How the United States can contain Russia by strengthening the Ukrainian economy



The influence of the Russian Federation has been on the rise lately. Amassing thousands of troops along the Ukrainian border, negotiating a ceasefire between Armenia and Azerbaijan, playing a key role in the recent cessation of hostilities between Israel and Hamas: this seems to be the moment from Russia.

The Biden administration views Russia as our most serious threat (well, after climate change and white supremacy on our own shores). Therefore, any material geopolitical advance by Russia comes at our expense and must be contained.

One way to stop Russia is to help Ukraine. President Trump boasted of sending anti-tank missiles to Ukraine, while President Obama provided only “pillows and sheets.” The best way to support Ukraine in our efforts to derail Russian aggression involves neither arms nor bedding. The United States should invest to help Ukraine harness its enormous potential to compete with Russia in terms of economic might.

On the world stage, economic might trumps military might, and trade can be an incentive to end hostilities and do business together for years to come. We must help Ukraine reform and rebuild its faltering and corrupt economy in order to loosen Russia’s grip on Eastern Europe.

When the Soviet Union broke up 30 years ago, Ukraine should have become the leader of the New Guard. It has the largest land mass in Europe, with fertile soil for flourishing agriculture unrivaled in Europe. Ukraine’s ports (which Russia covets) give it access to international trade. The country produces natural gas for much of its own needs and, thanks to American technology, it could expand to supply its neighbors, who now depend solely on Russia.

Yet Ukraine lags behind its neighbors. The West’s high hopes for Ukraine turned first into confusion, then frustration. High tariffs, high business taxes and onerous regulations harm the Ukrainian economy, as does the lack of free market competition and efficient pricing. It is dominated by oligarchies who control most of the main sectors, making Ukraine a modern version of a feudal society.

Thus, inflation is high at 8%, and the unemployment rate is around 9%, and double that of young workers. Amid the Covid-19 pandemic, Ukraine’s GDP shrank almost 11% last year to $ 137.3 billion, according to the World Bank. The country’s economy is 25% lower than its 2013 peak. Foreign direct investment in the country, at just $ 5.82 billion in 2019, fell to zero last year and foreign investors pulled out nearly of $ 600 million in assets of Ukraine.

The flight from Ukraine is so severe that since the Russians took Crimea in 2014, up to two million people have left their homes to work in Poland, where the minimum monthly wage of $ 660 is more than three times that of Ukraine. Last year, foreign remittances sent to Ukraine totaled nearly $ 12 billion, far more than foreign investment contributed. The economic death spiral these statistics convey is not encouraging news for potential investors.

Yet there is great potential behind Ukraine’s structural problems. The nation has a young population, with 70% under 55 and 25% under 25. They can provide workers for a booming technology sector. Coders and software developers can earn up to $ 1,500 per month. In Lviv, the largest city in western Ukraine and home to UNESCO World Heritage sites, some 20,000 computer scientists had made $ 60 million in real estate purchases and were buying more than a third of the cars sold locally, a story in the Financial Times declared end of 2018.

The United States could offer advice and investments to help Ukraine develop three cutting-edge areas: Big Data, Artificial Intelligence and Blockchain. In return, US officials could demand concrete actions from the Ukrainian government to reform its economy:

  • Negotiate a mutually beneficial way to shatter the empires of the dozen oligarchs who control the economy with overlapping interests in steel, media, banking, energy, chemicals, machine building, racketeering, etc.
  • Drastically reduce corporate tax rates. Reduce VAT by 20% and Unified Social Tax by 22%.
  • Eliminate taxes on natural gas and other public services needed by the population. Reduce the price of natural gas, which is dictated by government officials and is likely significantly higher than it should be.
  • Establish microfinance for startups, $ 100,000 in long-term microloans offered by banks at 3% annual interest without collateral. Offer tax incentives to companies that employ new college graduates and do business with these startups.

That would be a triple for the Biden administration. Ukraine would find a new urgency and a new incentive to impose the reforms that its politicians have promised for years. This would multiply and accelerate the impact of American aid. The resulting stronger economy would strengthen Ukraine as a bulwark against our rivals in Russia. Win-win-win.

Yuri Vanetik is a California-based private investor, lawyer and political strategist. Read Yuri Vanetik’s reports – More here.

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