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      Russia’s War in Ukraine: State Patriotism or Economic Gain?

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      Journal of Global Faultlines
      Pluto Journals
      mineral, hegemony, pipelines, oligarchies, silovarchs, corruption


            Are the objectives of Russia’s invasion of Ukraine in 2022 based on Putin’s ideological view of Russia’s history and the place of Ukraine in it in the process re-establishing Russia’s position as a world power challenging US hegemony? Or are there underlying economic objectives shared with Russia’s oligarchs to gain control of Ukraine’s mineral wealth and strategic economic position at the crossroads of Europe and Eurasia? This article compares the economies of Russia and Ukraine and their performance since the end of the Soviet Union and finds that their economic structures and performance are very similar over the last three decades, as is the domination of their respective oligarchs, but that the war has hit Ukraine much more disastrously than sanctions have hit Russia. It concludes that Russia does not need Ukraine’s mineral wealth but that control of Ukraine would bring Russia economic gains. However, the principal reason for the invasion is to push back the potential NATO advance to the Russian border, itself a reaction to US fears of Europe’s increasing dependence on Russia for gas, and in doing so challenge US hegemony not just in Europe by across the world by building bridges to Asia and other parts of the Global South.

            Main article text

            The collapse of the Soviet Union in 1991 completed the dismantling of the Soviet sphere of influence in Eastern Europe embodied in the Warsaw Pact. It ended the “Cold War” between the Soviet dominated “East” and the USA dominated “West”. Whereas the post-World War II settlement in Europe established a relatively stable border between the two parts of Europe, it remained a faultline in international relations, as demonstrated by the Berlin blockade of 1948, the uprisings in East Berlin in 1953 and in Hungary, Czechoslovakia, and Poland in 1956, 1968, and 1980 respectively. The collapse of the Soviet Union seemed to repair the faultline insofar as the Eastern and Central European former state socialist countries were concerned, all of which were happy to turn west and apply for EU and NATO membership. However, it is now clear that another faultline was created between the new Europe and Russia. This has now erupted: first, as the Russian “incursions” into the east of Ukraine and the taking of Crimea in 2014, and then in 2022 as an invasion of the rest of Ukraine across its eastern and southern borders.

            At the time of writing, while there have been further gains of territory beyond those achieved in 2014, Russian forces which had advanced to within a short distance from Kyiv, Ukraine’s capital, have been forced to retreat to the eastern territories gained in 2014. The general consensus among the Global North’s commentators and politicians is that the Russian invasion of Ukraine is not going as well as the Russians thought it would. This judgement begs the question of Russia’s objectives in pursuit of this war. The predominant analysis in the press and in books published before and after the invasion has focused on the motives, thinking, character, and even state of mind of Russia’s President Putin and that section of the governing elite and the associated ideologues of what Faure (2022) has termed “state patriotism”. This article will consider these largely ideological issues but also examine a less well discussed question, that is, how far the invasion has economic motives and objectives. The next section will discuss the mainly ideological reasons that have been given for the Russian invasion. The following section will compare the Russian and Ukrainian economies and suggest the possible economic reasons for the invasion. The final section concludes with a discussion of the relative importance of the economic and ideological reasons for the invasion.

            What are Russia’s objectives?

            Most of the explanations of Russia’s invasion of Ukraine centre on its President, Vladimir Putin. Leaving aside issues of Putin’s state of mind or state of health, for which there is no reliable information, we are left with interpreting what he has actually said and written. Putin has expressed regret over the break-up of the Soviet Union and reflected positively on Peter the Great and the Russian empire, of which of course Ukraine was an important part, and on Stalin. As Service (2019) notes, Putin

            is not nostalgic about communism but is bitter about the break-up of the USSR, which in April 2005 he described as “the greatest geopolitical catastrophe of the [twentieth] century”. His remark is widely misunderstood. He did not at all regret the passing of Soviet communism but rather the consequences of its disappearance: the mass poverty of the 1990s, the rise of the so-called oligarchs and the dislocation of families separated by the new borders. (p. 34)

            While Putin is the one who overtly commands the Russian government, he is part of a much bigger group of former and current state security officers that has its origins in the Soviet Union’s KGB and of which Putin himself became a senior operative. This is a group that wishes to re-establish Russia as a world power whose interests are respected both by the United States through its leadership of NATO, and by the European Union. However, both NATO and the EU have expanded into what was formerly the Soviet sphere of influence, provoking Russia’s sensitivity to 20th-century history. The domination of eastern Europe by the USSR as a result of the Yalta agreement of 1943 gave Russia itself, let alone the USSR, a ring of allied countries providing a cordon sanitaire, something which Stalin and his successors saw as necessary after suffering the German invasion in 1941. This buffer to Russia’s west was augmented by the Central Asian states to the east that formed part of the Union. The post-Soviet Russian governments sought to maintain dominant relations with these now independent republics both to the west and to the east by establishing the Commonwealth of Independent States (CIS) and the Collective Security Treaty Organization (CSTO), but the invasions of Georgia and Ukraine and the annexation of Crimea led to Georgia exiting the CIS and Ukraine ending its associate membership. Putin’s attempt to construct a Eurasian Economic Union (EEU) as a purely economic union without any political features attracted very few of the former USSR republics, and especially failed to incorporate Ukraine (Service, 2019).

