Why hasn't Ukraine switched to war economy? [closed]

Question

Why didn't Ukraine institute rationing, or other policies once the war began, and why did they use some money out of the $26B financial assistance package to stabilize the hryvna instead? As well as not instituting sign-up bonuses like Russia has.

Answer 1

"Switching to a war economy" needs to be clarified when one talks about it. There are many aspects to it, and not all make sense in every situation.

Rationing makes sense when an economy faces a shortage of certain goods (food, fuel, etc.) and needs to assure a minimum supply to all citizens regardless of wealth. Ukraine has a border with the EU and the ability to import significant amounts of food if that should become necessary. They are also still an exporter of some food.

Financial aid is being provided by many different sources, for many different purposes but usually not at the free discretion of the Ukrainian government. So they cannot use money e.g. for infrastructure or arms on the financial markets, instead. Intervening in the markets can also turn into a massive shift of public wealth to investors betting against that country, which may be politically unfeasible.

Russian-style sign-up bonuses are required when a country does not admit to having a mobilization. Unlike Russia, Ukraine has. In a way, such a bonus is the exact opposite of a war economy. In a war economy, people can be ordered to a workplace without financial incentives. ("You are a watchmaker? Stop repairing watches, report at the ammunition factory.")

There are elements of a war economy which Ukraine should and often does implement. Prioritizing electrical power when supplies are limited. Priority for military trains on the rail network. Making factories produce military goods even if they could earn more with civilian production.

Answer 2

Rationing would make some sense if Ukraine made most of their weapons from domestic raw materials. But most are imported. Even drones are assembled mostly with imported parts. And much of that stuff has no useful civilian applications, at least not in such quantities (like a million FPV drones etc.) The competition between guns and butter in Ukraine is mostly at a financial level, not raw resources that need to be allocated between sectors, except possibly for the dwindling supply of electricity (and of course, manpower).

Ukraine's economy has undergone some structural transformations due to the war. Many jobs in the East have disappeared (e.g. the vast majority of the steel industry) and [some] were "replaced" by different kinds of jobs in the West of Ukraine.

"stabilize the hryvna" -- inflation in itself is not useful in fighting a war. The West agreed to plug a large gap in Ukraine's government finances. Ukraine itself has transitioned to a war economy in that one respect, namely that they've used their central bank assets to plug some gaps too, at least until inflation kicked in!

From the moment of the Russian invasion and the introduction of martial law, the NBU's activities were totally subordinated to military objectives. The NBU financed as much as half of the public deficit in the first half of 2022. Its key rates were kept unchanged for the first few months (see Chart 2), as it considered that it was no longer useful to adjust rates during the acute phase of the conflict. To support the banking sector, the NBU opted to create an unlimited collateral-free refinancing facility with a renewable maturity of one year, with a rate corresponding to the overnight lending facility rate +100 bp.

However, as a sign of the NBU's attachment to its independence and to the transparency of its monetary policy, it immediately stressed the temporary nature of these measures. An official announcement has been made for each purchase of a war bond on the primary market.

Inflationary pressures began to materialise in the summer of 2022 before reaching a peak in October 2022 (+26.6% y/y), forcing the NBU to take aggressive measures to address the imbalances generated by the war and the monetary financing of the public deficit (see Table 1). At the start of 2023, the challenge was to reduce excess bank liquidity in order to improve the transmission of monetary policy. To achieve this, the NBU introduced liquidity-absorbing measures that required banks to pay higher interest on customer deposits, while at the same time putting an end to monetary financing of the public deficit with the technical support of the IMF (economic surveillance programme).

As of Q2 2023, the NBU diversified its sources of financing for the budget deficit. On 17 March 2023, the IMF approved Ukraine's first wartime structural adjustment programme. It provides financial assistance of USD 15.6 billion over a four-year period. The programme acts as a catalyst for international financial aid. At the same time, disinflation is helping to drive up real interest rates, making hryvnia-denominated assets, including government bonds, more attractive. Ukrainian banks and savers are gradually standing in for the NBU as holders of government bonds.

As for one-time bonuses for troops, Ukraine is apparently providing some starting this year, albeit I'm unsure how much.

Ukraine's Prime Minister Denys Shmyhal confirmed that the government has set an allowance of 70,000 UAH ($1,784) for servicemen and police officers performing combat tasks on the front lines.

"A one-time bonus will be disbursed for every 30 days of service in such duties," Shmyhal said.

Besides, they've also increased regular pay earlier on, as this early 2023 piece says

Before the full-scale invasion, the average Ukrainian soldier was paid about the national average: 14,000 hryvnias (£300) a month. A sevenfold jump was not affordable on a sustainable basis. But with Russian tanks moving on to Kyiv, the decision to boost military pay was a vital move to ensure the country’s survival. So the government introduced two kinds of additional payments: 100,000 hryvnias (£2,200) for those on the frontline, directly fighting the enemy, and 30,000 hryvnias (£650) for the rest of the servicemen, dispersed all over Ukraine. Soldiers felt their courage to fight for the state would be fairly rewarded. [...] As a result, financing Ukraine’s military and security agencies absorbs half of the country’s entire budget.

On 28th June [2023?], the Verkhovna Rada, the Ukrainian parliament, passed the draft law in its entirety, stipulating that military personnel would receive additional payments ranging from 30,000 to 100,000 hryvnias (£650-£2,200) based on the duration of their engagement in special combat tasks. This means the rewards for Ukrainian soldiers outside the combat zone will not be reinstated. The populist law voted by the Parliament in April, which aimed to return 30,000 hryvnias (£650) payment for the military outside the combat zone, failed to address the funding source for the hefty expenses exceeding £4 billion and risked exacerbating Ukraine’s budget deficit.

