Tag: Ukraine
How to Sustain Support for Ukraine and Overcome Financial and Political Challenges | SITE Development Day 2022
The Russian war on Ukraine has turmoiled Europe into its first war in decades and while the effects of the war are harshly felt in Ukraine with lives lost and damages amounting, Europe and the rest of the world are also being severely affected. This policy brief shortly summarizes the presentations and discussions at the SITE Development Day Conference, held on December 6, 2022. The main focus of the conference was how to maintain and organize support for Ukraine in the short and long run, with the current situation in Belarus and the region and the ongoing energy crisis in Europe, also being addressed.
War in Ukraine, Oppression in Belarus
Starting off the conference, Sviatlana Tsikhanouskaya, Leader of the Belarusian Democratic Forces, delivered a powerful speech on the necessity of understanding the role of Belarus in the ongoing war in Ukraine. Tsikhanouskaya argued that Putin’s war on Ukraine was partly a result of the failed Belarusian revolution of 2020. The following oppression, torture, and mass arrestations of Belarusians is a consequence of Lukashenka’s and Putin’s fear of a free Belarus, a Belarus that is no longer in the hands of Putin – who sees not only Belarus but also Ukraine as colonies in his Russian empire. Amidst the fight for Ukraine, we must also fight for a free Belarus, Tsikhanouskaya added. Not only Belarusians fighting alongside Ukrainians against Russia in Ukraine, but also other parts of the Belarusian opposition need support from the free and democratic world and the EU. The massive crackdowns on opponents of the Belarusian regime today and the war on Ukraine are not only acts of violence, but they are also acts against democracy and freedom. The world must therefore continue to give support to those fighting in both Belarus and Ukraine. Ukraine will never be free unless Belarus is free, Tsikhanouskaya concluded.
Johan Forssell, Minister of Foreign Trade and International Development Cooperation continued Tsikhanouskaya’s words on how the Russian attack must be seen and treated as a war on democracy and the free world. Belarus, Moldova and especially Ukraine will receive further support from Sweden, Forssell continued, adding that the Swedish support to Ukraine has more than doubled since the invasion in February 2022. Support must however not be given only in economic terms and consequently Sweden fully supports Ukraine on its path to EU-membership, which will be especially emphasized during Sweden’s upcoming EU-presidency. Support for the rule of law, democracy and freedom will continue to be essential and, in the forthcoming reconstruction of Ukraine, these aspects – alongside long term sustainable and green solutions – must be integrated, Forssell continued. Forssell also mentioned the importance of reducing the global spillover effects from the war. In particular, Forssell mentioned how the war has struck countries on the African continent, already hit with drought, especially hard with increased food prices and increased inflation, displaying the vital role Ukrainian grain exports play.
Andrij Plachotnjuk, Ambassador Extraordinary and Plenipotentiary of Ukraine to the Kingdom of Sweden, further talked about the need for rebuilding a better Ukraine, emphasizing the importance of involvement from Kiyv School of Economics (KSE) and other intellectuals and businesses in this process. Plachotnjuk also pinpointed what many others would come to repeat during the day; that resources, time and efforts devoted to supporting Ukraine must be maintained and persevered in the longer perspective.
Economic Impacts From the War and How the EU and Sweden Can Provide Support
During the first half of the conference, the Ukrainian economy and how it can be supported by the European Union was also discussed. On link from Kiyv, Tymofiy Mylovanov, President of the Kyiv School of Economics, shared the experiences of the University during wartime and presented the work KSE has undertaken so far – and how this contributes to an understanding of the damages and associated costs. Since the invasion, KSE has supported the government in three key areas; 1) Monitoring the Russian economy, 2) Analyzing what sanctions are relevant and effective, and 3) Estimating the cost of damages from the war. For the latter, KSE is collaborating with the World Bank using established methods of damage assessment including crowd sourced information on damages complemented with images taken by satellites and drones. According to Mylovanov, the damage assessment is crucial in order to counter Russia’s claims of a small conflict and to remind the international community of the high price Ukraine is paying to hold off Russia.
The economic impact from the war was further accentuated during the presentation by Yulia Markuts, Head of the Centre of Public Finance and Governance Analysis at the Kyiv School of Economics. Markuts explained how the Ukrainian national budget as of today is a “wartime budget”. Since February 2022, the budget has been reoriented with defense and security spending having increased 9 times compared to 2021, whereas only the most pressing social expenditures have been implemented. This in a situation where the Ukrainian GDP has simultaneously decreased by 30 percent. Although there has been a substantial inflow of foreign aid, in the form of grants and loans, the Ukrainian budget deficit for 2023 is estimated to 21 percent. Part of the uncertainty surrounding the Ukrainian budget stems from the fact that the inflow from the donor community is irregular, prompting the government to cover budget deficits through the National Bank which fuels inflation and undermines the exchange rate. Apart from the large budget posts concerning military spending, major infrastructural damages are putting further pressure on the Ukrainian budget in the year to come, Markuts continued. As of November 2022, the damages caused by Russia to infrastructure in Ukraine amounted to 135,9 billion US Dollars, with the largest damages having occurred in the Kiyv and Donetsk regions, as depicted in Figure 1.
Figure 1. Ukrainian regions most affected by war damages, as of November 2022.
Source: Kiyv School of Economics
The infrastructural damages constitute a large part of the estimated needed recovery support for Ukraine, together with losses to the state and businesses amounting to over one trillion US Dollars. However, such estimates do not cover the suffering the Ukrainian people have encountered from the war.
The large need for steady support was discussed by Fredrik Löjdquist, Centre Director of the Stockholm Centre for Eastern European Studies (SCEEUS), who argued the money needs to be seen as an investment rather than a cost, and that we at all times need to keep in mind what the consequences would be if the support for Ukraine were to fizzle out. Löjdquist, together with Cecilia Thorfinn, Team leader of the Communications Unit at the Representation of the European Commission in Sweden, also emphasized how the reconstruction should be tailored to fit the standards within the European Union, given Ukraine’s candidacy status. Thorfinn further stressed that the reconstruction must be a collective effort from the international community, although led by Ukraine. The EU is today to a large extent providing their financial support to Ukraine through the European Investment Bank (EIB). Jean-Erik de Zagon, Head of the Representation to Ukraine at the EIB, briefly presented their efforts thus far in Ukraine, efforts that have mainly been aimed at rebuilding key infrastructure. Since the war, the EIB has deployed an emergency package of 668 million Euro and 1,59 billion for the infrastructure financing gap. While all member states need to come together to ensure continued support for Ukraine, the EIB is ready to continue playing a key role in the rebuilding of Ukraine and to provide technical assistance in the upcoming reconstruction, de Zagon said. This can be especially fruitful as the EIB already has ample knowledge on how to carry out projects in Ukraine.
During a panel discussion on how Swedish support has, can and should continuously be deployed, Jan Ruth, Deputy Head of the Unit for Europe and Latin America at Sida, explained Sida’s engagement in Ukraine and the agency’s ambition to implement a solid waste management project. The project, in line with the need for a green and environmentally friendly rebuild, is today especially urgent given the massive destructions to Ukrainian buildings which has generated large amounts of construction waste. Karin Kronhöffer, Director of Strategy and Communication at Swedfund, also accentuated the need for sustainability in the rebuild. Swedfund invests within the three sectors of energy and climate, financial inclusion, and sustainable enterprises, and hash previously invested within the energy sector in Ukraine. Swedfund is also currently engaged in a pre-feasibility study in Ukraine which would allow for a national emergency response mechanism. Representing the business side, Andreas Flodström, CEO and founder of Beetroot, shared some experiences from founding and operating a tech company in Ukraine for the last 10 years. According to Flodström there will, apart from a huge need in investments in infrastructure, also be a large need for technical skills in the rebuild. Keeping this in mind, bootcamp style educations are a necessity as they provide Ukrainians with essential skills to rebuild their country.
A recurring theme in both panel discussions was how the reconstruction requires both public and private foreign investments. Early on, as the war continues, public investments will play the dominant part, but when the situation becomes more stable, initiatives to encourage private investments will be important. The potential of using public resources to facilitate private investments through credit guarantees and other risk mitigation strategies was brought up both at the European and the Swedish level, something which has also been emphasized by the new Swedish government.
Impacts From the War Outside of Ukraine – Energy Crisis and Other Consequences in the Region
The conference also covered the effects of the war outside of Ukraine, initially keying in on the consequences from the war on energy supply and prices in Europe. Chloé Le Coq, Professor of Economics, University Paris-Pantheon-Assas (CRED) & SITE, gave a presentation of the current situation and the short- and long-term implications. Le Coq explained that while the energy market is in fact functioning – displaying price increases in times of scarcity – the high prices might lead to some consumers being unable to pay while some energy producers are making unprecedented profits. The EU has successfully undertaken measures such as filling its gas storage to about 95 percent (goal of 80 percent), reducing electricity usage in its member countries, and by capping market revenues and introducing a windfall tax. While the EU is thus appearing to fare well in the short run, the reality is that EU has increased its coal dependency and paid eight times more in 2022 to fill its gas storage (primarily due to the imports of more costly Liquified Natural Gas, LNG). In the long run, these trends are concerning given the negative environmental externalities from coal usage and the market uncertainty when it comes to the accessibility and pricing of LNG. Uncertainties and new regulation also hinder investments signals into new low-carbon technologies, Le Coq concluded. Bringing an industrial perspective to the topic, Pär Hermerèn, Senior advisor at Jernkontoret, highlighted how the energy crisis is amplified by the increased electricity demand due to the green transition. Given the double or triple upcoming demand for electricity, Hermerèn, referred back to the investment signals, saying Sweden might run the risk of losing market shares or even seeing investment opportunities leave Sweden. This aspect was also highlighted by Lars Andersson, Senior advisor at Swedenergy, who, like Hermerèn, also saw the Swedish government’s shift towards nuclear energy solutions. Andersson stated the short-term solution, from a Swedish perspective, to be investments into wind power, urging policy makers to be clear on their intentions in the wind power market.
Other major impacts from the war relate to migration, a deteriorating Belarusian economy and security concerns in Georgia. Regarding the latter, Yaroslava Babych, Lead economist at ISET Policy Institute, Georgia, shared the major developments in Georgia post the invasion. While the Georgian economic growth is very strong at 12 percent, it is mainly driven by the influx of Russian money following the migration of about 80 000 Russians to Georgia. This has led to a surge in living costs and an appreciation of the local currency (the Lari) of 12,6 percent which may negatively affect Georgian exports. Additionally, it may trigger tensions given the recent history between the countries and the generally negative attitudes towards Russians in Georgia. Michal Myck, Director at CenEa, Poland, also presented migration as a key challenge. While the in- and outflow of Ukrainian refugees to Poland is today balanced, the majority of those seeking refuge in Poland are women and children and typically not included in the workforce. To ensure successful integration and to avoid massive human capital losses for Ukraine, Myck argued education is key, pointing to the lower school enrollment rates among refugee children living closer to the Ukrainian border. Apart from the challenges posed by the large influx of Ukrainian in the last year, the Polish economy is also hit by high energy prices, fuel shortages and increasing inflation. Lev Lvovskiy, Research fellow at BEROC, Belarus, painted a similar but grimmer picture of the current economic situation in Belarus. Following the invasion, all trade with Ukraine has been cut off, while trade with Russia has increased. Belarus is facing sanctions not only following the war, but also from 2020, and the country is in recession with GDP levels dropping every month since the invasion. Given the political and economic situation, the IT sector has shrunk, companies oriented towards the EU has left the country and real salaries have decreased by 5 percent. At the same time, the policy response is to introduce price controls and press banknotes.
Consequences of War: An Academic Perspective
The later part of the afternoon was kicked off by a brief overview of the FREE Network’s research initiatives on the links between war and certain development indicators. Pamela Campa, Associate Professor at SITE, presented current knowledge on the connection between war and gender, with a focus on gender-based violence. Sexual violence is highly prevalent in armed conflict and has been reported from both sides in the Donetsk and Luhansk regions since 2014 and during the ongoing war, with nearly only Russian soldiers as perpetrators. Apart from the direct threats of sexual violence during ongoing conflict and fleeing women and children risking falling victims to trafficking, intimate partner violence (IPV) has been found to increase post conflict, following increased levels of trauma and post-traumatic stress disorder (PTSD). While Ukrainian policy reforms have so far strengthened the response to domestic violence there is still a need for more effective criminalization of domestic violence, as the current limit for prosecution is 6 months from the date crime is committed. An effective transitional justice system and expertise on how to support victims of sexual violence in conflict, alongside economic safety measures undertaken to support women and children fleeing, are key policy concepts Campa argued. Coming back to the broader topic of gender and war, Campa highlighted the need for involvement of women in peace talks and negotiations, something research suggests matter for both equality, representativeness, and efficiency.
Providing insights into the relationship between the environment and war, Julius Andersson, Assistant Professor at SITE, initially summarized how climate change may cause conflict along four channels: political instability and crime rates increasing as a consequence of higher temperatures, scarcity of natural resources and environmental migration. Conflict might however also cause environmental degradation in the form of loss of biodiversity, pollution and making land uninhabitable. As for the negative impact from the war in Ukraine, Andersson highlighted how fires from the war has caused deforestation affecting the ecosystems, that rivers in conflict struck areas in Ukraine and the Sea of Azov are being polluted from wrecked industries (including the Azovstal steelworks) and lastly that there is a real threat of radiation given the four major nuclear plants in Ukraine being targeted by Russian forces. Coming back to a topic mentioned earlier during the day, Andersson also emphasized potential conflict spillovers into other parts of the world due to the war’s impact on food and fertilizer prices.
Concluding the session, Jonathan Lehne, Assistant Professor at SITE, reviewed how war and democracy is tied to one another, highlighting that while studies have found that democracies per se are not necessarily less conflict prone, it is still the case that democratic countries almost never fight each other. As for the microlevel takeaways from previous research, it appears as if individuals and communities having experienced violence and casualties actually reap a democratic dividend in some respects, such as greater voting participation. On the other hand, while areas with a large refugee influx also experience an increased voter turnout, voting for right-wing parties also increase with politicians exploiting this in their communication.
Book Launch – Reconstruction of Ukraine: Principles and Policies
The Development Day was also guested by Ilona Sologoub, Scientific Editor at VoxUkraine, Tatyana Deryugina, Associate Professor of Finance at the University of Illinois at Urbana-Champaign, and Torbjörn Becker, Director of SITE, who presented their newly released book “Reconstruction of Ukraine: Principles and policies”. Sologoub started off by giving an overview of the mainly economic topics covered in the book and pointing out that the main purpose of the book is to inform policy makers about the present situation and to suggest needed reforms and investments. Becker outlined the four key principles recommended to stem corruption during reconstruction; 1) Remove opportunities for corruption and rent extraction, 2) Focus on transparency and monitoring of the whole reconstruction effort, 3) Make information and education an integral part of the anti-corruption effort, and 4) Set up legal institutions that are trusted when corruption does occur. Deryugina focused on the energy sector and related back to what had previously been discussed throughout the day, the need to “build-back-better”. Deryugina mentioned that Ukraine, previously heavily reliant on coal and gas imports from Russia, now have the opportunity to steer away from low energy efficiency and bottleneck issues, towards becoming a European natural gas hub. The book is available for free here. There will also be a book launch on the 11th of January 2023 at Handelshögskolan.