            Behind Putin’s regret of the demise of the USSR as a world power is a resistance to the world view that sees this demise as a victory for globalization under the hegemony of the United States as protector of the interests of global capital based in the “Global North”. The Russian view of the world is that the bi-polarization of the Cold War has not been replaced by a uni-polar US-dominated globalized world system, but by a multi-polar world which has been disentangling itself from US hegemony whether in the Middle East and Asia or in Latin America and Africa. This multi-polarity is represented by support for (or non-opposition to) Russia’s war in Ukraine coming from all over the Global South (Platonova, 2022). From this standpoint, the invasion and ultimate subjugation of Ukraine is designed both to stop the advance of the US across Europe and restore Russia to the status of a great power commanding the respect of this multi-polar world, but especially depriving the US of its hegemony of a globalized world (Short, 2022).

            Before the Maidan “coup” of 2014 resulting in the ousting of President Yanukovitch and a pro-Western government, Ukraine’s leadership had tried to balance the desire of the western Ukrainians to join the EU and even NATO with those in the east of the country who wanted to align with Russia and its economic and security ambitions. Putin was so anxious to keep Ukraine within the Russian and Eurasian economic sphere that he lured Yanukovitch away from signing an accession agreement with the EU in 2013 with a deal that would have given Ukraine a $15 bn loan and a 50% discount on gas supplied to Ukraine (D’Anieri, 2019).

            With the fall of the pro-Russian Yanukovitch and a pro-Western regime in place in Kyiv intending to sign an accession agreement with the EU, Putin saw a threat not simply to Russia, but to the Russians who lived in the Ukraine, and especially in its regions bordering on Russia. The occupation of parts of these border regions by Russian troops and the annexation of Crimea, with the former USSR’s only warm water port at Sevastopol, was the Kremlin’s response. Until 2014, Russia had observed the expansion of NATO and a switch in US policy from first, under Bush, supporting Russia’s joining the alliance to one under Clinton of recreating Russia as the enemy. Ukraine’s evident wish after 2014 to join NATO and the EU left Belarus as the remaining pro-Russian state on its borders. As William Burns, the former US ambassador to Moscow, wrote:

            Ukrainian entry into NATO is the brightest of all redlines for the Russian elite (not just Putin). In my more than two and a half years of conversations with key Russian players, from knuckle-draggers in the dark recesses of the Kremlin to Putin’s sharpest liberal critics, I have yet to find anyone who views Ukraine in NATO as anything other than a direct challenge to Russian interests. (Quoted in Short, 2022: 424)

            Such a development could also only have the effect inside Russia of strengthening the nationalist forces and “state patriotism”. Indeed, with respect to Ukraine, it became clear that for Putin and his supporters, it was not really a nation: “modern Ukraine is entirely the product of the Soviet era. We know and remember well that it was shaped – for a significant part – on the lands of historical Russia” (Putin 2021).

            Ukraine and Russia in Putin’s view are one nation:

            I am confident that true sovereignty of Ukraine is possible only in partnership with Russia. Our spiritual, human and civilizational ties formed for centuries and have their origins in the same sources, they have been hardened by common trials, achievements and victories. Our kinship has been transmitted from generation to generation. It is in the hearts and the memory of people living in modern Russia and Ukraine, in the blood ties that unite millions of our families. Together we have always been and will be many times stronger and more successful. For we are one people. (Putin, 2021)

