137. ANALYSIS: Mark McNamee on Ukraine’s economic opportunities and challenges
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Welcome to the War on Ukraine update from Kyiv podcast. I'm Jessica Gnauer, a senior lecturer in international relations at Flinders University in Australia, and I'm talking today with Mark McNamee. Mark is the Europe director at Frontier View, a market intelligence firm that tracks political, economic, financial, security and social developments

across the Eurasian region. Mark has lived and worked in Russia and is an expert in counterterrorism, having taught counterterrorism to CIA and FBI agents at the U.S. Army Combating Terrorism Center. Mark also works in Ukraine and is currently located in Kyiv,

Thanks for joining me on the podcast today, Mark. Sure. My pleasure. Thanks for having me. As I mentioned, you are currently in Kyiv in Ukraine. We've seen this sort of ongoing counteroffensive that's been taking place over the last couple of months. What is the mood like in Kyiv at the moment? A few answers to that question, I suppose. So

First and foremost, what has impressed me the most, what's most clear and evident to any foreigner who comes here is just, and it's become almost cliche now to say this, but just the incredible resilience of Ukrainians, right? So I was here back in May for the first time since the war had begun. I was here for about 10 days.

And that's when there was actually the biggest bombing campaign in Kyiv, really since the beginning of the war. I just happened to coincide with those 10 days I was here. And then I've come back now since, and I'm currently in Kyiv. I intend to move here in October later on. So yeah, the resilience is most clear. I would say optimism, and as every Ukrainian has noted to me, optimism because they do believe it, but optimism also because that's the only option they have.

Right. This is their country. This is existential for them. For Russia, this is this is elective. They want to end the war tomorrow. They could. For Ukrainians, they have nowhere to go. And to that point, I was speaking with a client a couple of days ago who a client who noted that they personally know several young men who.

end up in Poland, even before February invasion of last year, and then have since returned in recent months because they said, I'm Ukrainian. This is my country. We don't have a country unless we win. And my future is in Ukraine. It's not in Poland or in Germany or somewhere else in Europe.

So they've actually come back to volunteer to go fight, knowing, of course, all the extreme risks involved. That said, and you have a lot of really compelling, inspirational stories like that, you do, of course, have war fatigue and people who are very, very tired. And then you go farther east. The way I'd say it is that what I hear back here in Kiev and from my contacts is that

the views get more extreme, right? So either people are extremely tired, just so exhausted for this and almost want the war to end at any cost,

And then at the other end saying, no, we're going to keep fighting all the way to the end. We're going to get back to 1991 borders. It doesn't matter if it takes 10 years and my kid's going to fight in the future too. We're going to keep going. Right. So unsurprisingly, I suppose in such an extreme situation, you get the whole gamut of responses, but I would say at the end of the day, even the people who are tired and exhausted, no,

nobody really wants to quit. And also it's just the spirit of community and the stories of altruism that I hear. People just sort of banding up together. Everybody's in this fight together.

you know, the economic fight, right, the financial fight, the issues in the labor market, everybody feels the sense of sort of being in it together. And, and directly, just to give a last anecdote, speaking with with clients, the sense from the business point of view, I can give a direct quote to clients, I've asked them, what are your biggest challenges and opportunities right now? His immediate first answer was, well, to be honest, since the war,

our business problems aren't actually real problems anymore. These are things that we would have panicked and worried about five years ago. And now with the bigger picture and understanding everything, these aren't real problems and everything is manageable. And maybe it doesn't get taken care of next week, but in six months or in three years, or we just figure things out because we're all in this together, right? So obviously you have a total mindset shift in light of obviously the extreme circumstances people are living under here. Can you talk a bit about

the work that you are actually doing in Ukraine and across the region? As you mentioned briefly, Frontierview is a global macroeconomic and political risk consulting firm. Our clients are almost exclusively Western multinational corporations, a lot of Fortune 500 companies, of course, with extensive investments, particularly in emerging markets globally.

