Economic Consequences of a Ukraine Peace

Originally published at Project-Syndicate | June 10th, 2022

The demand that Russia pay reparations for its unprovoked war in Ukraine is morally compelling. But Russia would be less likely to reconcile itself to Ukraine’s independence and territorial integrity, leaving Ukrainians unsafe and thus unable to embark on reconstruction, much less sustain stable economic growth.

BERKELEY – Russia’s war on Ukraine shows no sign of ending, but it is not too soon to start thinking about how to ensure postwar Ukraine’s stability, prosperity, and security. Already, two discussions are occurring: one about financing economic reconstruction, and the other about affirming Ukraine’s external security. The problem is that these discussions are proceeding separately, even though the issues are intimately related.

Reconstruction costs are uncertain because the course of the war is uncertain. Ukraine’s prewar GDP was some $150 billion. Given a capital-output ratio of three, and assuming that a third of the capital stock will be destroyed, we are again talking about $150 billion. As always, alternative assumptions yield alternative scenarios, but $150 billion seems like a reasonable starting point.

This is not an impossible amount of aid for donors to commit. It is one-sixth the size of the NextGenerationEU program on which European Union states agreed in July 2020. It is one-twelfth the size of the American Rescue Plan Act signed by US President Joe Biden in March 2021.

Still, it seems wrong to ask the United States and Europe to repair what Russia has broken. So, it is tempting to suggest that Ukraine’s reconstruction should be financed by garnishing Russian assets. At $284 billion, the Bank of Russia’s frozen reserves would certainly fit the bill.

True, there is a moral case for reparations: Russia started an unprovoked war and has almost certainly committed war crimes in prosecuting it. There is also an argument grounded in deterrence. As Ukrainian President Volodymyr Zelensky put it at Davos this year, “If the aggressor loses everything, then it definitely deprives him of his motivation to start a war.”

Security guarantees are as vital for economic recovery as they are for the safety of Ukraine’s population. Official aid can’t finance the economy forever; private investment will be required. But foreign investment won’t flow in if security is uncertain. Indeed, Ukrainians themselves won’t invest, either.

The West can strengthen Ukraine’s ability to defend itself by giving it more powerful weapons. But as long as Russia is nuclear-armed and Ukraine is not, the strategic balance will be tilted. A security guarantee from the US and the EU could counter this Russian advantage, but the West is reluctant – not without reason – to bear the risks.

The only durable solution is a Russia reconciled to Ukraine’s political independence and territorial integrity. And reparations are the last thing needed to achieve that. They would mean additional hardship for a Russian population already experiencing hardship. With the economy on course to contract by 10-20% this year, it is not as if Russia is getting off scot-free.

To be sure, going too easy on Russia risks shading into appeasement. And under no circumstances should Russian President Vladimir Putin be rewarded for his aggression. But there is also the opposite risk. Russia must recognize the political and territorial integrity of Ukraine. Punishing it further in the course of peace negotiations will not make this easier. We want future Russian governments to respect international norms. Invoking those norms to extract every pound of flesh will not make achieving this more likely.

There is an obvious analogy with German reparations after World War I and the war-guilt provision of the Treaty of Versailles. Rightly or wrongly, Russians now, like Germans then, do not see themselves as solely responsible for the war. The treaty’s war-guilt clause gave nationalistic German politicians a grievance on which to campaign. The victors’ financial demands gave German governments cover to disregard the treaty’s disarmament provisions and the prohibition on establishing a customs union with Austria. And reparations complicated the task of stabilizing and reconstructing the international system. John Maynard Keynes anticipated all this and more in his prescient Economic Consequences of the Peace.

This indictment of post-WWI reparations should not be overdone. Reparations alone did not cause the Great Depression, and Germany’s depression alone did not lead to Hitler and World War II. The analogy to today’s circumstances, like all historical analogies, is imperfect. Still, this experience is a cautionary tale.

There are still other arguments against reparations. The legality of seizing frozen Russian assets is unclear. Western governments could pass enabling legislation, although they might then be seen as bending the law to their convenience. The United Nations could create a commission with the power to seize those assets, though countries such as China, imagining that they might one day be targeted, would oppose the step. Either way, seizing Russia’s foreign assets will cause other governments to think twice before investing abroad.

The central point, though, is that the demand for reparations would make it harder to imagine a Russia reconciled to Ukraine’s independence and territorial integrity. With a hostile Russia at its doorstep, it will be more difficult for Ukraine to stay safe, much less to sustain sound and stable economic growth.


Barry Eichengreen: Professor of Economics at the University of California, Berkeley, is a former senior policy adviser at the International Monetary Fund. He is the author of many books, including In Defense of Public Debt (Oxford University Press, 2021).

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