57–79. https://doi.org/10.1007/s001480050121
Duleep, H. O., & Regets, M. C. (1999). Immigrants and human-capital investment. American Economic Review, 89(2), 186–191. https://doi.org/10.1257/aer.89.2.186
Engler, P., Giesing, Y., & Kraehnert, K. (2023). The macroeconomic effects of large immigration waves. IAB-Discussion Paper. https://doi.org/10.5167/uzh-239271
Iara, A. (2006). Skill diffusion in temporary migration? Returns to Western European working experience in the EU accession countries (Development Studies Working Paper No. 210). Centro Studi Luca d’Agliano. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=921492
Reinhold, S., & Thom, K. (2009). Temporary migration and skill upgrading: Evidence from Mexican migrants. University of Mannheim, unpublished manuscript.
UNHCR. (n.d.). Operational Data Portal. https://data.unhcr.org/

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.

Should the $60 Price Cap on Russian Oil Exports be Lowered?

Posted on March 24, 2025 | Policy Brief

Oil tanker at sea representing the impact of price cap on Russian oil exports.

Western governments have imposed a $60 price cap on Russian seaborne oil exports using Western services. To evade the policy, Russia has developed a “shadow fleet” which uses no such services. In this policy brief, we claim that the resulting segmentation of Russian oil exports dramatically modifies the conventional analysis of a price cap. Our research shows that lowering the cap would not hurt Russia as intended unless a robust expansion in non-Russian oil supply was to limit the induced increase in the world oil price. If this price increase is not limited, lowering the cap could even moderately increase Russian profits because shadow fleet sales would be more profitable. By contrast, policies that reduce some shadow fleet capacity would reduce Russian profits if undertaken while Russia still relies on some Western services.

In response to Russia’s invasion of Ukraine in February 2022, the EU, the U.S., and other G7 countries (hereafter the West) ceased their imports of Russian oil, leading Russia to export more to India, Turkey, and China instead. In addition, the West imposed sanctions on oil exports from Russia, whose profits are instrumental in supporting its war.

Since more than 80 percent of Russia’s seaborne oil exports relied on the provision of Western services (CREA, 2023) (financial, operational, and commercial) the EU suggested banning the use of these Western services for all Russian seaborne exports. However, governments feared that this would cause a spike in the world oil price. As an alternative, the U.S. suggested a price cap, which the West ultimately imposed in December 2022, limiting Russian revenues from oil shipped using Western services to $60 per barrel.

Oil transported without Western services is exempt from the cap. Therefore, Russia has gradually assembled a “shadow fleet” that uses non-Western services in order to sell oil at prices above the cap.

The price cap on Russian oil is a new, insofar untested economic sanction, currently a subject of active public discussion, with experts recommending potential adjustments and application to more countries, and policymakers currently considering to tighten the price cap – see for example the January 2025 call by Sweden, Denmark, Finland, Latvia, Lithuania and Estonia to lower the price cap below $60. The policy quickly piqued the interest of economists – see for example Spiro, Wachtmeister, and Gars’ (2024) comprehensive review of policy options to limit Russia’s ability to finance the war.

In their pioneering contribution to the literature, Johnson, Rachel, and Wolfram (2025) provide a rich analysis of the effects of the price cap, albeit under the assumption that the shadow fleet has a fixed capacity. In a recent working paper (Cardoso, Salant, and Daubanes, 2025), we present a new dynamic economic model that accounts for the expansion of the Russian shadow fleet. The model is calibrated to reproduce observed facts and used to simulate the effects of (1) various levels of the price cap, including the extreme case of a complete ban, (2) enforcement stringency, and (3) policies targeting the shadow fleet.

Perhaps surprisingly, our analysis shows that, in the absence of any increase in non-Russian oil supply, lowering the level of the price cap below $60 would benefit Russia. This includes lowering the cap to levels so low (below $34) that the policy amounts to a ban as Russia would prefer not to use Western services at all at these cap levels. More generally, the model reveals that a lower cap would have two opposite effects on Russia: On the one hand, it would reduce Russia’s profit (i.e., revenues net of production costs) from sales at the cap. On the other hand, since a lower cap would reduce Russia’s oil exports, it would increase the oil price and, therefore, Russia’s profit from sales through its shadow fleet. Our analysis yields a testable and intuitive condition under which the latter effect dominates the former, making a lower cap counterproductive. This condition depends on the shadow fleet capacity relative to Russian sales at the ceiling price.

