THE COST OF WAR

Introduction. Research Methodology

Regardless of its scale, war is a catastrophe for the Ukrainian state and society; immeasurable grief for ordinary people. The formation of a negative international image, a deep economic crisis, falling social standards, irreparable human losses, forced migration, and emigration cause rapid political and socio-economic changes, give rise to destructive social moods and leave a psychological imprint on the consciousness of many generations. Of course, not all of these consequences can be assessed by economic categories. Still, their identification, description, structuring, and detailing, in our opinion, allow us to fully answer the question: “What is the cost of war?” We recognize the shortcomings of this study and the methods it uses, but we believe that its systemic value outweighs the likely errors.

The main goal of our almost two years of work is to assess the losses Ukraine suffered due to territorial losses and the war in the East of Ukraine. The work has been prepared for further use by authorities, international organizations, public platforms for the implementation of reintegration and restoration of the territories of the Donetsk and Luhansk regions, and the improvement of state policies in general. The paper also attempts to assess in actual numbers the consequences of the state policy of Ukraine in connection with the events in the Donbas.

To determine the significant losses of the state and society as a result of hostilities and the separation of the territories of some areas of the Donetsk and Luhansk regions (ORDLO) and the Autonomous Republic of Crimea, we mainly relied on official data from the State Statistics Service, as well as government ministries and departments. The study used the method of comparative analysis of changes in the following aspects: loss of territories, the decline in production, reduction in the domestic resource base, the decline in living standards, reduction in tax revenues to the budget, spending on the country's defense, an increase in the number of unemployed and the level of crime, a decrease in the country's export potential, reduction of the competitiveness of the Ukrainian transport system and other indicators.

When assessing the value of human lives, the Ukrainian Institute of Politics (UIP) used the RAND Corp. calculation method based on statistics from the Los Angeles Police Department and the FBI. We have extrapolated American figures to Ukrainian realities, taking into account the difference between Gross Domestic Product (GDP) and Purchasing Power Parity.

An approximate calculation of bills for housing and communal services for the population of Ukraine was made taking into account the reduction in the population size and housing stock since 2014, based on the data of the State Statistics Service, as well as the ratio of the urban and rural population as 69% to 31%, respectively. When calculating water bills, the Ukrainian Institute of Politics (UIP) took the water consumption rate for the population in Ukraine per person into account: 4.5 cubic meters of cold water per month and three cubic meters of hot water per month.

We cannot correctly assess the losses associated with the exclusion from the Ukrainian economy of the residents of ORDLO and the Autonomous Republic of Crimea and refugees. We should bear in mind that our study indicates only a part of the losses of the state and society, and the indicators of losses for the country that we have determined increase over time. Since the lost national resources continue to be blocked and exploited by other entities, state budgets and companies do not receive the profit they are entitled to and incur corresponding losses.

When we talk about the losses of Ukraine from the war in Donbas, it must be taken into account that in the period 2014-2019, the global economy continued to grow, growing by 13% over this period. While Ukraine's GDP has declined significantly, in 2019, it was only 94.1% of the 2013 level.

At the same time, we are aware that not everything that happened after the start of the war and annexation occurred due to them. Therefore, throughout the work, we tried to take a responsible and reasonable approach to the choice of assessment objects and operate with actual data.

In any case, the study's authors do not consider this work an accurate calculation of losses and do not claim absolute reliability. This study is an expert assessment and an attempt to review the whole range of socio-economic and state-legal losses and consequences that Ukraine has suffered due to the war in the east and the illegal annexation of the Autonomous Republic of Crimea.

We invite you to dialogue and will be happy to answer your questions by phone: +380637893257; e-mail: uiamp2012@gmail.com. 

The authors would like to express special gratitude to expert economists, human rights activists, and journalists, including Natalya Mirimanova, Enrique Menendez, Marina Cherenkova, Viktor Suslov, Viktor Skarshevsky, and others. Thank you, colleagues! Thanks to your advice and recommendations, this work has become much more profound and better.

Main conclusions
 

Due to the warfare-related losses in Donbas, the annexation of Crimea, and occupation of the parts of Donetsk and Luhansk regions by the “LDNR” separatists, Ukraine lost nearly 15% of its population that decided to keep on living in the uncontrolled territory, and 7% of the territory suffered irreparable human losses as a result of the death of people, the occurrence of the waves of refugees and amplification of the labor emigration, the appearance of enormous quantities internally displaced persons. Ukraine experienced an increased burden on the state’s social support system. At the same time, defense spending went up while economic activity went down.