            For Putin and his ruling group, the threat especially to the Russian minorities in the east of Ukraine comes from Ukrainian nationalists and especially the far right Ukrainian “Nazis”. The claim, for which there was no evidence, was that Ukraine was going to embark on a systematic elimination of the Russian minority (Short, 2022). “De-nazification” of Ukraine was presented by Putin as one of the reasons for the invasion and conveniently recalled that section of the Ukrainian population that cooperated with Germany during the Second World War and participated in the Holocaust. While there are extreme right-wing groups in Ukraine, it is beyond exaggeration to describe the country as a Nazi state. One organization in particular, the Azov Battalion, does have an historical association with the Ukrainian Nazis who, fueled with their antagonism to the Soviet state, allied with Germany during the war and actively participated in the Holocaust (Rachman, 2022). However, although Azov has played an important role in building up the Ukrainian military capability, especially since 2014, and has neo-Nazi members, it is not predominantly an extreme right organization. Nevertheless, even this relatively minor role, together with the revived worship of the Ukrainian nationalist hero, Stepan Bandera, has given Putin sufficient excuses to fear developments in Ukraine and claim that its resident Russians are in danger (Rachman, 2022). That President Zelenskiy was both Russian-speaking and Jewish clearly cuts no ice with these Russian interpretations of Ukraine. Nevertheless, memories of the German invasion are long and perpetuated and are used by Putin to attempt to bind the Ukrainians to the Russians. Indeed, both Ukraine and Russia suffered huge casualties in resisting the invasion: four Ukrainian cities, Kyiv, Odesa, Kerch, and Sevastopol, were named “hero cities” because of their resistance, out of the total of 13 in the whole USSR (Gessen, 2022).

            Most commentators take the view that the Ukrainian response has taken the Russians by surprise. They thought Ukraine would not resist and that they would either make a deal with President Zelenskiy or install a pliable Ukrainian in his place. If that is the case, then not only have the Russians got bogged down in a costly war both in terms of arms and military personnel, but the Russian economy has been hit by Western sanctions, which in particular involve reducing its dependence on Russian energy. All of this suggests that Russia miscalculated the Western response to the invasion. It now seems likely that the West’s muted reaction to the events of 2014 and earlier to the invasion of Georgia in 2008 (Service, 2019) encouraged Putin to believe that there would be an equally muted reaction to the 2022 invasion. 1

            The Russian strategy of increasing the EU member states’ dependence on Russian oil and especially Russian gas supplies through the first the Nordstream 1 and then through the now suspended and unfinished Nordstream 2 gas pipelines, both of which bypass Ukraine to go to Germany via the North Sea, acted as a counterweight to NATO expansion and brought the economies of the EU and Russia closer. At the same time, it further undermined US hegemony in Europe as the Washington-London-Berlin axis was potentially replaced by a “Eurasian” axis of Paris-Berlin-Moscow-Beijing, especially after Brexit. The US and UK leadership on sanctions brought early tensions with EU member states and especially Germany and the countries of central Europe which heavily depended on energy supplies from Russia. However, the domination of NATO over the EU has brought most EU members into line. Gas supplies from Russia have dropped by around 60% as consuming countries have managed to source supplies from elsewhere including Liquid Natural Gas (LNG), the major exporters of which are Australia, Qatar, and increasingly the USA after lifting its ban on LNG exports (Albrizio et al., 2021; Lan et al., 2022). Russia could retaliate by shutting off supplies altogether. According to recent calculations this could result in a fall of up to 6% in GDP in some central and eastern European countries and substantial declines in others including Germany and Italy (Di Bella et al., 2022; Lan et al., 2022). However, the US has more than doubled its rate of LNG exports to Europe over the last year and is building more terminals to increase its export capacity (USEIA, 2022). US hegemony in Europe has been strengthened, extending further east and ending any possibility of a “Eurasian” project.

            The course of events since February 2022 has made it more difficult to make sense of the Russian strategy unless Putin and his circle assumed that there would be no reaction from NATO or they assumed that European dependence on Russian energy supplies would at least weaken European reaction. It is quite possible that Putin received poor intelligence advice (Davies & Steward, 2000) thus underestimating the Ukraine and NATO’s, and especially the US’s, will to respond. For the US and the UK, the war in Ukraine temporarily boosted the popularity of their governments and it may well have affected the results of the French elections, both increasing support for the incumbent president and limiting the support for his rival who was tarnished by her association with Putin (De la Baume, 2022). In Germany, the new government’s decision just after the invasion to send arms to Ukraine and increase its defence spending gained the approval of 80% of those surveyed, with a third of those saying the government had not gone far enough (Kinkartz, 2022).

            In Russia, opinion polling has suggested that Putin’s support increased from around 65% to well over 80% after the invasion of Ukraine as it did similarly after the annexation of Crimea. Even allowing for the unreliability of polling in Russia, where people may not want to say what they really think (even though a significant proportion declares itself critical of Putin’s government), these are significant changes (Statista, 2022). Even in Ukraine, the war boosted the popularity of its president. His approval rating in October 2021 halfway through his term of office, was 28% (Statista, 2021), much of that disapproval as a result of the government’s inability to deal with the powerful oligarchs 2 and associated state corruption as well as increasing poverty and inequality. In late February 2022 his approval rating had risen to 91% (Statista, 2022) and this high rating has appeared to have continued through the war.