Concluding Remarks
Via link from Kiyv, Nataliia Shapoval, Head of KSE Institute and Vice President for Policy Research at Kyiv School of Economics closed the conference by emphasizing the urgency of continued education of Ukrainians in Ukraine and elsewhere to avoid loss of Ukrainian human capital. Shapoval also stressed how universities can act as thinktanks, support policy makers in Ukraine and Europe to come up with effective sanctions against Russia and provide a deeper understanding of the current situation – a situation which will linger and in which Ukraine needs continued full support.
This year’s SITE Development Day conference gave an opportunity to discuss the need for continued support for Ukraine and the implications from the war in a global, European, and Swedish perspective. Representatives from the political, public, private and academic sectors contributed with their insights into the challenges and possibilities at hand, providing greater understanding of how the support can be sustained, with the goal of a soon end to the war and a successful rebuild of Ukraine.
List of Participants in Order of Appearance
- Anders Olofsgård, Deputy Director at SITE
- Sviatlana Tsikhanouskaya, Leader of the Belarusian Democratic Forces
- Johan Forssell, Minister of Foreign Trade and International Development Cooperation
- Andrij Plachotnjuk, Ambassador Extraordinary and Plenipotentiary of Ukraine to the Kingdom of Sweden
- Tymofiy Mylovanov, President of the Kyiv School of Economics (on link from Kyiv)
- Yuliya Markuts, Head of the Centre of Public Finance and Governance Analysis, Kyiv School of Economics
- Jean-Erik de Zagon, Head of the Representation to Ukraine at the European Investment Bank
- Cecilia Thorfinn, Team leader of the Communications Unit at the Representation of the European Commission in Sweden
- Fredrik Löjdquist, Centre Director of the Stockholm Centre for Eastern European Studies (SCEEUS)
- Jan Ruth, Deputy Head of the Unit for Europe and Latin America at Sida
- Karin Kronhöffer, Director of Strategy and Communication at Swedfund
- Andreas Flodström, CEO and founder of Beetroot
- Chloé Le Coq, Professor of Economics, University Paris-Pantheon-Assas (CRED) & SITE
- Lars Andersson, Senior advisor at Swedenergy
- Pär Hermerèn, Senior advisor at Jernkontoret
- Ilona Sologoub, VoxUkraine scientific editor (on link)
- Tatyana Deryugina, Associate Professor of Finance at the University of Illinois at Urbana-Champaign (on link)
- Torbjörn Becker, Director at SITE
- Michal Myck, Director at CenEa, Poland
- Yaroslava Babych, Lead economist at ISET Policy Institute, Georgia
- Lev Lvovskiy, Research fellow at BEROC, Belarus
- Pamela Campa, Associate Professor at SITE
- Julius Andersson, Assistant Professor at SITE
- Jonathan Lehne, Assistant Professor at SITE
- Nataliia Shapoval, Head of KSE Institute and Vice President for Policy Research at Kyiv School of Economics (on link)
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.
Financing Ukraine’s Victory: Why and How #Ukraine
There is a risk that Ukraine’s war effort may be undermined by inadequate external support, leading to excessive reliance on monetary financing, which would drive high inflation, risk a currency crisis, and could undermine the war effort just as the military tide is turning in Ukraine’s favour.
The authors of the CEPR Policy Insight argue that donors should fund Ukraine next year and describes how best to do it.
Authors:
- Torbjörn Becker
- Olena Bilan
- Yuriy Gorodnichenko
- Tymofiy Mylovanov
- Jacob Nell
- Nataliia Shapoval
Read the CEPR Policy Insight to learn more (see here).
Disclaimer: Opinions expressed in policy briefs and reports, during events and conferences are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Higher Education and Research in times of War and Peace: Key Insights from the 2022 FREE Network Conference
More than thirty years after the collapse of the Soviet Union, Europe is struck with war following the Russian aggression on Ukraine. Russia’s war on Ukraine entails lost human capital, both in actual lives lost and due to major disruptions to key functions of the society, such as education and research. In light of this, the FREE Network, together with the Centre for Economic Analysis (CenEA) and the Stockholm Institute of Transition Economics (SITE), hosted the public conference “Higher Education and Research in War and Peace“ in Warsaw on the 10th of September 2022. This policy brief is based on the presentations and panel discussions held during the conference.
The large-scale Russian invasion of Ukraine has disrupted an entire society, including the education system, with Ukrainian schools just recently partially welcoming back students to the classrooms for the first time since the 25th of February 2022. Closing schools has severe impacts on a population, as highlighted by the recent Covid-19 pandemic. The lockdown and closure of schools around the world following the virus have had and will continue to have massively negative consequences globally, with severe losses in human capital due to lost years of education. This is especially in countries where access to online education is limited or of poor quality. Inequalities also rise following the closure of schools and girls return to school in fewer numbers than their male counterparts. The disruption to the Ukrainian education system will result in lost human capital and lowered levels of knowledge among the population. The war has further restricted access to relevant information for many Ukrainians but also for Russians, making people susceptible to the increased Russian propaganda and misinformation about the war on Ukraine depicted within and outside of Russia.
In light of this, the FREE Network gathered representatives from its affiliated institutions and other relevant actors in the region to discuss the relevance and necessity of continued support for higher education and research within social sciences in Ukraine, and more broadly in Eastern Europe and post-Soviet countries. The conference and the overarching theme related back not only to the original ambition of the FREE Network, namely to support outstanding academia within economics and relate it to policy work but also to the current situation in Europe and the existing threat from Russia to this objective.
This brief will initially cover the work carried out by the Kyiv School of Economics (KSE) in response to the Russian aggression, followed by thoughts on Russia’s role in the evolution of knowledge and human capital in the region. The brief continues by covering the benefits and positive outcomes of investments into education and research and lastly concludes with reflections on the role of the FREE Network.
The Kyiv School of Economics’ Response to the Russian Aggression
The war on Ukraine put the spotlight on the importance of high-quality academic institutions as a safety net for the government to maintain vital functions to society. The Vice President for Policy Research at KSE, Nataliia Shapoval, gave a brief overview of how KSE’s work has changed since the Russian war on Ukraine and its implications. Shapoval initially painted a picture of the disruption to the Ukrainian society caused by the Russian aggression, explaining how KSE stepped up during the first months of the war, in some areas doing the work of ministries. While the government has mainly taken back some duties, the KSE is still providing policy advice in areas related to the effects of sanctions, estimates of damages, and food security among others. KSE is also highly active within the areas of education and health, working with Ukrainian schools through the KSE Charitable Foundation (KSE CF) to ensure students can safely return to the classrooms.
Another important aspect of the work carried out by KSE concerns spreading knowledge about and shedding light on the situation in Ukraine. Through the various networks, by talking to colleagues within academia but also to the media, KSE is trying to explain what has happened and is still happening in Ukraine. According to Shapoval, there is a need for delivering correct information and to keep attention fixed on the situation in Ukraine such that people are kept aware of what is going on in the region.
Shapoval also regularly returned to the role of education and research for the present and future Ukraine. According to Shapoval, avoiding brain drain and ensuring Ukrainians are equipped with the necessary knowledge is key to rebuilding a future Ukraine founded on well-functioning democratic institutions. To facilitate this, the KSE is offering two programs, Memory and Conflict Studies (a multidisciplinary field concerned with how the past can be understood and remembered, and how it might impact the present transformation of societies) and Urban Studies, both aimed at covering the future need for competence within these fields. Further mentioned by Shapoval is the fact that, due to the war, many Ukrainians have left the country and are being educated elsewhere. While this partially ensures intellectual human capital is not lost, these students must be kept anchored to Ukraine through networks to ensure they will return back to help rebuild Ukraine. This is especially important in order to counter the ongoing evolution in Russia.
Thoughts on the Role of Russia in the Region
While the recent developments in Ukraine have of course disrupted education and research in more severe and tangible ways, the situation for independent researchers in Russia has also deteriorated. Torbjörn Becker, Director of SITE, emphasized how several Russian colleagues in exile still collaborate with the FREE Network on policy work and research. Becker also further stressed how they will be paramount once Ukraine wins the war, as will the role of partnerships for a future transformation of the Russian society. Acknowledging that there are many Russians (especially amongst academics in exile) who oppose the war, Shapoval however stressed the disturbing fact that many Russians do seem to support the Russian aggression and that the role of Russia as a destructive force in the region cannot be understated. This was seconded by Tamara Sulukhia, Director of the International School of Economics at Tbilisi State University (ISET). Sulukhia argued that Russian politics slow down and disturbs the free states within the region, and hampers organizations and countries from moving in the right direction in regard to democracy, economic evolution and integration toward Europe. Both Shapoval and Sulukhia reminded the audience that even with a Ukrainian victory, and this in a war which is defining the future of democracy in the region, Russia will persist. Russia has proven time and again, by effectively occupying 23 percent of Georgia as of 2008, with the occupation of Crimea in 2014 and with the most recent war on Ukraine, to be a real military threat to post-Soviet countries. Even though Russia losing the war would shift the power dynamics in the region, the ever-present threat of Russia is not only of a military character. Russia also attempts to impact education, research and knowledge more generally by promoting a Soviet-style education and by altering reality through propaganda and false information.
While discussing the current situation of higher education within economics in Belarus, Dzmitry Kruk, Deputy Academic Director of the Belarusian Economic Research and Outreach Center (BEROC), regularly came back to the negative impacts from Russia on the quality of education and research. Where the western style education is free but also differential, Soviet-style education is centred around learning how to fulfil instructions, according to Kruk. The Belarusian educational system is anchored to Russia and as a result Belarusians today have what Kruk referred to as a “spoilt mental map”. The necessity of free education and research outside the Russian alternative (which is mainly published in Russian and with a post-Marxist view of the world) is vital in order to equip people with the tools to respond to the new types of dictatorship evident in the region. Young people within academia who have experienced freedom and have had the opportunity of thinking for themselves will also be vital on the future path toward democracy. Kruk’s opinions were furthered by Shapoval stating how education must and should counter the risk of brainwashing in the region and in the world as a whole. Shapoval argued the necessity of countering propaganda with the help not only of education but also the legislation of media and social media and enforcement of international laws in general. The necessity of ensuring new values for intellectuals and students in times to come is of paramount value and, according to Shapoval, as important to halting the Russian imperialist visions today as it was some thirty years ago. Shapoval further argued that the threat from Russia’s ambitions should be met not only with education and research but also through installing a sense of hope and prosperity among young people.
Investments into Education and Research as a Safeguard and Development Driver
While countries within the turbulent region differ, not least in regard to overall political ambitions and structure, in most of them investments into education and research have been paying off. KSE’s expertise allowed it to work closely with the Ukrainian government, standing strong in their fight against Russia. The impact from investments into education and research in the region is also evident in both Georgia and Latvia.
Sulukhia argued ISET to be, and to have been, a key contributor to human capital among Georgians as well as others in the Caucasus region. Sulukhia argued this to be especially important when under occupation, mentioning how Georgia has, since the occupation of the two regions of Abkhazia and South Ossetia, in all ways possible tried to ensure that the human capital of internally displaced people is not lost. ISET have ten folded its intake of students and is today providing world-class education in the Georgian language, effectively counteracting brain drain. Post-graduates are working in major institutions providing relevant knowledge and competence in key areas of not only the Georgian society but also other countries in the Caucasus. A similar picture was painted by Anders Paalzow, Rector at Stockholm School of Economics in Riga (SSE Riga). Paalzow specifically pointed out how the investments in education made in Latvia in the 1990s have truly paid off, with graduates having been absorbed into relevant parts of the Latvian society and the Baltics for decades.
Having previous students in key positions in society to ensure sound policy work (such as good fiscal and audit control of the countries in question etc.) is however not the only benefit of investing in education and research within the region. As emphasized by Sulukhia, institutes within the FREE Network and other networks alike are strategically vital in the sense that they ensure knowledge and evidence for policy makers and as they convey evidence-based messages for the general public. This is especially important in a time when the message of the developmental direction for the countries within the region has to be reinforced in order to stand against Russian misinformation and propaganda as well as voices questioning the benefits of European integration. Sulukhia emphasized how it is of importance that the relevance of education and research is rooted among the people and not only within academia to evade the risk of preaching to the choir. Vlad Mykhnenko, Fellow at St. Peter’s College at the University of Oxford, further argued it is necessary for academia to be much more policy oriented than what is the reality today. Researchers should comment on political events and public policy to ensure the outreach of knowledge and information, not just to help the public have a greater understanding of complex issues but also to help inform experts. According to Myhnenko, other researchers are keen on getting context-relevant knowledge and insights from economists working within the region.
The necessity of communicating the outcomes from investments within economics education and research and more broadly within social sciences was a recurring theme during the conference. Presenting the University’s engagement in various programs such as Erasmus+, Horizon Europe, The European Strategy for Universities etc., Professor Agnieszka Chłoń-Domińczak from the Warsaw School of Economics (WSE) outlined the importance of funding from the EU. Chłoń-Domińczak highlighted how EU support has enabled greater partnerships and internationalization and pointed out that while the transfer of knowledge and internationalization of students and researchers are of the essence, there is a need for also ensuring capacity building among other staff when building sound institutions. Internationalization through the exchange as a hedge against brain drain and as a means of improving the quality of academia was further emphasized by Michal Myck, Director of CenEA.
Chłoń-Domińczak, alongside Paalzow and the Swedish Ambassador to Poland, Stefan Gullgren, further argued the necessity to bridge between business and academia. This, especially as investments in social sciences, as compared to investments in natural sciences or technology cannot be commercialized. Additionally, the former havs payoffs in the long run which lowers investment incentives for firms making it even more crucial to communicate the large benefits to society of investments into the sphere. Ensuring consistent and continued support requires not only a good connection to businesses but also proper legal structures in place. As argued by Gullgren, the Swedish model with private businesses funding about 70 percent of research and education in Sweden, is made possible largely thanks to the fact that many investments are funnelled through foundations that are exempt from taxation when set up to finance research grants and education. Thus, one should consider not only business, academia and investors when thinking about future funding for research and education, but the legislative framework as well, especially in contexts such as the future rebuild of Ukraine.
As for how the benefits from investments into social sciences best are communicated, opinions shifted among participants throughout the day. On the one hand, Becker’s argument of being visible not only in traditional media but on social media alike was met by Shapoval, highlighting the need for a regulatory framework for both platforms. On the other hand, Myhnenko’s argument for more policy oriented and outreaching research was met by Kruk claiming there is a risk of researchers within economics deviating too far from research within the field. Kruk also addressed the argument of being available on social media by countering that in his view, researchers should refrain from work based on what generates clicks or reads.