Ukraine lost control over 1.6 million hectares of land, the cost of which can be valued at more than $2 billion. At least 12-13 more billion dollars were lost due to the so-called "nationalization" of the Ukrainian enterprises in the "LDNR.” Ukraine experienced a production recession and the reduction of internal resources such as raw materials, fuel, and other energy resources.

Tax revenues to the budgets of the country at all levels are decreasing. In 2015, nominal GDP in dollar terms decreased by almost 50%, compared with the 2013 year.

Due to the sharp devaluation of the national currency hryvnia and the growth of utility bills, the real incomes of citizens have significantly decreased compared to the 2013 year. Also, purchasing power falls and substantially deteriorates the level of life of the overwhelming majority of residents of the country.

Because of shutdowns, many industrial enterprises reduced their business activity while unemployment and crime rates went up. Social tension has risen significantly, causing growing protest sentiments within society.

The export potential of the country also shrinks. The competitiveness of Ukrainian transport systems decreases, meaning the rapid loss of the transit potential. Nord Stream 2 can deprive Ukraine of the most crucial role as the primary country enabling natural gas transit from Russia to Europe.

Ukraine overcomes the transformation of the economic relations with Russia and other post-Soviet countries. There is accelerating destruction of the well-established bilateral financial connections that existed for decades, causing additional damage to the Ukrainian economy.

Ukrainian society and the state itself have changed as well. After 2014 the geopolitical orientation of Ukraine has changed clearly toward the West: the Constitution and the laws of Ukraine were updated in terms of losing the non-bloc status of the country and proclaiming the intention of becoming a member of the EU and NATO.

Russia and Ukraine introduced a row of political, information, and trade sanctions against each other, which worsened interstate connections and negatively influenced the export-import relationship.

Ukraine has signed several loan agreements with the IMF, the EU, the United States, and other creditors, which led to an increase in external debt. Under the influence of Western partners, Ukraine launched many unsuccessful liberal reforms in many sectors such as public administration and socio-economic politicians, which often led to the deterioration of the social standing of citizens.

The political balance in Ukraine has also been deformed. The famous left and center-left parties have been accused of participating or facilitating separatism. At the same time, this situation is directly at odds with Ukrainians’ actual political preferences. Russian language and other languages national minorities were expelled from public space usage. The authorities started large-scale (not supported society) revisions of the history of Ukraine; the state intervened in religious processes in the country. The authorities attempted to form a new state ideology by relying on the right-spectrum political movement.

As of 2021, Ukrainian society is segmented in many different ways and experiencing a growing aggressive apathy. At the same time, there is a large-scale confrontation inside the political class with the inclination of concentrating as much political power in one hand as possible. Simultaneously, there is a trend on the growing external influence, the image of the enemy, and unresolved military conflict.

The media field in Ukraine has changed drastically. There are not enough efforts on peaceful settlement and reintegration of the ORDLO territories. The media became more propagandistic, simultaneously self-censored. The editorial teams and owners of the media experienced higher pressures on what content they should broadcast.

More people started supporting the idea of “building the wall” with Donbas. Nevertheless, in Ukrainian society, there is a massive demand for peace. And as we have seen in this study, economically, politically, socially, and strategically the peace is profitable to Ukraine. The main point is that it is hard to build a sovereign, democratic and prosperous state without returning ORDLO.

Estimated losses of the state, society, and national economy of Ukraine can be broken down into several groups:

1. Human resources:

   1. a General number of citizens in Ukraine remaining in the uncontrolled territories is approximately 5.68 million people. Nearly 3 million of these citizens have already received Russian citizenship. Loss from the non-participation of these people in the socio-economic life of Ukraine is hard to calculate. Still, we are talking about tens (and probably hundreds) of billions of US dollars.

   2. The total number of hostilities victims in the Donbas from 14 April 2014 to June 30, 2021, is 42.5-44.5 thousand people. Among them: 13200-13400 dead (at least 3901 civilians, about 4200 Ukrainian military, and about 5800 armed groups); 29600-33600 wounded (7000-9000 civilians, 9800-10800 Ukrainian army, and 12800-13800 armed groups). Only straight human losses due to death of people can be estimated to be worth $2.3 billion with taking into account missing without a trace and wounded - in more than $3 billion (using RAND method Corp., which relies on the statistics of the Police Department of Los Angeles and FBI in 2010).

   3. Losses due to the emergence of a wave of refugees and the increasing scale of labor emigration could not be objectively calculated. After the start of military operations in the Donbas, only officially the number of labor migrants increased from 500 thousand up to 1.3 million people.

Ukraine witnessed many internally displaced people forced to leave their permanent residence property and move to other regions. As of July 6, 2021, 1,473,650 IDPs were officially registered in Ukraine; the quality of life of these people significantly deteriorated.

