Ukraine must not become what it’s fighting against 

As Ukrainian President Volodymyr Zelensky wrapped up another series of meetings in Washington last week, ongoing disunity in Congress threatens to derail the funding and supplies that Ukraine needs to continue defending its freedom.

Though this support has never been guaranteed, now is a good time for Ukraine to put in place the mechanisms necessary to succeed in a post-war world. Whether Ukraine manages to evict Russian occupying forces from its territory or negotiates an end to the conflict, it will have to shift from an aid-driven wartime economy to a functioning, free market economy that supports its society as well as its European Union (EU) and NATO aspirations. 

Under threat of annihilation, there is a tendency to undertake extreme measures to protect the essence of national identity and security. At the outset of the Russian invasion, Ukraine sensibly declared martial law, then extended that order into 2024. Zelensky announced in November that the elections originally scheduled for spring 2024 would also be postponed, contending that the nation’s focus must remain on the war effort. The government also nationalized several companies linked to strategic industries to better control wartime production, with promises of a rapid return to post-war normalcy. 

Though emergency measures are warranted given the need to consolidate capacity and agency against a much larger adversary, these efforts may jeopardize Ukraine’s democratic trajectory in the long run. As Ukraine fights ferociously to maintain its independence from Russia, it must be wary of taking actions that could ultimately re-shape the country into a mirror of the model it’s fighting against — an oligarchy run by a central authority with no true accountability, supported by a small group of state-run enterprises.  

To succeed in the future, Ukraine’s economy and governance must recover not only from the invasion, but also from the decades of market centralization and corruption that defined it in the post-Soviet era. It may be logistically preferable to centralize revenue streams in a wartime setting, but the long-term outlook for state-managed companies in Ukraine is poor; they are inefficient and monopolistic, and only a third of them are profitable.

President Zelensky should be applauded for his anti-corruption efforts, but more must be done to limit bureaucratic waste, promote market independence and diversification, and reduce opportunities for interference by opportunistic oligarchs or Russian agents.  

Recent government actions have limited Russian interference, but at a cost: Ukraine is centralizing industries as varied as forestry, electricity supply and real estate within a small number of state-owned enterprises, ostensibly to investigate criminal behavior and curb tax evasion in far-flung regions. In May 2022, the Supreme Council of Ukraine passed a mechanism that allowed the state to confiscate assets and nationalize businesses partially owned by persons under sanctions. This led to freezes placed on Sense Bank, one of the largest Ukrainian banks, and Kyivstar and Lifecell, the largest and third-largest mobile operators in Ukraine. In June, Sense Bank was nationalized, and in October, the corporate rights of Kyivstar and Lifecell were transferred to Ukrainian authorities.  

According to the deputy head of the Office of the President, Rostyslav Shurma, there is a “high probability” that Kyivstar will be fully nationalized. Doing so would harm thousands of international private shareholders, who were not informed of the decision to seize the company’s capital and have already lost $150 million as a result.

Concerned about the impact of these actions on American investors, Sen. Roger Marshall (R-Kansas) has introduced the Prohibiting Nationalization of American Companies and Investments Act of 2023, with a companion bill by Reps. Cory Mills (R-Fla.) and Kevin Hern (R-Okla.) being sponsored in the House. 

Scaring off investors is problematic for Ukraine. The World Bank estimates that reconstruction will cost more than $400 billion, far more than can be supplied by governments and international organizations. If investors in Ukrainian companies continue to have their assets seized, it’s unlikely they will invest in the future revitalization of the Ukrainian economy, putting the country’s future in doubt.

In addition to the reputational risk, continuing to nationalize Ukrainian industry sets back vital reforms that U.S. officials say are necessary for American firms to invest in reconstruction. Ukraine has committed to re-privatization as part of its campaign to join the EU and NATO, but seizing and redistributing assets comes with legal and logistical hurdles that will reemerge in force when martial law has ended.  

To secure Ukraine’s freedom from Russian tyranny and set it on a path to European integration, Kyiv will need to avoid the trappings of other aid-saturated economies in recent decades. Taking lessons learned from another war-ravaged country, Afghanistan, in which foreign aid accounted for 43 percent of GDP prior to the Taliban’s victory, Ukraine needs a diversified and competitive private sector to sustain a competitive economy that innovates, addresses the needs of its citizens and adopts the standards necessary for European integration.

Western states should support this effort through investment but ensure that Kyiv remains committed to the rule of law through long-term bipartisan actions such as the Freedom Support Act and others instituted after the Cold War. 

It would be unfortunate if in its effort to break free of Russian influence, Ukraine ultimately became more like Russia than the European countries it wishes to emulate. Ukraine needs to set itself up for success in a post-war, post-Zelensky era, and that means supporting a competitive, private market-based economy that spurs innovation and investment. 

Matthew Wallin is the chief pperating officer at American Security Project. Follow him on X @matthewrwallin. Courtney Manning is a national security research fellow at American Security Project. She specializes in emerging national security risks and military readiness.