The Relevance of the FREE Network in times of War
Considering the evidence brought forth during the conference by colleagues within the FREE Network, be it the suppression of BEROC in their efforts of founding a School of Economics in Belarus, the effects on the KSE from the war on Ukraine, or the rise of anti-European expressions in Georgia, the necessity of the network was at the end of the day perhaps clearer than ever. As highlighted by virtually all speakers during the conference, internationalization through networks such as the FREE Network fosters open minds, allows for improvements within all aspects of academia, and enables the exchange of thoughts, ideas and experiences. Although the heterogeneity of the region should not be overlooked and investments made in accordance with this, the similarities between the countries within the FREE Network outnumber the differences. The immediate threat from Russia must be met with knowledge and fact-based information as well as high-quality education and research being made available among the population in the region as a whole. To ensure a continued transition within the region, the risk of brain drain must be evaded through continuous support to the social sciences, as these have the power to truly transform nations.
Concluding Remarks
The FREE Network public conference in Warsaw was the first in-person conference since the outbreak of the Covid-19 pandemic. The benefits of meeting in person were however overshadowed by the ongoing Russian aggression on Ukraine and ultimately on democratic ideals, including those of independent academia. We hope to welcome all FREE Network institutes to next year’s conference in Kyiv, to further discuss how outstanding education and research can help rebuild a sovereign Ukraine.
List of Participants
- Torbjörn Becker, Director of SITE
- Agnieszka Chłoń-Domińczak, Professor at WSE
- Stefan Gullgren, Swedish Ambassador to Poland
- Dzmitry Kruk, Deputy Academic Director, BEROC
- Michal Myck, Director of CenEA
- Vlad Mykhnenko, Fellow, St. Peter’s College, University of Oxford
- Anders Paalzow, Rector SSE Riga
- Nataliia Shapoval, Vice President for Policy Research at KSE
- Tamara Sulukhia, Director of ISET
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.
Foreign Aid to Ukraine: Lessons from the Literature on Strategic Foreign Aid
Ukraine is currently receiving substantial inflows of foreign aid from western donors to help the country withstand the Russian aggression. The foreign aid flows partly reflect altruistic motives from the donor side, but also donor’s domestic strategic foreign policy objectives as the war is seen as part of a battle over the future world order. In this brief, I discuss the academic literature that has analysed the existence and consequences of strategic motivations behind aid flows more generally, and draw some preliminary insights for the case of Ukraine.
One of many consequences of the Russian war on Ukraine is that western countries have responded by providing substantial bilateral financial support to Ukraine. This support has taken the form of humanitarian, financial and military aid. As of August 3rd 2022, the US has provided the most support in absolute terms (44,5 billion euro), followed by EU institutions (16,2 billion euro) and the United Kingdom (6,5 billion euro). Relative to GDP, countries in Eastern Europe have however been the most generous, led by Estonia and Latvia (0,9 percent of GDP) and Poland (0,6 percent of GDP) (Antezza et al., 2022). Meanwhile, a discussion on the reconstruction of Ukraine has started, following the massive destruction of physical capital from the Russian aggression. The immense costs of this destruction increase every day, and the reconstruction effort for a future “Ukraine 2.0” will likely require thousands of billions of $US, mainly in the form of foreign aid (Becker at al., 2022).
Against this background, it is important to consider the academic and policy-oriented literature on aid effectiveness, i.e., to what extent aid impacts economic development and social welfare. Aid effectiveness involves many different dimensions such as issues of donor coordination, responsibility for reforms and investment choices of government and people (ownership), how to avoid corruption and so-called “white elephants” (expensive and useless investments), and how to effectively implement evaluation and evidence-based policy choices (e.g. OECD, 2008). In this brief, I will focus my attention on one such dimension, the underlying donor purpose of aid giving, and its implications for the contribution of aid inflows to human welfare in partner countries. More specifically I will discuss strategic aid, aid given primarily for the purpose of donor’s own broader foreign policy agendas. I will discuss what the literature has to say about the existence of such strategic aid, and what it has to say about its implications for aid flows and aid effectiveness. This will be done on basis of the existing literature, including a few of my own contributions. It is important to note that this literature focuses on development aid, defined by the OECD as “Official Development Assistance” (ODA). ODA does not include for instance military aid but is rather defined as official flows that explicitly target economic development and social welfare in the partner country. This literature is thus most relevant when talking about the reconstruction of Ukraine and to some extent the current financial and humanitarian aid given to the country.
Identifying the Existence of Strategic Aid
In the quantitative literature, there are primarily two approaches to measuring the strategic incentives behind aid disbursements. The first approach looks at the distribution of foreign aid across partner countries with different levels of needs, institutional capacity to absorb aid inflows, commercial potential, historical ties to donors, and strategic importance. If aid was based only on altruistic motives we would expect aid allocation to strongly favour partner countries with low human development (measured by, e.g., GDP per capita levels, poverty headcount ratios and child mortality) and the capacity to turn aid inflows into social welfare (measured by e.g., indices of macroeconomic policies, democracy scores and corruption indicators). While the empirical literature suggests this is partly true, although more so for some donors than others, it is far from the whole picture. Many donors tend to favour former colonies or countries of commercial interest, observed by flows of trade and foreign direct investments (e.g., Neumayer, 2003; Berthelemy and Tichit, 2004). The same is true for strategic interests, although their importance varies substantially across donors (more so for the US and less for the Scandinavian countries, for instance). This is also true across a broad set of proxies for strategic relevance, all trying to capture foreign policy alliances or foreign policy importance, such as arms imports (Hess, 1989; Maizels, and Nissanke, 1984), arms expenditures (Schraeder et al., 1998), the correlation of voting records in the UN General Assembly (Alesina and Dollar, 2000), and dummies for Israel and Egypt (capturing the significance of the Israel-Palestine peace process).
In Frot, Olofsgård and Perrotta Berlin (2014), we take a closer look at the Central and Eastern Europe (CEEC) countries and the Commonwealth of Independent States (CIS) in the early years of their transition towards market economies. As these countries opened up a substantial amount of western aid became available, but the allocation of aid across countries varied substantially, as did needs, commercial potential and strategic significance to major donors. We argue that these motivations may have also played a different role at different times. In particular, there is a strategic advantage of early market access if aid flows are driven by commercial interests, suggesting that trade and investment relationships may play a more prominent role for aid allocation early on and less so as private partnerships have been [increasingly] established. Similarly, some strategic considerations were particularly salient early on, such as supporting nuclear disarmament and building a bulwark in Eastern Europe against the perceived remaining military threat of Russia. When disaggregating the data over time, we do indeed find that commercial interests played a much more prominent role in the first half of the 1990’s than in later years. Similarly, we find that countries with nuclear arms and countries located geographically closer to Brussels benefit particularly during these early years. As time went by, commercial interests became less important, needs variables gained more traction, and aid seems to rather have been used to reward countries undergoing deeper democratic reforms (Frot, Olofsgård and Perrotta Berlin, 2014).
The second approach is to focus on how aid flows are generally affected by changes to the strategic importance of a partner country, or partner countries, over time. In Boschini and Olofsgård (2007) we estimate the role of the intensity of the Cold War on aggregate levels of foreign aid from western donors. It is commonly argued that foreign aid was (partially) used as an instrument to gain political loyalty from leaders in the developing world during the Cold War and that the substantial drop in aggregate aid levels witnessed in the 1990’s can be explained by the disappearance of an important strategic motive behind foreign aid altogether (e.g. Lancaster, 2008). This had however not been tested in quantitative terms, and thus we collected data on military spending in the Eastern bloc to serve as a proxy for the intensity of the Cold War. We found that there was a positive correlation between military expenditures in the east and western development assistance during the period 1970-1990. After the Cold War, military expenditures in the east have no correlation with western development assistance. This suggests that development assistance was used as a complement to recipient’s domestic military spending in producing strategic security within donor countries. Once the Cold War ended though, the immediate need for such investments in security and loyalty abroad largely disappeared, ending the connection between military spending in the east and western development assistance and causing overall aid levels to drop. Kilby and Fleck (2010) find a similar but reverse effect of the war on terror following the 9/11 attack on the US in 2001. Overall aid flows increased, and the allocation across countries became biased in favour of countries of greater importance to the US in the War on Terror.
Another strand of literature has focused on what happens to aid inflows when a country becomes a temporary member of the UN Security Council (UNSC). This literature looks primarily at the impact on aid from multilateral aid agencies such as the World Bank and the International Monetary Fund (IMF). The rationale for the analysis is the notion that (western) permanent members on the UNSC have strategic interest in showcasing broad majority support for their resolutions at the council. This gives them an incentive to “buy support” from temporary members through influence over multilateral aid agencies.
Accordingly, Dreher et al. (2009a) find that partner countries receive a greater number of aid projects from the World Bank during years of UNSC membership than during the years before and after membership. Similarly, Dreher et al. (2009b) find that participation in IMF programs increases during membership years, and that agreements have fewer policy conditions.
In a recent paper (Berlin Perrotta, Desai and Olofsgård, 2022) we look at temporary UNSC membership and World Bank aid. Following the previous literature, we analyse whether temporary UNSC members receive more aid projects, but with a larger data set. Providing originality, we also test whether partner country governments are given more leeway to allocate aid projects regionally for political purposes during the years of UNSC membership. The argument is that donors can give partner country governments benefits not only in terms of the amount of aid, but also the extent to which they are free to spend resources based on political interests rather than needs. More specifically, we test whether birth region of political leaders, and regions dominated by co-ethnics of the political leader in question, receive a particular boost to aid inflows during membership years. We select these indicators of domestic political importance based on an existing literature which suggests governments at times favour such regions for public spending (e.g., Bommer et al., 2022; Briggs, 2014).
Consistent with earlier findings, we confirm that temporary members of the UNSC receive a greater number of World Bank projects during membership years than what they would otherwise receive. We also find partial support for the hypothesis that partner country governments have greater leeway to redirect projects to politically favoured regions. More specifically, co-ethnic regions get a boost in the number of projects and total aid inflows during membership years, whereas we find no similar impact in the leader’s home regions. More detailed analysis reveals that our results are driven by countries that persistently vote in line with the US in the committee, further supporting the interpretation that this reflects a trade of favours (Berlin Perrotta, Desai and Olofsgård, 2022).
The Consequences of Strategic Aid
But does the underlying motive behind foreign aid matter? Development aid can of course benefit social and economic welfare in a partner country if invested in activities with positive social rates of return (e.g., schools, health care and infrastructure), irrespective of any underlying motivation. A strategic motivation can even be beneficial if it means that partner countries receive more aid than they would do in its absence. Consider the drop in total western aid budgets after the end of the Cold War, and the increase after the start of the War on Terror, as previously mentioned. Similarly, often referred to as the first example of foreign aid, the Marshall Plan to help rebuild Europe after the 2nd World War, was not only motivated by altruistic reasons. It was explicitly motivated by the need to maintain US national security and safeguard US access to European markets. Yet, the plan is hailed as a success, vital to the reconstruction of Europe after the war. It is also evident that popular support for aid to Ukraine in western donor countries partly depend on the conception of a threat to Europe and the free world, facilitating/enabling governments to be generous in their support.
There are however also examples of where strategic considerations have motivated aid with very limited or even negative impact on economic development and social welfare in partner countries. In particular during the Cold War, in order to gain loyalty in the ideological battle between the superpowers, western aid often went to highly corrupt regimes with low absorptive capacity (e.g., Easterly, 2006). A frequently mentioned example is the case of the Democratic Republic of Congo (DRC) during the regime of Mobutu Sese Seko. The US provided the country with more than a billion $US in development aid between 1962 and 1991, under a kleptocratic regime that impoverished the country (see here). This without doubt helped the regime stay in power, and the aid was thus not just a waste of resources but directly counterproductive.
Another argument at the global level is that there always exists an opportunity cost in the sense that strategic objectives reallocate limited aid resources from where the need is the greatest, to countries more politically salient. Burnside and Dollar (2000) run a simulation based on their empirical findings, changing the actual (partially donor interest based) allocation of aid across partner countries to an allocation based on need and absorptive capacity (which they associate with macroeconomic policies). Within their sample, they estimate such a reallocation to increase per capita growth by 0,2 to 0,3 percentage points, from a mean growth rate of 1,1 percent. Such calculations are of course rough estimates, yet they give a ballpark figure.
In the case of Ukraine however, the first of these arguments carry little weight. Aid is not sustaining a dysfunctional government with little interest in its own population, rather the opposite is true. On the other hand, the argument of allocative efficiency may carry some weight at a global scale. The needs and the human suffering in Ukraine are immense but unfortunately there are other places in the world with such extensive suffering (Ethiopia, Yemen, and Somalia to mention a few examples). There is thus concern within the donor community that the attention to Ukraine will negatively affect resources and attention to other places in need of support, in particular since the war has externalities in the form of increased food and energy prices in low-income countries. Such argument however relies on the assumption of crowding out resources from a budget of given size. While hard to prove, it is probably safe to say that the strategic interest in Ukraine has in fact increased the total budget available. As for now, it is therefore not entirely clear to what extent resources to other nations in need will be crowded out. Yet, the UN’s appeal for Ukraine is more than 80 percent funded for this year, whereas the UN’s response plan for Afghanistan is around 38 percent funded, Yemen’s is around 27 percent funded and Sudan’s is around 20 percent funded (see here).
A third lesson from the literature concern the (lack off) strings attached when aid is strategic. Continuous aid to the corrupt and violent regime of Mobutu Sese Seke in DRC is an extreme example of this phenomenon. But, as previously discussed, it’s also been shown that temporary UNSC membership comes with fewer conditions in IMF agreements (Dreher et al., 2009b) and with more leeway to partner governments to allocate inflows for domestic political purposes (Berlin Perrotta, Desai and Olofsgård, 2022), which has been shown to have efficiency consequences. Dreher et al. (2018) use a typical panel growth regression setting to compare the contribution of aid to economic growth during the period around UNSC membership to that same contribution in other time periods and for comparable countries that have never been temporary UNSC members. They find that aid is less effective during UNSC membership years, which they allude to the strategic use of aid under these special circumstances. The point is that donor oversight and monitoring may be weaker when aid is strategically motivated. Alignment of the partner country government to the goals of economic development and social welfare, therefore, becomes even more important. At a time of massive aid inflows in a setting with less than perfect institutional control and a history of corruption, as is the case of Ukraine, this may have a detrimental impact on aid effectiveness unless proper safeguards are in place.
Conclusion
Foreign aid from western donors to Ukraine is partly motivated on altruistic grounds but it also reflects wider foreign policy objectives of the donors. The Russian aggression is perceived not only as an attack on Ukraine but as an attack on the existing rules-based world order and as part of a broader conflict between liberal democracy and authoritarianism. More donor-oriented motives behind foreign aid are referred to as strategic in the academic literature, and in this brief, I have given a short and selective introduction to that literature. In terms of foreign aid to Ukraine, the good news is that the combination of altruistic and strategic motives can generate greater aid flows and that, irrespective of the underlying motivation, such inflows can be effective if the priorities of donors and partner country government align around initiatives spurring economic development and social welfare. A potential concern is that the literature suggests that donors are more accepting of abuse of such funds, so the need to evade corruption and mismanagement may become particularly acute. On a global scale, there is also a concern about crowding out of aid resources away from other places in need when attention is focused on Ukraine. The severity of such crowding out will be a function of the extent of additionality of support to Ukraine, to the existing total aid budgets. It is thus important that governments in donor countries manage to maintain support for Ukraine, without forgetting about the needs elsewhere. With tough economic times ahead in Europe, this may unfortunately become a challenge.
