There is a discussion these days about the likely cost of reconstructing Ukraine’s infrastructure and housing stock once the war is over.  In a fair world, Russia would have to pick up the bill, Dieter Wermuth writes in an essay on finews.first.

This article is published on finews.first, a forum for authors specializing in economic and financial topics.

Estimates vary widely, with a maximum of up to 1,000 billion euros. This is significantly more than the country’s pre-war GDP (2021: 168 billion euros) but will of course not be spent all at once.

In a fair world, Russia would have to pick up the bill because it has started the invasion for no plausible reason and without being provoked. It is responsible for the destruction and for thousands of civilian and military casualties. Since Russia cannot be defeated by Ukraine, it will refuse to pay for the damage, at least for the moment.

«Almost no other country exports so much capital lives so far below its means and has so many reserves»

From a financial point of view, this would actually be no problem at all because Russia’s net foreign assets are very large and have also increased a lot since last year’s take-off of global energy prices and the economic sanctions imposed by the West over the past three months – which have led to a decline of Russian imports.

In its spring forecast, the EU Commission has forecast that Russia’s 2022 balance on the current account will show a surplus of no less than 13.7 percent of its nominal GDP. The surplus is the equivalent of an increase in its net foreign assets. Almost no other country holds, relative to its GDP, so much foreign wealth. Almost no other country exports so much capital lives so far below its means and has so many reserves.

«Nato’s GDP is about 25 times larger than that of Russia»

If the economic sanctions against Russia and its governing class can be maintained for a few more quarters, and if everybody in the West fully sticks to what has been agreed, it may be possible to force Russia to pay up. We are dealing with a small and poor commodity economy that depends much more on the West than vice versa.

Nato’s GDP is about 25 times larger than that of Russia, while the EU on its own is nine times bigger. No one needs to be afraid that a cut-off of Russian oil and gas supplies would be a catastrophe: the world energy market is large, flexible and full of alternatives.

Should there be an all-out arms race once again, there is no doubt who is going to win. For Russia, it would mean a dramatic and politically risky reduction of its standard of living which, at a third of EU levels on the basis of GDP per capita, is very low already – and unevenly distributed.

«The longer the war lasts the more will sanctions bite»

Things are already deteriorating very fast. The EU Commission predicts that Russia’s real GDP will be 10.5 percent lower this year than in 2021 while consumer prices will be up more than 20 percent. It starts to hurt.

In the end, Russia will probably be forced to make more concessions than it presently seems to expect. In all likelihood, these include the full troop withdrawal from Ukraine as well as reparations for war damages. Russia’s foreign assets are de facto under the control of the West and can be frozen anytime.

The longer the war lasts the more will sanctions bite. Sadly, this means yet more destruction and thousands of more deaths, before it is all over.

Dieter Wermuth is an economist and a partner at Wermuth Asset Management (WAM). The firm is a family office that also acts as a Bafin-regulated investment consultant. The company specializes in climate impact investments across all asset classes. Jochen Wermuth founded WAM in 1999. He is a German climate impact investor who served on the steering committee of Europeans for Divest Invest. He is also a member of the investment strategy committee for the 24 billion euros German Sovereign Wealth Fund (KENFO).

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