Latest / Reformed Thinking / Taming Wartime Inflation: A Multi-Pillar Strategy for Ukraine’s Price Stability and Recovery

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Taming Wartime Inflation: A Multi-Pillar Strategy for Ukraine’s Price Stability and Recovery · Reformed Thinking

• 0:00
  Welcome to Reformed thinking. We're doing a deep dive today
• 0:03
  into a monumental challenge facing a nation under extreme
• 0:07
  duress, Ukraine's wartime inflation.
• 0:10
  We've got a stack of analysis here and what's interesting is
• 0:13
  they all bypass the quick fixes. They're really focused on a
• 0:17
  comprehensive multi pillar strategy for sustainable price
• 0:21
  stability and it's 1 rooted in the kind of careful stewardship
• 0:26
  and long term credence that, well, it suggests a real
• 0:30
  reformation in economic thinking is needed.
• 0:32
  That really is the core mission for us today.
• 0:34
  I mean, we're not just looking at a price index as some
• 0:36
  abstract number. No, we're trying to understand
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  how Ukraine can manage these huge wartime budget deficits
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  and, you know, the catastrophic supply shocks from the conflict
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  without totally undermining the national currency.
• 0:49
  We're making the reconstruction effort even harder.
• 0:51
  Exactly. Inflation in this kind of
• 0:52
  scenario is incredibly destructive.
• 0:54
  It's not just an economic problem.
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  It erodes real wages. It wipes out savings and it
• 0:59
  weakens social cohesion at a time when national unity is,
• 1:03
  well, it's paramount. It just introduces so much
• 1:06
  uncertainty that making rational post war investment decisions
• 1:11
  becomes nearly impossible. So we're not talking about some
• 1:14
  technical economic liver to pull here.
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  Not at all. We're discussing a strategy that
• 1:18
  requires belief, that requires public trust.
• 1:22
  What makes a plan credible? Because, you know, just raising
• 1:26
  interest rates, while it's necessary, that's not going to
• 1:29
  solve a systemic budget problem. And it won't fix a bombed power.
• 1:32
  Plant exactly. So we have to look at a
• 1:34
  coordinated policy mix, a a structured approach where fiscal
• 1:38
  policy, monetary policy and these deeper structural reforms
• 1:42
  are all working in lockstep. We're going to break down the
• 1:45
  the complex drivers of this volatility first before we get
• 1:47
  into the necessary actions, everything from tight monetary
• 1:50
  policy to tackling ingrained corruption and radically
• 1:55
  reforming the energy sector. Overarching theme that just
• 1:58
  anchors all of our source material really is credibility,
• 2:02
  or you know, what we might call prudent authority.
• 2:04
  Prudent authority. I like that.
• 2:05
  For any of these deep and sometimes painful measures to
• 2:08
  actually succeed, whether we're talking about tighter credit or
• 2:12
  gradual fiscal austerity, markets, businesses and, most
• 2:16
  critically, ordinary households, they have to believe.
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  Believe what specifically? They have to believe that the
• 2:22
  high wartime deficits, which are absolutely necessary for defense
• 2:26
  and social support, are not going to become a permanent
• 2:29
  fixture. That they're not the new normal.
• 2:31
  Right. That they won't be financed by
• 2:32
  the central bank just printing money forever.
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  That fear of endless money printing has to be dispelled,
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  and the only way you can do that is through a clear, unified and
• 2:41
  coordinated strategy of responsible action.
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  That sets the stage perfectly. OK, so let's unpack this.
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  Let's start by understanding the patient, so to speak.
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  Our sources identify at least 4 distinct but interconnected
• 2:56
  mechanisms that are driving this fragile inflation.
• 2:58
  It's sort of a dual diagnosis, isn't?
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  It it is, you have the physical destruction of the economy on
• 3:03
  one hand, and then the monetary pressure is created by financing
• 3:06
  the war on the other. And if we only treat 1, the
• 3:10
  instability just continues. You've got it.
• 3:13
  So where do we start? I think we have to begin with
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  the most visible and frankly visceral driver, the war related
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  disruption to the supply side. This is textbook cost push
• 3:25
  inflation, but it's on a national catastrophic scale.
• 3:29
  We're not talking about minor bottlenecks in a supply chain.
• 3:32
  We are discussing the physical destruction or the occupation of
• 3:35
  large parts of the industrial base.
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  We're talking vast swaths of critical agricultural land and
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  primary transport infrastructure, rail lines,
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  bridges, ports. All the things you need to
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  produce and move. Goods, exactly.
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  So when your production capacity shrinks that dramatic,
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  especially for essentials like food processing or materials
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  manufacturing, the cost of just securing goods, even if they're
• 3:58
  available, it's skyrockets. And here's where the targeted
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  nature of the war makes it so devastating for price stability,
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  right? I mean the systematic targeting
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  of energy facility. That's a huge factor.
