Letter to the FT’s editors (May 26, 2022) — long version

This is a longer version of the letter to the editors of Financial Times, written as a response to an Op-Ed by one of the top Ukrainian officials

May 26, 2022

Dear Sirs,

Reading on your recent Op-Ed “Now is the time to help Ukraine by stepping up sanctions on Russia,” by Andriy Yermak, Chief of Staff to President Volodymyr Zelensky, forced me interject with the following remarks.

The course of the past three months proves there is an extreme urgency to terminate Russia’s open and brutal war on Ukraine. Now, it is obvious Russia’s army is destroying Ukraine’s economy, killing and unsettling in mass its population. At the same time, Kremlin aims eliminates Ukrainian identity. This is an inhumane and cruel invasion. The Kremlin’s campaign of violence must be defeated. But how?

Yermak’s answer is more sanctions on Russia’s economy: banning it from international finance and commodities trade to banning international business dealings with it in general.

I must stress that this proposal is rather weak. It is still not enough as it will not bring a quick defeat to Russia’s aggression. Why? It’s not because of Yermak’s or his advisors’ shortcomings in the economic training.

It is a more profound, international matter. These shortcomings are coming from the underlying economic theory in the monetary sphere specifically. It prevails in the greater public’s thinking by default.

This theory, in the nutshell, states that savings fund private investments and taxes fund public expenditures. It also states that domestic macroeconomic stability is best served by access to the international pool of savings that is in abundance generally and especially these days. And lastly, that the domestic currency must be made convertible, and then private capital flow will do the job. This is a description of peaceful economics.

During a war time, this theory’s logic implies that the bad actor must be sanctioned by no access to international finance. Extended sanctions ban international business in general. Hence, so-called “inflows” of funds from trade and finance will stop. And, they will not continue to “finance” the bad actor’s private investments nor public expenditures. All in all, a lack of funds will force Kremlin to stop its war on Ukraine.

This theory is quite limited in scope. It creates unrealistic expectations.

Instead of it, Ukrainians, who are bravely defending their land against the Russia’s invaders, must be equally brave to embrace a more sober theory.

It says that a country that has its own money of account that is nonconvertible and does not rely on foreign finance is able to sustain its domestic expenditures, both private and public, for quite an extended period if not indefinitely. This is essentially modern money theory or MMT.

By my own observation, Russia’s authorities have implicitly aimed to meet those qualifications: of more nonconvertible ruble and less reliance on foreign savings. It became evident in 2013. And Russia’s leadership has been going along this path ever since. Western sanctions imposed throughout 2014–21 were rather helping them to go through that path than disrupting Kremlin aggressiveness towards Ukraine.

Why this all happened that way requires another extensive explanation. But in this piece, I will state that this direction was consciously chosen by Kremlin before sanctions started to mount since 2014. These sanctions as we know them as of May 2022 are quite inconvenient to Russia’s economy but not terminal.

Hence, sanctions and diplomatic negotiations between West and Russia are not going to reverse neither the core of Russia’s shift in economic sphere nor Russia’s tendency to aggressive geopolitical games. The latter accompanies the former.

In the economic arena, this pervasive aggression by Russia against Ukraine is better explained by monetary economics and those nuances mentioned above than by the international relations proposition that NATO expansion aggravated Kremlin. The latter principle is a diversion however, while the former is the more substantive issue.

When the likes of American scholars John Mearsheimer and Jeffrey Sachs and the late American scholar of Russian studies Stephen Cohen say “look at the map of NATO bases and how they encircled Russia”, I consider their argument as lacking economics.

They neglect to mention one fact of monetary economics. That key fact is how the U.S. dollar as a money of account had long ago not only approached the borders of Russia, but also ably penetrated Russia’s economy back in the 1990s if not earlier. Back then, it was welcomed by the ordinary Russians themselves! Albeit the US dollar usage as money of account subsided in Russia since 2013, which is quite recent in terms of historical importance.

This push by the Kremlin for greater monetary sovereignty is firmly rooted in highly paranoid, anti-Western rhetoric that pervades Russia’s own society. Under the curtain of Western sanctions and anti-Western paranoid atmosphere in politics, the Russian wider population is being disciplined mentally to think of their economic transactions and wealth accumulation in terms of ruble as money of account and not US dollar as money of account, which has been the case since the very early 1990s.

The economic path the Kremlin has chosen to follow is an exercise with a very long-time horizon which will require more “special operations” such as in Ukraine, which is in effect an all-out war with drastic effects, but in other countries. That is why so many other Eastern European states are so wary of the Kremlin’s intent. Hence, we must realize the economic substance of it.

Those who somewhat naively believe that a negotiated peace agreement can be reached with Russia must grasp the importance of the more realistic economic theory that the Kremlin will continue to wage this deadly ground war and carry out humanitarian atrocities regardless of the cost as it is perceived in the West. Kremlin’s costs-vs-benefits calculation is different to the West’s calculation. Not only will it continue its deadly campaign in certain parts of Ukraine, but also in other territories as I mentioned above.

How to defeat aggressive Russia is to realize that Ukraine’s fighting army requires due ammunition and sophisticated defense system. Other vulnerable countries require the same. It is not a call for militarization — instead it is a call to face reality of the already present military threat by Kremlin.

That is why Ukraine’s leadership must continue to hold fast to its leadership and military campaign against Russia as well. Yermak’s thinking lacks the integral element of economics for substantive leadership, and this must be corrected.

Sincerely,

Alexander Valchyshen
University of Missouri Kansas City