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Ukraine & The Money Situation

I make the case for why supporting Ukraine militarily and financially is an excellent investment, including for US & EU taxpayers. (Longish read, but with text boxes that you can skip over... and maybe even come back to)

August in L'viv is often lovely. Rarely is it hot, and we often get passing showers and thunderstorms. No drought in this part of Europe. (Photo from a few days ago on Rynok Sq.)

Let’s talk money and Ukraine. I know “we” haven’t talked about anything for a while here on this site, and that’s largely because I’ve been following military events. There hasn’t been enough change on the battlefield since June to get into the details of military operations just yet, but I hope to be writing on that subject in September. (Time to start studying the difference between your M142s and M270s, your HARMs vs your SAMs...)

For this entry, I'll make the case as to why Ukraine represents a huge long-term economic development opportunity. If realised to anywhere near its potential, Ukraine could have a huge impact upon Eurasian stability, European economic competitiveness, and have a positive impact on global trade and peace. It could also see one of Europe’s greatest economic success stories since the Irish “Celtic Tiger”, when the size of the Irish economy more than tripled in about twenty years. I suspect, quintupling is possible for Ukraine coming out of a war and for the next twenty years.

From 1987 until the Great Financial Crisis about twenty years later, the Irish economy grew almost 230%, earning it the moniker of the Celtic Tiger, echoing the Asian Tigers of the 1990s. (An Tíogar Ceilteach is the Irish.) There are several causes for the substantial turn of the Emerald Isle's fortunes, and the "luck of the Irish '' wasn't one of them.

Being part of the EU and having an educated English-speaking labour force meant that Ireland was attractive to a booming US tech sector. Ireland had seen massive investment by Microsoft, Dell, Oracle, Intel, and Symantec through the 80s and 90s, followed by Google, Yahoo, Amazon, EBay, Cisco, and Facebook at the start of the new millenium. This was further enabled by deregulation, and buoyed by a hopefulness of enduring peace and a friction free border with the north. Now, English proficiency isn't a strength of Ukraine, but education is valued and part of the culture of Ukraine. Labour and land prices in Ukraine are also more competitive than they were in Ireland decades ago.

Perhaps the most meaningful difference between the nations is that Ireland is small and was a rather homogenous society at the time, and Ukraine is neither. It’s important to recognise that all the really wealthy countries of Europe are small, and that now includes Ireland. So in many ways it's best to think of those countries like wealthy US metropolitan areas. Norway, for example, has about as many people as Ireland, both of which are smaller than a dozen US metro areas. In terms of GDP, both are smaller than the Philadelphia metropolitan area. As for Ukraine, though, I’m not painting a picture of a nation that moves from the bottom to the top, but rather one that can steadily outperform itself year over year.

First, One Version of the Ukrainian Reality: the Gloomy Numbers

The numbers on Ukraine prior to 2022 were pretty gloomy already. Really gloomy, in fact. That’s the one reality geographers and economists around the world have known. Ukraine is effectively the poorest nation in Europe when measured by wages and GDP per capita. Kosovo was measurably poorer in 2021 insofar as per capita GDP, but while the two nations share the problem of territorial disputes with nefarious neighbours, hopefully Kosovo is on the long-term mend from war, while Ukraine is experiencing the worst of it presently.

(The two tables below are meant to give you a quick idea of where Ukraine fits into our world insofar as a rough measure of "individual income" (per capita GDP adjusted for cost of living (PPP)) and the size of the economy compared to some US states. The graphic below the tables places "average income" for each country on a map of Europe, with Ukraine's being the lowest. Hopefully your European geography is good enough to know your Montenegro from your Monte Carlo.)

These maps on gross income (left) and after-tax net income (right) come from a Wikipedia page on European average monthly income by nation. Sources seem to come from a combination of the IMF and OECD. Ukraine is the lowest one. (Your job is to fill in the names of the rest and win a prize.)

Second, Another Version of Reality: the Qualitative View

I don't think the story is as clear-cut as the numbers represent. Surely the numbers aren't masking the emergence of a latent economic powerhouse in eastern Europe, but there is a future among the many alternative futures that looks relatively bright. For example, I think of Ukraine as being “wealthier” than most of those Balkan nations to the south that appear better in the statistical indicators.