2. Resource-based economy (assets):

   1. As a result of hostilities and separatization of ORDLO, Ukraine lost control of 1.6 million hectares of land, the cost of which we can estimate in more than 2 billion dollars. (After the annexation of Crimea, Ukraine lost 1.4 million hectares of land worth 1.8 billion dollars).

   2. Considering that the total cost of minerals on the territory of Ukraine is estimated at 3-8 trillion US dollars, their losses in the temporarily uncontrolled part of Donbas (coal, ore, and other raw material) can be estimated in sum from $200 billion.

3. Losses of enterprises:

   1. Estimated cost of "nationalized" Ukrainian companies in the self-proclaimed "DPR" alone cost more than $9.5 billion with taking into account "LNR,” on approximate estimates worth $12-13 billion.

   2. In 2013-2021, the number of state-owned enterprises decreased by 300 units (-8%). The number of active/working enterprises decreased by 740 units (-35%), the number of profitable enterprises decreased by 654 units (-40%). 167 state-owned enterprises are in the annexed Crimea and uncontrolled parts of Donbas.

4. General economic losses of Ukraine:

   1. In 2014, due to the loss of Crimea, parts of Donetsk and Luhansk regions GDP of Ukraine in percentage ratio straightaway lost 8.5% of its profitable parts (-3.2% in Donetsk areas, -1.6% in Luhansk areas, -3.0% from losses Crimea and -0.7% from the loss of Sevastopol).

   2. In 2015, nominal GDP in dollar terms decreased by 49.4% compared to 2013. Further, the size of GDP gradually began to grow, but even in 2020, it did not reach the indicators of the 2013 year in dollar terms, amounting to 71.4% of GDP in 2013. Over 2014-2020, Ukraine's nominal GDP fell by $33.6 billion. Considering possible growth, compared with the indicators of 2013, GDP Ukraine before 2020 lost nearly $208 billion. Here included: decline in business activity, emigration of capital, the decline in production in key sectors of the economy, economic assets, banking losses systems, degradation export opportunities of Ukraine, destruction of the infrastructure.

   3. From 12/31/2013 to 08/31/2021, the hryvnia depreciated by 3.4 times.

   4. At the end of the budgetary period of 2014, it is possible to state the reduction of the profitable part of the state budget by 30% and spending by 29%. By the end of 2020, we can observe some increased income and expenditure parts, which, however, did not reach the level of 2013 and stopped at 94-95%. Besides, despite the significant reduction of consumable parts in dollar equivalent, we can state a constant increase in the total amount of public debt. By 2021, it amounted to 124% of the indicator in 2013. Military actions may explain the situation, the depreciation of the hryvnia, and the loss of many enterprises that remained on the territory of ORDLO, which before brought profit to the Ukrainian budget.

   5. By the results of 2014, tax revenues fell 1.3 times (by the $7.4 billion) to the budget of Ukraine. According to the state tax service of Ukraine, due to loss of control over ORDLO from 2014 to 2021 Ukrainian budget received fewer taxes for UAH 206.9 billion. (about $7.6 billion) and fees in size UAH 108.5 billion (near $4.1 billion).

   6. In 2014, level shadow economy was 42% from volume

   7. GDP. It is 7% more than in 2013 (35%). Considering the falling GDP in 2014, this amount was approximately UAH 658 billion, and in 2013 - 509 billion UAH. From 2013 to 2018, the sum of the shadow economy increased by 337 billion UAH and made 23.8% from official GDP (846 billion hryvnias).

   8. Over the past five years, there has been a significant (more than threefold) reduction in remittances from Russia. According to data of the National Bank, in 2020, the leaders in terms of remittances in Ukraine from labor migrants are Poland (27.5%), the USA (10.2%), the UK (8.5%), Russia (7.2%), and Czech Republic (7%). Significantly decreased percentage of cash receipts from the CIS, most of which are transfers from Russia. In 2020 money transfers from CIS countries amounted to 8.4% of the total volume of transfers, from EU countries - about 57%. For comparison: in the 2015 year from EU came 45.3% of transfers, from CIS– 28.6%.

   9. The structure of international trade. Total amount losses from exports from 2014 to 2016 amounted to $26959.0 million to 2020 - $49194.5 million. Ukraine has not reached the 2-13 level of export ($63320.7 million), stopping in 2020 at 77% of the pre-war 2013. General commodity turnover from 2013 ($140307.5 million) to 2020 ($103429.0 million) decreased by 27%, or by $36878.5 million. From 2013 to 2021, the total reduction in exports to Russia amounted to 17.219 billion dollars - more than seven times. The declared reorientation of foreign markets to the European Union and the benefits of signing the Association with the EU (for which began Euromaidan) not acquitted their expectations. And Ukraine lost $15.36 billion of its export.