I'm the managing director of Europe in general. So through my own research and analysis and my team, we cover everything UK, Western Europe, Central Europe, and then Russia, CIS markets, Commonwealth and Independent States markets. My personal specific remit, I'm responsible for all the

the research, the reports, the forecasts for Russia, Ukraine, and the whole CIS region. So essentially what I'm doing here is somewhat twofold. One is, in terms of our clients, helping get a better grasp of

the understanding of the investment environment here and helping sort of relay and communicate that message to headquarters back in the United States or in the UK or in Germany or in Italy. And so being here on the ground and talking to the clients themselves, talking to economists, talking to journalists, various government officials, and get a very comprehensive view of what's going on in the country with

The goal being all of these implications, the political, the military, the social, the economic, the financial, all of these implications, what it actually means for large Western companies investing. I came back for this current trip now because I'm actually starting a business here with my business partner, Andrew Prima, who runs what's called Ukraine Business News, so UBN. And we're starting a company called Ukraine Business Network.

for foreign investors to come to as their sort of network advisory service for investing in the country. In short, to sort of do our part to help reconstruct the country, rebuild the country. You know, when the war does end and we come to some sort of peace terms and foreign investment reconstruction money comes flowing very highly back into the country.

Yeah. So, I mean, obviously being in a state of military conflict, a state of war is an extreme situation for a country. Yeah.

But at the same time, the economic context is really important, not only now, but also going to be very important going into the future for Ukraine. So how do you currently evaluate key challenges and the key opportunities that you're seeing in terms of investment in Ukraine? I mean, look, first and foremost, everything's about what's going to happen with the war.

Right. So real investment money can't come flowing in until you do have a number of things sort of fall into place. So one, the war outlook obviously has to improve for Ukraine over a certain period.

you know, relatively, you know, not too distant time period. If there's still this level of possibilities for five more years, unfortunately, that'd be devastating for the economy. That's, that is not our expectation, by the way. Obviously, the war ending in a positive way for Ukraine, and then reconstruction money flowing back into the country, which would entail obviously very positive sort of peace or ceasefire terms, removing capital controls, obviously, because what Western company is going to throw

throw millions of dollars in here if there are legal restrictions on pulling any of that money out. And then, of course, one of the maybe less discussed but very, very important factors would be a return of all of the refugees and the migrants, particularly since the beginning of the war, February 2022, but actually since

2014, when this war actually did begin. I mean, among other components, but those are the primary core components to allow for major flows of Western investment back into the country. In the meantime, frankly, I'm very optimistic. Obviously, if I'm intending to move here and start a business, I'm optimistic for the direction that the country will be heading in, I believe, in the relatively near future. But for about the next year or so, headquarters is usually...

in almost every case, quite supportive of businesses here. Now I say supportive in terms of retaining staff, even if it's at a perhaps considerable loss for the company. Naturally they have global resources, so they're able to maybe protect staff and continue with jobs, raise wages, because of course they can sort of compensate with gains in other markets globally. But in any case, they have been very, very protective and helpful for the staff, even helping them some relocate, particularly women,

Men can't leave the country, right? So relocating women to different parts of the organization, maybe in different teams within Europe. And then there is still support for the market, but of course, sales, marketing activity, those budgets, of course, have been hurt by the war. Naturally, you have such significant high levels of inflation for the last year and a half. They are starting to moderate, but from a very high base.

those high levels of inflation, the extremely high cost of credit, obviously the savings mode of consumers and businesses, businesses facing very high costs overall beyond just labor costs being quite high. All these things, of course, are hurting the investment attractions in the environment. So this is basically a case of

corporate being supportive in the hopes that they're maintaining market share, maintaining the business at a nice adequate level, maintaining all their talent. These people are in their jobs because they are some of the most talented professionals within Ukraine. So they're working for some of the highest salaries, it's some of the most profitable, robust Western organizations in the country. So making sure to basically keep the staff

as happy as possible and as safe and protected and secure as possible in this sort of interim before the hoped for reopening of the market again. Yeah. And I mean, you mentioned how, of course, what happens militarily on the battlefield is going to be critical for how things go forward. And I know you're not a military analyst. Nevertheless,

How do you evaluate what we might see in the coming couple of months before, you know, the winter weather starts to set in and we're probably going to see some kind of freeze in the sort of hot military conflict again for a few months?

before next year? Right, despite not being a military analyst, deferring to the people who indeed are both on the ground here in Ukraine, reading consistently Russian military analysts themselves, and then Western military analysts as well, I've actually developed just in the last couple of months, a much more optimistic view of the outlook for Ukraine in this war. So I can say pretty concretely, you know, in sort of the evolution of my views since the beginning of the war,

Once it was clear within the first week that Russia was not going to take Kyiv and take the entire nation, which was basically impossible and predictable, as I had told clients in the weeks and months prior to the invasion, with the amount of resources and manpower that they had, that this was not really possible to take the whole country. So it would be kind of almost suicidal, you could say, that this is going to turn into a war of attrition that was actually going to favor Ukraine most likely over time.

