The financial costs of pushing back against Russian aggression in Ukraine are high, but entirely manageable given the size of Western economies. Failure to act would leave Europe at risk of further Russian expansion, attack and economic blackmail, ultimately costing the West much more over the long term.
Fallacy
Vladimir Putin’s war in Ukraine, and indirectly on the West, is imposing a huge financial cost on Ukraine, the West and indeed the global economy. A common misconception stemming from this situation is that the West simply cannot afford the financial burden of continuing to help Ukraine, given other economic priorities, and that the best way to end tensions with Russia is to return to the pre-war status quo of economic interdependency. Only then, this argument goes, will Russia have an interest in de-escalation.
Analysis
Western budgetary support for Ukraine since February 2022 has totalled around $46 billion, while military assistance is estimated to have cost around $50 billion thus far. Putin’s restrictions on energy trade in response to Western support for Ukraine are estimated to have reduced GDP growth in the EU by around 1 percentage point in 2022 (equivalent to a €200 billion loss) and forced multiple European countries (namely EU members, the UK and Norway) to announce energy relief measures to the tune of $800 billion. The war has also boosted inflation across the euro area by between 5 and 6 percentage points. In response to Russia’s invasion, defence spending in NATO countries is now set to increase from an average of around 1.5 per cent of GDP to 2–2.5 per cent of GDP, equivalent to an additional $375 billion of recurring costs.
Taken together, these sums are huge, but there is no credible alternative to increased spending for the West. No scenario can simply set the clock back to 23 February 2022. European security has been fundamentally weakened because of Russia’s aggression, and the West must adjust accordingly. This means putting its security at the fore when it comes to economic choices.
Through its full-scale invasion of Ukraine, Russia has surely proven its aggressive intent towards the West. If it is not stopped in Ukraine, there is a credible risk of further Russian expansion into Europe. Restoring economic relations with Russia would only assist Moscow in swiftly rebuilding its military forces. If this then leads to Russia defeating Ukraine and extending its reach into Poland, the West would have to spend much more on defending its borders, but from a greatly weakened position and with Russia in the ascendancy.
NATO’s best strategy is forward defence by stopping Russia in Ukraine now. This is also the cheapest option.
Conversely, the rationale for the West holding firm in resisting Russia is boosted by the greater relative economic impact on Russia of continuing the war. Current economic constraints on the country mean that replacing conventional military capacity lost in Ukraine will entail difficult choices to be made in other areas of state spending – a classic ‘guns versus butter’ dilemma. This in turn has the potential to create new political and social fissures in Russia, perhaps even opening opportunities for political change, to the West’s – and Russia’s own – long-term benefit.
NATO’s best strategy is forward defence by stopping Russia in Ukraine now. This is also the cheapest option. In fact, the sums currently being spent to help Ukraine defend itself – and, by extension, to protect the security of the West – remain relatively small in the context of overall NATO financial commitments. At around $96 billion to date, the combined defence spending and budgetary support for Ukraine thus far represents just 0.2 per cent of the GDP of the Western alliance working in support of Ukraine, with the defence component equivalent to around 4 per cent of defence spending in these countries. That represents a phenomenal return on investment if estimates are correct that around half of Russia’s conventional military capability has thus far been destroyed in Ukraine.
In response to the idea that the West is still spending too much, it is also important to note that the economic impacts of the war – in terms of depressing European growth and prompting the launch of energy adjustment measures – represent costs that are locked in and cannot be recovered. Partly these sunk costs are the result of past policy failures in not taking the threat from Russia seriously, a mistake Europe cannot afford to make again.
The way forward
The West needs to reduce its economic dependency on Russia, and thereby limit the latter’s ability to use economic blackmail as a tool of statecraft. Cutting Russia out of supply chains will, as the recent oil price cap introduced by the G7, the EU and Australia has shown, limit Russia’s pricing power on international markets. This will restrict the financial resources available to Russia to rebuild its military capacity – which, unless checked now, will likely be used against the West in the future.
The West needs to reduce its economic dependency on Russia, and thereby limit the latter’s ability to use economic blackmail as a tool of statecraft.
Russia has demonstrated that it is an unreliable energy partner, and Europe cannot credibly return to the status quo that prevailed before the invasion by simply turning Russian energy taps back on once the war is over. Europe has now to ensure its energy security by diversifying supplies away from Russian energy and accelerating the low-carbon transition. Much of the $800 billion in energy support allocated by European countries consists of investment needed for that adjustment – and investment in energy security will also help revive European growth.
Ensuring the defence of Ukraine in this war, and Ukraine’s successful post-war reconstruction to make it economically self-sufficient in defence, is the best investment the West can make in its own security, and thereby the best way to reduce defence spending over the longer term.