References
- Alesina, A. and Dollar, D. (2000). Who Gives Foreign Aid to Whom and Why? Journal of Economic Growth, 5, pp. 33–63.
- Antezza, A., Frank, A., Frank, P., Franz, L., Kharitonov, I., Kumar, B., Rebinskaya, E. and Trebesch, C. (2022). The Ukraine Support Tracker: Which countries help Ukraine and how? Kiel Working Paper No. 2218.
- Becker, T., Eichengreen, B., Gorodnichenko, Y., Guriev, S., Johnson, S., Mylovanov, T., Rogoff, K. and Weder di Mauro, B. (2022). A Blueprint for the Reconstruction of Ukraine. Rapid Response Economics 1, CEPR Press.
- Berlin Perrotta, M., R. Desai, A. Olofsgård. (2022). Trading Favors? UN Security Council Membership and Subnational Favoritism in Aid Recipients. Review of International Organizations, forthcoming.
- Berthelemy, J. and Tichit, A. (2004). Bilateral donors’ aid allocation decisions – a three-dimensional panel analysis. International Review of Economics & Finance, 13 (3), pp. 253–274.
- Bommer, C., A. Dreher, and M. Perez-Alvarez. (2022). Home bias in humanitarian aid: The role of regional favoritism in the allocation of international disaster relief. Journal of Public Economics, 208, pp. 1-16.
- Boschini, A. and Olofsgård, A. (2007). Foreign Aid: An Instrument for Fighting Communism? The Journal of Development Studies, 43, pp. 622–648.
- Briggs, R. C. (2014). Aiding and abetting: project aid and ethnic politics in Kenya. World Development 64, pp. 194-205.
- Burnside, C. and Dollar, D. (2000). Aid, Policies, and Growth. The American Economic Review, 90(4), pp. 847–868.
- Dreher, A., Sturm, J-E. and Vreeland, J. R. (2009a). Development Aid and International Politics: Does Membership on the UN Security Council Influence World Bank Decisions? Journal of Development Economics, 88, pp. 1–18.
- Dreher, A., Sturm, J-E. and Vreeland, J. R. (2009b). Global horse trading: IMF loans for votes in the United Nations Security Council. European Economic Review, 53 (7), pp. 742-757.
- Dreher, A., Eichenauer, V. Z. and Gehring, K. (2018). Geopolitics, aid, and growth: The impact of UN Security Council membership on the effectiveness of aid. World Bank Economic Review, 32(2), pp. 268-286.
- Easterly, W. (2006). The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good. The Penguin Press, New York.
- Fleck, R. K. and Kilby, C. (2010). Changing Aid Regimes? US Foreign Aid from the Cold War to the War on Terror, Journal of Development Economics, 91, pp. 185–197.
- Frot, E., Olofsgård, A. and Perrotta Berlin, M. (2014). Aid Effectiveness in Times of Political Change: Lessons from the Post-Communist Transition. World Development, 56, pp. 127–138.
- Hess, P. (1989). Force ratios, arms imports and foreign aid receipts in the developing nations. Journal of Peace Research 26 (4), pp. 399–412.
- Lancaster, C. (2008). Foreign aid: Diplomacy, development, domestic politics. University of Chicago Press.
- Maizels, A. and Nissanke, M. K. (1984). Motivations for Aid to Developing Countries. World Development, 12, pp. 879–900.
- Neumayer, E. (2003). The pattern of aid giving: the impact of good governance on development assistance, volume 34. Psychology Press.
- OECD. (2008). The Paris Declaration on Aid Effectiveness and the Accra Agenda for Action. OECD, Paris.
- Schraeder, P., Hook, S. and Taylor, B. (1998). Clarifying the foreign aid puzzle: A comparison of American, Japanese, French, and Swedish aid flows. World Politics, 50(02), pp. 294–323.
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 Effects of Sanctions
Sanctions imposed on Russia after its invasion of Ukraine are argued to be the strongest and farthest-reaching imposed on a major power after WWII, more numerous and more comprehensive than all other measures currently in force against all other sanctioned countries. A question often asked, which is hard to answer, is whether sanctions are effective. In the present case, the effect most associate with success would be a swift end of the hostilities, perhaps accompanied by a regime change in Russia. But even when it seems these prizes are out of reach, sanctions certainly have effects, all too often glossed over by the debate but nonetheless of significance.
Why Are Sanctions Seen as Ineffective?
Sanctions are restrictions imposed on a country by one or more other countries with the intent to pressure in effect some desirable outcome, or conversely to condemn and punish some undesired action already taken. When evaluating sanctions, therefore, the focus is naturally on whether they succeed to discourage this particular course of action, or to remove the decision-makers responsible for it. And on this account, sanctions are overwhelmingly seen as unsuccessful. However, a few complications cloud this conclusion.
First of all, sanctions that are implemented already failed at the threat stage. If the threat of a well-specified and credible retribution did not deter the receiving part from pursuing the sanctioned course of action, it is because they reckoned that they can afford to ignore it. So, unless this punishment goes beyond what was expected, in scope or in time, its implementation will also fall flat. This implies that any effort to evaluate sanctions retrospectively suffers from the negative selection problem, when almost exclusively cases of failure, intended in this particular sense, are observed.
Second, sanctions are a rather blunt instrument, that often cannot be targeted with the precision one would desire. Even though sanctions have over time become “smarter”, in the sense that stronger efforts are made to target the regime, or elites that may have the clout to actually affect the regime (think the oligarchs in Russia), they often fail to reach or affect in a meaningful way those individuals that are the real objective, for various reasons. Instead, they can cause significant “collateral damage”, to groups of a population that often are quite far removed from any real decisional power, including those in the sending countries, and even third parties who are extraneous to the situation. The damage inflicted to those parties can only in very special circumstances be part of a causal link eventually impacting the intended outcome. For instance, citizens struggling in an impoverished economy could be led to a riot, or in some other way put pressure on their government – but this implies that the country is sufficiently free for riots to take place or for voters’ opinions to be taken into consideration.
To this, it should be added that, once a course of action has been taken, it might be not obvious how to change or undo it, notwithstanding the signaled displeasure from the sanctioning parties. Sanctions are therefore rarely working in isolation. When positive outcomes are achieved, it is often the case that diplomatic channels were kept open and clear incentives offered for a way out. But then it might be unclear whether it was the sanctions or something else that led to the success.
Other Effects of Sanctions
The pitfalls highlighted above, which make it tricky to answer whether sanctions are effective at reaching their aim, also apply when studying other effects that sanctions might have. There is of course a range of outcomes that might be affected: in this literature we find studies looking at inequality (Afesorgbor et al., 2016), exchange rates (Dreger et al., 2016), trade (Afesorgbor, 2019; Crozet et al. 2020), the informal sector (Early et al, 2019), military spending (Farzanegan, 2019), women’s rights (Drury, 2014), and many more. But as it often happens the most studied outcome is GDP, as this is a measure that efficiently summarizes the whole economy and correlates very nicely with many other outcomes we care about.
Suppose then that we would like to investigate what is the effect of sanctions on a target country’s GDP. One problem is identifying an appropriate counterfactual; to observe what would have happened in the target country in the absence of sanctions. It is also an issue that the incidence of international sanctions is often a product of a series of events in the target or sender country (e.g. the Iraqi invasion of Kuwait or the apartheid system in South Africa), which also have impacts on the economy that would need to be isolated from the impact of sanctions themselves.
A variety of econometric techniques can be of help in this situation. One first idea is to use, as a reference, cases where sanctions were almost implemented. Gutmann et al. (2021) compare countries under sanctions to countries under threat of sanctions, while Neuenkirch and Neumeier (2015) contrast implemented sanctions to vetoed sanctions, in the context of UN decisions. Both studies find a relatively sizeable negative impact on GDP, in a large group of countries over a long period of time. In the first study, the target country’s GDP per capita decreases on average by 4 percent over the two first years after sanctions imposition and shows no signs of recovery in the three years after sanctions are removed. The second study estimates a reduction in GDP growth that starts at between 2,3 and 3,5 percent after the imposition of UN sanctions and, although it decreases over time, only becomes insignificant after ten years. It should be considered that a lower growth rate compounds over time: experiencing a slower growth even by only 1 percent over ten years implies a total loss of almost 15 percent. As a comparison, the average GDP loss due to the Covid-19 pandemic is estimated to be 3,4 percent in 2020.
These studies have limitations. Countries under threat of sanctions are probably making efforts to avoid punishment, which might imply that these countries are precisely the ones who would be most negatively affected by the sanctions. If so, the impact found by Gutmann et al. (2021) is probably underestimated. Neuenkirch and Neumeier (2015) only look at UN sanctions, which on one hand might give a larger impact because of the multilateral coordination. But on the other hand, the issue of an appropriate counterfactual emerges again: countries whose sanctions are vetoed might be larger, more influential, and better connected within the international community or to some of the major powers, which may also affect their economic success in other ways.
Kwon et al. (2020) adopt a different technique and come to a different conclusion. They use an instrumental variable (IV) approach and find that standard OLS overestimates the negative effect of sanctions, in other words, that sanctions’ effects are less negative than we think. They find an instantaneous effect on per capita GDP that becomes insignificant in the long run, just as if sanctions never happened.
Our confidence in these estimates hinges upon the validity of the IV used. In this case, the actual imposition of sanctions is replaced by its estimated likelihood based on sender countries’ variation in institutions and diplomatic policies (which are exogenous to the target country’s economic developments) and pre-determined country-pair characteristics (trade and financial flows, travels, colonial ties). Therefore, episodes where sanctions are imposed because the sender country happens to be in a period of hawkish foreign policy and because the target does not have strong historical relations with them are contrasted to episodes in which the opposite is true, and sanctions are therefore not implemented, everything else being equal.
The results also show that there is heterogeneity across types of sanctions, with trade sanctions having both a short and long run negative impact, while smart sanctions (i.e. sanctions targeted on particular individuals or groups) have positive effects on the target country’s economy in the long run. This is quite an important point in itself. Often, sweeping statements about effectiveness of “sanctions” lump all the different measures together, and fail to appreciate that there may be substantial differences. However, the effect of one or another type of sanctions will vary depending on the structure of the economy that is hit.
A third approach is the synthetic control method. Here the researcher tries to replicate as closely as possible the path of economic development in the target country up to the point of sanctions’ implementation, using one or a weighted average of several other countries. In this way, evolution after sanctions’ inception can be compared between the actual country and its synthetic control. Gharehgozli (2017) builds a replica of Iran based on a weighted combination of eight OPEC member countries, two non-OPEC oil-producing countries and three neighboring countries, that match a set of standard economic indicators for Iran over the period 1980-1994. The study finds that over the course of three years the imposition of US sanctions led to a 17.3 percent decline in Iran’s GDP, with the strongest reduction occurring in 2012, one year after the intensification of sanctions (2011-2014) was initiated.
This is a stronger effect than those presented earlier. However, it only speaks to the special case of Iran, rather than estimating a broader global average effect. Another study focusing on Iran (Torbat, 2005) makes the important point that the effect of sanctions varies by type: financial sanctions are found to be more effective (in lowering Iran’s GDP) than trade sanctions – which contrasts with what is found to be true on average by Kwon et al. (2020).
Finally, the relation between economic damage and the effectiveness of sanctions in terms of reaching their goals is debatable. In a theoretical model, Kaempfer et al. (1988) suggest that this relation might even be negative and that the most effective sanctions are not necessarily the most damaging in economic terms. The sanctions most likely to facilitate political change in the target country are those designed to cause income losses on groups benefiting from the target country’s policies, according to the authors.
The Effect of Sanctions on Russia
Are these results from previous studies useful to form expectations about the effects of the current sanctions on Russia? The invasion of Ukraine which started at the end of February was a relatively unexpected event, at least in character and scale, in contrast to what can be said in the majority of situations involving sanctions. However, the context leading up to it was not one of normality either. Besides the global pandemic, Russia was already under sanctions following the Crimean Crisis in 2014. The impact of those economic sanctions, and of the counter-sanctions imposed by Russia as retaliation, is still unclear – and will be in all probability completely dwarfed by the current sanction wave as well as other exogenous shocks, such as significant changes in oil prices in this period. Kholodilin et al. (2016) estimated the immediate loss of GDP in Russia to be 1,97 percent quarter-on-quarter, while no impact on the aggregate Euro Area countries’ GDP could be observed. A Russian study (Gurvich and Prilepsky, 2016) forecasted for the medium term a loss of 2,4 percentage points by 2017 as compared to the hypothetical scenario without sanctions. This pales in comparison to the magnitude of consequences that are being contemplated now. Even the potentially optimistic, or at least conservative, assessment of the current situation by the Russian Federation’s own Accounts Chamber, in the words of its head Alexei Kudrin, suggests that: “For almost one and a half to two years we will live in a very difficult situation.” At the end of April, they published revised forecasts on the economic situation, among which the one for GDP is shown below. Russian Central Bank chief Elvira Nabiullina also sounded bleak, speaking in the State Duma: “The period when the economy can live on reserves is finite. And already in the second – the beginning of the third quarter, we will enter a period of structural transformation and the search for new business models.” The World Bank has forecasted that Russia’s 2022 GDP output will fall by 11.2% due to Western sanctions. These numbers do not yet factor in the announcement of the sixth EU sanction package, which famously includes an oil embargo (see an earlier FREE Policy Brief on the dependency of Russia on oil export).
Figure 1. Revised forecasts of growth rates for the Russian economy
Source: Macroeconomic survey of the Bank of Russia, April 2022.
Are these estimates realistic, and what would have been the counterfactual development without sanctions? If we believe the studies reviewed in the previous section, and also taking into account the unprecedented scale and reach of the current sanctions, at least the time horizon, if not the size, of the consequences forecast by Russian authorities is, though substantial, certainly underestimated. But there is too much uncertainty at the moment, hostilities are still ongoing and sanctions are not being lifted for quite some time in any foreseeable scenario. One reason why these sanctions are not likely to be relaxed, and why their impact is expected to be more severe than in most cases, is that a very broad coalition of countries is backing them. Not only this but the sanctioning countries see Russia’s conduct as a potential threat to the existing world order, so their motivation to contrast it is particularly strong relative to, say, the cases of Iran, North Korea, or Burma.
Moreover, these loss estimates do not yet factor in the announcement of the sixth EU sanction package, which famously includes an oil embargo. Oil is a fundamental driver of growth in Russia. An earlier FREE Policy Brief shows how two-thirds of Russia’s growth can be explained by changes in international oil prices. This is not because oil constitutes such a large share of GDP but because of the secondary effect oil money generates in terms of domestic consumption and investment. Reducing export revenues from the sale of oil and gas will therefore have significant effects on Russia’s GDP, well beyond what the first-round effect of restricting the oil sector would imply.
In short, it is too early to venture an assessment in detail, however, the scale of loss that can be expected is clear from these and many other indicators. In the longer run, it will only be augmented by the relative isolation in which Russia has ended up, implying lower investments and subpar capital inputs at inflated prices, and by the ongoing brain drain (3,8 million people have already left the country since the war began).