And that's more or less what we have seen. It did turn to a war of attrition very quickly by summer of last year, essentially, and then continues more or less to today. And so my view had been this will be a war of attrition. It's going to be a stalemate for a long time. And basically, you're not going to see a breaking of the stalemate until you see a collapse of the political regimes either in Kyiv or in Moscow. So the fall of Zelensky government in Kyiv or otherwise the Putin regime in Moscow.

In the last couple of months, we have seen some significant shifts. So one, since the end of June with the Prigozhin mutiny, I do believe that this is essentially the beginning of the end for Putin. I'm not saying that he falls next week, but I'm saying that we

we will look back, I think, at a maximum in maybe, let's say, a year and a half, two years, and we'll look back and say, June 24th, 2023, this is what was the beginning of the end for Putin. This is the proximate cause, because I also had believed since February 24th of last year that with the invasion,

This is the beginning of the end for Putin. It might take two years, four years, six years, but we'll look back and know this invasion, this mistake is what caused the end of his regime. What I also believe is that the Western support has actually picked up quite dramatically. And when I talk about support, I'm speaking about rhetorical support, very specifically from France and Germany.

since about April, but decisively since May and June, how Macron and Schultz have been speaking. It's actually quite shocking to hear France speaking more hawkishly than the United States against Russia, Soviet Union, maybe for the first time in history, where Paris is more hawkish than Washington, D.C.,

But that has been consistent now, really, for about the last three or so months coming from France and Germany, on top of, obviously, the strong support out of the UK, not to mention Poland, the Baltics, Romania, Czech Republic, etc. So the Western world and actually Biden, as we saw in the Vilnius summit, the NATO summit, Biden was the one sort of more reticent, right, a little bit more hesitant and actually held back in the published document at the end of the summit that wouldn't give Ukraine at least the wording that they had wanted.

and supposedly had agreed upon, by the way, before the summit. Nonetheless, I do also tend to believe that the United States is going to come around. Most of the administration does seem to be much more hawkish than Biden's current view. Biden has historically been very supportive of Ukraine, both in this war and prior, even back as vice president under Obama. So I do tend to think the United States will come around more to Europe's a little bit more hawkish position. And then also very critically, the United States giving the cluster munitions

just a couple of weeks ago, which I've spoken to some journalists and military analysts here in Kyiv. And it's very clear this is having pretty significant and immediate effects on the battlefield. Very helpful. But then probably more critically, Ukraine's biggest limitation in the war is

is its deficit of artillery and ammunition as well, but artillery in particular. So the provision of cluster munitions has actually been quite critical to sort of bridging the gap to buying them another six months or so of fighting through the end of the year, at which point then in 2024, they're in a better place because U.S. ramped up production of artillery at the end of last year, EU a bit later, so around March or April of this year.

So that will only start to see a major pickup in artillery next year, which will be helpful. But this helps bridge that gap. And also it extends this offensive that Ukraine is currently on. A lot of military analysts have said that effectively without the clustered munitions, Ukraine would have likely had to slow down the rate of usage of artillery to such a drastic degree that the offensive, wherever they would have been, would have petered out basically by the end of August.