No Balkan nation has the depth of industry and breadth of expertise that Ukraine does. Ukraine was critical in the Soviet space programme and built the world’s largest commercially viable aircraft, which has since been destroyed in the early days of this war. While it’s important to realise that, like cars and ships made in the former Yugoslavia, these industries in Ukraine are really not presently prepared to compete in a modern global economy, the historical expertise and knowledge is there. The problem really comes down to the lack of investment in education and technology that was the final decades of the Soviet Union, and has been the legacy of Russia in the last 30-some years as well.

Similarly, the whole of the Balkan labour market cannot match that of Ukraine's information technology sector. Even with its declining population and labour flight, there are tens of thousands of multi-lingual IT professional working internationally from within Ukraine. There's definitely a big divide between these tech and skilled workers and just about everyone else within Ukrainian's many urban markets, particularly among young workers.

Demographic Demise.

One of the other sets of dreary digits that Ukraine shares with southeastern Europe is dismal demographics. The UN projects Ukraine's population to HALVE by the end of the century, but that Albania, Bulgaria, and Serbia will lose even more. Not far behind are Latvia, Croatia, Bosnia, Lithuania, Kosovo, North Macedonia, and Poland; all expected to lose more than 40% of their population.

I don't put a lot of stock in these projections since it assumes a continued economic imbalance between western and eastern Europe to a similar magnitude as we see now. Population projections out 80 years are interesting but not exactly destiny. It's really interesting to note that more than half of the global population growth over the coming thirty years will happen in just eight countries: DR Congo, Egypt, Ethiopia, India, Nigeria, Pakistan, the Philippines, and Tanzania.

Most Balkan countries have one “big” city in them. Ukraine has several, a few of which have subway systems. While I’m not going to tell you that Zaporizhzha or Kharkiv are beautiful cities in a European context, and while Kyiv is nothing like Budapest or Praha, there is no city in southeastern Europe that can contests Kyiv across a range of subjective measures. I’m including Athens and Istanbul in that comparison and am open to disagreement in those cases, but anyone who thinks Belgrade compares to Kyiv probably has a preference for filth and chaos and a dearth of architectural relevance.

Among the assets Ukraine enjoys on the whole is farmland. No EU nation has more high-quality soil than Ukraine. Conversly, western Balkan nations have very poor soil, but if you’re looking for striking landscapes and diverse ecosystems, the nations of the former Yugoslavia have spectacular scenery. The Carpathian mountains, for that matter, are probably at their best in Romania or maybe Slovakia. So, between Ukraine and other low-end European markets, I'd emphasise the comparative growth potential of Ukraine's agriculture, high-end manufacturing, and sheer size of the labour market. Southeastern Europe is better positioned for tourism in the western and southern Balkan peninsula, and agricutlure in the east. The labour market is pretty lackluster, and I would subjectively say southeastern Europe lags culturally regarding integration with the work and educational ethos of the EU. Ukraine is much more in line there.

I found this map on a Reddit thread and have not been able to identify the author/source. Look at the green and bluish colours for high-quality soil.

So why hasn’t the “asset wealth” of Ukraine paid off in dividends?

Most of Ukraine’s trade since industrialisation, which only really started 100 years ago, has been with Russia. Having Russia as your main trading partner for the first 25 years of your independence isn't a recipe for growth, especially when Russia invades because you want to prioritse other markets, as happened in 2014. Agriculture is the one area where Ukraine's market is more dispersed around the region. Its agricultural output has been mostly limited to relatively low-value bulk crops, however, like grains. The Nederlands, for example, exports three times more than Ukraine (in terms of US$) since Dutch farmers deal mostly with high-value products. (Apparently the tulip craze isn't over yet.)

Almost all of Ukraine’s major cities are close to the Russian border, and that’s where the Soviets invested the most and that's why Ukraine had such historically strong trade ties with Russia. The Dnipro river is also a big reason for the location of many of the industrial cities, but Donetsk and Kharkiv would be obvious eastern exceptions not on the big river.

For the most part, in the western half of Ukraine, from Kyiv south and west, the countryside is dotted with small to medium-size towns and cities, with L’viv being the largest. The economy in the western half is distinctly more agrarian, with L’viv being the standout in tourism, information technology, and education in the whole western half (outside of Kyiv). The east also is big in agriculture, but the west simply doesn’t generate the export value that drives the multiplier effect to support big cities. Big cities are where we house the desirable modern workforce that attracts manufacturely and new investment. So far, the west hasn't appealed to foreign investors or many domestic businesses either. That needs to change.