Application of this condition shows that when sanctions were imposed, Russia’s shadow fleet capacity was already sufficiently high for Russia to benefit from a reduction in the price ceiling. Russia would even have benefited from a reduction in the cap if the West had prevented any expansion in Russia’s shadow fleet beyond its initial level. With no such limitation, Russia would continue to expand its fleet size regardless of the size of the cap reduction. This leads us to conclude that Russia would also benefit if an unanticipated reduction in the cap (or a complete ban) occurred subsequently.

It should be noted that in the absence of a non-Russian supply response, caps at different levels quantitatively impact Russian total profits in a similar way. For example, the $60 cap reduces Russian profits by about 25 percent compared to a scenario without sanctions, and a complete ban would have impacted Russia only slightly less.

The following figure shows a comparison of prices, shadow fleet capacity, and profits under a price cap sanction (solid lines), a service ban (dotted lines), and the absence of sanctions (grey dashed lines). The simulations assume no supply response from non-Russian producers (none occurred when the cap was first implemented). A lower cap cuts Russian exports and raises the global oil price, increasing Russian profits from its fleet sales. A non-Russian supply response would dampen this oil price spike and would, therefore, diminish the resulting revenue increase from Russian fleet sales.

Figure 1. Outcomes under different sanction scenarios

Source: Authors’ calculations.

Russia sometimes uses Western services to ship oil at a price above the cap, taking the risk that its shipments get sanctioned. Increasing the probability that cheating is punished lowers the price Russia expects to receive, with consequences identical to a reduction in the cap level.

By contrast, policies that reduce some capacity of the shadow fleet (“sidelining” some of its tankers) may harm Russia, even though they prompt Russia to rebuild its fleet rapidly. This happens, for example, if sidelining part of the fleet occurs while oil is also being sold at the ceiling, so that ceiling sales replace the lost fleet sales and there is no increase in the world oil price.

Conclusion

To conclude, we consider a variety of oil-market sanctions that have been have imposed on Russia to reduce the total export profits it uses to finance the war in Ukraine. As seen, tightening these sanctions is more effective if the induced increase in the world price can be significantly mitigated (if not entirely eliminated); otherwise, increased revenues from shadow fleet sales will weaken or undermine the intended effect of the tighter sanctions.

In one case we considered, no supplementary intervention is required for the sanction to be effective. Reducing Russia’s shadow fleet capacity when Russia is still selling at the ceiling price will induce an equal and offsetting increase in Russian sales at the ceiling, resulting in no increase in the world price.

However, other sanctions – lowering the ceiling, increasing its enforcement, or even reducing the shadow fleet capacity after Russian sales at the ceiling have ceased – will induce an increase in the world price sufficient to undermine the sanctions’ intended effect unless accompanied by a simultaneous expansion of non-Russian supply (presumably from the U.S. or OPEC) to dampen the increase in the world price. Supplemented in this way, the potency of each of these sanctions would be restored.

Overall, our results call attention to the need for complementary energy policies that would facilitate the response of non-Russian oil production to higher global prices.

References

Cardoso, D. S., S. W. Salant, and J. Daubanes. (2025). The Dynamics of Evasion: The Price Cap on Russian Oil Exports and the Amassing of the Shadow Fleet. MIT CEEPR Working Paper 2025-05.
Centre for Research on Energy and Clean Air. (2023). December 2023 Monthly Analysis on Russian Fossil Fuel Exports and Sanctions.
Johnson, S., L. Rachel, and C. Wolfram. (2025). A Theory of Price Caps on Non-Renewable Resources. NBER Working Paper No. 31347.
Spiro, D., H. Wachtmeister, and J. Gars. (2024). Assessing the Impact of Oil Sanctions on Russia. SSRN Working Paper.

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.

Agricultural Subsidies: The Case of Georgia

Posted on March 17, 2025 | Policy Brief

Fresh apples, pears, and grapes at a local market benefiting from agricultural subsidies in Georgia.

This brief explores the role of government subsidy programs in Georgia’s agricultural sector, with a focus on grapes, apples, and hazelnuts. These subsidies play a significant role in providing social assistance to the sector and in supporting farmers; however, their long-term impact on industry growth remains a subject of discussion. Key challenges include ensuring product quality, enhancing productivity, and expanding market opportunities, particularly regarding export market concentration and infrastructure constraints.

Introduction

Governments have historically intervened in agricultural markets under the pretext of promoting food security. At first, interventions aimed to provide affordable food for rapidly growing urban populations, afterwards more emphasis was put on enhancing agricultural productivity. Nowadays, agriculture remains a priority for policymakers due to its role in promoting inclusive growth and reducing poverty. Additionally, renewed concerns about food security have further driven these policy efforts (Gautam, 2015).