   10. By calculations of the Center economic strategy, as a result of conflict on the Donbas economy, ORDLO lost $ 51 billion per 2014-2018 years, which is near 10% of the GDP of Ukraine for these five years. And the economic losses as a result of the annexation of Crimea constitute from 100 to 135 billion dollars, or near 75% of GDP Ukraine for 2013, or 2.5 budgets for 2021. According to official data, losses of the Ukrainian economy only in 2014-2015 amounted to 15-20% of Ukraine's GDP, and the total losses - from 50 to 150 billion dollars. Losses from the occupation of ORDLO at the moment amounted to 375 billion UAH (near $14 billion).

5. Transit losses

1. 1. Ukraine as a transit state loses its positions on the international market of the service of international and transnational routes transportation cargo and passengers. Because of transit restrictions, Ukraine lost more than one billion dollars; expected losses amounted to no less than $6 billion for six years.

   2. Nord Stream 2 may deprive Ukraine of the most critical roles of the primary transmitter gas of Russia to Europe. By calculations, "OperatorGTS Ukraine", losses country from launch "Northern flow-2" may compose 5 to 6 billion dollars per year.

6. Social changes

1. 1. It is currently impossible to evaluate the social consequences of Ukrainian society and state transformation. In the first year after the beginning of hostilities, the standard of living of Ukrainian society significantly decreased as per results of international ratings. Ukraine straightaway collapsed by 5 points in human development ranking, having moved from 78th to 83rd. And only in 2019 was she able to climb on the 74 positions.

   2. Happened significant impoverishment of socially unprotected layers of population - pensioners, what primary way provoked the collapse of the economy in 2014-2015. and the inability to restore it to the pre-crisis level. On average per period from 2013 to 2021, the minimum wage increased by $88, average wage payments - by $ 47. At the same time, the size of the minimum pension from 2013 to 2021 decreased by 47 dollars; the size of middle pensions fell by 55 dollars, a subsistence minimum dropped on the $60

   3. Debt on pensions residents of uncontrolled territories for the period from August 2014 to 2021 can be from 90 billion UAH to 115 billion hryvnia

   4. According to our calculations, the increase in tariffs from 2013 to 2020 will be in connection with implementation formulas "imported parity" for citizens Ukraine amounted to at least UAH 370 billion, and in dollar terms - $6.8 billion. In addition, an increase in natural gas production by 2021 compared to 2013 did not happen. On the contrary, we see stable dynamics cutting volumes of mining gas. Per this period, natural gas extraction decreased by 1.8 billion m 3.

   5. The country introduced a military tax. From 2015 to July 2021, income citizens and enterprises were withheld 116.449 billion UAH collection - near $4 3 Billion.

   6. Losses of income to the pension fund as a result of loss of ORDLO for the period from August 2014 to May 2021 amounted to UAH 141 billion

   7. Level unemployment in Ukraine after 2014 increased by 2%. This is explained mainly by the influx into controlled territories of internally displaced persons who created a stir in the labor market. In the period from 2013 to 2021, the unemployment rate in the country has risen by 3.2%.

   8. Increased load on the system of state social support. In the period from 2015 to 2018, costs of the state budgetOn the veterans, ATO/JFO and their families amounted to more than 805.6 million UAH in the budget in 2021. The help, privileges, and rehabilitation participants ATO/JFO and their families are provided with about UAH 809 million. For 2014- 2019, the Ministry of Social Policy provided expenditures on temporarily displaced persons in 16.1 billion UAH., 2020 they were supplied with 3 billion and 42.5 million of hryvnia payments, in 2021 - 3 billion 51 million UAH.

   9. Given the depreciation of the hryvnia, health care spending in Ukraine before 2018 decreased by nearly 1.9 times in dollar equivalent compared to 2013, for education - by 2.4 times, for social security and social protection - almost by 1.9 times. The situation slightly improved in the 2019-2020 years, considering selecting additional funds for health care and social security in conditions of coronavirus pandemic from the COVID-19 fund.

   10. Paradoxically, the size of the military budget of the 2013 level was reached only in 2017. From 2013 to 2020, the military budget did not double nominally. As a percentage of Ukraine's GDP in dollar terms, the military budget has changed slightly (from 1.28% in 2013 to 2.8% in 2020), considering the overall decline in GDP. For the period 2014-2020 military budget, compared to the year 2013, increased by $2.1 Billion.

