In the eleventh year of Russia’s war against Ukraine and amid the seventh month of discussions in the U.S. Congress regarding a vital aid package, the Ukrainian public is abuzz with talk about transitioning the economy to a wartime footing. What exactly does this entail in the context of the 20th and 21st centuries, and who should now seriously contemplate jumping aboard the wartime economic train?
What was the wartime economy like less than a century ago?
“Everything for the front!” This was the motto for factories that were repurposed for the production of weapons, shells, and ammunition during wartime. Workers had to work round-the-clock shifts for minimal pay and were given rationed food. They had to surpass production quotas through exhaustive labour, which often led to living on the brink or below the poverty line. Consumer goods were scarce during this time. This is what the wartime Soviet economy looked like during the Second World War, the Soviet Union faced existential threats similar to those Ukraine is facing today. Following the German attack on the USSR, the economy underwent a rapid transformation. This was aided by the state’s ownership of all enterprises, production means, and natural resources, as well as the use of a coercive approach to human resources.
In the grand scheme of things, by 1942, compared to the stats from 1940, the portion of the national income dedicated to wartime necessities surged from 15% to a whopping 55%. Production aimed at fulfilling wartime demands spiked from 26% to 68%, while agriculture jumped from 9% to 24%. These numbers were dictated by the sheer scale of the USSR’s armed forces. By 1942, the active Soviet personnel boasted 5.5 million soldiers (for comparison, the German forces and its allies totalled 6.2 million).
In the Soviet territories occupied during those initial months of the invasion, there were industries responsible for over 50% of iron and steel production, coal mining, aluminium manufacturing, and vast agricultural lands, all of which delivered a heavy blow to the Union’s economic capacity. The evacuation effort saw over 2,500 enterprises moved, with nearly half being crucial to defence production. The manual labour required in non-automated industries led to a demand for workers, including even children, and often relied on individuals without specialised training for basic tasks.
It’s important to note that prior to the outbreak of war, the USSR had already been preparing for it. The country had completed two and a half rounds of five-year plans, resulting in significant industrial achievements. However, these achievements were often attained through repressive measures and the use of low-paid or unpaid labour, including political prisoners. Yet, even with these efforts, it wasn’t enough to halt Germany’s march in 1941, especially with the economic resources drawn from the occupied European territories.
Hence, it is uncertain how events would have unfolded without the American lend-lease program, which supplied weapons, ammunition, food, and strategic materials to the US allies during the Second World War.
The United States provided significant aid to the Soviet Union during World War II, including 12.7 thousand tanks, 22.2 thousand aircraft, 17.8 thousand artillery systems (including anti-aircraft), 44 thousand trucks and jeeps, 1.8 thousand locomotives, and 8 thousand tractors. In other words, around 16% of the armoured vehicles, 15% of combat aircraft, and 18% of artillery used by the Soviet army during the war came from this aid program. The number of cars and motorcycles transferred was almost equal to the entire fleet of the USSR, and every second plane was built from imported raw materials. Overall, out of the goods and equipment transferred by the allies to the USSR, totalling almost $50 billion, one-fifth was designated for the Soviet Union.
Across the Atlantic, the war brought about the end of the Great Depression, a 96% increase in production productivity, the creation of 17 million new jobs, and the bolstering of labour unions. It also strengthened the U.S. federal government’s role as a regulator of economic activity. One-third of all production was geared towards military needs. The shift to defence production spurred scientific and technical advancements, leading to innovations in consumer goods manufacturing. Between 1939 and 1944, the gross wages surged by 50%. Overall, this transition marked an unprecedented economic and political ascent for the US after 1945.
However, not all industries smoothly reoriented to wartime demands in advance and at the same pace. The transition became a central concern in America’s economic landscape during 1940-1942. Often, company executives resisted the shift towards war production, fearing the loss of their consumer market share to competitors. Consequently, advocates for this transformation were often government officials and labour union leaders. For instance, in 1940, Walter Reuther of the United Automobile Workers advocated for major automakers to shift towards aircraft production. By 1943, automotive companies were making a substantial contribution to aviation manufacturing.
