Military operation in Ukraine , 12 Feb, 14:27
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EXCLUSIVE
Mikhail Zadornov
What does peace mean for Russia and Ukraine?
https://www.rbc.ru/story/658c98dc9a...58c98dc9a794706712c381b&utm_term=10.4Z_noauth
Mikhail Zadornov (Photo: Mikhail Grebenshchikov / RBC)
What does peace mean for Russia and Ukraine? Statements of readiness for peace and negotiations are heard from both sides, contacts between the Kremlin and the White House, Kyiv and Washington have clearly intensified. All this speaks of a chance to stop the military actions, which are three years old.
Trump's election is a trigger. But the conditions necessary for peace in Russia, Ukraine, and among decision-makers in many countries are increasingly clear even without his arrival. The resources expended by both sides, especially human ones, and the costs are increasingly placing a heavy burden on both the economy and people's daily lives.
Sociological surveys reflect the readiness of the majority of the population in both Ukraine and Russia for peace, and this is a key prerequisite for any agreement.
Without prejudging the terms of a possible peace agreement, let us assess the socio-economic consequences for each of the parties.
What does peace in Ukraine mean for Russia?
First of all, it's
saving lives . No new wounded, no new victims, fewer people with post-traumatic stress disorder. This is actually a key resource for our country.
Russia's available labor force for 2022–2024, in addition to military action, has been reduced by approximately 2 million people due to demographics: significantly more people retired each year than entered the labor market as school, college, and university graduates.
According to official data, at least 1.1 million people were called up to participate in the SVO over three years (330 thousand mobilized in the fall of 2022, 350 thousand and 420 thousand contract soldiers in 2023 and 2024).
Approximately 550 thousand people from civilian industries moved to work in the military-industrial complex (see
the assessment of First Deputy Prime Minister Denis Manturov in the summer of 2024) and at least 500-600 thousand young Russians of clearly working age went abroad, although some of them continue to work for Russian enterprises.
Thus, the resource that Russia most needed in these and subsequent years has been noticeably reduced.
Naturally, partial demobilization will return the labor force to the economy. There will be a reverse flow from the military-industrial complex to civilian engineering, complex production and other industries, because, despite the preservation of the defense order, such a workload of many enterprises will not be required.
Not immediately, but after some time, we can expect the return of some of the young people who left for the near or far abroad. Not immediately, because they and their parents will watch how events develop here, analyze the further development of the political situation.
But if military action continues, we will see, albeit not on such a scale, a further exodus of young people – out of fear of being called up to the front in the coming years.
We must also not forget that today we are experiencing a reduction in migration from the Caucasus, Central Asia, and other countries—not only because of the devaluation of the ruble, but because of concerns related to the CIS and the conflict in Ukraine.
Second.
Only after the end of military operations will the government be able to balance the budget . The budget stimulus for 2022-2025 is approximately 10% of Russia's GDP, or 2.5-3% of GDP per year.
In today's money, this is approximately 20 trillion rubles. The result of this budget stimulus was an increase not only in defense orders, but also in salaries throughout the country. The downside is that the National Welfare Fund, essentially the country's reserve fund, the liquid part of which reached 7.4% of GDP at the end of 2021, was only 3.8 trillion rubles as of February 1, which is already less than 2% of GDP. In the event of a sharp drop in oil prices - God forbid, it happens - this will be enough for no more than six months of financing budget expenditures.
The inertia of continued funding will exist even if military actions stop, but a significant portion of the annual defense spending that has increased by 2.5-3% of GDP can be redistributed both for the restoration of new territories and the Kursk region, which must be done, and for other purposes, primarily development. And this is trillions of rubles.
Without the end of the SVO, the budget cannot be balanced. A balanced budget is a key factor in defeating inflation. The Central Bank alone and only by raising the key rate and limiting the growth of lending cannot cope with it.
The consequences of inflation, which the Russian population and businesses are increasingly feeling, are obvious. This is
a further depreciation of the ruble, a tax on everyone , but first of all on the poor, a depreciation of their savings and assets, and also a significant slowdown in investments, which at such an interest rate become absolutely meaningless.
Accordingly, the end of military operations and budget consolidation make it possible for the monetary authorities to bring down inflation through joint efforts.
The reduction of the key rate of the Central Bank and the cost of money
opens the way for private investments of the population , non-state investments in the economy. This will contribute to the acceleration of economic growth over a two-three year horizon.
Immediately, even at the first signs of peace agreements,
we will see an increase in the capitalization of the Russian stock market . We can estimate an approximate increase in the value of shares by 30-40%, this is shown by the graph of the capitalization of the Russian market from 2009 to 2024.
The yield will immediately fall and the cost of OFZ and corporate securities, other assets that our citizens manage, will increase. These assets will increase in price in a short time, which will affect people's moods and their willingness to spend and invest.
And lastly, although not the least important, is
the issue of sanctions . The sanctions will not be lifted immediately and in full. But even a reduction in new sanctions risks, a reduction in the huge transaction costs of purchasing and delivering goods, traveling abroad, the cost of air and train tickets both inside and outside the country will become significant positive changes for the Russian middle class and for business.
