Ukraine’s Struggle to Survive Without U.S. Aid

The U.S. Congress has so far failed to pass a $60 billion aid package for Ukraine supported by the Biden administration due to opposition from Republican lawmakers. European policymakers, by contrast, managed to get a major aid package recently approved by the EU in the amount of 50 billion euros. But the failure of the U.S. aid is being described by some as a potential tipping point in Ukraine’s stalemated war with Russia.

How dire is Ukraine’s economic situation? How do the politics of Ukrainian aid play out in Europe? And how promising are Ukraine’s plans for integrating economically with the West?

Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

Cameron Abadi: If the U.S. aid doesn’t come through, how dire is the situation for Ukraine? Can Ukraine support itself this coming year?

Adam Tooze: I think the crucial distinction here is between financial assistance and military aid. And then within the military aid, the question of money and the question of the supply of crucial weapons, drones, ammunition. I think on the general financial economic side, the situation is serious but less acute, because the EU money did go through, and that is earmarked essentially for budgetary support so as to secure economic stability in Ukraine. The IMF [International Monetary Fund] is also a backstop, and there’s the possibility of bilateral support from the European side in extreme situations. So I think the economic situation, though serious, is probably less worrying. I think the central anxiety around the American impasse is that this is military aid first and foremost, and America has, above all, been the key backstop of Ukraine’s military efforts. And even were the Europeans to attempt to step up to offset the shortfall in American support, the question would be whether they have the industrial capacity, whether or not they’re willing to spend the money to actually supply the equipment that Ukraine needs.

And the element that everyone seems to be focusing on is artillery rounds, like shells, and the disparity between the Russians and the Ukrainians at this point in artillery ammunition is already large. The outlook is that the Russians are likely to be firing 10,000 rounds a day, which, if you figure that out over the course of the year, is in the order of about 4 million rounds. The Ukrainians are restricting themselves to a few thousand a day. The Europeans made a pledge that they would supply a million rounds by the spring of the coming year, this year, 2024, and have fallen woefully short. They’re closer to 300,000. And so I think it’s that kind of waterfall, if you like, of concerns. There is the economic issue, which is medium term and is relatively stable at the current point, especially given the EU decision. Confidence plays a role there; loans could be used instead of grants. The most serious issue is the military support. And within the military support, the most serious issue is that only the U.S. really in key areas has the capacity, and it’s a strain even for the U.S., to step up industrial production. And the EU right now simply isn’t in a position to match that. And so that, I think, is the real worry. Not an immediate collapse, but a grinding shift in the military balance to Ukraine’s disfavor. And then ultimately, of course, the risk that at some point the lines break and the balance shifts dramatically.

CA: How do the politics of Ukrainian aid play out in Europe? Europe’s economies haven’t been growing as quickly as America’s in recent years, and there are still pretty strict debt rules in place, insisted upon by Germany. At a time when many in Europe are being forced to contemplate austerity, is financial aid to Ukraine a stretch for European countries?

AT: This is a really interesting question. And it’s worth making some important distinctions here. European aid to Ukraine takes two forms. One is from the national side, so national government budgets and bilateral deals for Ukraine. And then one element is EU central, coming from Brussels out of the EU’s budget. And it splits about two-thirds, one-third in most cases. So two-thirds from national sources and one-third from the EU side. And there are two sorts of arguments going on, therefore, about the budgetary politics of this.

For the two-thirds element that’s coming from the national side—which in some cases is huge, right? So the Baltic states—Latvia, Estonia, Lithuania, Denmark—have all done at a national level more than 1 percent of GDP in terms of aid for Ukraine. That’s two-and-a-half times the U.S. effort. It would be $200 billion in an American effort. So a gigantic amount of money from them, proportionately speaking. And that does impact national budgets. And there has indeed been a debate at the EU level about a new set of budget rules. But what’s crucial is that the EU has seen this problem coming. And since the European Commission is really rather hawkish on Ukraine, they have allowed defense spending to be what’s called a relevant consideration in the discretionary judgment that the commission makes when a country exceeds the budget rules. So you’re not allowed to run a deficit larger than, depending on the rule system, either 2 percent or 3 percent of GDP. And if you go above that, it’s in the discretion of the commission to institute disciplinary action or to propose disciplinary action, which the other member states would have to agree. And the ad hoc agreement is that defense spending, under which Ukraine aid would clearly fall, would be a relevant criterion for suspending the rule. So that is how they’re finessing it for the national component.