Perhaps it's just that these figures aren't as high as what Russia can afford that they're less talked about.

Anyhow, the IMF is now calling for Ukraine to raise some taxes like the VAT, so they'd be somewhat less reliant on external budgetary support. But there are of course tradeoffs with that.

And yeah:

On 10 October [2024], the Ukrainian parliament (Verkhovna Rada) enacted a law amending Ukraine’s tax code during the period of martial law, which raises taxes for individuals and sole proprietors, while also increasing the tax on bank profits. This marks the first tax increase since the onset of the full-scale war and is a response to the widening budget deficit in defence spending, amounting to approximately 500 billion hryvnias ($12 billion), which cannot be covered by foreign aid. [...]

The amendments to the tax code were initially expected to pass by the end of August, but this was delayed until October. The proposed solutions included raising VAT, increasing the military tax (an additional 1.5% levy on personal income introduced in 2014), or a combination of both options. Many economists and businesspeople supported a VAT increase, as it is easier to administer and fairer, distributing the burden evenly across all taxpayers, including those earning income in the shadow economy.

Ultimately, however, due to concerns over rising inflation, the government decided not to raise VAT, but only to increase the military tax. This decision drew criticism from the business community, which argued that the increase would primarily affect fully transparent companies, rather than those that employ workers off the books or pay most wages under the table. [...]

The legislation raises the military tax on wages of individuals (excluding those serving in the military, for whom the rate remains unchanged) and on all other types of income from 1.5% to 5%. It also introduces a military tax of 10% on the minimum wage for sole proprietors and individual entrepreneurs paying a lump-sum tax. Additionally, entrepreneurs in the so-called third group (with an income limit of 8.2 million hryvnias, paying 3% tax) will now be subject to a 1% military tax on their income.

Moreover, the tax on bank profits was raised from 25% to 50%; this increase will apply to the entirety of 2024 rather than from the date when the law takes effect. Starting next year, non-bank financial institutions, such as insurance companies, will also pay a 25% tax.

[...] After the first reading of the bill, it was estimated that the tax increases would generate an additional 58 billion hryvnias (approximately $1.4 billion) this year and 137 billion hryvnias (approximately $3.3 billion) next year.

The tax increases will only slightly alleviate this year’s budgetary challenges. A deal reached last August to defer payments and partially restructure Ukraine’s Eurobonds, for which 115 billion hryvnias (approximately $2.8 billion) were allocated in the budget, will enable the government to cover part of the deficit. An additional 100 billion hryvnias (approximately $2.4 billion) is expected from higher-than-anticipated tax revenues. However, the largest portion of the required sum, over 200 billion hryvnias, is to be raised through additional domestic bonds; the remaining gap will be filled through cuts to various budget items.

The 2025 draft budget anticipates 579.2 billion hryvnias (approximately $14 billion) from bond issuance, the vast majority of which (561.9 billion hryvnias, or $13.6 billion) will be used to repay previous obligations. Another challenge arises from the fact that foreign donors have only confirmed $15 billion in support so far, which falls significantly below the $38.4 billion anticipated in the draft budget.

BTW, S&P slapped Ukraine with a 'selective default' over that restructuring.

TLDR: Ukraine doesn't really have the money to splurge on bigger bonuses. At least not with at the tax levels they could muster so far, and external aid levels.

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As there have been some comparisons in the comments with the UK in the world wars etc. I looked that up out of curiosity. The fraction of the UK budget spent on defense was about 45%-50% of GDP during both WW1 and WW2. That is somewhat higher than Ukraine's now, which as percentage of GDP Wikipedia gives as 37% (for 2023).

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Aside, but fairly interesting: one can't be too sure of these figures, but reportedly

• In the poorest regions of Russia a man dead at the front is worth more to his family than alive due to the large death "bonus"/compensation promised--around 500 times the minimum monthly salary (i.e. 40-years worth). This latter "bonus" is also 10 greater than the sign-up bonus.

• Just the [war] death and injury compensations in Russia might amount to $26 billion in total, assuming they're paid at the max advertised levels, and using Western figures for Russian casualties.

Answer 3

The exact definition of a "war economy" is unclear in this context, but the crucial point in my view is that there is no form of economic organisation that would facilitate Ukraine to win militarily against Russia using only its own resources.

There is simply too much disparity in size of everything - natural resources, industrial capacity, population size.

The country has effectively shattered in civil war, with the eastern areas largely welcoming the Russians as liberators - at least to begin. What is left, and governed by the Zelensky regime, is effectively "Western Ukraine". It's economy is actually in intensive care, paid for by the West, like a patient who receives 8 pints of blood transfusion daily.

The major challenge for this remnant is not marshalling economic resources. It is pressing its remaining population to fight and die on the fronts, to buy time for the possibility of Russia to tire or fracture somehow under Western pressure. Overmastering Russia on the battlefield whilst the Russian state retains any ability to resist losing, is impossible without nuclear winter, so the state itself must be collapsed first if it is to also lose on the battlefield.

The issue of economic organisation in Ukraine is therefore largely irrelevant in terms of influencing the battlefield outcome. The only potentially important aspect is that the liberals in control don't want to appear too socialist in case this influences popular politics after the war, nor to alienate their foreign bankrollers who are doing so for the chance of profit and post-war resource claims.