Western resolve continues to hold, resisting Putin’s pressure
Over the course of 2023, investment and demand will improve in the western part of Ukraine as well as in Kyiv, as the war and Russian missile attacks get more relegated to the eastern half of the country. Western aid will help sustain public incomes and some private demand, though it will be inadequate to forestall another depreciation of the hryvnia in early 2023 and high inflation from energy, food, and goods shortages.
Overview
- The EU approved plans to provide an EUR 18 billion aid package for Ukraine in 2023 after Hungary dropped its opposition in return for EU funding
- The US is set to approve a nearly US$ 38 billion aid package this week, with support from both Democrats and Republicans.
- The US approved a record US$ 858 billion defense budget bill, US$ 45 billion more than requested by Biden, with billions earmarked for Ukraine.
- Ukraine has estimated its financial needs for 2023 to be a total of at least US$ 55 billion, with US$ 38 billion needed for the budget and another US$ 17 billion for reconstruction costs.
Our View
The Kremlin will struggle to break Western resolve in aiding Ukraine for at least another year, as all budgetary needs and much of the defensive support—which has increased dramatically in both volume and technological sophistication in recent months—look set to be confirmed for the coming year. Ultimately, this war of attrition, like all others, will be decided by the side with greater resource capacity, and as the West has continued to prove and even increase its support consistently, problems will accrue for Russia in sustaining the fight when competing with the entire industrial capacity of the Western world.
In terms of defensive aid, with the US providing the overwhelming majority of the support, the amount of money devoted to Ukraine is only 1–2% of total US defense spending next year, effectively a rounding error in terms of spending for the Pentagon. Regarding budgetary and reconstruction support, the total required funding is likely to exceed Ukraine’s earlier rough estimates of ~US$ 55 billion, though the additional billions required will be entirely affordable to the Western world. By comparison, Germany alone recently devoted ~US$ 200 billion to cover rising energy costs—a few billion extra by all Western governments over the course of the year is financially feasible, though potentially politically unpalatable.
Moreover, related to defense, both sides are struggling with munitions shortages. Neither side can keep up the pace of artillery shelling for the next several months, as stockpiles dwindle and new artillery and missile production fails to keep up with usage. This has become evident in the slowdown in the artillery shelling in the east and also Russia’s missile strikes in December, which were only about half the amount launched in October and November. Production capacity will be tested next year, though the combined total support from the West has a far lower opportunity cost than it does for Russia, while the weaponry is also far more sophisticated.
Realistically, additional budgetary support, as well as more general reconstruction costs to infrastructure across the country, will likely be needed over the course of 2023. To overcome the political toxicity of diverting money from Western nations in economic depressions, MNCs should monitor the rising likelihood of the West finding the legal avenue to unfreeze Russia’s over US$ 300 billion in FX reserves sanctioned immediately after the invasion in late February, confiscate the money, and provide the funds to Ukraine. Following support from Washington DC, as well as several Central European EU members and Ukraine, European Commission President Ursula von der Leyen likewise recently supported such a measure. Should this occur, Russia would struggle to ever win this war of attrition via resource and moral depletion and instead would be incentivized to pursue alternative routes to break Western resolve, e.g., cutting oil and gas exports to drive up prices dramatically.
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