That’s not to say Kyiv isn’t an economic powerhouse in and of itself within the national economy. It is, and its economy looks more like a modern "western" city with the prevalence of finance, insurance, communications, information technology industries, and the like. This model could be replicated in other big cities around Ukraine, especially the desirable locations like L’viv and Odesa. Indeed, as Ukraine’s trade orientation shifts from north and east to west and south, L’viv and Odesa should become more attractive manufacturing locations.

​​What's the Status of Ukrainian Roads and Rails? Internally Ukraine's roads are really quite bad but improving. There is no freeway network, but there are stretches of a few miles here and there that are really quite nice. Others are cratered like dirt roads. Generally the roads in the west are better quality, but not necessarily good for much capacity.

In the EU, freeways meet up with freeways at international borders and that doesn't exist at the Ukrainian borders. The rail network in Ukraine is wonderfully extensive, though the quality isn't that common to support high-speed rail options.

The biggest problem is that the gauges between Ukraine and the EU are different, and so Ukraine needs to convert to standard gauge. That means new rails and often means new rolling stock, and not just changing out the wheels and axles. Ukraine's larger rail cars won't fit on all EU right-of-ways.

While estimates of $100-billion have been thrown out there to convert Ukraine to standard gauge, I don't think all the existing lines need to be converted, but the truck lines do so that international logistics are efficient. To convert the rolling stock, it doesn't all need to be new, as there are likely second-hand options from Europe and North America that could make the conversion cheaper and faster.

It’s not only about improving connections to export markets to the south and west, but also diversifying Ukraine’s energy orientation as well. Reliance on Russian energy and domestic energy from the Donbas region (a portmanteau of “Donets coal basin”) is no longer an option. Like heavy industry in the US moving out of the Great Lakes region and the northeast’s river systems, the future of Ukrainian manufacturing is going to be more geographically flexible so long as the sources of energy are diversified as well.

And manufacturing should be a part of Ukraine’s economic future. It makes sense. Labour, construction, and land costs are going to be much lower here than most of Europe for a long time to come. Sure robotics and automation will be a big part of most new facilities – modern manufacturing isn’t that labour intensive anymore – but wherever salaries will be paid, they will be much lower than Germany and even than Hungary where quite a few automobile producers have new facilities. If ample rail and highway infrastructure investments are made, L’viv wouldn’t be that much farther in travel time to Berlin than Budapest is. The European Union with its 450-million inhabitants of comparative wealth represents a huge opportunity for Ukraine, just like it has been for Poland and Hungary.

Svit Kavy (World Coffee) is arguably the best coffee in L'viv and the quality is certainly world class. That 85UAH cappuccino is just a bt more than $2, a bargain still, but a year ago it was in the 40s.

Personal Experience: the "official" exchange rate, and then the "real" exchange rate

Five years ago when I was looking at properties in L’viv, the USD was buying about 26.5 UAH (Ukrainian hryvnia). Jump forward to the start of the winter of 2021-22 and the UAH was about the same price. In the intervening years, it fluctuated in a range between 23.5 to 28.5 UAH per dollar.

Also back a few years ago, I was getting as much as 18% interest on bank deposit accounts, which is what American banks call certificates of deposit (CDs). Those were good times to be taking risks on the Ukrainian financial system. The Ukrainian income tax of 18% (plus 1.5% war tax from the onset of 2014 hostilities) were taken out of my interest income automatically, which made everything quite clean. As an American, I then have to declare that net-income in the States, but still it was good.

By the time of this last winter, deposit interest rates slipped below 10% and were thus reflecting a lower perception of risk as Ukraine established itself as a reliable borrower. In the anxious ramp up to full-scale invasion, though, the hryvnia weakened to about 29UAH, and once the war started, the NBU pegged the interest rate at about 29.5 UAH to the dollar. That means that because the dollar was strengthening throughout 2022, the hryvnia was actually strengthening against European currencies all while the economy was being devastated. It was a nice idea to have invested money in Ukraine to support the war effort and get a nice return, but it wasn’t going to last for obvious reasons. By the start of the summer – pow! – the NBU reset the exchange rate to about 36.5UAH. Overnight all us sorry sods with hryvnia in our pockets and in our bank accounts lost 25% of our wealth.