One of the key instruments of these interventions are subsidies in different forms – such as various input subsidies, price supports, and trade interventions. While their use has been widespread, the economic effectiveness of subsidies continues to be heavily debated. Economic theory suggests that subsidies are useful in resolving market failures; however, even in this case, the actual effect of subsidies is highly dependent on the specific implementation. Further, in many other cases, subsidies have led to distortions and have been detrimental to countries’ own economic interests (Gautam, 2015).

Another important concern arises from the political economy of subsidies use. Widening rural-urban income disparities create political pressure to implement measures that support the livelihoods of the large agricultural population. Subsidies, due to their visibility, are a convenient instrument to increase political support from this population group. Further, subsidies offer immediate or near-immediate gains to recipients, whereas public capital investments take longer to deliver results, therefore subsidies are often used as a political instrument. Since political decision-making is typically driven by short-term considerations, often aligned with electoral cycles, long-term investments do not always align with political incentives (Gautam, 2015).

Box 1. Subsidies

Subsidies are financial assistance provided by governments to support or promote specific sectors, industries, or activities within the economy. They can take various forms, including direct cash payments, tax relief, low-interest loans, and in-kind support, such as the provision of goods and services at below-market prices. Subsidies play a significant role as a tool in government expenditure policy. They influence resource allocation decisions, income distribution, and expenditure efficiency (Schwartz & Clements, 1999).

In the case of Georgia, subsidies are the main instrument for support to the agricultural sector, with direct subsidies accounting on average 45 percent of total government expenditure in the sector (2014-2024). The government provides subsidies for most of the country’s main crops, including wheat, grapes, hazelnut, tangerines and apples.

Given the scope of this policy brief, only subsidies for major perennial crops – grapes, hazelnuts and apples – are discussed. This as as the wheat sector involves additional food security considerations and due to lack of data for tangerines. Among perennial crops grapes have the highest share of total production (46 percent, including both white and red grapes), followed by tangerines at 14 percent, apples at 10 percent, and hazelnuts at 8 percent (2023, Geostat).

This policy brief firstly explains the Georgian context in more detail, followed by sub-sections discussing each major perennial crop sector, ending with conclusions and policy recommendations.

The Georgian Context

Agriculture plays a crucial role in Georgia’s economy. As of 2024, 39 percent of the population resides in rural areas (Geostat, 2024), where agriculture serves as the primary source of income. The sector employs the largest share of the country’s workforce—17 percent (Geostat, 2023)—yet it contributes to only 7 percent of Georgia’s GDP (Geostat, 2023). At the same time, the disparity in income, and other major socio-economic indicators between the rural (agricultural) and urban population is large. For example, in Tbilisi, the capital of Georgia, the average monthly nominal earnings are 78 percent higher than the average for the rest of Georgia. Additionally, Tbilisi accounts for 70 percent of the total value added generated in the country (Geostat, 2023).

In recent year, the country has undertaken significant efforts to modernize and improve the agricultural sector, yet significant challenges remain. Georgian agriculture is largely characterized by small, fragmented family farms focused on subsistence farming with restricted market access. They are highly vulnerable to weather conditions, yet there is little awareness of or adoption of insurance and risk mitigation measures (State Audit Office of Georgia, 2023). Traditional farming methods remain dominant, with limited use of modern technology. Additionally, most farmers operate on a small scale and lack cooperation and coordination, further hindering efficiency and competitiveness. As a result, they often struggle with low productivity and have difficulty producing high-quality products in stable quantities. Lastly, a high dependency on the Russian market for most agricultural products poses significant risks, as Russia is not a stable trade partner.

Given this context, agricultural subsidies are a highly important topic in Georgia. The Georgian government implements various subsidy programs to support agricultural sectors such as fruit production, viticulture, hazelnut farming, and wheat production. These initiatives aim to promote the sales of grapes, non-standard apples, and tangerines, enhance hazelnut production, and ensure food security by subsidizing essential staples like wheat, particularly during the Covid-19 pandemic.

Starting from 2014 to 2024 (Figure 1), the share of subsidies in total agricultural expenditure has followed an increasing trend, ranging from 21.4 percent in 2014 to peaking at 67.5 percent in 2021. In 2024 the respective share is 54.1 percent. A decline occurred in 2022–2023, following the stabilization of the Covid-19 pandemic. Apart from this, the share of subsidies within agricultural expenditures has been increasing over the last ten years.