Conclusion
In conclusion, the debate about economic sanctions as a tool of foreign policy is often restricted to a binary question: do they work or not? There is ample support in the literature studying sanctions to say that this question is too simplistic. Even if we do not see immediate success in reaching the main aim of the sanction policy, they do cause damage, in many dimensions, and such damage is non-negligible. The political will and the regime behind it may be unaffected, but the resources they need to continue with their course of action will unavoidably shrink in the longer run.
References
- Afesorgbor, S. K. (2019). The impact of economic sanctions on international trade: How do threatened sanctions compare with imposed sanctions?. European Journal of Political Economy, 56, 11-26.
- Afesorgbor, S. K., & Mahadevan, R. (2016). The impact of economic sanctions on income inequality of target states. World Development, 83, 1-11.
- Crozet, M., & Hinz, J. (2020). Friendly fire: The trade impact of the Russia sanctions and counter-sanctions. Economic Policy, 35(101), 97-146.
- Dreger, C., Kholodilin, K. A., Ulbricht, D., & Fidrmuc, J. (2016). Between the hammer and the anvil: The impact of economic sanctions and oil prices on Russia’s ruble. Journal of Comparative Economics, 44(2), 295-308.
- Drury, A. Cooper and Dursun Peksen. “Women and economic statecraft: The negative impact international economic sanctions visit on women.” European Journal of International Relations 20 (2014): 463 – 490.
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Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Financial Aid to Ukrainian Reconstruction: Loans Versus Grants
This brief provides an overview of the discussion on the relative merits of grants and loans in the literature on foreign aid, including a short section on debt relief initiatives. These claims are then tested against the context of Ukrainian post-war reconstruction, and it is argued that the case for providing grants is very strong. This argument is based on the magnitude of the investments needed, the need to create a long-run sustainable economy, the road towards a future EU membership, and the global value of a democratic and prosperous Ukraine as a bulwark against autocratic forces.
Introduction
One topic in the discussion on the post-war reconstruction of Ukraine is to what extent foreign support should come as loans or grants. The case at hand regards reconstruction in the aftermath of a military invasion by an aggressive neighbor. Therefore, Ukrainian reconstruction is sometimes compared to the Marshall Plan, the US package to help rebuild Europe after World War II. But this choice is also part of the more general discussion on foreign aid, comparing concessional loans (loans with lower interest rates than the market rate) with grants (financial transfers with no expectation of repayment), not least since many aid receiving countries have been highly indebted. What are then the arguments in favor of one or the other in the foreign aid literature? And how should we think about this in the context of the Ukraine crisis?
The Case for Loans
From a donor perspective, loans could be preferred from a purely financial viewpoint, as long as they are repaid. This must be put into the perspective of the purpose of foreign aid, though. If the purpose is to increase the welfare of the poor, and if loans cause macroeconomic imbalances that eventually lead to a debt crisis, using loans for aid will defeat its purpose. It is thus important, even from a donor perspective, to differentiate between the pure financial costs and the effectiveness and efficiency of foreign aid in relation to the stated goals. Yet, the paradigm on which development banks such as the World Bank motivate their strategy is that, even from an effectiveness perspective, loans may outperform grants. In their model, the bank has a broad portfolio of investments across multiple countries prioritized in order of the social rate of return. By lending out money, the bank can invest the returns from the most prioritized project into the second-most prioritized project, most likely in a different country. If the money instead had been given as a grant, the best possible outcome is that the receiving country can now invest the returns in the next best project within that country. This argument thus relies on the assumption that development banks can continually identify the most promising recipients among their wide portfolio of alternatives.
It has also been argued that grants may reduce incentives to raise tax revenues, and encourage government consumption over investments, as there is no need to generate net revenues to repay the debt (e.g., Clements et al. 2004; Djankov et al. 2004). From a donor perspective, it can also be argued that the monitoring of grants may be weaker because donors have no direct financial interest in the success of a project if it is financed by a grant. The disciplining effect of loans, though, relies on the absence of moral hazard problems. If receiving governments expect debt to be forgiven anyway when it is perceived as unsustainable and counterproductive to the country’s development, loans may be no better.
Based on arguments such as those above, part of the literature suggests that concessional loans are more likely than grants to promote growth in recipient countries, at least in good institutional environments. Cordella and Ulku (2007) look into this in detail and develop a model linking the degree of concessionality, for a given level of foreign aid (i.e. the extent to which finances are on preferential terms compared to market rates), to the receiving country’s economic growth rate, in a world where default is possible. Concessionality varies from 100 percent grants to 100 percent loans on market terms. The model suggests that a country with better policies and stronger institutions has a higher absorptive capacity for investments, meaning it can handle a lower level of concessionality (i.e., more loans, fewer grants) without going into default. They also argue that the immediate incentives for default on a loan are higher for a poorer and more indebted country as the cost of servicing the loan is higher. This would motivate relatively more grants and fewer loans to countries that are poor and highly indebted. Taking this to the data, they find in consistence with their theory that for any given level of total assistance, the impact on growth is increasing with the degree of concessionality for poor countries with weak policy and institutional environments, whereas this matters less for richer countries with better policies and stronger institutions. Looking at the level of indebtedness, the results are inconclusive.
The Case for Grants
The arguments above generally favor loans over grants, but it is of course crucial to also consider the risks and consequences of excessive debt burdens and sovereign default. Perhaps the most dramatic example of the potential consequences of shouldering a country with an excessive debt burden comes from Germany after the end of World War I. The economic struggles and sense of humiliation that followed have been argued to have contributed to German grievances leading up to World War II. Less dramatic but still with significant implications is the “lost decade” affecting Latin American middle-income countries in the 1980s. The combination of cheap credit from oil-exporting countries and the sudden dramatic increase of international interest rates following US policies in the early 1980s resulted in unsustainable levels of commercial loans. This crisis led to a US initiative, the Brady Plan, by which bank loans were consolidated and partially backed by the US government.
Excessive lending is often the result of distorted incentives. Within development banks, there are widely recognized internal incentives to get projects “through the door” (e.g., Briggs 2021). This “aid pushing” happens for both grants and loans, but the consequences can be more detrimental for loans if this leads to unsustainable debt levels. Similarly, there is evidence of defensive lending, where countries receive loans simply to be able to repay previous loans. Birdsall et al. (2003) find that donors lent more to African countries with bad policies if they had a large existing debt. On the other side, recipient country governments with short-term horizons and in environments with weak institutional checks and balances do not necessarily internalize the full costs of excessive lending. Due to these incentives on both sides, loans too often reach unsustainable levels, with debt to GDP ratios and debt to net export revenues becoming increasingly alarming.
With increased recognition of the costs of development of unsustainable levels of official lending, debt negotiations targeting highly indebted low-income countries have become common. These negotiations have often taken place through the Paris Club (a group of 22 high or upper-middle income creditor nations, including Russia) or through the HIPC (Highly Indebted Poor Countries) initiative (e.g. Birdsall et al. 2002). These debt reduction agreements have been continuously renegotiated, offering more and more generous conditions including debt forgiveness, rescheduling of existing loan terms, and more focus on grants in the portfolios of official financing.
Of particular relevance for this note, though, are the discussions around these initiatives that illustrate the different arguments made in favor of, or against, debt relief. As brought up in Birdsall et al. (2002), critique against the HIPC initiatives came from both sides. On the one hand, some argued that debt forgiveness was just more aid “down the rathole”, encouraging irresponsible policies by receiving governments (e.g. Easterly 2001), and fuelled by commercially motivated bilateral donors and multilateral institutions with misguided bureaucratic incentives. In order for aid to be effective, much more stringent conditionality was needed, and if that didn’t work, stricter selectivity in terms of which governments to partner with. On the other hand, others argued that the initiatives did not go far enough (e.g. Sachs, 2002). The economic arguments largely relied on concepts of a poverty trap, impossible to escape under conditions of a heavy debt burden requiring scarce foreign exchange to be used for debt service and discouraging investments. These countries were perceived as particularly vulnerable to adverse economic shocks, and as such, in need of insurance mechanisms that wouldn’t burden them with claims hampering their ability to prosper looking forward. But there was also a moral dimension, with blame focused on the creditor side, arguing that citizens of poor nations could not be burdened by debt issued for political reasons by creditors looking the other way when receiving rulers used proceeds for personal purposes.
Financing Post-war Recovery
The discussion above relates to foreign aid in general. The situation of financing post-war recovery is more specific, but past examples may give some points of reference. It should be noted, however, that every situation is unique in terms of the level of destruction, preconditions for a quick recovery, the political ramifications, and the risk of a resurgence of violence. And all these factors matter for the ability and willingness of foreign actors to step in and help.
An often-made reference in conjunction with Ukrainian recovery plans is the Marshall Plan, also known as the European Recovery Plan following World War II. Through this plan, financed by the US, initially 16 countries in Europe were getting “help to self-help” at an amount corresponding to roughly 10,5 percent of the countries’ GDP at the time (roughly about $13 billion, or $138 billion in 2019 dollars). The resources were spent differently across receiving countries, depending on the level of physical destruction. Importantly, grants accounted for as much as 90% of the total resources (Becker et al. 2022). More generally, grants usually account for a more significant share of aid flows when it comes to post-war reconstruction. This is natural, as a large share of the funding typically goes to humanitarian relief, and war-torn countries tend to be saddled with debt and a low capacity to raise domestic revenues in the short to medium term given the destruction of the war.
The common reference to the Marshall Plan in the context of Ukraine is probably partly geographically motivated: it is another war in Europe. But there are also other reasons, such as the direct unprovoked aggression by one of the world’s leading military powers, and the potential ramifications for world peace and the existing world order. The Marshall plan was motivated by the desire to avoid the mistakes from the peace agreements after WWI, and to help create a unified western Europe as a bulwark against further communist expansion from the Soviet Union. There are similar arguments to be made for the case of Russia’s war on Ukraine.
Implications for Ukraine Reconstruction
According to World Bank statistics, the total external debt stock of Ukraine in 2020 was $130 billion in current values, or 81,4 % of Gross National Income (GNI). This is already quite high, but the war has of course completely upended the situation and the IMF argued that Ukraine was facing debt sustainability issues already by the beginning of March 2022. Public finances are in the short run facing double pressure from a steep fall in revenues as economic activity drops and the ability to raise taxes is eroded, and an increase in expenditures on defence and humanitarian relief. Looking ahead, estimates of the Ukrainian costs of the war range between $440 and $1 000 billion by end of March 2022, but there is of course high uncertainty, and the bill is increasing for each day that the war goes on (Becker et al. 2022). This could be compared to the 2021 estimate of Ukraine’s GDP at around $165 billion. Even in the most optimistic scenarios, the rebuilding effort will be very costly, and will require massive amounts of foreign capital.
The sheer amount of effort needed in itself speaks to the need for grant financing. Rebuilding will require both public and private capital, and attracting new investments will necessitate an economic environment that is perceived as stable, dynamic, and conducive to long-term growth. As in the discussion on debt forgiveness for low-income countries above, such new investments are unlikely to materialize if the debt situation is deemed unsustainable. Furthermore, arguments in favor of loans over grants on grounds of fostering domestic macroeconomic responsibility and reducing moral hazard problems, fall flat when a country is invaded by an aggressive neighbor. Ukraine has had its share of bad politics, but the current situation is not caused by poor policies, lack of reform, or irresponsible lending under the assumption of future bailouts.
It should also be noted that both the Ukrainian government and representatives of the European Union (EU) have emphasized the long-term ambition that Ukraine should join the EU. This will not be possible, however, unless the country’s economy is in order, including a sustainable debt level, according to EU requirements for all joining members. Were Ukraine to shoulder excessive levels of debt at this moment it would thus jeopardize this ambition. And not least, Ukraine is fighting for its survival, but the war is also part of a wider emerging struggle between democratic and authoritarian forces over the future world order. The result of the war is of great significance for all democratic countries, though it’s the people of Ukraine that are facing the immediate horrific consequences. It is thus in our common interest to rebuild a prosperous and democratic Ukraine also as a bulwark against further authoritarian ambitions to change the existing world order. A Ukraine saddled with an unsustainable debt burden runs completely counter to the interests of the democratic world.
The Marshall Plan was successful in its goal “to permit the emergence of political and social conditions in which free institutions can exist”. This allowed for economic and political cooperation to take roots in western Europe, also contributing to political stability and prosperity. This cooperation expanded further east after 1989 with the inclusion of new member states into the European Union, largely solidifying a move towards market-based democracy in the region (despite some recent setbacks, primarily in Hungary). Let us build on these successful examples. The current situation offers an opportunity to bring an additional 44 million people into the European umbrella of peaceful cooperation in the near future. This ambition would become much more difficult, though, if Ukraine was saddled with an excessive debt burden.
References
- Becker, Torbjörn, Barry Eichengreen, Yuriy Gorodnichenko, Sergei Guriev, Simon Johnson, Tymofiy Mylovanov, Kenneth Rogoff, and Beatrice Weder di Mauro. (2022). “A Blueprint for the Reconstruction of Ukraine” Rapid Response Economics 1, CEPR Press.
- Birdsall, Nancy, John Williams, and Brian Deese. (2002). “Delivering on Debt Relief: From IMF Gold to a New Aid Architecture”, Peterson Institute for International Economics, Washington DC.
- Birdsall, Nancy, Stijn Claessens, and Ishac Diwan. (2003). “Policy Selectivity Forgone: Debt and Donor Behavior in Africa” World Bank Economic Review 17 (3): 409–35.
- Briggs, R. C. (2021). “Why does aid not target the poorest” International Studies Quarterly 65 (3), 739-752.
- Benedict Clements, Sanjeev Gupta, Alexander Pivovarsky, and Erwin R. Tiongson. (2004). “Foreign Aid: Grants versus Loans” Finance and Development, September, pp. 46–49.
- Cordella, Tito and Hulya Ulku. (2007). “Grants vs. Loans” IMF Staff Papers, 54(1), 139-162.
- Djankov, Simeon, Jose G. Montalvo, and Marta Reynal- Querol. (2004). “Helping the Poor with Foreign Aid: The Grants vs. Loans Debate” World Bank, Washington, D.C.
- Easterly, William. (2001). “Debt Relief”, Foreign Policy 126, 20-26.
- Sachs, Jeffrey. (2002). “Resolving the Debt Crisis of Low-Income Countries” Brookings Papers on Economic Activity 1, Brookings Institution Press.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Land Market and a Pre-emptive Right in Farmland Sales
After more than 20 years of a land sales ban, Ukraine finally opened its farmland market on July 1st, 2021. A design of the land market contains a pre-emptive right to buy the land for the farmland tenants. In this study, we model the effect of this pre-emptive right. Following the approach of Walker (1999), we use a theoretical model with three players – landowner, potential buyer, and the tenant – to model outcomes of the land transactions with and without the pre-emptive right. To empirically estimate the effect of the pre-emptive right, we use farm-level data to derive farmers’ maximum willingness to pay and the minimum price that landowners are willing to accept. The introduction of the pre-emptive right decreases the land price and increases the tenant’s chances of winning as well as his surplus, at the cost of a potential buyer and the landowner. The introduction of the pre-emptive right also leads to inefficient distribution and deadweight losses to the economy.