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  When power plants, substations and natural gas infrastructure
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  get hit. It doesn't just cause a
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  blackout, it introduces extreme cost and unreliability into
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  every corner of the economy. Yeah, you have to think about
• 4:20
  it. Every manufacturing?
• 4:21
  Sure. Every farm, every transportation
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  company. All of them.
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  Suddenly they have to account for potential downtime.
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  They have to invest in expensive generators that run on imported
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  fuel. They have to face these totally
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  unpredictable input costs. Right.
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  So when the overall supply of goods and services contracts
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  because factories can't operate efficiently, or export routes
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  are blocked, but the demand for essentials stays high.
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  Or even rises because of fear and people stockpiling.
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  Exactly. Firms have no choice.
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  They have to raise prices to cover their higher input costs,
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  their transport costs and frankly, just the risk costs.
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  That disruption of the physical means of production is the
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  foundational inflationary shock. And that physical shock is
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  happening at the same time as a huge financial shock.
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  They're simultaneous War demands massive emergency spending.
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  We're talking defense, military equipment, treating the wounded,
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  humanitarian support and just keeping basic state services
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  running. All while tax revenues are
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  plummeting. Dramatically falling because
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  businesses are closed, production has stopped, people
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  have been displaced. So you get the structural
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  divergent a massive and really unavoidable budget deficit that
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  no conventional economy could sustain in peacetime.
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  And the issue isn't just the sheer size of that necessary
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  deficit, it's how you finance it.
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  That's the critical point in the initial acute phase of the
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  invasion, you know, when external aid was uncertain and
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  domestic bond markets were basically paralyzed, the
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  government had to rely heavily on the central bank.
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  On loans or direct purchases of government bonds.
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  Right, which we call monetary financing.
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  For anyone listening, you can think of it this way.
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  The government needs money, and the central bank essentially
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  creates new currency to fund that need.
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  And that directly increases the money supply without any
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  corresponding increase in goods or services available.
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  Which is a direct path to inflation.
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  It's almost the definition of it.
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  And this is where that expectation aspect becomes so
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  harmful, isn't it? It's so damaging because even if
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  the government later scales back or, you know, completely stops
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  direct central bank financing, the historical precedent is set.
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  The knowledge that the state can resort to printing money is now
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  baked into people's thinking. It sits in the minds of
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  investors and consumers the perception that the budget might
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  again be financed by money creation.
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  This idea that the government might just inflate away its
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  debt, that fuels inflation expectations today, and that.
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  Fear that lack of belief and fiscal prudence.
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  It must just blunt the effectiveness of anything the
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  central bank tries to do. It does because people believe
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  that in the end the central bank will be forced to cave to the
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  government's needs no matter what it says.
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  OK, that brings us to the third driver, external pressures.
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  As an open economy, Ukraine is, I mean, it's profoundly
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  sensitive to shocks that affect its trade balance.
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  Absolutely. War severely disrupts export
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  revenues, primarily by blocking or threatening those vital
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  export corridors like the black seaports.
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  Which are crucial for grain and metals.
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  Crucial So when export revenues are reduced or they become
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  highly volatile, the inflow of dollars in euros just contracts
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  and that weakens the national balance of payments.
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  So you have this weakness, plus all the worry from investors and
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  households who are just looking for some stability.
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  And that combination puts significant downward pressure on
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  the national currency, the Rivnia.
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  When the currency depreciates that much against the dollar or
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  the euro, it immediately makes imports more expensive.
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  Exponentially more expensive in local currency terms, and
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  Ukraine relies heavily on imports for fuel, for machinery,
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  electronics, even some consumer goods.
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  And this is classic imported inflation.
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  It doesn't stay at the border. Oh no.
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  It spreads quickly through the entire economy as higher
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  production costs, and that drives up prices for both the
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  imported parts and the final domestically produced goods that
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  rely on them. So we've got the physical shock,
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  the fiscal shock, the external shock, and the fourth one is
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  maybe the most subtle. It's about how history shapes
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  current behavior. I think so.
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  What's fascinating here is that Ukraine's past is marked by
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  periods of high inflation and currency instability.
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  This isn't their first rodeo with this problem.
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  So people already think defensively about prices.
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  They're sort of primed for instability.
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  Exactly. They're accustomed to it.
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  So when people expect inflation to stay high or to accelerate,
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  they don't wait around for prices to rise slowly.
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  They act preemptively. They demand higher wages.
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  They set their own prices more aggressively.
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  It's a completely rational response based on their
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  historical experience. It's a defensive mindset.
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  And that mindset creates a self fulfilling prophecy.
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  It absolutely does. Workers demand higher pay to
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  protect their purchasing power. Firms then readily granted
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  because they're confident they can just pass those higher labor
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  costs directly on to consumers. Which is the definition of a
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  wage price spiral? The very definition, and it also
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  shows up in more destabilizing financial behavior, Things like
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  abandoning local currency deposits in favor of foreign
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  currency. That process known as
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  dollarization or capital flight. Right.