Figure 1. Total and subsidy expenditures on agriculture, million GEL (2014-2024)

Graph showing total expenditures and agricultural subsidies in Georgia from 2014 to 2024.

Source: Geostat, 2025.

While these programs are designed to assist farmers and increase sales, how these subsidies support in addressing the mentioned structural challenges – therefore advancing the effectiveness of the sector – is under question.

The Grape Subsidy Programs

The grape subsidy programs in Georgia are primarily aimed at supporting viticulture in key wine-producing regions, such as Kakheti, Racha-Lechkhumi, and Kvemo Svaneti. These subsidies were designed to stabilize farmers’ incomes and ensure smooth harvests, to guarantee that even lower-quality grapes will be sold, particularly for grape varieties used in wine production. In general, the government uses two types of subsidies: direct and indirect. Direct subsidies involve paying farmers a certain amount of money per kilogram of grapes. Indirect subsidies are implemented through state-owned companies that are responsible for purchasing grapes from farmers.

Georgia’s grape subsidy program (direct subsidies) was introduced in 2008 and has been implemented every year except for in 2018 and 2019. Starting from 2014, the government provided substantial direct financial support to grape producers. However, starting in 2017, direct subsidies began to decline sharply, and by 2018–2019, the government announced that it would no longer directly subsidize the grape harvest. However, during this period, the state’s grape purchasing program remained in place, purchasing any surplus grapes left on the market after private acquisitions.

The Covid-19 pandemic in 2020 prompted a renewed surge in subsidies, with financial support reaching its highest levels in years. This elevated support continued until 2022 but was significantly reduced again in 2023 (by 63 percent), following a decline in production (Figure 2).

Figure 2. Grape production, subsidies and wine exports (2014-2023)

Source: Geostat, 2025.

Grape production has generally followed an upward trend, with record harvests in 2019 and 2020. Given the absence of direct subsidies in 2017 and 2018, the effect of subsidies on production levels is questionable. In more recent years, production has become more volatile, displaying a noticeable decline by 2023.

Wine exports, a crucial part of Georgia’s economy, have grown steadily, with volumes peaking in 2022, and persisting at high levels ever since. Export revenues have also increased consistently, reaching an all-time high in 2024, according to preliminary data.

The main destination for the Georgian wine sector is CIS countries. Russia accounts for the largest share among the CIS, with an average of 75.4 percent, between 2014-2024. Russia’s share has been increasing in recent years, reaching 85.8 percent in 2024 (among CIS countries). The average share of exports to the EU of total exports is 10 percent (Figure 3).

Figure 3. Wine exports by country groups (2014-2024)

Source: Geostat, 2025.

Although subsidies played a key role in revitalizing Georgia’s wine industry following the collapse of the Soviet Union, especially as grape production and processing have increased over the years, their long-term impact have been problematic (Ghvanidze, Bitsch, Hanf, & Svanidze, 2020). Since subsidies were introduced in 2008, Georgia’s grape market has become heavily distorted, with prices shaped by government support rather than supply and demand dynamics.

Even though a significant portion of government funding for the sector is allocated to subsidies, the way in which subsidies affect grape production levels is not obvious. Other sector insufficiencies, such as quality issues and exporting market diversification are inadequately addressed. Grape quality remains a key issue, as farmers lack incentives to improve production practices, knowing that the government will purchase their yield regardless. Additionally, Georgia’s heavy reliance on its main export partner, Russia, poses significant risks, and the share of exports to EU countries has not seen substantial growth. Overall, since the subsidies aim to stabilize producers’ income rather than to address structural issues in the sector, they may be considered social support.

The Apple Subsidy Program

The apple subsidy program in Georgia was introduced in 2014 to support the sale of non-standard apples after market prices dropped to a record low 0.02 GEL. Non-standard apples are damaged fruits that fall from trees due to wind, hail, or other natural factors. Typically unfit for direct consumption, these lower-quality apples are primarily used by factories to produce apple concentrate. The program aimed to stabilize prices and provide financial relief to farmers. Processing companies received financial support for each kilogram of non-standard apples purchased.

The program was discontinued between 2015 and 2019, before it resumed in 2020. The number of companies involved in purchasing non-standard apples for further processing ranges from 12 to15 over the years.

As for apple production levels, although there were significant production surges in 2016, 2018, and 2020, these increases have been volatile and unstable.

Figure 4. Apple production, subsidies and exports (2014-2023)

Source: Geostat, 2025.