            In sum, Russian actions since the end of the USSR suggest that their motivation has been to preserve what they could of Russian hegemony over the republics of the former Soviet Union. Their attempts to do so by interventions in former Soviet republics and by the repossession of Crimea have only served to undermine such hegemony and encourage these states to seek greater links with other countries. Meanwhile, the expansion of NATO into countries that were once dominated by the USSR as hegemon has emphasized Russia’s decline as a world power. The invasion of Ukraine can be viewed as an attempt to reverse that decline by making an example of one country as a message to those in and out of the CIS, CSTO, and EEA to get back in line. The fact that China has avoided condemnation of the Russian invasion suggests that they see a closer relationship with Russia being in their interests, especially given the stance taken by the US and its allies against China in its treatment of the Uighur minority. So Russian geopolitical motives for invading Ukraine may well have rational foundations. The next section takes a look at the possible economic motives for the invasion, first by comparing the two economies and secondly by examining what the Ukraine economy has to offer Russia.

            The Ukraine and Russian economies: a comparison

            While much attention has been directed to the possible ideological and geopolitical motives for the Russian invasion, there has not been much discussion on possible economic motives. There is good reason to consider that Russia might want to restore its previous control in the USSR over Ukraine’s heavy industry. Ukraine, especially the Donbass region in the east of the country, was an important USSR industrial centre, especially for heavy industry, with significant coal reserves, and a substantial manufacturing capacity in steel, armaments, helicopter engines, and rocket launchers. The population is well-educated and it has been argued that Russia would not have been a great power without Ukraine (Gessen, 2022). It was also a major producer of wheat, often called the “breadbasket of Europe”, as well as of sunflower oil (Dean, 2000: 94; Gessen, 2022). Before considering what the Ukraine economy holds for Russia, the rest of this section compares the two economies in terms of their income, their overall economic performance, their economic structure, their trade relations, and their financial obligations.

            Both Russian and Ukraine economies were concentrated on heavy industry based on mineral extraction and they both suffered from the Soviet-era emphasis on heavy industry with the consequent suppression of consumer manufacturing. Both economies have relatively low per capita incomes compared to their neighbours to the West, Ukraine being by far the poorest. In 1990 EU per capita income was 25% higher than that of Russia and over 40% higher than that of Ukraine with the gap slightly widening with both Russia and the EU after the financial crisis of the late 2000s. By 2021, the comparative figures were 26% and 66%. The gaps would have been greater had EU per capita income not fallen by 14% between 2019 and 2021 while per capita income in both Ukraine and Russia slightly rose during the same period.

            In the period since Ukraine and Russia separated, their economies have to some extent marched in step. The period immediately after the collapse of the USSR led to negative GDP growth in both countries until the end of the 1990s as a result of the liberal economic reforms which led to closures of uneconomic state enterprises or their privatization and restructuring, increases in unemployment, and a decline in investment. The 2000s saw relatively high growth rates in both countries and an upturn in investment until the global financial crisis of 2008–9. There was a recovery in both countries in the early 2010s until the events of 2014 (Maidan, the subsequent change of regime in Ukraine, the Russian annexation of Crimea and occupation of parts of Eastern Ukraine). A further recovery in growth rates was halted in 2020 because of COVID-19, but in 2021 there was a return to growth as COVID restrictions were relaxed. This recovery has now been reversed because of the war and also in the case of Russia because of sanctions. Although it is too early for reliable data to be available, the IMF (International Monetary Fund) first estimated that the Russian economy would decline by 8.5% in 2022 (IMF, 2022a), but by July it had reduced that decline to 6% (IMF, 2022b). The IMF latest estimate forecasts Russia’s GDP shrinking by 6% in 2022 (IMF, 2022a), while a World Bank study has forecast that Ukraine’s GDP will shrink by 45% in 2022 (World Bank, 2022).

            However, it is not clear how far sanctions are damaging the Russian economy. There are three principal reasons to believe that, although the Russian economy has been hit, it will still be able to sustain a costly war for some time to come. First, Russia has built up substantial reserves over the period when oil prices started to increase and even more so now they have increased to unprecedented heights. Secondly, Russia has been able to sell its oil at a discount to countries not signed up to sanctions, a lucrative business even at lower than the already high prices. Thirdly, although Russia has decreased gas supplies to Europe, it is still receiving payment now required in roubles, thus strengthening the currency. Paradoxically, in spite of sanctions against Russia, European countries’ dependence on Russian gas has them complaining about the fall in supply and they now anticipate major problems over the coming winter. At the time of writing, Nordstream 1 has been shut down because of an alleged oil leak, such action being regarded by Europe as the weaponizing of gas, although, ironically, because alternative sources are not yet available, the consumer countries cannot boycott this gas. The Russian calculation is very likely to assume that there will be no problem with continuing to earn substantial revenues from their natural resources despite the US-led boycott.