Now that they can extend that much deeper, say September, October, maybe even to November. Of course, the issue here means you're going to severely test Russian morale, which is already quite low. Each additional day, each additional week of further fighting is going to cause problems there. And so our general view is that the combination of the

This post-Pragosian mutiny environment in Russia, Putin's been sort of revealed as vulnerable, doesn't have quite the authority and control over the system that he had enjoyed for over two decades, matched with further offenses, further gains on the battlefield, further weakened Russian morale within Ukraine, the combination of

these elements will lead to political instability in Moscow, which the point being this will allow Ukraine to win, quote unquote, however we define victory. Obviously, different Western countries and Kiev have varying definitions of what victory

Ukraine looks like. The point being that Ukraine will continue to make these advances that will create significant political pressure within Moscow. We believe with the ouster of Putin then within, say, about the next 12 months, as Ukraine is able to launch another offensive next year, maybe Russia is forced to do, they'll continue to do mobilization, but maybe they have to do a more formal public mobilization with all the political risks inherent in that. So the combination of all these pressures leading to basically the ouster of Putin and then over time,

The expectation being the second half of next year, Ukraine achieving some form of victory.

whatever exactly victory would then look like in some sort of ceasefire peace deal. And I am interested in how you say that from your perspective, that sort of attempted insurrection from Evgeny Prokhozhin and the Wagner group in late June, that we'll sort of look back on that as an inflection point where we say, well, that was the beginning of the end for Putin himself, for his regime, right?

Can you say a little bit more about how you view the significance of that event and the change sort of political and security landscape in Russia following that? There's a lot there to sort of unpack, but first and foremost, the fact that

Once Przegorzin wasn't dead or Wagner taken under control by the Russian military or Moscow, once that didn't happen within about 24, 48 hours, that's when it's obviously very problematic for Putin. In the morning, he called this whole mutiny, he called them traitorous. You know, this was...

treason, betrayal of the motherland, etc., etc. And a matter of hours later that evening is effectively cutting a deal with these guys to sort of get out of this jam. Didn't want to obviously have almost what would look like civil war, fighting an armed insurrection in the country while at war in Ukraine, of course, avoiding that.

So the whole point being here is that Prigozhin exposed the vulnerability of Putin really for the first time. And so Putin, when you look at his pillars of support, they've really come down to about two or three things now.

One of the core things being this sort of this mystique and this veil of invincibility being preeminent and above the entire system, the ultimate arbiter of all political conflicts within the country. Everybody goes to him as the grand master who then decides the fate of all of these political factions and their different disputes, etc., etc. And obviously very critical to this, the money needed to decide these disputes.

and or the repression required. The point is this really has the war itself, the mutiny, everything, this has eroded all of those factors that have supported his regime over two decades now. That veil of invincibility, that mystique is now permanently gone. So that's irrecoverable at

after this. And I think that's also, he was exposed because if he had wanted to kill Progozhin, I mean, something like this wouldn't have happened under Stalin, as an example. Now, obviously, different era, these are different people, but nonetheless, I mean, real totalitarian control over a system, something like this could not have ever arisen, right?

he at a minimum was even potentially afraid to give the order to kill Prokofiev or to strongly repress Wagner because maybe he was uncertain if it would be followed through knowing that Prokofiev does have

you know, his Russian, as I say, the Krisha within Moscow and certain factions on his side. Maybe Putin was a little bit afraid. Well, how large is your base of support here? Would the order, because if his order is not followed through, that's the end of Putin that day, right? His authority is permanently undermined.

undermined. So that could be part of it. But then also, you know, when you think about the war, the sanctions, what this has probably done to the economy, paying off people, so he wasn't able to repress and so paying off people. And I think it's not unrelated that in this post pre-Goshen environment, we saw for the first time in Russian history, I mean, for the first time since literally the October Revolution, 1917, we saw expropriation of assets in Russia.

We hadn't seen this at any point. I mean, we didn't see this, you know, since the 1990s under any point under Putin. And we saw Danone, Carlsberg, essentially nationalized, handed to the nephew of Kadyrov, one of Putin's long childhood friends. And then also further pressure, basically the signal being to Western companies that

you can't leave Russia anymore. You are a prisoner here and be happy that you're able to even operate because it's likely just a matter of time until we actually do take your asset, right? The point being, he needs that Western money to now pay off the various factions to maintain that political stability at home. All of this sort of being the case, this is not sustainable, we don't believe, for the long run. Part

particularly with this war in Ukraine, with further losses on the battlefield. And I think a real important one is we're focused so much on the battles in the south, which is legitimate. You know, when they get if they're pushing farther south, if they get to Azov Sea or they don't even need to get to Azov Sea. We have strike capability, you know, hit Kurd Strait Bridge more frequently, hit targets around Crimea frequently, but potentially taking Bakhmut and encircling Bakhmut in the next

couple of months here, which I've spoken to military analysts here who feel quite confident that that can happen really probably in the next month, two months.

