Who will pay?

Glint Pay
7 min readApr 14, 2022

“Fanaticism consists of redoubling your efforts when you have forgotten your aim” — George Santayana.

It’s been two months since Russia invaded Ukraine. There’s no indication that the war is nearing an end, although it has dropped down the mainstream news media agenda in what some are terming ‘Ukraine Fatigue’. Pope Francis has pointed out the reality of this conflict. On Palm Sunday, he rhetorically asked an audience in St Peter’s Square in Rome “what kind of victory would be one that plants a flag on a heap of rubble?”

Yet we need to keep tabs on the cost of this war, as in one way or another all of us are paying the price, through higher prices for energy and food (which erode the value of incomes), disrupted trade flows, and higher investor uncertainty weighing on asset prices. Never mind the real possibility of the conflict spilling out beyond Ukraine’s borders.

Christine Lagarde, president of the European Central Bank, solemnly informed a Cyprus audience in March: “The longer the war lasts, the greater the costs are likely to be”. No kidding. David Beasley, the head of the UN’s World Food Program, has said the conflict will create “a catastrophe on top of a catastrophe” and may trigger the worst global food crisis since World War Two. The Pentagon said this week that the war would probably enter a “more protracted and a very bloody phase”.

Basic things like shipping pallets — made of Russian nails and wood from Belarus and Ukraine — are becoming scarce in Germany, according to the transport logistics company Transporeon, partly because of sanctions. The cost of insuring shipping to the Black Sea is now “out of control” says Bloomberg. Prices across the board are headed up — and have already hit record highs for some commodities, such as wheat. A “recession shock” is on its way and the “inflation shock” is worsening, according to a note to its clients from Bank of America.

Ukraine has suffered not just loss of lives, but destruction of its infrastructure; everything from school buildings to airports has been blitzed. The city of Mariupol has been “destroyed” with “tens of thousands of dead” according to Ukraine’s President, Volodymyr Zelenskyy. Kyiv’s School of Economics puts the damage caused to Ukraine up to 24 March at almost $63 billion and “global economic losses” at about $543-$600 billion. The financial cost to Russia is estimated to be huge too — around $20 billion a day.

The savagery of the war means that President Putin has little option but to intensify it in the hope that Russia will eventually crush Ukrainian resistance. If his troops can destroy Ukraine’s energy sector then the country could be made uninhabitable; European Union fears that EU countries would have to accommodate as many as eight million displaced Ukrainians will come to pass. To retreat and declare victory on or before the symbolically important day of 9 May (‘Victory’ Day in Russia, which marks the defeat of Nazi Germany in 1945), which some think could be Putin’s intention , may still be within his grasp. But such a ‘victory’ would be hollow indeed. On 15 March, Ukraine’s Prime Minister, Denys Shmygal, said that Ukraine would need $565 billion for reconstruction ; the bill will have gone up since then. Ukraine’s central bank says the war is costing the country the equivalent of $1 billion a day.

Yet by the time the shooting is over neither Russia nor Ukraine will be in any condition to meet the bills for reconstruction. Bloomberg suggests that Russia’s gross domestic product (GDP) will fall by about 9% in 2022 (the Institute of International Finance or IIF puts the likely fall at 15%). The International Monetary Fund (IMF) expects “deep recession in Russia” according to its managing director, Kristalina Georgieva. The World Bank now forecasts that Ukraine’s GDP will shrink by about 45% this year; in the worst case the Bank expects Russia’s GDP to fall by 20% and Ukraine’s by 75%. Both countries will be financially broken, no matter who ‘wins’ — not that a conventional ‘winner’ is likely from this mess.

Calls are already being made for a new ‘Marshall Plan’ to be implemented in Ukraine. While it’s perhaps sensible to start thinking about what needs to be done after the war is over, any plans need to recognise two things: the first is that the fighting may well drag on for months; the second is that finding funds to rebuild Ukraine will stretch already over-indebted governments. Who will pay for this new Marshall Plan?

How the Marshall Plan was divided up

Marshall Plan 2.0

The original Marshall Plan was named for the then US Secretary of State George Marshall. Officially it was called the European Recovery Program or ERP. Signed into law by US President Harry Truman on 3 April 1948, it was a remarkably generous instance of US philanthropy. The Marshall Plan was not entirely altruistic; the US recognised that a Germany and Europe that was economically restored would buy US exports.

The plan lasted four years, during which the US gave $17 billion (equivalent to almost $205 billion in 2020) to help European countries (minus those within the Soviet orbit, who declined the assistance) recover from the war. In 1948, the US had a GDP of some $258 billion, and a national debt of $252 billion, giving a debt-to-GDP ratio of 92%. Nor did the largesse stop there: In 1951, the Marshall Plan was replaced by the Mutual Security Plan, which annually gave to Europe some $7.5 billion until 1961.

Today, the US national debt is officially more than $30 trillion and is forecast to rise above $36 trillion by 2031 (and that’s before any Dollar is mandated to rebuild Ukraine), by which date the debt-to-GDP ratio will have risen above the current 128%. Anything above a 100% debt-to-GDP ratio — 101% for example — means a country isn’t producing enough to pay off its debts. Whether that spells problems for the country in question is a much-debated topic. Japan, for example, has a debt-to-DGP ratio of 266%. Sudan’s ratio is 259% and Greece’s 206%, while Venezuela’s is 350%. Japan can sustain such a high debt because most of the debt is owed to its own citizens, so the perception is it’s less likely to default. But eventually it too will find such a high debt unsustainable. Since 1960, 147 governments have defaulted; Sri Lanka has just defaulted on $51 billion of foreign debts. Russia may join the list.

Ukraine thinks that Russia should be made to pay reparations for “‘the destruction of private and public property’ during the war”; it says it has already assembled an international legal team to lodge claims against Moscow. Kyrylo Shevchenko, governor of Ukraine’s Central Bank, probably spoke for most of Ukraine’s citizens when he said that Russia should pay to rebuild his country. Russia’s foreign exchange reserves now frozen by sanctions — about half out of a total of $640 billion — should be used as “reparation” said Shevchenko. While that might seem ‘fair’ it is also a fantasy — how on earth could reparations’ claims lodged against Russia be enforced?

Proxy war, proxy money

One of the terrors that Moscow has already dangled in the face of the West is an escalation of the Ukraine conflict. Putin has put his nuclear forces on high alert, a Sword of Damocles hanging over Brussels and Washington D.C. NATO members — crucially not NATO itself — are supplying Ukraine with weapons, such as the tanks, rocket launchers and artillery that have been sent from the Czech Republic. NATO is thus fighting a proxy war with Russia.

And this proxy war is being funded by proxy money — money which has become simply digits on an excel spreadsheet, the millions becoming billions and transmuting into trillions. The US Congress has approved $13.6 billion in emergency spending aimed to help Ukraine; $3.5 billion of this is to provide military supplies. Where will this money come from? ‘Deficit spending’ in all probability — it will be added to the mountain of US debt. In the last 22 years, the US Dollar has lost 39% of its value — a Dollar today only buys 60.694% of what it could in 2000.

Ukraine — and Russia too, if truth be told — will need a fresh Marshall Plan to overcome the months of destruction of infrastructure and finances. The trouble is, this is not 1947; neither the US nor any other country — except China perhaps — is in a position to meet the bill, at least not without vastly inflating its own debt and undermining its own currency. The rubble is not merely that of buildings — it’s also of the financial order and certainty that prevailed just a short time ago.