            However, there are others who believe that sanctions are resulting in Russia’s economic implosion (Sonnenfeld & Tian, 2022). They believe that those Russian reserves that have not been frozen by sanctions are rapidly being consumed to finance the war, that the decline in sales of gas have not been covered by an increase in discounted oil to countries that are not boycotting Russia, that the exodus of foreign companies has been accompanied by an exodus of highly qualified people, and that there has been a collapse in imports and in domestic trade that is severely damaging the economy and increasing unemployment. This attempted debunking of the myths that Russia’s economy is doing better than expected does not address the myriad of ways that Russia can get round sanctions, especially as many countries of the Global South, not to mention countries within the EU, have been lukewarm about the sanctions strategy (Sidiropoulos, 2022).

            The economic structures of both economies have also moved in step since the dissolution of the USSR. From economies dominated by their industrial sectors, they have developed into economies with a structure more in line with advanced capitalism, as their services sector has grown fast, making up for its low status in the state socialist period and their industrial sector (especially manufacturing) shrunk after the post-Soviet liberalization shock. In all economies manufacturing is the most dynamic economic sector as it generates, and quickly benefits from, rapid technological change, passing those benefits to other sectors. Both Russia and Ukraine, while within the USSR, had already developed substantial manufacturing sectors geared especially to the production of capital goods with a significant medium and high technology manufacturing capacity. While the shares of manufacturing in GDP have fallen sharply from around 40% to 10–15%, this is partly a result of the growth of the services sector in both countries during the post-Soviet period. The main difference between the two countries is that agricultural GDP in Ukraine at 10% of the total is almost three times that of Russia’s 3.7%).

            So there is now a remarkable degree of convergence between the two economies and this can also be seen by drilling down into the structure of manufacturing. The contribution to manufacturing GDP from medium and high technology, chemicals, machinery and transport equipment, and textiles and clothing in the two countries is very similar. The only substantial difference is that the share of food, beverages, and tobacco in Ukraine manufacturing is almost twice that of Russia’s, reflecting the relatively important share of agriculture in Ukraine’s GDP, noted above.

            Turning to the two countries’ economic relations with the rest of the world, Ukraine is a much more open economy than Russia, with the combined value of its imports and exports often exceeding the equivalent of 100% of its GDP, compared with Russia’s 50%. Levels of exports and imports relative to GDP are consequently much lower in Russia, which has maintained a trade surplus up until 2020, while Ukraine’s trade balance has fluctuated between surpluses and deficits over the same period. Over the last 25 years Russian exports have been dominated by oil and gas rising steadily to reach 70% of merchandise exports over 2011–2014 before falling back to the 40% level of the beginning of the period as a result of the sharp fall of around 70% in world oil and gas prices in 2014 . However, the war in Ukraine has raised prices back to their 2014 level and higher and so if Russia can reorient its energy exports to countries which are not boycotting its oil and gas, the Russian economy will receive a boost to its exports and its GDP. For Ukraine on the other hand, its main export was services, fluctuating between 30 and 40% of GDP, while over the last 25 years its food exports have risen rapidly from 15 to 45% to overtake both services and manufacturing as its most important export commodity. Russia’s services and manufactures exports have increased as a share of the total but as export revenues have remained stable or declined relative to low GDP growth, these increases are more the result of the declines in the export share of fuel than the absolute growth of the sectors themselves.

            Russia’s imports are dominated by manufactures which consume 80% of its total import bill. A quarter of those imports are Information and Communications Technology (ICT) goods. The highest proportion of Ukraine’s imports consists of manufactured goods, followed by fuel, but whereas in 2001 these shares stood at 40% each, by 2020, the share of manufactures was 70%, five times the share of fuel. The decline in the share of imports of fuel is largely the result of Ukraine’s investment in nuclear energy which before the war accounted for 50% of Ukraine’s electricity generation (IEA, 2021).

            Ukraine’s biggest trading partner has been China, which in 2020 took 13.8% of its exports and supplied 13.3 % of its imports. Other important trading partners have been Russia, Poland, and Germany (OEC, 2022). Ukraine also earned average annual transit fees of over US$2.5 billion in the five years to 2020 for Russian gas piped to Western Europe (equivalent to almost 5% of its annual export earnings). This fell by 25% in 2021 as Russia reduced the flow of gas (still above the level contracted between Russia’s Gazprom and Ukraine’s Naftogaz for 2020–24) through the many land pipelines that cross Ukraine. This move is widely viewed as retaliation for German suspension of Nordstream 2 as part of sanctions (Reuters, 2022). The operation of both Nordstream pipelines would have further reduced the amount of gas flowing through Ukraine and the revenue gained from the transit fees. Once both these pipelines became active, Ukraine’s revenue for transit fees was expected to fall to around $1.2 bn a year.