The revival of the shipbuilding industry, which had been in a slump since 1921, gained momentum with support from the United States Maritime Commission (USMC). The commission provided funding for the expansion of shipyards. From 1930 to 1936, only 71 ships were constructed. However, from 1938 to 1940, the number rose to 106, and nearly as many were built in 1941 alone.
Japan’s attack on Pearl Harbor served as a catalyst for the transformation of the American economy into what President Roosevelt had described as the “Arsenal of Democracy” a year prior to the tragedy. The initial step towards mobilisation during the war was an effort to enhance the efficiency of government mechanisms responsible for these sweeping changes.
In total, expenditures on the U.S. defence sector surged from 1.64% of GDP in 1940 to 16% in 1942, peaking at 37% in 1945. This meant that the United States not only emerged victorious in the war abroad but also secured peace and prosperity on the home front.
But what about the wartime economy today?
In the 21st century, functioning in a wartime economy demands the capability to manufacture cutting-edge weaponry in highly automated facilities staffed by workers with the necessary expertise. While the availability of raw materials remains a pivotal concern for production, international financial instruments offer avenues to discover additional resources to cushion the blow of war on the country’s economy, especially to avert severe impoverishment among the populace. Economic sanctions have shown some ability to slow down the aggressor country, but stopping the war entirely has proven elusive.
Russia’s economy during the war
Russia’s economic figures in 2023 exceeded expectations, showing a more positive trend: GDP saw a 3.6% growth, with the IMF now projecting a 2.6% rise for 2024. A significant portion of Russia’s budget, a third to be exact (over 10% of GDP), is allocated to defence spending, surpassing social expenditures for the first time since the dissolution of the USSR. The latter, encompassing salaries, pensions, and welfare, constitute roughly one-fifth of the budget.
This upturn was supported by the Russian government’s adept financial management strategies, maintaining substantial revenues from oil and gas despite Western sanctions. Moreover, the absence of full-scale hostilities within Russian borders and the annexation of resources from Ukraine played their part.
According to the UK Ministry of Defence, several factors have propelled the expansion of Russia’s military-industrial complex, including a surge in the workforce to nearly 3.5 million individuals, increased shifts, the enlargement of existing production lines, and the revitalization of dormant production capacities.
According to Ukraine’s Main Intelligence Directorate (GUR), Russia has the capacity to manufacture 30 Iskander-M ballistic missiles, 12 Iskander-K cruise missiles, and 2.1 million rounds of ammunition on a yearly basis. Additionally, they can produce up to 10 Su-35 aircraft and 150 new tanks annually (though the maintenance and modernisation of existing equipment outweigh the production of new ones). The Russian army’s stockpile can be restocked monthly with 300 Shahed kamikaze drones, some of which are made in Russia while others are still sourced from Iran. Overall, Russia relies on support from North Korea, Iran, and China, who either directly supply equipment and ammunition or provide components.
British intelligence noted that “Although the defence industry cannot fully meet the Russian army’s needs for conducting military operations in Ukraine, it is almost certainly capable of providing an advantage over Ukraine throughout 2024.”
Moreover, the boost to the military-industrial complex has resulted in an unusually low unemployment rate (2.9%) and a rise in wages. The Russian armed forces alone boast over 2 million personnel, with more than a million serving as active-duty military personnel. Experts view this economic situation as unsustainable; however, the Russian economy’s resilience has proved to be stronger than anticipated in 2022.
Ukraine’s economy during the war
IMF estimates indicate that Ukraine’s real GDP grew by 4.5% in 2023, yet this growth falls short of compensating for the 25% decline compared to the pre-war period. Currently, funds from Western partners constitute 60% of Ukraine’s budget structure.
Experts from the Kyiv School of Economics have assessed the direct losses inflicted on Ukraine’s infrastructure at $155 billion. However, the total amount of losses, including the loss of territories and resources, human capital, the consequences of ecocide, and more, could reach up to a trillion dollars. Military enterprises and critical mineral deposits necessary for production remain in the occupied territories.