Introduction
After more than 20 years of a land sales ban, Ukraine finally opened its farmland market on July 1st, 2021. The moratorium on the sales of agricultural land in Ukraine covered of 96% of the country’s farmland market (or 66% of its entire territory).
The critical element of the newly opened Ukrainian farmland market design is the pre-emption right (right of the first refusal, RoFR) that is granted to the current tenant of land plots. By applying their pre-emptive right, tenants can purchase the land at the highest price the landowner could get on the market. On top of that, this right is transferable, meaning that the tenant could sell the right to the interested party. In this brief, we model the consequences of the pre-emptive right introduction in Ukraine.
Farmland Market in Ukraine
The moratorium on farmland sales that was in place for the last 20 years created a substantial distortion on the farmland market. It led to the situation where large companies predominantly cultivate the rented land, with the average share of leased land in the land bank for corporate farms in Ukraine approaching 99% (Graubner et al., 2021). Another noticeable trait of the farmland market in Ukraine is significant inequality in Ukrainian farms’ land banks. Based on the statistical forms 50AG, 29AG, and 2farm, our calculations show that the GINI index for the allocation of cultivated land across farms in Ukraine is 86%, indicating an extreme degree of inequality. As we can see from Table 1 – the top 10% of farms operate on 75% of all cultivated farmland in Ukraine. On the other side of the spectrum, 49% of the smallest farms in Ukraine operate on only 2% of the cultivated farmland and rent only 0,3% of all rented farmland.
Table 1. Ukrainian farmland market structure
Source – own calculations based on the statistical forms 50AG, 29AG, 2farm for the year 2016.
Therefore, in our analysis, we break a sample of Ukrainian farms into five categories with respect to their size.
Framework
To model the effect of the pre-emptive right, we will use the approach proposed by Walker (1999) using farm-level data. Thus, this study compares two scenarios – with the pre-emptive right (right of the first refusal, RoFR) and without the pre-emptive right in place. We assume that there are only three sides to each transaction – the seller (landowner), the prospective buyer, and the tenant, to whom the pre-emptive right is granted. Throughout this brief, we assume that there are no transaction costs involved.
Scenario 1. No Pre-emptive Right
In the no-RoFR scenario, the prospective buyer offers the landowner a price that the seller is willing to accept. The seller now has two options: either accept and get the offered price or reach the tenant and propose to outbid this offer. The option of reaching a tenant is more attractive since, in a worst-case scenario, if the tenant’s valuation – i.e., the maximum price the tenant is willing to pay for the land plot – is lower than the offered price, the tenant would simply not respond to this offer, and the landlord still gets the offered price.
On the other hand, if the tenant’s valuation is higher than the offered price, he has a strong incentive to make the counteroffer and start a bidding process. Both the tenant and the prospective buyer are incentivized to make a counteroffer up until the point where the offer’s value reaches their respective valuation. Thus, the smallest valuation between those of the tenant and prospective buyer would be the final transaction price.
Scenario 2. A Tenant Has the Pre-emptive Right
In this scenario, the tenant does not need to increase the price in his counteroffer if the third-party buyer’s offer is lower than the tenant’s valuation. The tenant could execute his pre-emptive right and buy the plot at the third-party buyer’s proposed price. Therefore, the outside buyer will change his approach to the initial offer. If the offer he makes is “too low”, he loses the chance of buying this plot since the tenant would exercise his pre-emptive right. If the offer is “too high,” he misses the profit he would make by making a lower offer.
In such circumstances, the transaction price will be given by the third-party buyer’s offer that maximizes his expected profit. The latter, in turn, depends on the probability of the tenant exercising his preemptive right, the third-party buyer’s own valuation, and the price he offers to the landlord. The probability of the tenant exercising the offer is the probability that the tenant’s valuation exceeds the offered price. It depends on the tenant’s farm size category and on the offer itself and can be calculated based on the distribution of valuations.
Empirical Approach
Our empirical analysis considers a (hypothetical) situation of a third-party buyer coming to the landowner, whose land is rented to another farmer, with the offer to buy a one-hectare plot. We assume that the offer exceeds the landowner’s minimum price that a landowner is willing to accept (WTA). The landowner’s WTA is proxied by the current rental price the landlord gets multiplied by the capitalization rate, set to 20 for all three sides of the transaction. The farmers’ valuations are estimated based on their net profit per hectare. We use the farm-level data to compute the average net profit per hectare needed for valuations estimation and the average rental price per hectare for the WTA estimation. This data was collected by the State Statistics Service of Ukraine through statistical questionnaires called 50AG, 29AG, and 2farm for the year 2016 and covers 39,297 farms. The descriptive statistics of the data are presented in table 2.
Table 2. Descriptive statistics
Source: own calculations based on the statistical forms 50AG, 29AG, 2farm for the year 2016.
We construct a set of potential buyers for each farm that operates on rented land based on the 10-km threshold distance between the tenant and third-party buyer. We end up with a sample of 764760 pairs of tenants and potential third-party buyers. We drop all pairs where third-party buyers cannot make an offer landlord is willing to accept. Therefore, only a sample of 291506 observations of tenant – prospective buyer pairs is used for the analysis. Importantly, for large and ultra-large farms, the share of observations that would attempt a transaction is 70% and 69% correspondingly. On the lower side of the size spectrum, this share is noticeably lower. For the group of small third-party buyers, the buyer would attempt the transaction only in 42% of cases. The most excluded from the farmland sales market category are ultra-small farms as they would only attempt the transaction in 25% of all cases.
Results
Our findings suggest that the effect of the pre-emptive right on the land price is twofold. On the one hand, in 55% of cases – the RoFR price is higher than the (modelled auction) price in the absence of a preemptive right. However, the median price differences in these cases are just 0,7% of the auction price. At the same time, for the cases where the auction price is higher than the price with the RoFR, it exceeds the RoFR price, on average, by 83%, with a median value of 66%. As a result, if we compare the expected prices, the expected prices under the RoFR are significantly lower than the auction prices. There are also differences between different farm size categories of the third-party buyer – the larger the buyer is, the higher the transaction price would be regardless of the RoFR. In the scenario without the RoFR, the average transaction price for ultra-small farms would be $1259 per hectare. While for the ultra-large farm as the third-party buyer, the transaction price would be $1647. With the pre-emptive right granted to the tenant, the transaction prices would be $977 and $1313 correspondingly.
The pre-emptive right also increases the probability of the tenant acquiring the land. The most noticeable effect is for ultra-small and small farms – if an outside buyer attempts the transaction, their chances of purchasing the land increase from 12% to 28% and from 23% to 45%, respectively. The probability increase for the larger tenants persists, but percentage-wise it is smaller – their probability of purchasing the land due to the granted pre-emptive right increases from 42-45% to 65-66%.
The pre-emptive right also redistributes the surplus from the transaction. Measuring the surplus as the difference between the valuation and the buyer’s actual purchase price, we can conclude that the third party’s surplus decreased due to the RoFR introduction. The tenant’s surplus, on the other hand, increases. In the case of RoFR introduction, the percentage increase in the tenant’s surplus is larger for the ultra-small and small farmers, from 5% to 13% and from 10% to 23% of the tenant’s valuation, respectively. For larger farms, albeit the surplus’ increase is larger in absolute terms, percentage-wise, it is smaller than for their smaller counterparts. Their average surplus increased from 18-20% to 37-38% of the tenant’s valuation. For the third-party buyers, the percentage-wise decrease is more or less the same, regardless of their farm size. Their surpluses, on average, shrink by 23-27% depending on the size of the farm.
We also estimated the effect of the pre-emptive right on the joint surplus of the landlord and the tenant. The effect of the pre-emptive right on their joint surplus is positive regardless of the size category of the tenant. The largest increase of the joint surplus, percentage-wise, is observed for the small-sized farms as a tenant. In this case, the average joint surplus increased by 5%, translating into an $87 increase in the joint surplus. In absolute terms, the highest increase is for medium-sized farms as a tenant – $108 increase in the surplus or 4.5% of their original joint surplus.
The pre-emptive right also leads to inefficient allocations when the land is acquired by a lower valuation party, resulting in deadweight losses. Inefficient allocation is observed in 19% of all observations. The deadweight losses generated by the introduction of the ROFR are statistically significant (with the t-value equal to 195) and average 233 USD per hectare.
Conclusions
In this brief, we suggest a theoretical and analytical approach to calculate the impact of the pre-emptive right in farmland sales. Our analysis offers a range of important findings. First, small and medium-sized farms are almost entirely excluded from the farmland market. While more than two-thirds of the medium, large or ultra-large farms can afford to buy a nearby parcel, based on their profitability – for ultra-small farms, which have a land bank of under 50 hectares – this share is equal to just 25%. The introduction of the pre-emptive right granted to the current tenant may exaggerate this problem. The reason is that most of the rented land is already controlled by large and ultra-large companies. At the same time, the pre-emptive right increases the tenant’s probability of winning and its surplus at the expense of the landowner and outside buyer.
On the other hand, the pre-emptive right increases the joint surplus of the tenant and the landowner. Therefore, if the pre-emptive right would be a voluntaristic clause in the contract, rather than a right granted to all tenants by the government, it creates an incentive to include the pre-emptive right in the rental agreement with the price of this right negotiated between the landlord and the tenant.
Summing up, the pre-emptive right, as a policy instrument, has its costs. It leads to inefficient distribution and deadweight losses. In view of this, as much as the recent farm market reform in Ukraine is a clear step towards a market economy, the design of the land market should be taken with a grain of salt.
References
- Graubner, Marten, Igor Ostapchuk and Taras Gagalyuk, 2021. “Agroholdings and land rental markets: a spatial competition perspective”, European Review of Agricultural Economics, 48(1), 158-206
- Walker, David, 1999. “Rethinking rights of first refusal“, Stanford Journal of Law, Business & Finance, 5, 1-58.
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.
Do Condominiums Pay Less for Heating?
In Ukraine, a widely shared perception is that housing utility costs are too high. In this policy brief, we study if these costs can be alleviated by introducing a modern form of housing management practice, condominiums. We find that condominiums in old houses (built before 1991) pay 22% less for heating compared to old non-condominiums. Among new houses (built after 1991), we find that condominiums pay 29% less for heating. Considering the dynamics of condominium formation in 2018-2020, old houses do not show any significant immediate effect of condominium formation on heating costs relative to that of non-condominiums. However, condominium formation among new houses leads to a relative 18% decrease in heating costs. In addition, among condominiums in old houses, participation in an overhaul co-financing program is associated with a 15% lower heating bill. The immediate effect of the program in 2018-2020 is a 16% relative decrease in heating costs for old condominiums and 37% – for new ones.
Heating Costs and Condominiums
In recent years, the cost of housing utilities has been a common concern among Ukrainians. According to a recent survey, 80% of Ukrainians believe that tariffs on utilities are too high.
The form of housing management is a factor that could affect utility costs. Experiences from Slovakia, Hungary, Poland, and Romania in the 1990s suggest that state-owned housing maintenance companies are often associated with inefficient management. Residential buildings that are owned and managed collectively by its dwellers (hereafter referred to as condominiums) are more likely to choose a more efficient private housing maintenance company (Banks, O’Leary et. al., 1996). For instance, in Slovakia’s second-largest city, Kosice, one-third of houses that were privatized in the 1990s chose private maintenance companies with competitive prices. Residents perceived the services as “far more effective” (ibid).
This brief summarizes our analysis of the relationship between heating costs and the form of housing management in Ukraine. Analyzing a large sample of houses in Kyiv, we show that condominiums are associated with lower heating costs, both among the older houses, built before Ukrainian independence in 1991, and among newer houses.
Types of Housing Management Practices in Ukraine
The different housing management practices in Ukraine can be roughly divided into three types. The most commonly used practice is when housing maintenance is carried out by a municipally owned company (commonly referred to as ZhEK – “zhilischno-eksplotazionnaja kontora”, housing maintenance office). Usually, houses that have the ZhEK-type management were built before Ukrainian independence and have kept this practice since Soviet times. The second practice is when housing maintenance is done by a private company affiliated with the building developer. This management type is usually used by houses built after Ukrainian independence that did not form condominiums. These two practices are similar in the sense that dwellers are not directly involved in the decision-making, all decisions are made by the municipal or private company, respectively.
The third type of housing management practice, relatively new for Ukraine, is condominium ownership (the Ukrainian term for it is ОСББ, translated as “Association of Co-owners of Multi-Apartment House”). In a condominium, unlike in the previous two types, the house is managed collectively by the dwellers; in particular, they have the freedom to choose and/or change utility providers, invest in major overhaul, and participate in co-financing programs.
Houses with Condominiums Pay Less for Heating
In our analysis, we use monthly data on housing costs between 2018 and 2020 collected from the Ukrainian municipal enterprise Kyivteploenergo. The data covers more than 70% of residential buildings in Kyiv and includes information on heating costs per square meter, whether or not the house is a condominium, and other house-characteristics (including the source of heating production; the presence of the meter; type of the meter number of service days per month; and share of heat consumption by legal entities).
In addition, we have information on the year of building construction retrieved from the real estate portal LUN, and condominium formation date between 2018-2020, as well as data on house participation in overhaul co-financing programs obtained from the Kyiv state administration.
Our final sample contains 7957 houses. Since we only are interested in apartment housing, we exclude residential buildings with an area below 500 m2, which would normally correspond to a small private house (these constitute only a small part of our sample). The share of condominiums in the sample is 11%, the share of houses with ZhEK is 81% and the share of houses managed by private companies is 8%.
Figure 1. Median costs for heating per m2 across housing management types and house age.
Source: Authors’ calculations. Old houses are those built before 1991, the year of Ukrainian independence, and new houses are built after 1991.
Figure 1 provides preliminary evidence towards our hypothesis, showing that the median heating costs are lower in condominiums, independent of the year of construction.
In our first econometric model, we use an OLS-approach to compare utility costs across different types of housing and management models, while controlling for a number of observable characteristics. We find that condominiums in old houses pay 22% less for heating than old non-condominium. Similarly, we find that condominiums in new houses pay 29% less for heating compared to new non-condominiums.
The lower heating costs observed in condominiums may have several explanations:
- First, condominium-type management could be more flexible in its response to weather conditions. Considering that they are profit-maximizing, heating providers in Ukraine tend to overheat houses during the heating season; it could be that condominiums reduce consumption of heating on the warmer days to a greater extent than other houses. In other words, condominiums could increase the efficiency of heating use.
- Second, it could be that condominiums have lower heating costs because they improve energy efficiency, for example, by installing individual heating points (an automatized unit transferring heat energy from external heat networks to the house heating, hot water supply, ventilation, etc.), new windows, or even insulating the house.
Is There an Immediate Effect?
The next step in our econometric analysis is to study the effect of condominium formation during 2018-2020. Here, we investigate whether non-condominium houses that became condominiums experienced changes in heating costs by utilizing a fixed-effects regression model. This approach not only allows us to assess the immediate effect of condominium formation but also controls for unobservable house-specific characteristics that are constant over time, such as differences in building materials.