            Sanctions on Russia have in any case now led to a reduction in gas going through Ukraine, though it was still reported to be receiving payments from Russia up to late May 2022 (Reuters, 2022). There is a continuing dispute between Naftogaz and Gazprom regarding these payments as Naftogaz argues that it should be receiving payments for the minimum contracted amount of gas which is higher than the gas actually being supplied (Upstream, 2022). Further Russian threats to the gas supply have come after its insistence that accounts with Western consumer countries are settled in roubles. This policy has been seen as a means of strengthening the rouble against the US dollar and the euro. The rouble’s value against the dollar had been fairly stable until 2014 (c. ₽30/$) when it depreciated by over a half (₽80/$) in January 2015, fluctuated between ₽55 and ₽70/\(until 2018 when a slow depreciation rapidly accelerated after the invasion of Ukraine in February 2022 to ₽135/\) and then appreciated to around ₽55/$, a value not seen since late 2014. This recovery has been a consequence of the rapid rise in fuel prices caused by the war just as the depreciation of the rouble followed the fall in fuel prices in 2014. As noted above, at the time of writing Russia has reduced further its supply of gas, though Germany has claimed these so-called technical problems are a pretext to further pressurize the West to drop sanctions (Oberman, 2022).

            Finally, both Ukraine and Russia have considerable levels of debt to service, Ukraine more so than Russia. Russian debt service as a percentage of exports has risen from 8% in 1995 to 29% in 2020, peaking at 37% in 2016, while the comparable figures for Ukraine are 10%, 40%, peaking in 2015 at 84%. Russia has technically defaulted on its debt as a result of its payments to its creditors’ accounts being blocked as part of sanctions (Reuters, 2022). Ukraine has been given a year’s suspension of its debt service by a number of countries including the US, UK, France, and Germany (US Treasury, 2022). The bigger issue is private sector debt (loans and bonds issued abroad by Russian corporates) of $150 billion which is well above the sovereign debt of $20 billion. The possibility that corporates will be unable to borrow and have to reduce their scale of operations will adversely affect the Russian economy (Financial Times, 2022).

            The economic attraction of Ukraine

            Ironically, although Ukraine is both a conduit for Russian gas piped to Central and Western Europe, it has the second biggest known gas reserves in Europe. It also has some reserves of oil and produces a relatively small amount, around 34 barrels a day. Both these fuels were not exploited during the Soviet era when the reserves in Siberia were prioritized. However, these reserves are 3% of those of Russia, so that is hardly likely to be the reason for the Soviet invasion (Marcinek, 2022). However, Ukraine does have substantial reserves of other scarce resources in which not only Russia but the Global North could have an interest (Shehadi, 2022). Potentially, the most important of these is lithium. This earth metal is in increasing demand because of its use in batteries for the expanding electric vehicle market as many countries aim to phase out fuels contributing to global warming. Ukraine has potentially very large reserves of lithium oxide which could satisfy its own demand, the surplus being exported to Western Europe. The bulk of these reserves are in the Donbass region in areas is currently occupied by Russia or close to those areas (Muggah, 2022). In November 2021 an Australian company, European Lithium, claimed to be near to gaining the rights to reserves of lithium located in eastern and central Ukraine while China’s Chengxin Lithium is also seeking rights to some deposits (Fant, 2022).

            Ukraine is also rich in metallic minerals such as iron ore, manganese, titanium, gallium, germanium, all of which have many uses, especially in advanced electronic devices for which demand is high. Non-metallic metals are also found in Ukraine: kaolin, principally for the Italian ceramics industry, zirconium silicate, which has a range of uses from enamels and ceramics glazing to cosmetics, and graphite, which among multiple uses is, like lithium, a key component of batteries. Finally, Ukraine is well known as a coal and coking coal producer as well as producing some uranium (Ukraine Invest, 2022) which when enriched is used for nuclear power and weapons. As some observers have noted, much of this mineral wealth is to be found in the east of the country now under Russian control or over which Russia is aiming to get control. It is not at all clear that Russia needs these resources or has invaded to get control over them. They will however certainly be an advantageous side effect of a successful annexation of eastern Ukraine.