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  Or you see consumers bringing forward big purchases, trying to
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  hoard inventory, which just stresses supply chains even
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  more. These defensive behaviors reduce
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  the effect of demand for the national currency, and they
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  increase its velocity, how fast it changes.
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  Hands a temporary acute supply side shock into a persistent
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  self reinforcing inflationary process.
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  You've got it. It becomes entrenched.
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  OK, so we have a clearview of the deep problems, physical
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  destruction, necessary but poorly financed deficits,
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  imported cost shocks and a behavioral spiral of defensive
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  expectations. A pretty grim picture.
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  It is. So The solution therefore has to
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  be what our sources call a coherent policy mix.
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  It's a structured, unified approach that removes any
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  tension between the government and the central bank.
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  It demands A coordinated policy of prudence, right?
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  So how does this critical partnership between the Ministry
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  of Finance and the National Bank, how does that function in
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  practice? Well, the core of the solution
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  is this explicit coordination between tight monetary policy
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  run by the central bank and a fiscally anchored strategy run
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  by the government. Let's start with the central
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  bank's role, OK? For monetary policy to control
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  inflation in the medium term, it first has to possess
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  credibility. And where does that credibility
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  come from? It hinges first and foremost on
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  independence. The central bank must be clearly
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  and legally independent from day-to-day political
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  interference. So it can't be told what to do
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  by the government. No, it must operate with a
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  strong statutory mandate for price stability.
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  This ensures that its decisions, especially on interest rates,
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  are based strictly on economic conditions, not on immediate
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  government financing needs or, you know, short term political
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  expediency. That's essentially the principle
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  of responsible stewardship applied to monetary policy,
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  isn't it? I think that's a perfect way to
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  put it. The central bank has to maintain
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  a sufficiently tight policy stance.
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  It has to keep its key interest rate high enough to discourage
• 11:19
  excessive borrowing for consumption.
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  In crucially high enough to make saving in the domestic currency
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  attractive again. Yes, that part is critical.
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  This high interest rate environment is the essential
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  signal. It shows the central bank is
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  willing to accept some short term economic pain like tighter
• 11:37
  credit and slower growth to curb that spiraling loss of
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  purchasing power. And the signal has to be backed
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  up with clarity. Exactly.
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  The signal must be accompanied by clarity.
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  The central bank has to be completely transparent.
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  It needs to be publishing regular, clear reports on
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  inflation developments, its forecasts and the rationale
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  behind its policy decisions. Why is that transparency so
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  vital? It's vital for shaping public
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  behavior and for building that necessary trust.
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  If households and businesses understand the central bank's
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  commitment and its methodology, they're more likely to align
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  their own price and wage expectations.
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  Which helps break the wage price spiral we were just talking
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  about. It's a key part of breaking that
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  cycle. But the central bank can't fight
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  this war alone. I mean that the sources are
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  crystal clear on this. The government's role, the
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  fiscal authorities, is equally, if not more, critical.
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  That's right, they have to demonstrate a seriousness about
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  establishing A realistic path to fiscal sustainability.
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  OK, but what does realism look like when your defense spending
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  is skyrocketing? It looks like establishing A
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  credible medium term fiscal consolidation path.
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  So not just saying you'll reduce the deficit, but actually
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  presenting a plan. A feasible, believable plan for
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  gradually reducing that massive wartime deficit as soon as the
• 12:54
  security situation permits. This plan sends a vital signal
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  to domestic and international partners that the government
• 13:01
  isn't just funding its entire budget through aid.
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  That it's actively working towards self-reliance.
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  Yes, that it's a responsible steward of its own finances.
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  And the plan has to be strategic.
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  It has to avoid cuts that are counterproductive.
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  You can't undermine your military capabilities or
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  critical infrastructure repair. No, absolutely not.
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  So where does the consolidation come from?
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  It comes from ruthless prioritization.
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  Spending has to be triage based. Military needs, critical
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  infrastructure, and truly targeted social assistance take
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  precedence. Clear precedence and conversely,
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  generalized subsidies, which are inefficient and often benefit
• 13:36
  the wealthy disproportionately, and inefficient state programs.
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  Low return capital projects, all those have to be scaled back or
• 13:44
  reformed to free up fiscal space.
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  This requires real political will, a true reformation in
• 13:50
  governmental efficiency. It really does.
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  So this brings us to what might be the single most important
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  financial question. How do you finance the remaining
• 13:59
  deficit without resorting to the inflationary option?
• 14:03
  The sources say you have to strictly limit monetary
• 14:06
  financing. Absolutely.
• 14:07
  The government has to set clear, publicly transparent limits on
• 14:11
  direct central bank financing. Why is that so non negotiable?