In terms of exports, the volume increased sharply between 2018 and 2019, reaching its peak in 2021 before gradually declining. Most apple exports are directed to CIS countries, with Russia accounting for an average of 94 percent between 2018 and 2024. In contrast, the EU’s share remains minimal, averaging less than 1 percent, with no exports recorded to the EU in half of the considered years.

Figure 5. Apple exports by country group (2014-2024)

Source: Geostat, 2025.

While apple production is highly vulnerable to weather conditions, the adoption of insurance remains low. The provided subsidy program supports farmers in producing lower-quality non-standard apples, thus limiting the incentives to enhance product quality, productivity, or production practices, as farmers rely on the government to purchase their produce regardless. Similar to the grape industry, government support in the apple market functions more as a social assistance rather than a tool for industry advancement.

The Hazelnut Subsidy Program

Georgia introduced the Hazelnut Production Support Program in 2022 to enhance competitiveness, assist farmers, and improve disease management. The program registered hazelnut orchards in a national cadaster, enabling better monitoring and targeted support, to subsidize the purchase of pesticides and agrochemicals essential for hazelnut care and cultivation. The program has continued in 2023 and 2024, with subsidies amounting 22 and 22.6 million GEL, respectively.

Hazelnut production in Georgia has been highly volatile in the past decade. The sector experienced its most severe crisis in 2017-2018 when fungal diseases and an Asian stink bug (Pharosana) invasion devastated yields. Consequently, both the quantity and quality of hazelnut production declined. In 2019, the production began to recover, peaking in 2021. However, unfavorable weather conditions resulted in a decline in 2022, with only a partial rebound in 2023.

Figure 6. Hazelnut production and exports (2014-2023)

Source: Geostat, 2025.

Hazelnut is mainly exported to EU countries, with an average share of 65.3 percent, between 2014 and 2024. The share of CIS countries in this period is 20.2 percent. However, the share exported to EU countries has been declining 2023 and 2024, to 52.4 and 56.7 percent, respectively.

Figure 7. Hazelnut exports by country group (2014-2024)

Source: Geostat, 2025.

The subsidy scheme in the hazelnut sector seems to be more targeted at the issues the sector is facing, compared to the other discussed programs. The effects are however yet to be explored as the program began in 2022. However, several challenges remain, such as insufficient technical facilities for drying and storing goods essential for ensuring the quality of products (Gelashvili, Deisadze & Seturidze, 2023).

Conclusion and Recommendations

Although the government of Georgia provides substantial support for the agricultural sector, it still suffers from various challenges. Product quality, high vulnerability to weather events and export dependency on unstable partners are major issues for the grape and apple sectors. Further, the effectiveness of the direct financial support and the corresponding incentives within these sectors can be questioned.

For these crops, the subsidy programs seem to function more as social assistance rather than tools for industry development. In the grape sector, guaranteed government purchases reduce incentives for farmers to improve grape quality. Similarly, the apple subsidy program encourages the cultivation of non-standard apples, as farmers rely on state-backed purchases rather than market-driven quality improvements. Apple production has also shown significant volatility over the years, further highlighting the sector’s instability.

Additionally, heavy dependence on Russia as a primary export market for these crops presents economic risks. Diversification, particularly to the EU, has remained limited.

As for the hazelnut sector, the subsidy program aims to address some of the structural challenges, while this sector also relies less on the Russian market. However, some issues with infrastructural equipment remain unresolved.

Overall, the share of subsidies in agriculture is very high; further, the design of the programs mainly prioritizes short-term income stability for farmers rather than long-term market competitiveness and sectoral development. To address the discussed systemic challenges, it is essential to develop targeted policies tailored to the specific needs of each sector. While the priorities may differ across each crop, several key areas require focused attention:

Quality of Products – Enhancing product quality through ensuring food safety standards, improved farming and manufacturing practices, and better regulatory frameworks can help increase competitiveness in both domestic and international markets.
Market Diversification – Strengthening ties with new international partners and improving branding strategies can help industries access new markets and reduce risks associated with economic or political fluctuations in dominant trade partners.
Infrastructure Development – Poor infrastructure remains a challenge for the sector. Investments in post-harvest drying and storage facilities, as well as modern machinery and equipment, will enhance efficiency, reduce losses, and improve product quality.
Adoption of innovative farming practices– Adopting innovative farming practices boosts productivity, lowers costs, and enhances sustainability. It helps farmers adapt to changing weather conditions, making agriculture more efficient, environmentally friendly, and resilient.

By addressing these fundamental issues, policies can play a role in contributing to the long-term stability and growth of the agricultural sector, ultimately strengthening the economy and increasing global competitiveness.