            There are other aspects of the Ukrainian economy that could be an attraction to Russia. The labor force is highly educated, especially in the more advanced areas of technology (Vakhitova & Coupe, 2014). There is considerable expertise in nuclear technology. Ukraine specializes in manufacturing rocket launchers. As a consequence of the war, however, it is likely that the better qualified Ukrainians will have left or will leave the country, thus denying their expertise to Russia. Russia also has a well-educated labor force and expertise in these areas, so once again any gains for Russia in these areas are a beneficial side-product of the war but not an adequate reason for the invasion.

            The state and the oligarchies: who has the power?

            Post-Soviet Russia has seen the emergence of two major forces from the chaos of liberalization. First, those associated with the security state under the Soviet regime and secondly, the oligarchs who amassed fortunes during the period of rapid liberalization through the corrupted privatization of state assets. After Putin’s rise to the presidency in 2000, some of the original winners from liberalization lost political influence and, in some cases left the country or were prosecuted and imprisoned. Putin had been a KGB (Committee for State Security) officer and was for a short time head of its successor the FSB (The Federal Security Service). Putin’s group of close associates, connected through the Ozero dacha cooperative which he was involved in forming, sought to take over the state apparatus to control the oligarchs and make them work for the economy rather than loot it (Service, 2019; Treisman, 2007).

            Secondly there are the oligarchs themselves who comprise some of the original billionaires of the 1990s and the ones, the siloviki (power agents) who in the 2000s used their security and military networks and connections to Putin to take control of privatized enterprises of oligarchs close to the former President Yeltsin (Treisman, 2007). The 2000s was a period which saw the biggest increase in the number and diversity of billionaires as they moved into “real estate, trade, chemicals and telecom” (Treisman, 2016). Some of these solivarchs are close to Putin but many are not. A third group, the outsiders, have been identified as those who are very rich but have no connection with Putin or the solivarchs (Markus, 2017). Several of the oligarchs close to Putin moved abroad and there have been suggestions, if not some evidence, that they have been used by Putin and his oligarch allies to finance political activities that support Putin’s international objectives, including support for the French right in the 2017 elections and for the successful Leave campaign in the UK’s 2016 referendum on membership of the EU (Service, 2019). There is now a great deal of evidence to suggest Russian involvement in financing various right-wing groups in Europe and the US (Datta, 2022).

            Putin’s strategy was to “establish a dynamic market economy … by strengthening the powers of central government” (Service, 2019:104). He “had no intention of renationalizing the economy. He understood the necessity of encouraging private enterprise if Russia was going to recover its position as a world power. But the business tycoons had to know their place.” Nevertheless, as Service notes, Putin “needs the ‘oligarchs’ just as much as they need him” (p. 110), although this has not prevented their elimination or detention when seen fit, presumably to show the others who has the ultimate power and discourage them from opposition inside or outside Russia. However, this symbiotic relationship of state and capital reinforced by the award of state contracts and the effective taxation of oligarch’s profits entrenches this relationship such that any oligarch opposition to the war in Ukraine is very muted or non-existent in public. Most oligarchs and their businesses will suffer from the Western sanctions, so that, as one analyst suggests, “new fault lines may emerge between a subset of the silovarchs who profit directly from the defense industry (and are therefore interested in a continued standoff with the West) and the rest of the business elites” (Markus, 2017). This faultline has yet to appear even though the sanctions have become tougher since the invasion in February 2022.

            Ukraine underwent a similar process of individuals enriching themselves through a corrupted privatization, coupled with a much more direct involvement in Ukrainian politics than was the case in Russia. The Ukrainian oligarchs’ source of wealth lay in rent-seeking activities and in particular in buying cheap Ukrainian gas and selling it on at Russian prices which were much higher. One of the richest of these oligarchs was former president Yanukovitch who presided over a kleptocratic regime and whose family enriched itself through state contracts and blatant theft (Aslund, 2014). The Ukrainian parliament was populated with millionaires who had in essence bought their seats by big spending on election campaigns. As Aslund puts it:

            The fundamental insight is that corruption pervades not only Ukraine’s economy but also its politics, and this corruption depends only marginally on who is in power. The current system will allow no one to come to power who is not prepared to play the old corrupt game. When there is a change at the top, weary Ukrainians ask not whether corruption will decline, but rather who will benefit the most from it under the new rule. (2014: 68)

