An Alternative for Reparations
The sanctions on oil can be the source of reparations; the seizing of Russian assets will fall short
Revised 24 March 2023
An Efficient Alternative for Reparations in Ukraine
Reconstruction of Ukraine depends on securing financial resources, but also delivering those resources as early as possible in a form that promotes strong economic fundamentals. Reparations from Russia is one very logical source. The current concepts for reparations seem to be limited to one — Seize Russian assets that have been frozen in the West and transfer them to Ukraine. While many international experts believe this can be done, Putin’s evasion and uncharted legal waters cloud its prospects.
Alternatively, Ukraine could accept reparations in the form of physical oil and gas. Release of frozen assets might serve to coerce compliance with this form of reparations. Motivation for Russia also follows from access to world oil markets — effective motivation, as the Kremlin’s reaction to the oil price cap has shown.
For purposes of strengthening the hryvnia and balancing Ukraine’s trading account, this also works. Presuming pricing of the physical oil and gas in hryvnias, it immediately produces a very valuable export commodity. I outline the rationale for this concept in the short piece below, which is also available online at An Alternative for Reparations.
I am a retired economist living in Seattle USA. I have no unique expertise in Ukraine or the technical aspects of this subject, but I don’t believe that is required. The logic is straightforward, and a fatal flaw is not apparent. It baffles me that the idea did not arise spontaneously everywhere. I submit it for your consideration and use, and would be very interested in any response.
Respectfully,
Alan Harvey
----------
Alternative Design for Reparations from Russia
Alan Harvey
17 January 2023
World War I and the Treaty of Versailles are the most analogous to today’s situation. Peace terms were imposed on Germany that bankrupted the country and devastated its domestic economy. The lesson was well learned, and following Germany’s defeat in WW2, which is remembered for the Marshall Plan, not the reparations.
The current war will end leaving different conditions than either world war. Russia will not be conquered as a territory; the boots of a foreign army may never step on Russian soil. It is also different in that the Russians have a ready wealth of petroleum. Whereas the Germans also had mineral wealth, it was needed for domestic production. When the Allied powers demanded both monetary damages and the means to generate money, it was an impossible situation, as detailed in John Maynard Keynes The Economic Consequences of the Peace, written at the time.
These assumptions are offered as self-evident:
● Russia will resist any payments, so the ability to coerce payment is key.
● A stable Russian economy is essential for a successful long-term peace.
● The costs of rebuilding Ukraine will be enormous, and a reparations regime needs to be large and timely.
● Ukraine’s exterior debt is also enormous, and largely denominated in euros or dollars.
● Repayment of the debt may bring Ukraine’s external pressure on Ukraine’s domestic policy. This pressure may be from creditors which do not have a history of practical success with their contract partners, e.g., the IMF.
● Ukraine’s domestic industrial base, aside from agriculture, will best be focused on domestic reconstruction.
● Ukraine’s economy will be ripe for inflation and a weakening of its currency.
● Currency weakness has the effect of increasing the burden of debt not denominated in that currency and of making imports more expensive.
● A stronger currency would reduce the costs of imports and the effective burden of debt, as well as the leverage of external actors.
These assumptions, and the history of reparations and the common knowledge that strong exports are the base of a strong currency, lead directly to the use of physical oil and gas.
Interjecting here, it is not necessary for this design, but Ukraine has extensive infrastructure to handle physical oil and gas. "Ukrainian pipelines have the capacity to deliver 146 billion cubic meters of gas per year to Europe — nearly 1.5 times the total volume of Nord Stream 1 and 2 combined." But physical possession is not needed for ownership and control.
In the simplest form of this reparations design, Russian petroleum products would be transferred directly to Ukraine on a negotiated schedule. Ukraine would then sell the oil, priced in hryvnias, on the world market. Russia would receive an amount to cover transshipment costs plus an amount to be negotiated as inducement. Assets of Russia and Russians that are currently frozen in the West, could be released in proportion to and parallel with the transfer of oil and gas to Ukraine. This would be a very effective and minimally litigious use of those assets. A reparations compliance authority would keep track of performance, proceeds and terms.
The Kremlin initially rejected the oil price cap in 2022, but subsequently complied, suggesting a similar reaction might be expected to this program. The cap itself could be modified to further encourage Russian acceptance of this form of reparations. Putin’s spin might even eliminate the word “reparations” while accepting the specifics of the arrangement.
It is important for a lasting peace that Russia be fully able to pay without diverting critical resources from its own domestic economy. This was not the case for Germany following WWI, when, as above, reparations led directly to economic and social dysfunction, and then more or less directly to the rise of Hitler. But notice also that targeting the petroleum sector directly targets the power elite. Gazprom hierarchy is congruent with the elite of the Russian kleptocracy. It may well be that this power elite does not survive the conditions which lead to the negotiations for reparations, but either way, losing substantial amounts of petroleum need not substantially affect other Russian business. A viable economy would short-circuit a lot of problems in an otherwise embittered, impoverished country.
Again, the receipt and possession of physical oil and gas would enable Ukraine to strengthen its currency by enabling the nation to balance its trade. That is, it gives Ukraine an export commodity to complement Agriculture. Ukraine could avoid the fate of countries, including some in the EU, which could not. [For reasons beyond the scope here, Ukraine would be wise to avoid adopting the euro even as it enters the EU. But that decision is still far in the future, and for the present Ukraine has no choice but to try to support the hryvnia.]
It is not too far into the weeds to imagine a Reparations Authority (or “cooperative export facility” in Russian) tasked with managing the transfer. This may be an area for oil companies that abandoned the Russian market after the invasion of Ukraine to return. Simultaneously, companies (such as Koch Industries) which remained in Russia and abetted its war economy could be excluded from participation.
Note about context:
Any reparations made to Ukraine will be received AFTER Russia’s defeat, hence not in a time of war when popular and political support both internal to Ukraine and internationally are at their height. The regime suggested here materially affects many powerful actors, and they will act in their own self-interests. Ukraine must ruthlessly pursue its own understanding of the economics and not passively accept the “expert” advice of its partners; it must actively assert its own national interest. For the benefit of democracy and civil society everywhere, Ukraine must win this peace and establish as strong an example for the world as possible.
Technical note:
Ukraine currently operates a fixed peg of the hryvnia to the US dollar, UAH/USD 36.5686. Although it is premature to abandon this regime any time soon, the move to a floating exchange rate should be made at the earliest opportunity. Plenty of distortions become dangerous if kept in place too long. Getting the fundamentals in place early on will save a lot of grief in high import prices and onerous debt burdens, for both the business and government sectors.
#
“To get its gas to Europe, Russia still relies on Ukrainian pipelines,” Coffee or Die Magazine, October 5, 2022, Nolan Peterson, retrieved 17 January 2023, https://www.coffeeordie.com/russia-relies-on-ukrainian-pipelines.