References

Gautam, M. (2015). Agricultural Subsidies: Resurging Interest in a Perennial Debate. Indian Journal of Agricultural Economics.
Gelashvili, S., Deisadze, S., & Seturidze, E. (2022). An Overview of the Georgian Wine Sector.
Gelashvili, S., Deisadze, S., & Seturidze, E. (2023). Overview of the hazelnut sector in Georgia: past trends and the way forward. Tbilisi: ISET Policy Institute.
Ghvanidze, S., Bitsch, L., Hanf, J. H., & Svanidze, M. (2020). “The Cradle of Wine Civilization” – Current Developments in the Wine Industry of the Caucasus. Caucasus Analytical Digest, 117, 9-15.
Jayne, T., & Rashid, S. (2013). Input Subsidy Programs in Sub-Saharan Africa: A Synthesis of Recent Evidence. Agricultural Economics, 44, 547-562.
Schwartz, G., & Clements, B. (1999). Government subsidies. Journal of Economic Surveys, 13(2), 119-148. doi:10.1111/1467-6419.00079
State Audit Office of Georgia. (2023). Audit Report on the Development and Management of the State Agricultural Insurance Program.

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.

Exposure to Violence and Prosocial Attitudes

Posted on March 10, 2025 | Policy Brief

A Ukrainian soldier walks past an overturned car on a war-torn street, illustrating the effects of exposure to violence in conflict zones.

This policy brief examines the academic literature on the impact of conflict exposure on pro-social behavior, a crucial component of resilience and societal cohesion. It also explores potential implications for public opinion, particularly in relation to Ukraine’s prospective EU accession and foreign relations.

Introduction

Since the full-scale invasion of Ukraine began on February 24, 2022, Russian forces have launched daily attacks with varying intensity. Living in a conflict zone profoundly affects individuals in multiple dimensions, including physical and mental health, as well as economic and social conditions. While reports often focus on the destruction of physical and human capital, social capital is equally affected by violence, influencing community resilience, cohesion, and cooperation. In conflict settings, identity can become more pronounced, particularly in distinguishing allies from adversaries.

This policy brief overviews the academic literature on this topic; the impact of conflict exposure on pro-social behavior broadly defined. This literature primarily examines post-conflict settings within the broader discourse on sustaining peace. It focuses on individuals directly engaged in combat or civilians directly affected by violence, particularly regarding the reintegration of former combatants and the rehabilitation of affected populations. As discussed below, results vary, depending on indicators used and the specific context. There is more consistent support for an impact on cooperation than on trust for instance. Another key finding in the literature is the differential behavior towards in-group members – those with whom individuals identify – versus out-group members, raising important questions about national identity and attitudes towards foreign allies. Based on this literature, the brief proceeds to discuss potential implications for public attitudes in Ukraine, focusing on Ukraine’s prospective EU accession.

Literature Overview

This review focuses on the empirical literature, though the theoretical basis spans psychology and the social sciences. Post-traumatic growth theory posits that adversity can foster positive change, whereas post-traumatic withdrawal theory suggests that violence exposure leads to distrust and social withdrawal. Economic arguments emphasize the need for rebuilding, enhanced safety concerns, or reduced time constraints for civic participation due to economic disruptions. Other perspectives highlight the detrimental effects of fragmented communities, given that trust and cooperation take time to develop, or suggest that individuals directly involved in violence may face social ostracization (see Fiedler 2023 for a detailed discussion).

Empirical studies on pro-social behavior employ diverse methodologies and data, including survey responses, indicators of political engagement, and controlled experiments measuring cooperation and trust. Methodology and research design vary, but most studies compare those with direct exposure to violence (treatment group) to those indirectly exposed (control group) within a post-conflict context. It is thus important to note that even the control group experiences some degree of conflict-related impact, meaning that studies specifically capture the effects of direct exposure.

Fiedler (2023), in a recent overview, categorizes the impact of violence into three main domains: personalized and political trust, cooperation, and political engagement. Most studies suggest a negative effect on trust, as seen in Kosovo (Kijewski & Freitag, 2018) and across Europe, the South Caucasus, and Central Asia post-World War II (Grosjean, 2014). Bauer et al. (2016) conducted a meta-analysis of 16 early studies measuring the effects of war violence on social participation, cooperation, and trust. When it came to trust, no significant impact of exposure to violence was found. Cassar et al. (2013) found that Tajik civil war survivors exhibited lower trust in close neighbors but not distant villagers, suggesting that intra-community political divisions played a role. However, a small number of studies report positive effects, such as Hall & Werner (2022), who found that victimized Syrian and Iraqi refugees in Turkey exhibited higher generalized trust.