Like I indicated, I wasn’t surprised. What the NBU has been setting is the “official” exchange rate. So if you use your American credit card to buy your groceries, you’re going to get the NBU exchange rate. On the street with cash in your wallet, however, the exchange rate favoured your greenbacks and euros even more. From March to June the exchange rate at the private currency booths slid from 29.5 to about 35, if I recall. So even if you liked your 1.5% cash back on your credit card, you’d have been losing money by not exchanging cash dollars for hryvnia, because by May it was saving you over 10%.

So the “official” exchange rate wasn’t going to survive a 25% difference with the market rate, which is what the street was showing. People wanted dollars and euros as a hedge against the risks inherent in an economy at war. It is an ecomony at the war's outset that the IMF projected to contract by 40% in 2022. If you’re wondering, and you probably should be, the current street exchange rate is about 40UAH. I suspect the official exchange rate will adjust a couple more times between now and the end of the war. Obviously how long the war lasts is the big question. One change, however, is that currency exchange places can no longer advertise their exchange rates. You have to ask.

Actually, the big question for me is whether the UAH will return to values below 30/dollar in the future. If it does, then there’s a lot to be gained by buying UAH above 40 even if it goes to 50 between now and then. Some of you may have read about Ukrainian war bonds being sold with a 25% coupon, but I've approached the retail banks here that are supposed to be selling them, and all I'm being offered are the bank's rate for deposit accounts. Maybe the banks are getting the 25% on my 12%, but if the return on that is keeping the banks solvent during the war, I'm not going to feel cheated. I know several of my banks are not doing private loans because of fear that people will just take the cash and leave the country. Collateral is necessary but scarce and hard to value. Oh, and just to fill out the picture: When I inquired at a bank in Odesa as to the mortgage rate back in 2017, it was 18%. Imagine that as we watch US mortgage rates pushing toward 6%.

So How Do I See Ukraine's Future?

If most of the necessary pieces fall into place, I see the next twenty years as economically vibrant for Ukraine. I also see Ukraine as a nation capable of participating in its own growth and reconstruction. That is, Ukraine should be able to go to the debt markets as a credible borrower. It is, however, a nation (like its neighbours) that will lose population. I don't think that's avoidable for the forseeable future. There will be an uptick from refugees returning and from the liberation of areas taken in 2014 (yes, I am assuming some repatriation), but generally birth rates will stay low and emigration will persist.

Here's a table that helps illustrate all of the above. It's not one based on sophisticated analysis, but rather an over-simplified set of assumptions that return credible results. (You may want to right-click the table image and open it in a separate window/tab to see it larger.)

What are those "necessary pieces" in the next 20 years? Most, if not all, of the following:

  • The EU, US and some other members of the G20 provide financial support for the reconstruction of Ukraine similar to the Marshall Plan, including both loans and grants

  • Ukraine eventually becomes a NATO member. Ukraine as a NATO member is probably a cost-saver on NATO/US defense budgets. (Remember: if it were already a member, it's unlikely we'd be talking about Ukraine in 2022.)

  • Ukraine eventually becomes an EU member.

  • Internal/international limited-access motorways (preferably tollways) connecting:

  • Poland to Kharkiv, via Kyiv and L'viv.

  • Romania to Kyiv, via Odesa.

  • Improved commercial highways connecting:

  • Slovakia/Hungary to Lviv, via Uzhhorod/Mukachevo

  • Romania/Moldova to Kyiv, via Chernivtsi/Vinnytsia

  • internal regions like Crimea/Donbas to Kyiv, via Kherson/Dnipro/Zaporizhzhia

  • New standard-gauge (used in the EU but not Ukraine) freight rail lines connecting to all centres of about 250,000+ people (about 30 metro areas across Ukraine) and all five neighbour nations.

  • New "higher-speed" standard-gauge passenger rail lines to all centres of 500,000+ (about 7 metro areas) and to Poland, Slovakia, and Hungary.

  • Opening of agricultural land sales to private entities, including to preferred international partners (EU).

  • Policy reforms that favour small business formation, particularly partnerships between Ukrainian entrepreneurs and EU & USMCA residents; financial sector stabilisation (deposit insurance); international intellectual property enforcement; energy independence;...

  • Large increases in investment in education and health care.

  • The culture of Ukraine continues to move away from the Soviet survivalist mentality of bribes and kickbacks and more towards systemic fidelity and meritocratic values.

