Ukraine Needs An Economic Victory
By Ariel Cohen, Fletcher School alumnus, and Senior Fellow at Atlantic Council
For Ukraine, winning on the battlefield is not enough, as Kyiv must ensure that the country’s economy stays afloat. If exports continue to slump, Kyiv could lose its ability to finance the war effort and sustain its population even further. Thus, maintaining the flow of its agricultural exports is vital.
The potential is there, as Ukraine could easily follow in the footsteps of other Central European states and become another Poland. However, it would need help from the European Union to do so. The EU’s 2022 decision to accept Ukraine’s application to join was a first – and right – step in this direction.
If Ukraine were to join the EU, it would gain access to tens of billions of Euros in subsidies that could give a much-needed jolt to its struggling economy. While geopolitically, this would be taken as an overt challenge to the Russian claim that Ukraine has no right to exist as a separate society and state, the downside from an economic perspective would be negligible.
Ukrainian agricultural products “compromise only 2 % of the EU’s total consumption,” German Bundestag member Peter Beyer (CDU) noted in an exclusive interview with Forbes. Forbes also obtained a letter from Dmytro Oliinyk, Chair of the Board of the Federation of Employers of Ukraine which represents over 8,000enterprises that generate 70% of the national GDP, to Dr. Ursula Von Der Leyen, President of the European Commission. In it, he notes that Ukraine is already struggling with poverty, with about 24.2 % living below the poverty line last year. If the Ukrainian economic picture darkens further, a refugee crisis could ensue, straining EU budgets. In that scenario, this could well mean fewer subsidies for European farmers, a prospect that could hurt their pocketbooks more than ceding a 2 % market share.
The stance of the Ukrainian neighbor state Poland has been ambivalent. Militarily, Warsaw has staunchly supported the Ukrainian war effort. However, on the agricultural front, a different narrative has come to dominate. When the EU liberalized trade barriers for Ukrainian agricultural exports, establishing routes to allow Ukraine to continue to export goods to the European market as Russian aggression restricted access to other markets, tensions with the embattled country’s neighbors to the West, particularly Poland, grew. Much of this discontent has emanated from the grassroots, as Polish farmers claimed that cheaper Ukrainian grains are biting into their profits.
Politicians bowed to the political pressure, even though the net impact of Ukrainian grains has aided the EU’s economic health. As of March 2023, countries like Germany were experiencing “record food inflation,” and only “the supply of Ukrainian grain mitigated these inflationary pressures,” says Peter Beyer in an interview with Forbes. This position is supported by multiple members of the Bundestag. As Germany goes, the rest of the EU follows. Germany continuing to suffer bouts of inflation would have aided none of its EU neighbors, much less Poland.
Poland and the rest of the NATO allies need to investigate and counter Russian involvement in stirring trouble on Ukraine’s western borders. There is a cause for concern, as there is evidence that Russian proxies have taken advantage of the recent uproar and participated in some of the farmer’s protests. In November of 2023, sixteen foreign nationals faced charges of espionage and organized crime on behalf of Russia. Along with the charges, worrying details filtered out, including the fact that these individuals had surveilled military sites and seaports. Tackling this issue will never be easy, but if the Kremlin’s assault on Ukraine pays off, pressure on Poland and attempts to destabilize it are only likely to increase. For now, as Ukrainian Prime Minister Denys Shmyhal recently noted, economic tensions have not imperiled the flow of weapons from Poland. This comes at a time when the Ukraine aid bill is delayed in the U.S. Congress, complicating the situation further.
This month, the European Parliament is deciding on whether to continue free trade with Ukraine for an additional year or to suspend it and limit it to the conditions of the DFTAFTA -0.2% agreement signed in 2017, envisaging several restrictions and trading quotas for Ukraine’s imports to the EU. While the European Parliament agreed on trade liberalization in 2022 and 2023, this year, it turned out to be a steeper challenge due to the position of Poland and France. The two countries’ influence tilted a draft regulation in the European Commission that includes “trade support for Ukraine with safeguards for EU farmers,” allowing for conditions under which the Commission can restrict food imports from Ukraine. If Poland and France decide to delay the vote in the EU, there is a risk that it may not be adopted on time.
This decision is still not final, but it might be a harbinger of things to come, as 2024 will be a vital test for Ukraine’s foreign supporters. In November, Americans will go to the polls and choose between the “as long as it takes candidate”and the pro-ceasefire candidate. Still, the EU is making choices now that will undoubtedly shape the war in the coming months. Restricting trade liberalization vis-à-vis Ukraine will damage what remains of its battered economy, which, in many ways, relies on agriculture exports. For context, exports to the EU account for nearly two-thirds of Ukraine’s total exports and, thus, account for a massive share of its foreign reserve earnings (as noted in Mr. Oliinyk’s letter to Dr. von der Leyen). Therefore, if the EU understands the importance of maintaining Ukrainian statehood resilience and stability, it should allow the country to continue to supply its goods, including foodstuffs, and eventually admit Ukraine into the EU’s single market.
Protectionists would surely protest such a move; however, the data do not support their concerns. Russia’s bombarding of Ukraine, as well as its mine-laying activities, have rendered previously fertile farmland unusable. Rehabilitating these lands will take years, if not longer, and a deluge of Ukrainian exports is unlikely any time soon. What is likely to be overwhelmed is Ukraine’s budget if restrictions on the country’s access to the European market go through. Peter Beyer pointed out that Ukraine’s 2024 budget deficit is alarming, about 41 billion USD, or 20.6% of annual GDP. Allowing this to worsen could potentially cede the initiative to Russia.
Shrinking the country’s struggling economy will only punish ordinary Ukrainians, about 14 % of whom work in agriculture. It would also hurt Europe’s strategic goals of denying Russian victory, the same ones President Emmanuel Macron has been touting, on the one hand, while on the other hand paradoxically adopting Poland’s stance on agricultural imports. The West needs to put its money where its mouth is – if the EU is serious about integrating Ukraine, Brussels needs to get Warsaw and Paris on the same page and allow Ukraine to continue its grain exports to the benefit of not only the war-torn country but also of the EU and countries that Ukraine has traditionally supplied with inexpensive foodstuffs in Africa and the Middle East.
(This post was republished from Forbes.)