• 14:14
  Because continuing the practice of using the central bank as a
• 14:17
  direct lender just completely undermines its independence,
• 14:20
  regardless of what interest rate they set, and it fuels future
• 14:23
  inflation expectations, this practice has to be phased out,
• 14:27
  ideally entirely as quickly as possible.
• 14:29
  OK. So if the central bank is off
• 14:31
  the hook, where does the necessary funding come from?
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  It has to be gradually replaced by two main sources.
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  First, external financing, concessional loans and grants
• 14:41
  from international partners. Which often come with
• 14:43
  transparency in governance conditions.
• 14:46
  Right, which are beneficial in the long run anyway.
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  Second, carefully managed domestic borrowing.
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  And how should that be managed? Domestically, the government
• 14:54
  should favor issuing bonds with longer maturities.
• 14:57
  This avoids that constant pressure to roll over short term
• 15:01
  debt, which can destabilize financial markets during times
• 15:04
  of uncertainty. By relying on real savings both
• 15:08
  domestically and internationally, the government
• 15:10
  helps the central bank regain its functional credibility.
• 15:14
  I think we need to linger on this concept of anchoring
• 15:16
  expectations. You mentioned establishing post
• 15:19
  war fiscal rules. Now.
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  Why announce a debt break rule today that might not even take
• 15:24
  effect for three years? Because it's an expectation
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  management tool, it's a powerful statement of intent.
• 15:29
  To really solidify this fiscal prudence, the authorities should
• 15:32
  publicly announce the design of specific post war fiscal rules
• 15:36
  right now. Maybe ceilings on the structural
• 15:38
  deficit or a limit on public debt relative to future GDP.
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  So even if these rules only come into force once the acute phase
• 15:46
  of the war has passed. Announcing them now helps
• 15:49
  households, investors and international observers believe
• 15:52
  that the current massive wartime deficits are temporary.
• 15:56
  It helps them believe these deficits will not become
• 15:58
  permanent sources of inflation. So that unified signal of
• 16:02
  institutional independence and fiscal restraint provides a
• 16:05
  powerful present day anchor for expectations.
• 16:09
  And that's arguably as potent as the mechanical effects of the
• 16:12
  interest rate itself. OK.
• 16:13
  So the core policies focus on the mechanics of debt and money
• 16:16
  supply, but we need what our sources call scaffolding,
• 16:19
  supporting policies that address the human and external element.
• 16:23
  Because of the necessary tight economic adjustment causes
• 16:25
  widespread social pain. The whole strategy could fail
• 16:28
  due to political pressure and social fatigue.
• 16:31
  Let's look at the social policies first.
• 16:33
  Right. Disinflation efforts, I mean,
• 16:35
  they inherently involve squeezing economic activity that
• 16:38
  inevitably hits real incomes and makes credit sparcer.
• 16:42
  And this disproportionately affects the most vulnerable
• 16:45
  groups. Absolutely displaced persons,
• 16:48
  low income households, pensioners, families relying on
• 16:51
  remittances, they get hit the hardest and if these groups feel
• 16:54
  ignored or abandoned by the state, social fatigue sets in.
• 16:58
  Which leads to political pressure for highly inflationary
• 17:01
  populist measures. Exactly.
• 17:03
  Things like imposing sweeping price controls or just going
• 17:06
  right back to money printing. So targeted social protection
• 17:09
  isn't just a moral concern, it's actually an economic necessity
• 17:13
  for maintaining the policies viability.
• 17:15
  It's an essential component, but the approach is vital.
• 17:18
  The fiscally sound method prioritizes means tested cash
• 17:21
  transfers or vouchers. Using digital registries and
• 17:24
  data systems to target the aid. Yes.
• 17:27
  This allows the state to direct support precisely to those who
• 17:30
  are verified as being most affected by rising prices or
• 17:33
  loss of income. It effectively cushions the
• 17:35
  impact of necessary price and utility adjustments without
• 17:38
  breaking the bank. And if we connect this to the
• 17:40
  bigger picture, this targeted approach avoids the trap of
• 17:45
  broad subsidies, right? Can you breakdown why broad
• 17:48
  energy or food subsidies are so damaging to the disinflation
• 17:51
  effort, even if they feel good politically in the moment?
• 17:54
  They're incredibly damaging on multiple fronts.
• 17:56
  First, they're extremely expensive.
• 17:59
  They add massive generalized pressures to the fiscal budget,
• 18:02
  which undermines the core goal of consolidation.
• 18:05
  Second, they're often regressive.
• 18:08
  A wealthier person with a large home or multiple cars benefits
• 18:12
  more from subsidized fuel or electricity than the poor do,
• 18:15
  right. And 3rd, they distort supply.