What has been even more controversial of late is the joint effort from the EU, which is where those 50 billion euros came from that you were referring to at the top of the program. And that is coming out of the common EU budget, which is 1 trillion euros over a period of years. And the commission insisted—so these are the people, the executives, if you like, of the EU that sit in Brussels—the Ukraine aid should be packaged with the rest of the budget. There was a discussion about separating it out, much like in Congress, and instead it was packaged as part of the budget. And that meant that it became a huge issue of argument with Hungary. And, you know, you could say, Well, here’s the Trump factor, right? [Former U.S. President Donald] Trump loves [Prime Minister Viktor] Orban, the authoritarian populist leader of Hungary. And Orban has been digging in. Orban, you know, he leans [Russian President Vladimir] Putin’s way. Hungary has historic beefs with Ukraine, because territory of Hungary, former historic Hungary, was sliced off in the creation of modern Ukraine. And so there are ethnic minority issues. The Ukrainians don’t play nicely with the Hungarians, either. They put Hungarian banks on Ukraine blacklists. It’s all really nasty. Plus, the EU has rule-of-law beefs with Orban over his authoritarian drift. And so they have been withholding tens of billions of euros in funding for Hungary. And Orban, seeing the opportunity to hold the EU for ransom, basically refused until a week or so ago his approval for the common EU package. So this is not national budgets, but the Brussels-backed package. And finally, with a series of face-saving compromises and some loosening of the budget purse strings, has opened it up. And it’s tempting from an American point of view to say, well, the Europeans have got a Trump problem, too. And at one level that’s superficially correct, except the difference is that Hungary is a very small part of the EU puzzle and ultimately can be muscled. And Brussels was thinking hard about different routes to go down. And the GOP is, you know, quite likely to end up as the governing party of the United States by the end of this year. So we’re talking apples and oranges or, you know, big fish, small fish here. The Hungarians are, or Orban’s government is, a problem.

All of this, by the way, and this is crucial on both sides of the Atlantic, is driving a lot of people to propose that Russian assets should simply be seized. This is really the hot topic on both sides of the Atlantic. And it’s kind of perverse because a) it’s an accounting figment, really. The Russian money isn’t, you know, in pots that sit in a, you know, cave somewhere that can be raided. It’s just largely debt owed by us, in other words, the West, notably the Europeans, to the Russians. Which we could just cancel, and instead what we’re trying to do is, quote unquote, confiscate it and use that money to somehow help the Ukrainians, which is a way of avoiding the political problem. Right? It’s a balance-sheet entry that’s already there that wouldn’t require the West to appropriate more funds that could simply be seized. It’s also a breach of international law in various ways and so is quite controversial. But when people hear that topic being discussed, it’s because both on the European and on the American side, the continuing ongoing funding of Ukraine over a period of years going forward is increasingly difficult to conceive of in political terms.

CA: There’s a lot of talk of Ukraine integrating with the West, and specifically with the EU. How well-suited is Ukraine to integrate with Western economies in that way? On the merits, is Ukraine a strong candidate to join the EU’s single market right now?

AT: Yeah. I mean, I think we’ve moved from the hypothetical to the real. I mean, in the sense that Ukraine has started accession talks with the EU, which is huge. You know, you move from an associate status and being, you know, having talks about talks to being in the process of actually joining, and that’s what happened with Ukraine. But this could take a very long time. The possibilities, the boosters, you know, point to the fact that Ukraine has gigantic agricultural resources. It has 41 million hectares of agricultural land, compared to France, which is the big agricultural powerhouse of 30 million hectares. So potentially it could transform the European agro-economy. It has, of course, that black earth region, which is this extraordinarily fertile land. Ukraine is widely discussed as a green energy hub, and it obviously has very considerable digital resources that have been on display during the war. So the Ukraine boosters kind of push this view. Plus, the whole reconstruction of Ukraine could be like a Marshall Plan stimulus effort for the infrastructure industries of Europe. So that’s the positive vision.

The big worry is the administrative, political, legal demands of entry. Right? So joining the EU, even if you are a powerful, well-organized state, is a huge lift. As the British are discovering as they exit, the EU does a huge amount of governing for you, infrastructurally. There’s this thing called acquis communautaire, which is the communal acquisition, if you like, and it consists of 33 chapters of the most elaborate regulation of various types, which a future member state has to join up to. Does Ukraine have the administrative capacity to really go through that process is a huge question. Others have managed. It’s a big ask. Then there is this long-standing issue of corruption which centers in the very first instance on the judicial system, which the Constitutional Court is itself accused of being entangled in corrupt practices. So both the IMF and the EU have been pushing very hard for a series of reforms which are supposed to safeguard the stability of the rule of law in Ukraine going forward. There have been a series of proposals about, for instance, asset declarations for Ukrainian members of parliament. All of these sorts of institutional changes need to be put in place, I think, before anyone can be convinced that we even know the scale of the problem.

But fundamentally, and this is the point to go back to, the basic problem is that Ukraine is poor, and it is much poorer than the EU average. Roughly a third of the EU average, in fact, in terms of GDP per capita. And so integrating a state as big as this with a population of 40 million-plus, with a GDP per capita one-third the EU average, is a huge challenge for the EU because the EU is not NAFTA. It’s not just a trade deal, right? It’s a very complex redistributive system. And the effect of Ukraine joining would be that it would be entitled, according to calculations by EU officials, to as much as 186 billion euros in transfers over a seven-year period once it joined. And those would flow to agriculture, which is this promising but hugely expensive, given the EU subsidy regime, sector and general reconstruction and convergence kind of funding, so as to raise the level of Ukraine’s infrastructure. And the effect of that would be to tip other member states, which currently are in receipt of funding from the EU on net, to being net contributors. So as you add Ukraine into the EU’s budgetary system, you first have to increase the size of the budget, which is a red flag, and then you have to redistribute that budget to what is now a very large 44 million people at one-third of the EU average, who will be in receipt of very large transfers. And that’s really the challenge for the EU.