            The failure of successive Presidents, most recently Zelenskiy, to get a grip on corruption led to increasing popular discontent with Ukraine’s political rulers. Ukraine’s plutocrats were able to influence competing political parties by ensuring financial connections with those, of whatever political persuasion and policy intent, likely to form the government: “oligarchs do not expire – Politicians do” (Markus & Charnysh, 2017: 1660). As suggested earlier, this discontent has dissipated with the Russian invasion and the defiant resistance led by Zelenskiy and his government. It is reported that the oligarchs have fallen into line behind the regime, unlike in 2014. Then, the oligarchs were split. Some,

            in Kharkiv and Dnipropetrovsk sided with Kyiv and helped those regions avoid a successful separatist uprising. But oligarchs in Donetsk and Luhansk abandoned the area – or went along with the pro-Russian protests to extract concessions from Kyiv. Their actions enabled the separatists and helped pave the way for the subsequent Russian intervention in those regions. (Nitsova, 2022)

            Now, the oligarchs are united behind the government and cooperating with each other in the face of losing their assets. If Russia took over Ukraine by force, its oligarchs could expect to have their assets expropriated as happened in Crimea and in the Russian occupied areas of eastern Ukraine. The Russian silovarchs would seize the opportunity to build up their wealth by appropriating Ukrainian oligarchs’ corporates, especially in the rest of the east of the country. As the most important of these are in the extractive sector, mergers with the related Russian corporations would be a logical next step in the latter’s growth and domination of both economies – a strong motivation for them to support the Russian invasion. Even in the unlikely event that Ukraine had agreed to a peaceful takeover by Russia, the more powerful Russian oligarchs would have taken over the less wealthy Ukrainians’ enterprises, as they had done in Russia with the less powerful oligarchs there, as well as those that had fallen out of political favor. The Ukrainian oligarchs’ continuing links to political office protect their wealth: opposition to the Russian invasion is in their best interests.

            In addition, their united support for the Ukraine government means that the question of dealing with corruption and the oligarchs’ role in milking the state is now on the back burner in spite of the anti-oligarch law passed in 2019. This law 3 is designed to rein in the political activities and influence of oligarchs by making them register their assets, prohibiting them from financing political parties, from holding public office, and from privatizing public assets. State officials who deal with the oligarch’s corporates have to declare their interest. The National Security and Defence Council (NSDC) is designated the watchdog authority. There is considerable doubt as to whether this legislation will be enough to reduce oligarch influence in politics. It does give more power to the President, but he also has oligarch links that financed his election campaign and the NSDC reports to him. There is no legislation dealing with monopolies or with reforming the judiciary so laws are adequately enforced and breaches punished. An indication of how far the government is still beholden to business in general is the recent announcement of a liberalization of the labor market to allow for such “free-market” devices as zero-hours contracts and exemption of small and medium sized companies from the labor code which safeguards their employment rights. Both of these bills reference EU law and liberalized markets as a justification for them (President of Ukraine, 2021; Dzamukashvili, 2021; Rowley & Guz, 2022).


            This article has sought to understand the Russian invasion through an economic as well as an ideological lens. In so doing it has considered Putin’s stated reasons for invading Ukraine as they concern Russia and its place in the world. It has then examined the economic dimension to the war in Ukraine and in particular compared the economies of the two countries and the potential attractiveness to Russia of Ukraine’s mineral resources. It seems very unlikely that the invasion has economic reasons behind it although it may have economic benefits, if successful, both to the Russian economy and to the oligarchs who underpin it both politically and economically. Furthermore, the security network that has gained state power in Russia together with the mutually dependent billionaire business class do not appear to have significant divisions that could undermine Putin’s military adventure. Indeed, it would appear that the interests of this state capitalist class lie in supporting Putin’s objective of a greater Russia as a world power to rival the US and challenge its hegemony over much of the world. This does not suggest that there will be a swift end to this war.



            It would not be the first time that the US and its allies have sent mixed signals to putative invaders. Both General Galtieri and Saddam Hussein were led to believe that annexing the Falkland Islands and Kuwait respectively would not induce a reaction from the UK or the US.


            An oligarch is technically one of a small group of very rich individuals that constitute a governing “oligarchy”, meaning rule by the few. Post-Soviet “oligarchs” are extremely wealthy billionaires who like their counterparts in the “West” are more accurately termed “plutocrats”. Some have been involved in government as presidents of the country or legislators for example. “Oligarch” in this article refers to all the plutocrats whether in government, close to government, or outside these connections, as this is the meaning now in common use.


            Law No. 1780-IX On Prevention of Threats to National Security Related to Excessive Influence of Persons Who Have Significant Economic and Political Weight in Public Life (Oligarchs) (President of Ukraine, 2021).


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            Author and article information

            Journal of Global Faultlines
            Pluto Journals
            13 February 2023
            : 9
            : 2
            : 198-211
            Author notes
            [* ]Peter Lawrence is Emeritus Professor of Development Economics in Keele University.

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            Pages: 14

            Social & Behavioral Sciences


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