• 18:18
  If you remove the price signal, people consume inefficiently
• 18:21
  targeted cash transfers. On the other hand, they allow
• 18:24
  the price signal to operate, encouraging conservation while
• 18:27
  still providing the poor with the means to afford essential
• 18:30
  services. It's a balance of prudence and
• 18:32
  care. Targeted assistance also helps
• 18:34
  manage the broader wage pressures in the economy.
• 18:37
  It does. When the most vulnerable
• 18:39
  households receive that basic protection, it reduces the
• 18:42
  overall pressure for automatic economy wide indexation of wages
• 18:46
  to inflation. And that reduction of
• 18:48
  generalized pressure is critical for preventing that feedback
• 18:51
  loop. It is, and the government, as
• 18:54
  the largest employer, has to lead by example here.
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  How so? It must avoid granting uniform
• 18:59
  fully index pay rises across the entire public sector.
• 19:03
  While they absolutely have to prioritize essential workers,
• 19:06
  those in defense, security and healthcare for necessary salary
• 19:09
  adjustments, they must seek more moderate adjustments elsewhere.
• 19:13
  Because of the public sector grants 100% inflation matching
• 19:16
  raises. The private sector follows, and
• 19:19
  that wage price spiral we fear is instantly activated, and it
• 19:22
  just neutralizes the central bank's tight policy.
• 19:25
  OK, let's. Shift to the external risks.
• 19:28
  What stands out here is the volatility of the currency.
• 19:31
  A reasonably stable, though not rigidly fixed, exchange rate is
• 19:34
  essential. Why is that stability so
• 19:37
  critical? Because instability is
• 19:39
  inflationary, sharp panic driven depreciations feed immediately
• 19:42
  into imported inflation, just as we discussed.
• 19:44
  So the strategy requires adequate foreign exchange
• 19:47
  reserves. Yes, maintained partly through
• 19:50
  prudent management and external financing support.
• 19:53
  The central bank has to be judicious in its intervention.
• 19:56
  It should use its reserves to smooth out only the abrupt
• 19:59
  swings and prevent panic driven overshooting.
• 20:02
  It signals stability without fighting the underlying economic
• 20:05
  realities. I.
• 20:06
  Recall the critique mentioned the risk of defending an
• 20:09
  unrealistic rate. What's the mistake authorities
• 20:11
  have to avoid here? They have to avoid wasting
• 20:14
  finite precious reserves trying to defend an exchange rate that
• 20:18
  is fundamentally overvalued compared to the country's
• 20:21
  economic reality. That sounds like a losing
• 20:23
  battle. It's an open invitation to
• 20:25
  speculative attacks, and it just drains the reserves you need for
• 20:28
  genuine crisis management. The goal is stability and
• 20:32
  predictability, allowing the market to find a sustainable
• 20:35
  equilibrium, not rigid control. And long term stability really
• 20:39
  hinges on what happens at the border, doesn't it?
• 20:41
  Yeah, export performance is crucial for the currency.
• 20:43
  Absolutely restoring and securing key export corridors
• 20:47
  like the black seaports for grain or alternative land routes
• 20:50
  for manufactured goods. That is foundational
• 20:53
  macroeconomic policy. It provides a more stable and
• 20:56
  predictable flow of revenue. Real dollars in euros and that
• 21:00
  strengthens the balance of payments.
• 21:01
  That constant reliable inflow naturally supports the national
• 21:05
  currency, which reduces external inflationary pressure and
• 21:08
  lessens the dependence on short term financing.
• 21:11
  Securing trade routes is maybe the best long term currency
• 21:14
  defense there is. OK, now let's move to the
• 21:17
  Longview. Even if we execute the core and
• 21:20
  the scaffolding policies perfectly in the short term, our
• 21:23
  sources argue that success is fragile if the underlying
• 21:26
  economy remains prone to bottlenecks, corruption, and low
• 21:30
  productivity. That's right, Structural reforms
• 21:32
  are needed to make low inflation the natural outcome of a
• 21:36
  resilient economy, rather than a constant, painful struggle.
• 21:40
  We need to look at 5 critical areas here.
• 21:42
  And let's start with what is arguably the most important
• 21:44
  structural pillar, institutional quality, the rule of law and
• 21:48
  anti corruption. This comes up in every analysis.
• 21:50
  Because it's foundational, persistent corruption, arbitrary
• 21:53
  enforcement of laws, opacity and public processes.
• 21:56
  All of this acts like a massive hidden tax on every single
• 21:59
  business transaction. And that raises costs, it deters
• 22:02
  long term investment. The kind of productivity
• 22:05
  enhancing investment the country desperately needs.
• 22:08
  Instead it just encourages short term rent seeking behavior.
• 22:12
  So corruption isn't just a moral or a governance issue, it's a
• 22:16
  direct inflationary force. Precisely if investors fear that
• 22:20
  their contracts won't be honored or that their property rights
• 22:23
  are insecure, they demand a much higher rate of return to
• 22:26
  compensate for that risk. And that higher cost of capital
• 22:30
  keeps potential economic output low.