For new houses, we find that condominium formation decreases heating costs by 18% compared to other new houses. For old houses, we find that the corresponding effect is statistically insignificant.
This estimation only evaluates the effect of condominium formation in a relatively short timeframe, between 2018 and 2020. While the data coverage does not allow us to give a precise quantitative assessment for a long-run effect, we argue that the positive impact of condominium formation on heating costs could potentially be higher in the longer-run. Indeed, our previous OLS estimation assesses the average utility costs for all condominiums in the sample (including those formed prior to 2018). It shows that the gap in heating costs between all condominiums and non-condominiums is higher than the corresponding gap derived from our fixed-effects estimation (22% for the old houses and 29% – for the new ones). While this difference in results can be driven by several reasons (e.g., fixed effect estimation taking into account unobservable house-specific characteristics), a stronger long-term effect could be among them.
Concerning the results for new vs. old houses, it might be the case that new houses are technically equipped to be more flexible when it comes to adjusting costs (e.g., are able to switch the heating on/off), while old houses might be inferior in this regard. If this is the case, old houses would only experience lower costs after some thermo-modernization, such as installing individual heating points.
Heating Costs and the Co-financing Program
Since 2015, the Kyiv city council offers a program that helps condominiums to finance major overhauls with the intent to improve the energy efficiency of the residential sector. Applicants compete in planning thermo-modernization projects where winning condominiums are awarded financing covering 70% of the overhaul cost.
Our results show that for old houses with condominiums, those who at some point participated in the co-financing program pay on average 15% less for heating compared to non-participants. The corresponding effect for new houses with condominiums is not significantly different from zero.
However, the immediate effect of program participation is present in both new and old houses with condominiums. Old and new condominiums that took part in the program in 2018-2019 experienced an immediate reduction in heating costs by 16% and 37% respectively.
Figure 2. The number of houses participating in the 70/30 co-financing program across the years.
Authors’ calculations.
There are several potential explanations as to why we observe an immediate effect but no effect of ever participating in the program for the new houses with condominiums.
First, it could be that new houses with condominiums that are not participating in the program are investing in overhaul anyway, although somewhat delayed compared to investments made by participating new condominiums. The average difference in heating costs between participants and non-participants would then be visible in the short-run and fade away after a few years. If this is the case, the program is financing houses that would have invested in overhaul anyway, even without co-financing. This explanation is partly supported by the fact that the share of the new houses condominiums among participants is 32%, while the corresponding share is 15% among all houses. In other words, old houses with condominiums, that are usually in a worse condition, are underrepresented in the program.
If this is the case, the share of old houses with condominiums among participants should be increased. Given that the purpose of the program is to improve the energy efficiency of residential buildings, its efficient implementation implies encouraging overhauls in houses that are otherwise unable to fund it. In other words, the program should incentivize people living in energy-inefficient housing to form condominiums and undertake overhauls to improve their energy efficiency, rather than finance houses who are already doing well in that regard. To improve on such selection issues, the program could change the co-financing proportions, making participation more beneficial to old houses with condominiums, e.g. 80/20 – for old and 60/40 – for new condominiums.
Second, the new houses with condominiums that participate in the program might be in a much worse state before participation than those that do not. Program part-taking could make participants catch up to the average level of energy-efficiency (or perhaps do slightly better). If this is the case, the program fulfills its function in the sense that it targets the most energy-inefficient houses.
Government Policies That Should Be Changed
Above, we argue that the formation of condominiums leads to efficiency gains in energy use and cuts utility costs for dwellers. Given the design of the overhaul co-financing program, the Kyiv city council seems to recognize these benefits as well. However, there is a range of government policies currently in place that discourage people from condominium formation.
For example, there are cases when the government finances 100% of overhaul costs using a subvention (“subvention for socio-economic development”). In 2020, 17 houses in Kyiv got overhaul expenses funded by this type of subvention. At the same time, 85 houses that participated in the co-financing competition did not receive any state funding (there were 100 winners among 185 participants).
Considering that this type of subvention predominantly finances non-condominiums, we argue that this policy creates the wrong incentives. Dwellers will likely refrain from forming condominiums in the hope of eventually being selected for an overhaul fully financed by the state, instead of forming condominium and getting only part of overhauls expenses covered (70% of the overhaul funding if winning co-finance program competition, and no funding otherwise).
In addition, this subvention typically has a “pork-barrel” nature since it is often allocated to the constituencies of the ruling party’s MPs. State financed overhauls are often used as an advertisement tool to get popular support. This creates an additional problem in the sense that subvention is targeted to politically loyal regions and not necessarily to regions in need of support.
Along this line of reasoning, we suggest that this pork-barrel subvention should be cancelled and housing-overhauls should instead be funded through co-financing programs. The government should implement programs similar to the “70/30” and further encourage people to adopt condominium ownership.
Conclusion
Motivated by the common perception that utility costs are excessively high, we study one possible way of reducing the utility bill – condominium housing management.
Our analysis shows that old houses with condominiums pay 22% less for heating compared to old non-condominiums. For new houses, we find that condominiums pay 29% less in heating costs than non-condominiums. In addition, old houses with condominiums that participate in Kyiv’s co-financing program pay 15% less than other old condominiums. That is, condominium formation combined with the co-financing program could save more than one-third of a resident’s heating costs.
Our analysis suggests the following policy implications:
- Condominiums have a positive effect on energy efficiency, and utility cost savings, and should thus be promoted to the population as a preferable form of house management practice.
- State and municipal governments should provide incentives for condominium formation through, e.g., overhaul co-financing programs. Other state-provided forms of overhaul financing, such as pork-barrel subvention, should be cancelled.
- Co-financing programs should combine better targeting (e.g., to those houses that are in greater need of overhaul) with sufficient incentives for condominium formation.
References
- Hamaniuk, Oleksii; and Andrii Doschyn, 2020. “Let’s reduce the cost of heating by a third!” – ACMH and co-financing program for buildings”, https://voxukraine.org/en/let-s-reduce-the-cost-of-heating-by-a-third-acmh-and-co-financing-program-for-buildings/
- Banks, Christopher, Sheila O’Leary, and Carol Rabenhorst, 1996. Review of urban & regional development studies, vol. 8, issue 2. https://doi.org/10.1111/j.1467-940X.1996.tb00114.x
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.
How to Liberalise EU-Ukraine Trade under DCFTA: Tariff Rate Quotas
This policy brief focuses on trade relations between Ukraine and the EU amid preparations for the review of the Deep and Comprehensive Free Trade Agreement (DCFTA) due in 2021. In particular, it analyses Ukraine’s utilization of the DCFTA tariff rate quotas (TRQs) over 2016-2019. According to the results, Ukraine has been steadily increasing the level of TRQs usage – in terms of the number of utilized TRQs and export volumes within and beyond TRQs. For some DCFTA TRQs, total exports to the EU far outweigh quota volumes, while for other TRQs supply is limited by quota volume. The brief provides arguments and recommendations for the DCFTA TRQs update to increase Ukraine’s duty-free access to the EU market.
Why Update DCFTA TRQs for Ukraine?
EU-Ukraine trade under the Deep and Comprehensive Free Trade Agreement (DCFTA, in effect since January 1, 2016) progressed considerably. Ukraine’s exports of goods to the EU reached $20.8 billion in 2019 – a 54% increase compared to 2016 and a 24% increase compared to pre-crisis 2013.
According to the EU-Ukraine Association Agreement/DCFTA, the parties may initiate a review of its provisions in five years from its implementation – in 2021. So far, both governments confirmed their readiness to start such negotiations next year.
Ukraine advocates for further trade liberalisation with the EU through reducing the existing tariff and, most importantly, non-tariff barriers. This is an imperative for maintaining positive trade dynamics and providing new impetus to deepening bilateral economic integration.
Updating duty-free tariff rate quotas (TRQs) under the DCFTA is at the top of the EU-Ukraine 2021 negotiations agenda. Current quota volumes are based on outdated statistics, as it has been 10 years since the DCFTA negotiations (2008-2011).
Many TRQs are too low in terms of Ukraine’s current export and production capacities. For example, Ukraine’s total exports of grains (annual averages) increased from 19 million tons in 2008-2010 to 42.3 million tons in 2016-2018. Honey exports increased from 5.9 thousand tons in 2008-2010 to 58 thousand tons in 2016-2018. As a result, some TRQs are fully exhausted in the first days or months of the year.
High competition for access to duty-free quota volumes is a barrier first of all for SMEs that cannot compete effectively for it with large companies, while out-off-quota tariffs may be too restrictive for them.
Ukraine’s TRQs Utilisation During 2016-2019
DCFTA TRQs grant partial liberalisation of market access to the EU. Zero tariff rates are only applied to a specified quantity of imported goods inside a TRQ, while beyond TRQ imports to the EU are dutiable on a regular basis (subject to third-country tariff rates).
The EU applies TRQs for 36 groups of agro-food products originated in Ukraine plus 4 additional TRQs for certain product groups (in total 40 TRQs under DCFTA) – see Table 1. Ukraine applies TRQs for 3 groups of products plus 2 additional TRQs.
By the level of utilisation, TRQs fall into three groups: 1) fully utilised. They, in turn, can be divided into TRQs with and without over-quota supply; 2) partially utilised; and 3) not utilised.
The data indicate a general upward trend in Ukraine’s utilisation of TRQs under the DCFTA. In general, Ukrainian exporters utilised 32 TRQs in 2019 (80%) comparing to 26 TRQs in 2016 (65%).
Figure 1. Number of DCFTA TRQs utilized by Ukraine during 2016-2019.
Table 1 shows Ukraine’s utilization of 40 DCFTA TRQs over 2016-2019 – in tons and %. The main findings include:
The number of fully exhausted TRQs has been increasing. In 2019, Ukraine filled up 12 TRQs including honey; processed tomatoes; wheat; maize; poultry meat; barley groats and flour, other cereal grains; sugars; grape and apple juice; butter and dairy spreads starches; starch processed; as well as malt-starch processed products. For 9 of them, Ukraine’s supplies exceeded TRQs volumes.
The number of partially utilized TRQs increased from 16 in 2016 to 20 in 2019. In 2018-2019, Ukraine began using new TRQs such as fermented-milk processed products; malt-starch processed products; sugar syrups. High TRQs utilization rates (over 80%) in 2019 were observed for malt and wheat gluten; cereal processed products; eggs (main); barley, barley flour and pellets.
Moreover, Ukraine increased utilisation of TRQs for processed products. For example, utilisation of a TRQ for cereal processed products increased from 2.7% in 2016 to 99.5% in 2019. This signifies the growing ability of Ukrainian producers to comply with the EU food safety requirements and standards for processed products. Exports of processed starch increased significantly in 2019 and exceeded TRQ volume by a lot.
Ukraine’s utilisation of some TRQs has decreased. For example, a TRQ for oats gradually decreased from 100% in 2016 to 31% in 2019 due to a decrease in total exports and domestic production of oats in Ukraine during this period. Low utilisation of other TRQs may also be attributed to high price competition and quality requirements in the EU, complex quota allocation procedure, etc.
The number of not utilized TRQs decreased from 14 in 2016 to 8 in 2019. For instance, no exports within TRQs were observed for beef, pork, sheep meat, as Ukraine has not yet been authorized to export these meat products to the EU.
Moreover, since October 2017, Ukraine has been able to use provisional TRQs that were granted by the EU as autonomous trade measures (ATM) for 3 years. They increased duty-free access for 8 groups of Ukrainian products – in addition to the relevant DCFTA TRQs. So far, Ukraine fully utilises 5 ATM TRQs including honey; processed tomatoes; barley groats and meal, cereal grains otherwise worked; wheat, flour and pellets; maize, flour and pellets.
Total Exports to the EU vs Duty-Free Exports Within TRQs
For most fully utilized DCFTA TRQs, Ukraine’s total exports of the covered products exceeded TRQ volumes during 2016-2019. Considerable over-quota supply occurred for: honey; processed tomatoes; barley groats and meal, cereal grains; apple and grape juice; maize, flour and pellets; poultry meat; wheat, flour and pellets; sugars; butter and dairy spreads; starch processed.
For instance, over-quota exports of processed tomatoes from Ukraine to the EU in 2019 (31.2 thousand t) more than doubled the quota volumes (10,000 t of the DCFTA TRQ and 3,000 t of the provisional ATM TRQ). See Figure 2 for more examples.
Figure 2. Ukraine’s exports to the EU within and beyond certain TRQs, 2016-2019.
Increasing exports beyond TRQs indicate significant demand for these Ukrainian products in the EU, and their competitiveness in terms of price and quality on the EU market.
It also signifies that volumes of these fully utilised DCFTA TRQs with increasing over quota exports are rather low in terms of Ukraine’s export and production potential. Therefore, these TRQs are the primary candidates for updating.
At the same time, for certain DCFTA TRQs (malt-starch processed products; starch, malt and wheat gluten), exports to the EU were about 100% of TRQ volume but did not go far beyond. This may indicate a significant restrictive impact of those TRQs and out-of-quota tariffs for Ukrainian exports. These TRQs also need to be further analysed and revised.