In terms of cooperation, early studies overwhelmingly support a positive effect, including the meta-analysis of Bauer et al. (2016). For example, Bauer et al. (2014) held experimental games in Sierra Leone and Georgia, demonstrating that those directly exposed to violence exhibited greater altruism and inequality aversion. More recent work has come to different conclusions, however. Hager et al. (2019) found that Uzbek victims of violence in Kyrgyzstan were less cooperative in experimental games with both in-group and out-group members. Similarly, Cecchi & Duchoslav (2018) found that violence-exposed caregivers in Uganda contributed less in public goods games.

When it comes to political engagement, most studies find a positive effect, including the meta-analysis by Bauer et al. (2016) looking at participation in social groups and political engagement. Early and influential studies by Bellows & Miguel (2006, 2009), found that individuals in Sierra Leone with direct war exposure were more likely to participate in community meetings, elections, and social or political groups. Interestingly, while Kijewski & Freitag (2018) found that violence reduced trust in Kosovo, Freitag et al. (2019) found increased political participation in the same setting. Grosjean (2014) also reported a negative effect on trust but found that conflict victims were more likely to engage in civic organizations and collective action. These findings suggest that broad measures of prosocial behavior may be overly simplistic.

A common, and important, finding in much of the literature is with regards to differential behavior towards in-groups and out-groups. Bauer et al. (2014) found that exposure to violence increased altruism and inequality aversion only when interactions occurred within the in-group. Similar findings emerge in studies on soccer players in Sierra Leone (Cecchi et al., 2016) and trust experiments in Colombia (Francesco et al., 2023). Calvo et al. (2019) found that in conflict-affected areas of Mali, participation increased in kinship-based groups while it decreased in more inclusive organizations. Similarly, Mironova & Whitt (2016) found that Kosovars exhibited greater altruism and cooperation when interacting with in-group members. These findings align with research on parochial altruism in general, where cooperation and altruistic behavior are evolutionarily linked to in-group solidarity in response to external threats (e.g. Bernhard et al., 2006, Tajfel et al., 1979). There is thus a risk that social identity becomes more based on a narrow in-group (defined by ethnicity, religion, or language) potentially exacerbating societal divisions.

Implications for Ukraine

What do these insights imply for Ukraine? Given the context-dependent nature of the literature, definitive conclusions are challenging. Two studies on conflict exposure in eastern Ukraine offer preliminary insights. Mironova & Whitt (2021) examined fairness preferences among young Ukrainian men in Donbas, finding that, while no bias against ethnic Russians existed at the onset of violence in 2014, such bias increased after a year of conflict – particularly among non-combatants, contradicting typical patterns in the literature. Coupe & Obrizan (2016) used survey data from November 2014, showing that direct exposure to violence affected political behavior: physical damage reduced voter turnout, while property damage increased support for Western-leaning parties and stronger opposition to Russian aggression.

The strong effect on non-combatants in Mironova & Whitt (2021) highlights a key limitation in the literature – findings on direct exposure may not generalize to entire populations under invasion. Comparing directly and indirectly exposed individuals does not capture the broader societal impact, potentially leading to an overly optimistic view of conflict-induced prosocial behavior. If everyone is negatively affected, those with direct exposure to violence may simply be impacted a little less.

Of particular interest is how the war shapes national identity, in-group perceptions, and political preferences. These dynamics matter for domestic cohesion, interethnic relations, and Ukraine’s foreign policy trajectory. Focusing on the latter, the EU and the U.S. have provided substantial support during the full-scale invasion but delays and insufficiencies in aid may influence perceptions of these allies. EU accession presents economic benefits but entails lengthy and costly reforms with uncertain outcomes. Additionally, shifting U.S. policies and emerging geopolitical alignments may alter Ukrainian attitudes toward Western institutions.

Terror management theory (Landau et al., 2004) suggests that fear strengthens support for charismatic leadership, which, in fragile democratic settings, may favor more authoritarian tendencies. If Western democratic institutions lose appeal, this could negatively impact Ukraine’s political engagement, trust in allies, and willingness to align with European values, which are crucial for successful EU integration.