• 22:32
  Right. So whenever demand begins to
• 22:34
  recover, the constrained capacity hits its ceiling very
• 22:37
  quickly and that generates inflation.
• 22:40
  You can't sustain high growth with low inflation unless you
• 22:43
  have high productive capacity. And you can't build high
• 22:45
  capacity without trust in the governing institutions.
• 22:48
  Exactly. So the solution involves
• 22:49
  strengthening the mechanisms of trust.
• 22:51
  We're talking about judicial reform, making contract
• 22:54
  enforcement reliable, increasing transparency in massive public
• 22:58
  procurement processes, and empowering independent anti
• 23:01
  corruption agencies with real teeth and resources.
• 23:04
  Because when investors, both domestic and foreign, trust that
• 23:08
  their capital will be respected and rules will be applied
• 23:10
  fairly. They are far more willing to
• 23:12
  commit to long term ventures, new factories, better logistics
• 23:16
  networks, technological upgrades.
• 23:18
  This expansion of efficient productive capacity allows the
• 23:21
  economy to absorb higher levels of demand and employment without
• 23:26
  triggering the supply side price pressure that has plagued the
• 23:29
  nation historically. Let's move to the second
• 23:32
  structural area, energy sector reform.
• 23:34
  This has long been a weak point, and now it's a core target of
• 23:38
  military strikes. You mentioned it tackles 2 core
• 23:41
  inflation drivers, fiscal risk and cost push risk.
• 23:45
  Let's start with the fiscal side.
• 23:46
  We need to clarify a piece of jargon here, quasi fiscal
• 23:49
  deficits. What exactly are those and why
• 23:52
  are they inflationary? That is a critical technical
• 23:54
  point that needs some conversational clarity.
• 23:56
  Quasi fiscal deficits are basically debts or liabilities
• 23:59
  built up by state owned enterprises, particularly in the
• 24:02
  energy sector. How do they build them up?
• 24:03
  Because they're often unable to cover their operational costs.
• 24:07
  Historically, state energy utilities were compelled by the
• 24:10
  government to provide gas or electricity to households and
• 24:14
  businesses at tariffs that were far below the true cost of
• 24:18
  production, supply or maintenance.
• 24:20
  So that creates a massive financial gap.
• 24:22
  A massive gap. The utilities still have to pay
• 24:25
  for the fuel and the upkeep, so they run large losses.
• 24:28
  And who ultimately covers those losses?
• 24:30
  The state covers them either through direct subsidies that
• 24:33
  are hidden in the budget or by allowing the utilities to
• 24:36
  accumulate debt that is often implicitly guaranteed by the
• 24:39
  government. I see.
• 24:40
  So these massive non transparent liabilities, the quasi fiscal
• 24:44
  deficits, they act like a hidden government spending commitment
• 24:48
  that is entirely outside the official budget.
• 24:50
  So when the government has to bail out these utilities, it
• 24:52
  results in unexpected spending surges.
• 24:54
  Surges that are then financed either through inflationary
• 24:57
  means or by disrupting other, more critical spending plans.
• 25:01
  Reforming tariffs to reflect the true cost of supply is how you
• 25:04
  eliminate this hidden fiscal bleeding.
• 25:06
  That makes perfect sense. You eliminate the hidden
• 25:08
  liability. You reduce unexpected future
• 25:11
  physical pressure. What about the cost push risk?
• 25:13
  How does reform help there? Energy reform also directly
• 25:17
  addresses cost push inflation. By investing in diversifying
• 25:20
  energy sources, focusing on decentralized smaller scale
• 25:24
  generation like renewables, and by upgrading to smarter grids,
• 25:27
  you make the entire system more resilient.
• 25:29
  More resilient to physical attack and less dependent on
• 25:33
  large imported inputs. Exactly like centralized gas
• 25:36
  supplies, this reduces vulnerability to price spikes
• 25:40
  and supply disruptions, which stabilizes production costs
• 25:43
  across the whole economy. It provides the reliability
• 25:46
  necessary for manufacturers to plan with confidence.
• 25:49
  Now we have to shift to the enormous task of post war
• 25:51
  reconstruction. This will involve the largest
• 25:53
  inflow resources the country has ever seen.
• 25:56
  But the sources cautioned that this spending has to be
• 25:58
  strategic and productivity focused.
• 26:01
  They're not just a consumption boom.
• 26:02
  Absolutely. The reconstruction effort has to
• 26:05
  be guided by rigorous cost benefit analysis, strong
• 26:08
  internationally aligned procurement rules and
• 26:10
  transparent oversight to prevent waste.
• 26:12
  Because if the foreign aid and reconstruction funds just pour
• 26:15
  into the economy and get channeled into low quality
• 26:18
  projects or immediately converted into a short term
• 26:21
  consumption spree. It will be purely inflationary.