   11. After the renewal of conscription during active military actions, more than 19 thousand people were conscripted. After reducing military activity in the east of Ukraine, the number of conscripts also decreased. In 2017 and 2018, it was increased again; in 2019, it remained at the level of the 2018 year, and in 2020 increased to 30,030 people. Also, President Vladimir Zelensky signed a decree on conscription from eighteen years but not twenty.

   12. By data from the ministry of defense, in 2021, the average monetary support of military personnel of the Armed Forces of Ukraine amounted to 14 thousand UAH. And in the zone of OOS, the income of the military increased more than two times – to 29 thousand UAH

   13. The general number of crimes in recalculation on the one hundred thousand population between 2014 and 2016 increased by 19% (from 1165 to 1386). In the 2017 year, this indicator returned on the level 2013 year, in the 2020 year turned out to be 1.4 times less than in 2013. They were increased as a percentage of war crimes: in 2014 - 11 times compared to the 2013 year, in 2015 (peak - during the period of escalation of hostilities) - almost by 17 times, compared to 2013. The high number of military crimes persisted in the 2020 year, despite the July 2020 truce: the number of military crimes increased by 439 units compared to 2019.

   14. In the ranking of the safest countries globally from Global Finance for the 2021 year, Ukraine took 119 positions from 134 researched countries, nestled between Lebanon and South Africa (sixteen places from the end).

7. indicative expenses on the recovery Donbass

   1. The lower limit of costs for the reconstruction of Donbas is $21.7 billion (about UAH 584 billion). Or a total of 14.6% from the level of nominal GDP of Ukraine per the 2020 year.

   2. Damage inflicted upon physical capital (equipment, factories, etc.) is estimated at 44% of this amount ($9.5 billion). Of them, damage from fighting - $3.8 billion (40%), damage from violations of the processes related to continuity of doing business – $5.7 billion (60%).

   3. The cost of human capital rehabilitation (including solving the undermined mental health of Donbas inhabitants - post-traumatic syndrome, depression, etc.) - 40% ($8.6 billion). Psychological rehabilitation - $3.6 billion, social support - $5 billion.

   4. Cost of ecological recovery (including demining the territory) - 16% ($3.6 billion) of which to close flooded mines - $2.9 billion, for demining territories - 650 million euro (approx. $760 million).

To sum up:

1. 1. • Overall losses of ECONOMY OF UKRAINE regarding the indicators of nominal GDP of Ukraine and taking into account possible growth, in comparison with 2013, constitute from $33 Billion to $208 billion.

      • Other losses of the STATE, per our calculations, are about $280 billion. (taking into account the loss of territories, subjects of economy, resource base, deaths of people, declined tax revenue, transit restrictions and thus changes in the structures of international trade, reduction of export potential, reduction receipts to the pension fund, an increase in the burden on the state social support and additional expenses to the military budget).

• General losses of the POPULATION of Ukraine taking into account the increase in tariffs, military tax, debt on pensions of residents of uncontrolled territories, according to our calculations, amounted to approximately UAH 601.4 billion, or $11.3 billion

• According to our assessment, the total losses of Ukraine as a result of combat action on the Donbas, separatization of ORDLO only for the period of 2014-2020 ARE IN THE RANGE FROM $317 TO $ 491 BILLION. And these losses continue to increase.

• By the way, according to official data, the losses of the Ukrainian economy only in 2014-2015 constitute from $50 to $150 billion (according to data of ex-minister of the economy of Ukraine Timothy Milovanov). Losses from

occupation of ORDLO amounted to 375 billion hryvnias or near $14 Billion. (according to the data of Vice Prime Minister - Minister for the Reintegration of the Temporarily Occupied Territories of Ukraine Alexey Reznikov).

• We can add that according to Prime Minister Denis Shmyhal and the Center of economic strategy, losses of the state due to the annexation of Crimea constitute from $100 up to $135 billion.

Note: a necessary remark that in this research, we tried to trace dynamics in changes of major of the most important economic and social processes in the country after starting combat action in the Donbas. We do not claim to determine the percentage of changes (labor migration, a level increase of unemployment, decreased quantities of profitable enterprises, etc.), which happened precisely due to war, but not for other reasons.

Indicators that we defined regarding the losses for the country increase over time. State budgets and companies receive less profit and bear relevant losses because the lost national resources continue to be blocked and exploited by other entities. No study is perfect. Any methodology can be better. But the basic conclusion made by the authors is frightening with its prospects. Every day, the war on Donbas kills our country, destroying even the slightest opportunity to return to a happy life.

Ruslan Bortnik, Oksana Krasovskaya, Eve Antonenko for UIP