“Rebuilding requires post-war investments, and investments require not just money,” believes Oleksiy Blinov, an expert from the analytical department of Sense Bank, emphasising the significant demographic and capital losses Ukraine has faced. From 2022 onward, European countries and institutions have allocated €88.7 billion in aid to Ukraine, with the United States providing €66.6 billion. However, the United States outpaces Europe in military aid by just over €2 billion.
Expenditures on security and defence are solely allocated from Ukraine’s budget. They amount to 2.6 trillion hryvnias in 2023, marking a 70% increase from 2022. This represents slightly less than 40% of the country’s GDP, with not all NATO countries managing to allocate 2% of their GDP to collective security. The total number of personnel in the Armed Forces of Ukraine stands at 880 thousand.
Meanwhile, Ukraine is in the process of rebuilding its military-industrial complex, though comprehensive data on progress is not yet available. Approximately 300 enterprises, institutions, and organizations have been mobilised for full-scale defence industry efforts, employing over 250 thousand individuals.
From 2014 to 2019, new models of missile weaponry, anti-tank systems, self-propelled artillery, light armoured vehicles, anti-aircraft missile systems, body armour, drones, and more were developed. However, as early as 2021, some production lines were shifted to shortened workweeks, resulting in layoffs or employees being placed on unpaid leave.
From 2022 to 2024, funding for Ukraine’s military-industrial complex (MIC) surged from 2.5 billion hryvnias to 51 billion. Over 200 new companies jumped into drone production, marking a 100-fold increase. Serial production of artillery shells has kicked off for the first time since Independence. Ukrainian developments have seen a manifold boost in production, and in collaboration with Western allies, the establishment of a virtually new defence-industrial complex is underway. The US, UK, Germany, and several other European countries are involved, including the production of Fuchs armoured personnel carriers and Lynx infantry fighting vehicles.
However, despite these strides in revitalizing the military-industrial complex, Ukraine heavily relies on international assistance. Without it, the lives of the Ukrainian population would echo the hardships of the 1940s.
The US economy during the war
Despite the US national debt hitting a staggering $34 trillion in 2024, the state of the economy remains untroubled. Experts no longer anticipate a recession, with the International Monetary Fund (IMF) forecasting a 2.1% growth in the US GDP for 2024.
Towards the end of the previous year, the US Congress greenlit a historic defence budget of $886 billion, surpassing the combined defence expenditures of the world’s next ten top-spending countries. This budget includes aid earmarked for Ukraine and funding for policies aimed at countering China, showcasing a clear focus on the production of ammunition and components.
As the full-scale Russian invasion has kicked off, the US military-industrial complex is witnessing a true surge. Not only does the lion’s share of military aid allocated to Ukraine find its way into the coffers of American arms manufacturers, but there’s also been a spike in orders from other nations for their goods.
While major arms manufacturers initially hesitated to ramp up production volumes shortly after the full-scale invasion in Ukraine, fearing a surplus of unclaimed stock, 2024 is expected to see a notable uptick in demand. This is due to Russia’s ongoing aggression, China’s ambitions, and emerging conflicts in the East.
In the fiscal year of 2023, US government arms sales, defence services, and security cooperation totalled $80.9 billion, marking a 55% increase from 2022. Direct commercial sales from American arms manufacturers also saw a rise, climbing from $153.6 billion to $157.5 billion compared to the previous fiscal year. Throughout the year, stocks of Lockheed Martin, General Dynamics, and Northrop Grumman could see a boost of 5–7%.
To meet the demand for ammunition for Patriot systems, each priced at $4 million, an increase in sales of $400 million per year is anticipated. Boeing has already announced plans to expand production capacities for sensors used in Patriot missile guidance in Alabama by over 30% in the coming years.
Overall, the top-selling items include Switchblade drones, Bradley Infantry Fighting Vehicles, howitzers, HIMARS launchers, and Javelin anti-tank missiles. Sales of F-35 fighters have seen a sharp rise.
So, once again, the US is coming out on top, just like a casino.