• 26:24
  Paying higher wages for construction labor with about
• 26:26
  increasing the long term supply of goods is just a recipe for
• 26:30
  inflation. So the focus must be on enabling
• 26:32
  future output, not just spending today's capital.
• 26:35
  Precisely. The focus must be on upgrading
• 26:38
  infrastructure in ways that structurally increase
• 26:41
  productivity. We're talking about rebuilding
• 26:43
  transport networks to modern European standards.
• 26:46
  Investing heavily in digital infrastructure and logistics to
• 26:50
  integrate into global value chains.
• 26:52
  Yes, and prioritizing education and training systems.
• 26:56
  The goal is to prepare workers for higher skilled jobs and to
• 26:59
  ensure goods can move efficiently.
• 27:01
  This strategic investment expands the long term supply
• 27:04
  side of the economy. Which is the only way to allow
• 27:07
  for higher levels of demand and growth without triggering
• 27:10
  sustained price pressure? It's an investment in future
• 27:13
  stability. OK.
• 27:14
  The 4th structural pillar is financial sector deepening.
• 27:18
  For a listener who might not think about capital markets
• 27:21
  every day, why does the depth of a nation's financial sector
• 27:25
  matter for inflation? Because shallow capital markets
• 27:28
  are inherently inefficient and they create risk.
• 27:30
  When markets are shallow, meaning there aren't many
• 27:33
  investment instruments available besides, you know, short term
• 27:35
  bank deposits or foreign currency, the government gets
• 27:39
  forced towards short term debt financing or critically back
• 27:43
  towards central bank support. I see So deepening the financial
• 27:46
  sector which involves cleaning up bank balance sheets,
• 27:48
  developing instruments like long term government and corporate
• 27:51
  bonds, building reliable stock exchanges.
• 27:54
  That achieves 2 things. First, it allows for better
• 27:58
  channeling of domestic savings into long term productive
• 28:01
  investments. That reduces the economy's
• 28:04
  reliance on often volatile foreign capital.
• 28:06
  And 2nd. Second, it improves the
• 28:09
  transmission of monetary policy. When capital markets are deeper,
• 28:12
  the central bank's interest rate decisions translate more
• 28:15
  effectively and predictably through the banking system and
• 28:18
  into the broader economy. It makes their actions more
• 28:21
  powerful and predictable, which reinforces their credibility.
• 28:25
  Finally, we have to address labor market and demographic
• 28:27
  policies. The war has caused massive
• 28:30
  internal displacement, refugee flows, tragic human losses.
• 28:35
  How does this factor into inflation?
• 28:37
  It creates bottlenecks and skill mismatches.
• 28:39
  So while you may have general unemployment, specific regions
• 28:43
  or sectors like construction or certain specialized
• 28:46
  manufacturing might face severe labor shortages.
• 28:49
  And that drives up wages and costs in those critical areas.
• 28:51
  Exactly so. Policies are needed immediately
• 28:54
  to facilitate the return and reintegration of refugees and
• 28:57
  demobilized soldiers, and that requires social infrastructure
• 29:00
  like temporary housing and childcare facilities.
• 29:03
  And retraining has to be key, right, to ensure the labor force
• 29:06
  matches the needs of a rebuilt, modernized economy.
• 29:09
  Absolutely. Providing robust retraining
• 29:11
  programs ensures that the labor supply can shift to where it is
• 29:14
  most productive. That reduces those localized
• 29:17
  wage pressures that can fuel inflation.
• 29:19
  And looking even further out, addressing the long term
• 29:22
  demographic decline through thoughtful migration and family
• 29:25
  policies might be necessary to ensure that chronic labor
• 29:28
  scarcity doesn't become a sustained source of inflationary
• 29:31
  pressure long after the conflict ends.
• 29:34
  The challenge we've laid out is just immense.
• 29:37
  It requires coordination and simultaneous reform in five
• 29:40
  areas, all while a war is still raging.
• 29:43
  So what are the major risks that could derail this multi pillar
• 29:47
  strategy no matter how well coordinated the policies are?
• 29:50
  Well, the ongoing war itself is the most the most unpredictable
• 29:54
  source of risk. New military offenses or
• 29:57
  intensified targeted attacks on vital economic infrastructure
• 30:00
  like energy grids or export facilities, can rapidly undo
• 30:03
  months of painstaking policy work.
• 30:05
  They destroy productive capacity.
• 30:07
  They force fresh, massive spending surges from the
• 30:10
  government, and they shatter fragile currency confidence,
• 30:12
  forcing people right back into that defensive behavior we
• 30:15
  discussed earlier. And this inherent military
• 30:18
  uncertainty makes the timing and calibration of policy incredibly
• 30:23
  difficult. I mean, if the central bank
• 30:25
  tightens too much but then a major supply shock hits, they
• 30:28
  might end up looking incompetent.