Conclusions

This review examined the literature on exposure to violence and prosocial behavior, discussing implications for Ukraine’s societal resilience and international alignment. The findings suggest no universal relationship between conflict exposure and prosociality; instead, effects vary depending on the recipient of trust, cooperation, and engagement. Generally, prosocial behavior increases within in-groups, while attitudes toward out-groups may remain unchanged or worsen. In the Ukrainian context, this has ramifications for internal cohesion and external diplomatic relations, particularly regarding the country’s path toward EU membership.

References

Bauer, M., Blattman, C., Chytilová, J., Henrich, J., Miguel, E., & Mitts, T. (2016). Can War Foster Cooperation? Journal of Economic Perspectives, 30(3), 249–274.
Bauer, M., Cassar, A., Chytilová, J., & Henrich, J. (2014). War’s Enduring Effects on the Development of Egalitarian Motivations and In-Group Biases. Psychological Science, 25(1), 47–57.
Bellows, J., & Miguel, E. (2006). War and Institutions: New Evidence from Sierra Leone. American Economic Review, 96(2), 394–99.
Bellows, J., & Miguel, E. (2009). War and Local Collective Action in Sierra Leone. Journal of Public Economics, 93(11–12), 1144–57.
Bernhard, H., Fehr, E., & Fischbacher, U. (2006). Group Affiliation and Altruistic Norm Enforcement. American Economic Review, 96(2), 217–221.
Calvo, T., Lavallée, E., Razafindrakoto, M., & Roubaud, F. (2019). Fear Not for Man? Armed Conflict and Social Capital in Mali. Journal of Comparative Economics, 48(2), 251–76.
Cassar, A., Grosjean, P. A., Khan, F. J., & Lambert, M. (2022). Mothers, Fathers and Others: Competition and Cooperation in the Aftermath of Conflict. UNSW Business School Research Paper.
Cecchi, F., Duchoslav, J. (2018). The Effect of Prenatal Stress on Cooperation: Evidence from Violent Conflict in Uganda. European Economic Review, 101, 35–56.
Cecchi, F., Leuveld, K., & Voors, M. (2016). Conflict Exposure and Competitiveness: Experimental Evidence from the Football Field in Sierra Leone. Economic Development and Cultural Change, 64(3), 405-435.
Coupé, T., & Obrizan, M. (2016). Violence and political outcomes in Ukraine—Evidence from Sloviansk and Kramatorsk. Journal of Comparative Economics, 44(1), 201-212.
Fiedler, C. (2023). What Do We Know about How Armed Conflict Affects Social Cohesion? A Review of the Empirical Literature. International Studies Review.
Francesco, B., Gómez, C., & Grimalda, G. (2023). Crime-related exposure to violence and prosocial behavior: Experimental evidence from Colombia. Journal of Behavioral and Experimental Economics, 104.
Freitag, M., Kijewski, S., & Oppold, M. (2019). War Experiences, Economic Grievances, and Political Participation in Postwar Societies: an Empirical Analysis of Kosovo. Conflict Management and Peace Science, 36(4), 405–24.
Grosjean, P. (2014). Conflict and Social and Political Preferences: Evidence from World War II and Civil Conflict in 35 European Countries. Comparative Economic Studies, 56(3), 424–51.
Hager, A., Krakowski, K., & Schaub, M. A. X. (2019). Ethnic Riots and Prosocial Behavior: Evidence from Kyrgyzstan. American Political Science Review, 113(4), 1029–44.
Hall, J., & Werner, K. (2022). Trauma and Trust: How War Exposure Shapes Social and Institutional Trust among Refugees. Frontiers in Psychology, 13, 786838.
Kijewski, S., & Freitag, M. (2018). Civil War and the Formation of Social Trust in Kosovo: Post-traumatic Growth or War-Related Distress? Journal of Conflict Resolution, 62(4), 717–42.
Landau, M. J., Solomon, S., Greenberg, J., Cohen, F., Pyszczynski, T., Arndt, J., Miller, C. H., Ogilvie, D. M., & Cook, A. (2004). Deliver us from Evil: The Effects of Mortality Salience and Reminders of 9/11 on Support for President George W. Bush. Personality and Social Psychology Bulletin, 30(9), 1136–1150.
Mironova, V., & Whitt, S. (2016). Social Norms after Conflict Exposure and Victimization by Violence: Experimental Evidence from Kosovo. British Journal of Political Science, 48(3), 749–65.
Mironova, V., & Whitt, S. (2021). Conflict and parochialism among combatants and civilians: Evidence from Ukraine. Journal of Economic Psychology, 86.
Tajfel, H., Turner, J. C., Austin, W. G., & Worchel, S. (1979). An integrative theory of intergroup conflict. Organizational Identity: A Reader, 56-65.

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.