If that were to happen, that would be such, as much as Bakhmut doesn't matter strategically from a military point of view, the political symbol that Putin made it over the previous year, and then Zelensky responded by reinforcing the symbolic worth of Bakhmut by fighting the fight out for Bakhmut and extending the losses for, well, for both sides, to be fair, but extending those losses for Russia and seizing Bakhmut.

If Ukraine were able to, after having lost it in May, if they were able to take it back only a matter of months later, which is Russia's only significant achievement on the battlefield in the last year, that would really be, again, at a symbolic level, such a dagger to the heart of the Putin regime.

which, again, just creates more pressure, potential for more instability for him. And then, again, we should be expecting further losses for the Russian side. Very slow, of course, in the south, but pushing towards Crimea, again, just creating more pressure on Moscow there. So I think those are a couple of things, but Bakhmut in particular, something to look out for with how that resonates then within Moscow and the political system. Yeah, I can see how that would be a real symbolic and psychological pressure point in the Russian domestic context.

And I guess finally, the economic situation in Russia is also going to be very important for whether or not the regime manages to remain stable.

What's your evaluation of what's going on in the Russian domestic sphere economically? I mean, first and foremost, taking into account Western expectations, which were the West puts these extraordinary extreme sanctions on Russia, which they are. They are quite extreme and extraordinary and rapid on Russia that this inevitably would have to cause the economic collapse of Russia.

The only problem with this was that the most impactful sanctions on Russia are the ones targeting the energy sector, right? So the oil sanctions in particular.

The issue there and why Russia has remained far more resilient than Western governments would have hoped is the fact that basically the EU gave about a six-month lead time to Russia to prepare to be able to transit all of those volumes, which the vast majority of Russian oil exports had gone to the West, primarily to European nations, and re-transit all those volumes, which they have subsequently gone to basically China and India almost exclusively.

Selling it a bit of a discount. But the point is they're able to redirect all those volumes using various, this whole, they're calling the shadow fleet of different, I mean, Venezuelan, Iranian tankers, old tankers they bought from Greece that were decommissioned 25 years ago and all sorts of things.

And then, of course, actually Greek shipping companies, really the ones who are helping Russia export so much of this through the Black Sea ports, right, export so much of these volumes to global markets.

This is the point, though. If they had not been able to get those volumes out and you would have seen them production levels diminishing, export levels diminishing further, then this would have you would have seen much more tragic consequences and immediate consequences for Russia. Gas is a frag. It's only about 20 percent of energy export revenues historically. So that was never the case.

the way to address or attack the Russian economy. So that's the brief answer. That's why the economy, there's a lot of other factors, but the point here, that's why the economy has been able to manage the sanctions in probably about the best way possible. Then I would also look at, okay, where's the effect actually been felt? So yes, it is

100% true. Moscow, St. Petersburg, some of the other major cities, yes, the effect is far less felt, almost negligible to a lot of the companies that we've worked with and people we know well within Russia. But you get outside of the major cities and it's twofold. The economic impact is far more clear, right? But then also the war impact is more clear. Obviously, they're not taking soldiers from central Moscow, from the richest families. They're

They're unfortunately taking soldiers from more lower middle class and low income households, and unfortunately also a lot non-Russian ethnic groups as well. So the war and the economic losses are being felt much more by those regions outside Moscow, St. Petersburg, some of the other major cities. The issue there is that when you get into sort of the psychology of expectations and all of this was that the standards of living weren't particularly high, the levels of nationalism there

are particularly high, so they also can be a little bit sort of more resilient and more willing to deal with and tolerate further losses in their standard of living, which wasn't particularly high to begin with, and then also sort of devoting and committing their families to the war. While, of course, that level of tolerance within Moscow and St. Petersburg is not quite there, but they haven't had to deal with the extreme economic losses and the impact of the war so directly to this point.

Well, thanks, Mark. I found this a really interesting discussion and I appreciate you being on the podcast with me today. Sure. My pleasure. Thank you for having me and yes, very, very enjoyable discussion. Thanks for listening and thanks to Gonk Overall for our theme music.