At the same time, already in a short period after the easing of sanctions, even in today's sanctions regime, we will see an influx of capital, primarily from Asian and Middle Eastern countries. Gradually, other capital will return to the Russian market. In addition to labor resources, this will provide the second necessary condition for further economic growth.
Thus, for Russia, the end of the SVO means saving lives, increasing – and quite quickly – the labor force, defeating inflation through a balanced budget, some strengthening of the ruble, and resources for further development, both economic and social.
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For Ukraine, whose economy contracted by almost 30% in 2022 and then grew slightly, according to the IMF, by 5.3% in 2023 and by 4% in the first three quarters of 2024, the key issue for further development is also
the lives of people and the population size in the territory controlled by Kiev .
The fact is that currently 9 million Ukrainians continue to live abroad (22% of the country's population in 2022). The largest number is in Poland - about 2 million, more than 1 million in Germany, 200 thousand in the UK, many in Romania and Canada.
At the same time, according to fairly representative surveys conducted in Germany and Great Britain, 70% of those who left there, mainly women and children, want to stay in the countries where they are now by any means necessary, because they do not see a safe future in Ukraine.
Therefore, the end date of military actions for Ukraine is not only the preservation of life and health of the military who are at the front, but also, first of all, the chance to return at least some of the refugees.
For Ukraine, this is probably the key issue of preserving not only the economy, but also the country itself, its development . The sooner military actions are ended, the greater the chances of some part of the population returning to the country.
Second. Despite economic growth and more than $40 billion in gold and foreign exchange reserves,
Ukraine is completely dependent on external aid to finance not only defense but also budget expenditures . From aid primarily from the European Union, then the United States of America and also international financial organizations, since a significant part of this aid goes through the IMF and the World Bank. External support covers up to 40% of the budget, so without direct external aid the Ukrainian economy cannot exist.
Therefore, one of the conditions for ending the conflict in Ukraine is the continuation of this assistance, which will apparently gradually decrease over a two- to three-year period until the economy starts working on its own.
Judging by the decisions already taken, European countries, Great Britain and, to a lesser extent, the United States are ready to provide support to the Ukrainian government.
For example, decisions made in August 2024 allowed Ukraine to partially write off and shift about $40 billion of debt to 2028, that is, to relieve the external debt burden for the next three years.
Thirdly, and this is very important,
Ukraine gets a chance to restore its infrastructure and economy . Let's not estimate the required sizes now, there is and will be a lot of speculation here.
The hopes of the Ukrainian leadership that Russia will pay for the restoration of what was destroyed are groundless. Russia is unlikely to be able to return its gold and foreign exchange reserves in the foreseeable future, but it will also not be possible to legally direct them to the restoration of the Ukrainian economy. They will remain in an uncertain status in the medium term.
Russia has never paid reparations, and there are no political conditions for this to happen now .
The source of financing for Ukraine's recovery will probably be a certain European fund created by the European Union and Great Britain following the example of the fund for the recovery of the European economy after Covid. Let me remind you that about €750 billion was collected there, which is now being spent on infrastructure and investments in European countries in the form of grants and loans.
It must be said that the option of implementing the "Marshall Plan", only not for Europe but for Ukraine, has certain chances of success.
But there may also be another development of events - following the example of the former Yugoslavia, when after the end of military actions in Croatia, Bosnia and Herzegovina, interest in Yugoslavia and investments in the Balkans gradually faded. Other events pushed attention aside, as often happens in the world and in life. And whether the necessary amount of support will be provided to Ukraine in the next 5-10 years is a big question.
It is not only about the talents of the political leadership of Ukraine. Everything will be determined by global trends that we will see in the next decade.
Much will depend not only on the leadership of Ukraine, but also on its society : how ready it will be to develop a clear program for the restoration, development of the country and to consistently implement it.
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For the European Union, the end of military action in Ukraine means, first of all,
a noticeable reduction in the financial burden at a time of acute budget deficit and the elimination of the need to raise taxes in almost all European countries .
Europe has provided Ukraine with serious support in the last three years. It is measured at approximately €120 billion. The main contribution was made by Germany, Great Britain, and a number of other countries. But today we see budget deficits in France of 6% of GDP, in Italy of 5% of GDP, and in a number of other major countries. In Germany, these are two years of recession and disputes about whether it is possible to violate the limits on the budget deficit established by the Constitution. The public debt in the largest EU countries, except for Germany and the Netherlands, has reached or exceeded 100% of GDP.
Therefore, when there is a choice between increasing taxes, cutting social spending, and the need to increase defense spending, reducing priority aid to Ukraine is a serious relief for the governments and budgets of the largest countries in Europe.
This will allow us to shift attention from the military agenda to solving domestic problems , working with the new American administration, which is not the most favorable partner for European countries today, coordinating work between the EU countries themselves, and discussing plans for the future.
It should be understood that
after the conflict in Ukraine, Europe will have to significantly increase defense spending. Obviously, in a calmer situation, EU countries will do this gradually and not as urgently as in the last two years.
And energy issues, relations with China and international trade will come to the fore in Europe in 2026-2027.
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About the author
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MIKHAIL ZADORNOVEconomist, Chairman of the Board of FC Otkritie Bank from 2018 to 2022
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