If these pieces largely fall into place, I can easily imagine a Ukraine in 20 years that has nominal GDP per capita numbers ($16,000 in 2022 dollars) somewhere between where Romania ($14,800) and Poland ($18,500) are today. It would have a diminished population, but one that is more urban, cosmopolitan, and better-educated. I can also imagine that several EU and US brands will have Ukrainian manufacturing in Ukraine by 2040 and that agricultural output will move closer to that realised in Germany and France.

What's the Story with Agricultural Land Reform? In 2020, the Rada (Ukrainian parliament) started reforming agricultural land ownership rules, which have been highly restrictive. Most farmers lease small plots for approximately 15 years or so, which has contributed to an extremely inefficient, labour-intensive agricultural sector that has often made Ukrainian goods more expensive than Polish ones in local grocery stores. Despite having the high-quality land that it does, Ukraine has some of the lowest value-added figures for rural land of any European country. Liberalising land ownership rules would improve the situation markedly, but not without further exacerbating the rural to urban flight. Opening up land ownership will also result in farming becoming less labour intensive (more efficient) and so the need for rural hands would diminish. This, again, has been a global phenomenon.

That kind of substantial but realistic growth also translates into tax revenue that can be reinvested in critical sectors like education and health care as well as repaying infrastructure loans that would be associated with a great deal of the above projects. What I do with my little table is I project GDP growth, and pull out the year-over-year incremental dollar increase in GDP. So if it goes from $100-billion to $125-billion (2021 GDP was $200-billion, just as a reminder), the growth increment is $25-billion. Then I multiply that increase by 34% to identify the tax revenue that could be allocated to repaying reconstruction, infrastructure, and defense loans. 34% is very roughly the current ratio of tax revenue to GDP in Ukraine, which is reasonable for a European country. (At the top of the scale, you've nation's like France at 46%+, with Ireland down around 22%.)

What is important to recognise in my assumption is that most of the incremental tax receipts taken on the way from $100-billion to $970-billion in nominal GDP do NOT go toward repaying reconstruction and infrastructure loans. It's just 34% of the increase from one year to the next. The tax collected on prior increases is not included in the line of numbers in bold. So, the lion's share of the increases in taxes collected would go toward existing operating expenses and prior debts. I calculate, thus, that over that twenty-year period, it would not be difficult to imagine Ukraine being able to finance $300-billion in improvements (excluding any financing costs).

Beyond that, how would I say Ukraine in 2042 benefits the European economy and the US? It could:

  • provide over a million emigrant labourers to the EU, particularly Poland, Slovakia, and Czechia, all of whom are providing labour to other EU members and confronting their own demographic crises

  • provide Europe and the EU with an on-shore location for cheap and secure manufacturing, and mitigate many of the current risks with supply chains that stretch out to Asia

  • provide NATO with a bulwark against Russian aggression in Europe, as well as an example to the Russian electorate that political and economic reforms can have meaningful impacts on even the poorest European economies

  • provide the US with a tried and tested military partner in the region

  • provide a model for the world to see how liberal free-market, democratic reforms are still desirable when compared to the authoritarian "strong-man" option that appeals to so many in developing economies for nationalist or security reasons.


In the 30-year history of Ukraine as an independent nation, it has experienced periods of incredible growth and optimism. Unfortunately those periods are short-lived because of corrupt practices and socio-political instability. The war this year, the on-going conflict since 2014, and the impact of the great financial crisis are all examples of the instability that strangles growth.

If Ukraine were to experience prolonged periods without war and external financial crises, it's imaginable that the economy could double in size every few years for the foreseeable future, just as it had coming out of the miserable 1990s and into the GFC. Economic gains made on new market opportunities in Europe, transportation efficiency, meaningful policy reforms, and the mitigation of corruption would be sustainable gains, real gains, and not wholly reversed during the traditional business cycles that are associated with recessions and periods of expansion.

Fundamentally, there's little reason that I can see that Ukraine couldn't achieve a nominal (unadjusted for purchasing power) GDP per person figure somewhere between Romania and Poland in 10-20 years. This would be more than quadrupling the 2021 figure. From a public-finance perspective, such growth could translate into hundreds of billions of dollars to finance defense, instractrucure, education, and healthcare improvements. I think that's an excellent investment outcome worth pursuing.

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