Тable 1. Utilisation of DCFTA tariff rate quotas by Ukraine, 2016-2019.
| 2016 | 2019 | |||||
| Quota name | Quota volume | Utilised | Quota volume | Utilised | ||
| t | t | % | t | t | % | |
| “First-come, first-served” method for TRQ allocation | ||||||
| Sheep meat | 1500 | 0 | 0,0% | 1950 | 0 | 0,0% |
| Honey | 5000 | 5000 | 100% | 5600 | 5600 | 100% |
| Garlic | 500 | 49 | 9,8% | 500 | 393 | 78,6% |
| Oats | 4000 | 4000 | 100% | 4000 | 1239 | 31,0% |
| Sugars | 20070 | 20070 | 100% | 20070 | 20070 | 100% |
| Other sugars | 10000 | 5929 | 59,3% | 16000 | 1006 | 6,3% |
| Sugar syrups | 2000 | 0 | 0,0% | 2000 | 7 | 0,4% |
| Barley groats and meal, cereal grains otherwise worked | 6300 | 6300 | 100% | 7200 | 7200 | 100% |
| Malt and wheat gluten | 7000 | 7000 | 100% | 7000 | 6319 | 90,3% |
| Starches | 10000 | 1898 | 19,0% | 10000 | 10000 | 100% |
| Starch processed | 1000 | 0 | 0,0% | 1600 | 1600 | 100% |
| Bran, wastes and residues | 17000 | 7286 | 42,9% | 20000 | 14467 | 72,3% |
| Mushrooms main | 500 | 0 | 0,1% | 500 | 0 | 0,0% |
| Mushrooms additional | 500 | 0 | 0,0% | 500 | 0 | 0,0% |
| Processed tomatoes | 10000 | 10000 | 100% | 10000 | 10000 | 100% |
| Grape and apple juice | 10000 | 10000 | 100% | 16000 | 16000 | 100% |
| Fermented-milk processed products | 2000 | 0 | 0,0% | 2000 | 866 | 43,3% |
| Processed butter products | 250 | 0 | 0,0% | 250 | 0 | 0,0% |
| Sweetcorn | 1500 | 13 | 0,9% | 1500 | 23 | 1,5% |
| Sugar processed products | 2000 | 340 | 17,0% | 2600 | 417 | 16,0% |
| Cereal processed products | 2000 | 55 | 2,7% | 2000 | 1989 | 99,5% |
| Milk-cream processed products | 300 | 73 | 24,4% | 420 | 9 | 2,2% |
| Food preparations | 2000 | 5 | 0,3% | 2000 | 65 | 3,2% |
| Ethanol | 27000 | 1889 | 7,0% | 70800 | 6083 | 8,6% |
| Cigars and cigarettes | 2500 | 0 | 0,0% | 2500 | 0 | 0,002% |
| Mannitol-sorbitol | 100 | 0 | 0,0% | 100 | 0 | 0,0% |
| Malt-starch processed products | 2000 | 0 | 0,0% | 2000 | 1998 | 99,9%* |
| Import licensing method for TRQ allocation | ||||||
| Beef meat | 12000 | 0 | 0,0% | 12000 | 0 | 0,0% |
| Pork meat main | 20000 | 0 | 0,0% | 20000 | 0 | 0,0% |
| Pork meat additional | 20000 | 0 | 0,0% | 20000 | 0 | 0,0% |
| Poultry meat and preparations main | 16000 | 16000 | 100% | 18400 | 18400 | 100% |
| Poultry meat and preparations additional | 20000 | 8552 | 42,8% | 20000 | 9174 | 45,9% |
| Eggs and albumins main | 1500 | 232 | 15,5% | 2400 | 2027 | 84,5% |
| Eggs and albumins additional | 3000 | 0 | 0,0% | 3000 | 1891 | 63,0% |
| Wheat, flours, and pellets | 950000 | 950000 | 100% | 980000 | 980000 | 100% |
| Barley, flour and pellets | 250000 | 249460 | 99,8% | 310000 | 249250 | 80,4% |
| Maize, flour and pellets | 400000 | 400000 | 100% | 550000 | 550000 | 100% |
| Milk, cream, condensed milk and yogurts | 8000 | 0 | 0,0% | 9200 | 250 | 2,7% |
| Milk powder | 1500 | 450 | 30,0% | 3600 | 560 | 15,6% |
| Butter and dairy spreads | 1500 | 690 | 46,0% | 2400 | 2400 | 100% |
Source: European Commission, own calculations * Note: We consider 99.9% usage rate as fully utilized TRQ.
Conclusion
The EU and Ukraine confirmed their readiness to initiate the update of the DCFTA due in 2021. Ukraine is interested in increasing duty-free trade under DCFTA with the EU in line with the current state of Ukraine’s production and export capacities, as well as EU-Ukraine bilateral trade developments.
Although many DCFTA TRQs did not limit over-quota exports, Ukraine wants to revise DCFTA TRQs to secure permanent broader duty-free access to the EU market and reduce access barriers for SMEs (as SMEs are more affected by TRQs and other non-tariff barriers). So far, the EU temporarily increased certain TRQs in 2017 for three years as autonomous trade preferences for Ukraine. The primary candidates for the update should include DCFTA TRQs demonstrating high utilization rates, with or without over-quota supply (honey; processed tomatoes; barley groats and meal, cereal grains; apple juice; sugars; butter and dairy spreads; starch processed, etc.).
Amid future DCFTA update negotiations, Ukraine should conduct a detailed analysis for each DCFTA TRQ (taking into account temporary ATM quotas) to prepare its suggestions how and to what extent to liberalise them. It is worth considering different options of such liberalisation – by either increasing TRQs’ volumes or setting up preferential tariff rates for Ukraine instead, etc.
In the framework of the future negotiations with the EU, a special emphasis should be placed on increasing duty-free access for Ukrainian processed goods to promote their exports to the EU – as stipulated in the Export Strategy of Ukraine. For this purpose, Ukraine may explore possibilities for modifying the structure of certain TRQs (such as wheat, flour and pellets; maize, flour and pellets; barley, flour and pellets) to separate primary and processed products and to ensure more duty-free volumes for processed products.
References
- European Commission, 21.04.2020. DG Agriculture and Rural Development. “AGRI TRQs – Allocation Coefficients and Decisions”.
- European Commission, 12.02.2020. Remarks by Commissioner Várhelyi at a press conference with Prime Minister of Ukraine, Oleksiy Honcharuk.
- European Commission, DG Taxation and Customs Union, 21.04.2020. Tariff quota consultation.
- European Commission, 21.04.2020. “Trade Helpdesk Statistics.”
- OECD, 2018. “Fostering greater SME participation in a globally integrated economy”.
- Official Journal of the European Union, 2014. “EU-Ukraine Association Agreement”.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
A Decade of Russian Cross-Domain Coercion Towards Ukraine: Letting the Data Speak
Russia’s coercion towards Ukraine has been a topic of major international events, meetings and conferences. It regularly makes the headlines of influential news outlets. But the question remains open – do we really understand it? We diligently collect and analyze data to make informed decisions in practically all domestic issues but is the same done for international relations? This research paper introduces a number of tools and methods that could be used to study Russia’s coercion towards Ukraine beyond its most visible manifestation, looking into latent trends and relations that could reveal more.
Introduction
For the past decade, Ukraine has been in the headlines of the major world news outlets more frequently than ever before. Ukrainian-Russian relations have been and still remain the topic of international summits and other events. The occupation of a part of Ukraine’s territory has been denounced and Russia’s coercion towards Ukraine is now generally accepted as a fact. But what do we really know about the underlying empirics and dynamics and how can this multi-domain assertiveness be measured and tracked? This paper presents a number of data-driven approaches that allow looking beyond the headline stories to identify and track various dimensions of Russia’s coercion towards Ukraine and the dynamics of its development.
Academic Interest
Mapping the landscape of scholarly literature reveals a number of interesting results. First, the body of works studying Russia’s coercion towards Ukraine remains relatively modest. It quintupled in 2014 but afterwards the interest started tapering off. A search for papers on this topic in Scopus and Web of Science with a very precise query (to increase the accuracy of search) and publication time of 2009-2019 returned 155 papers most of which were published in or after 2014.
Figure 1. Scholarly publications on Russian-Ukrainian relations.
Source: WoS and Scopus, 2009-2019
A closer look at the content of these works with the use of a bibliometric software called CiteSpace shows that the majority of papers focus on Putin, once again emphasizing the significant role of his personality in Russia’s coercion towards Ukraine. The second largest cluster has the “great power identity” as its main theme and presumably looks beyond actions of Russia to identify its ideological grounds. Another group of publications is devoted to sanctions, pointing to their important role in studying Russian-Ukrainian relations.
Figure 2. The landscape of topics in scholarly publications on Russian-Ukrainian Relations.
Expressions of Coercion
The “practical” side of Russia’s coercion towards Ukraine is also frequently associated with the personality of Vladimir Putin and his attitudes towards Ukraine. To analyze this perception further, we created a corpus of speeches of Russian presidents published on the Kremlin website, filtered them to keep only those that mention Ukraine, divided them into pre-2014 and 2014 and after, and then analyzed them using an LDA topic modeling algorithm. This algorithm is based on the assumption that documents on similar topics use similar words. So, the latent topics that a certain document covers can be identified on the basis of probability distributions over words. Each document covers a number of topics that are derived by analyzing the words that are used in it. In simple terms, the model assigns each word from the document a probabilistic score of the most probable topic that this word could belong to and then groups the documents accordingly.
Figure 3. Speeches of Russian presidents before 2014, LDA topic modeling.
Figure 4. Speeches of Russian presidents in 2014 and after, LDA topic modeling.
Quite surprisingly, we discovered that the overall rhetoric of speeches is very similar for the two periods. Although some speeches do differ and the later corpus includes new vocabulary to reflect some changes (i.e “Crimea”, “war”) the most common words remain practically the same. Thus, regardless of the apparent shift in relations between the two countries, Russian leadership still relies on the same notions of collaboration, interaction, joint activities, etc. The narrative of “brotherhood” between the nations persists despite and beyond the obvious narrative of conflict.
To include a broader circle of Russia’s leadership we also looked at the surveys of the Russian elite conducted regularly by a group of researchers led by William Zimmerman and supported by various funders over the years (in 2016 – the National Science Foundation and the Arthur Levitt Public Affairs Center at Hamilton College). Seven waves of the survey already took place; the most recent one in 2016. The respondents were the representatives of several elite groups (government, including executive and legislative branches, security institutions, such as federal security service, army, militia, private business and state-owned enterprises, media, science and education; for practical reasons from Moscow only).
The survey revealed a number of interesting observations. For instance, while the prevailing Russian opinion on Russia’s occupation of Crimea had been that it was not a violation of international law, a closer look at the demographic characteristics of respondents shows that they were not as coherent as it might seem from the outside. While the “green” answers from respondents with backgrounds such as media or private business may have been anticipated, the number of members of the legislative and especially executive branch and the military that had at least some doubt on the legality was surprisingly quite sizable, and they even demonstrated some support of the “violation of law” interpretation.
Figure 5. Elite and public opinion on Russia’s annexation of Crimea.
Comparing these elite opinions to the public opinion poll by Levada Center conducted in the same year shows that even the general public is slightly more likely to choose the most extreme “full legality” option than the respondents from the executive branch.
Beyond the elite or general opinion polls, we tried to develop a metric that might allow us to track Russian sensitivities towards Ukraine. For that, we examined two different ways of expressing “in Ukraine” in Russian language: ‘на Украине’ (the ‘official’ Russian expression) vs. ‘в Украине’ (the version preferred by Ukrainians). [In English, this can be compared so saying ‘Ukraine’ vs ‘the Ukraine’.]
Our first visual plots how many search queries were done on Google Search with both versions over the last decade.
Figure 6. Search queries for “в Украине” (green) versus “на Украине” (red), Google Trends, 2009-2019.
We can clearly observe that during less turbulent times the more politically sensitive version is much more common. This however drastically changes during the peaks of Russia’s coercion towards Ukraine when the number of searches with the less politically correct term increases significantly.
A different trend can be observed if we look at official media publications stored in the Factiva database. We estimated the ratio of search volumes for each term and observed that until the beginning of 2013, about a third of articles and news reports used “in Ukraine”. This changed around January 2013 when the ratio starts to decrease for “in Ukraine” searches and plummets to a mere 10% of outlets still preferring this term.
Figure 7. The ratio of “в Украине” to “на Украине” occurrences in large Russia media (2009 – 2019), Factiva.
Tracking Coercion Itself
What is the track record of Russia’s actual coercion over this decade? For this, we turn to a few recent datasets that try to systematically capture verbal and material actions (words and deeds): the automated event datasets. The largest one of those, called GDELT (Global Database of Events, Language, and Tone), covers the period from 1979 to the present, and contains over three quarters of a billion events. It is updated every fifteen minutes to include all “events” reported in the world’s various news outlets. To exclude multiple mentions of the same event by one newswire, the events are “internally” deduplicated. The events are not compared across newswires.
An event consists of a “triple” coded automatically to represent the actor (who?), the action (what?) and the target (to whom?) as well as a number of other parameters such as type (verbal or material; conflict or cooperation; diplomatic, informational, security, military, economic), degree of conflict vs cooperation etc. Other similar datasets include ICEWS (Integrated Crisis Early Warning System) and TERRIER (Temporally Extended, Regular, Reproducible International Events Records). For this analysis, we filtered out only those events in which Russia was the source actor and Ukraine was the target country. We present two metrics: (1) the percentage of all world events that this subset of events represents and (2) the monthly averages of the Goldstein score, which captures the degree of cooperation or conflict of an event and can take a value from -10 (most conflict) to +10 (most cooperation). Also, to add a broader temporal perspective, we looked beyond the last decade. It can be clearly seen that the number of events before 2013 was significantly lower, especially in “material” domains. Some verbal assertions from Russia towards Ukraine happened during the Orange Revolution and so-called “gas wars”.
The situation changes radically starting from 2013. The proportion of events increases with some especially evident peaks (i.e. during the occupation of Crimea). The verbal events remain quite neutral while the actions towards Ukraine move from some fluctuations to steadily conflictual.
Figure 8. Russia’s negative assertiveness towards Ukraine, 2000-2019.
Measuring Influence
We have seen that the past decade was exceptional in the scale of Russian assertiveness towards Ukraine. But what do we know about Russia’s influence on Ukraine and Ukraine’s dependence on Russia? Influence measures the capacity of one actor to change the behavior of the other actor in a desired direction. In an international context this often concerns the relations between countries. Influence can be achieved by various means, one of which is to increase the dependence of the target country upon the coercive one. This strategy is frequently employed by Russia willing to regain and/or increase control over the former post-Soviet countries. The Formal Bilateral Influence Capacity (FBIC) Index developed by Frederick S. Pardee (Center for International Future) looks at several diplomatic (i.e. intergovernmental membership), economic (trade, aid) and security (military alliances, arms import) indicators allowing to identify the level of dependence of one country upon another. This is especially interesting from a comparative perspective. Figure 9 shows that countries such as Armenia and Belarus remain highly dependent on Russia. For half of the decade, Ukraine was number three on this list. Today the situation has changed. Ukraine’s dependence on Russia has gradually decreased and has become even smaller than Moldova’s, moving closer to the steadily low level of dependence of Georgia. This may signify a positive trend and a break of a decade-long relationship of dependence.
Figure 9. Dependence of post-Soviet countries on Russia, FBIC.
Conclusion
Consequently, Russia and Ukraine have become much more visible in the international academic and policy research efforts. This can be measured through a number of instruments, including a comprehensive mapping of the academic landscape itself with regard to salience and topics that are being studied, analysis of the word choice (that could be represented by the use of the terms to describe events in Ukraine by the government media and Google search users (“на Украине” versus “в Украине”); speeches of Russian presidents that use the same rhetoric of collaboration when talking about Ukraine despite the obvious change in relationships) and material coercion (significant increase in number of assertive conflictual Russia’s actions towards Ukraine). Some findings do give hope for change: the opinions of the Russian elite on recent Russian actions towards Ukraine while remaining generally unfavourable are not as cohesive as it might appear and Ukraine’s dependence on Russia has decreased significantly.
Disclaimer
This research is a part of a larger research effort titled RuBase funded by the Carnegie Foundation of New York and implemented jointly by The Hague Centre for Strategic Studies and Georgia Tech with the help of the Kyiv School of Economics StratBase team in Ukraine. The ‘Ru’ part of the title stands for Russia; and ‘base’ has a double meaning – both the knowledge base built during the project, and the (aspirationally) foundational nature of this effort. The project intends to look beyond the often-shallow traditional understanding of coercion and apply innovative tools and instruments to study coercion in its multifaceted form. This is only a small selection of the tools that have been successfully tested in the course of this (ongoing) research project and applied to the study of Russia’s coercion in different domains. The prospects of any progress in resolving the Russian-Ukrainian conflict are currently slim, thus further work that would allow identifying patterns and trends that the human eye may oversee to understand Russia better and develop an informed foreign policy strategy both for Ukraine and the West is crucially important.
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