• 30:29
  The framework has to be flexible enough to absorb these sudden
• 30:33
  shocks while preserving the core long term commitment to price
• 30:36
  stability. The real test of policy
• 30:39
  credibility is how authorities handle these inevitable
• 30:41
  setbacks. Do they respond with
• 30:43
  transparent, measured adjustments, or do they resort
• 30:46
  to abrupt, opaque reversals that feed into panic?
• 30:49
  Exactly. Reversals that signal that the
• 30:51
  central bank is just a tool of the wartime government after
• 30:54
  all. This brings us to the central
• 30:56
  policy dilemma, the painful balance.
• 30:59
  You've argued for tight money and fiscal consolidation.
• 31:02
  But isn't tightening policy during a war just going to crush
• 31:04
  the economy, push firms into bankruptcy?
• 31:07
  Lead to a deeper recession. And, ironically, make fiscal
• 31:10
  consolidation harder by undermining the tax base.
• 31:13
  Right. So this raises an important
• 31:15
  question. Is the immediate cost of
• 31:17
  fighting inflation greater than the cost of funding the war?
• 31:20
  That is the narrowest path the policy makers must walk.
• 31:23
  There is always a trade off, but we have to view this through the
• 31:26
  lens of long term stability. If policymakers prioritize short
• 31:30
  term relief too much by keeping interest rates artificially low
• 31:33
  or delaying necessary fiscal reforms, they risk entrenching
• 31:37
  high destructive inflation and currency instability.
• 31:41
  And high inflation itself is a massive impediment to
• 31:44
  reconstruction. It makes capital planning
• 31:46
  impossible, so the sources suggest that the greater long
• 31:49
  term risk is unchecked inflation, which ultimately
• 31:52
  destroys the incentive to save, to invest and to even use the
• 31:56
  national currency. So the sequencing is key.
• 31:59
  They have to protect critical public investment, the strategic
• 32:01
  reconstruction and the targeted social support, while gradually
• 32:05
  phasing in the painful fiscal consolidation.
• 32:07
  Exactly. They can only ease monetary
• 32:09
  policy when inflation and inflation expectations are
• 32:12
  visibly falling and are anchored by that unified commitment to
• 32:15
  fiscal prudence. It's a precise balancing act,
• 32:18
  demanding great wisdom and always prioritizing long term
• 32:21
  stability over short term political comfort.
• 32:24
  So to sum up, we've covered how this wartime inflation is driven
• 32:27
  by a complex combination of physical destruction, massive
• 32:31
  deficits initially financed by money creation, exchange rate
• 32:35
  shocks causing imported inflation, and these entrenched
• 32:38
  defensive expectations rooted in Ukraine's history.
• 32:42
  But I think the most important take away is that the solution
• 32:44
  doesn't rely on a single policy lever or a heroic central
• 32:47
  banker. It relies on a coherent
• 32:50
  partnership. A partnership that requires a
• 32:51
  tight, independent central bank signaling its seriousness about
• 32:55
  price stability. Paired with a fiscally realistic
• 32:58
  government that commits to a phased path of sustainability
• 33:01
  and clear, transparent limits on future money printing, this
• 33:05
  approach really reflects the highest calling of stewardship
• 33:07
  and governance. We saw that this coordination is
• 33:10
  what transforms a potential losing battle, where the
• 33:13
  government spending pushes money out while the central bank tries
• 33:15
  to pull it back into a coherent, unified policy mix.
• 33:19
  Right. And the resulting shift in
• 33:21
  expectations, you know, when households, firms and investors
• 33:25
  begin to believe that inflation will actually be tamed, that
• 33:29
  shift is as vital as the mechanical effects of higher
• 33:31
  interest rates or lower deficits.
• 33:33
  And finally, we discussed how these deep structural reforms,
• 33:37
  tackling corruption, reforming the energy sector to eliminate
• 33:40
  those hidden liabilities and ensuring strategic productivity
• 33:44
  focus reconstruction are all necessary to expand the economy
• 33:48
  supply side. These actions create an
• 33:50
  environment where low and stable inflation becomes the natural
• 33:53
  sustainable outcome, rather than a fragile achievement that's
• 33:57
  only maintained by painful austerity.
• 33:59
  OK. So considering all the sources
• 34:01
  and the imminent flow of international financial support
• 34:04
  for reconstruction, here's a final thought.
• 34:06
  What might be the long term unintended inflationary
• 34:09
  consequence if that massive reconstruction spending, even if
• 34:13
  it's guided by robust procurement rules and
• 34:14
  transparency, is strategically slowed down to ensure
• 34:17
  institutional quality and is therefore not immediately
• 34:20
  channeled into increasing the supply of houses and materials,
• 34:23
  thereby preventing a short term consumption boom?