IDENTIFYING AND ANALYZING CORROSIVE INVESTMENTS INTO UKRAINIAN ECONOMY AS AN ELEMENT OF THE HYBRID WARFARE

The research was conducted with the support of the Center for International Private Enterprise (CIPE)

Edited by:

Serhii Savchenko

(Center for Analytical Studies and Countering Hybrid Threats)

Project Expert Group:

Anna Borshchevska

Ihor Chernukhin

Ihor

Guskov, Ph.D., Oleh Hatyan

The publication is devoted to the analysis and methods of identifying corrosive investments of the aggressor country in the economy of Ukraine, as one of the methods of conducting a hybrid war against Ukraine. Given that the economic sphere is one of the “theaters of combat” of hybrid warfare, the publication is a continuation of the previous work of the Center for Analytical Studies and Countering Hybrid Threats regarding Russia’s use of hybrid aggression against Ukraine and the West in the political and informational spheres.

The publication is intended for a wide range of experts, journalists, and scientists who are focused on studying the Russian aggression against Ukraine and subversive activities of the Russian Federation against the West.

This publication was created with support from the Center for International Private Enterprise (CIPE). The content of this publication represents the opinions and analysis of the authors and does not necessarily reflect those of CIPE or any of its employees.

Executive Summary

Hybrid warfare is a socio-political phenomenon, in which the achievement of the goal of aggression is carried out by conducting activities in the political, economic, and informational spheres, and military actions have a limited, auxiliary character. The war is conducted in the form of operations based on the strategy developed by the aggressor country, and therefore is not spontaneous but planned. This is hidden from the victim for as long as possible.

Economic warfare is a special theater in which the aggressor tries to inflict fatal damage on the economy of the victim country, using all available tools as much as possible. There are two ways of waging economic warfare: “collision” with the victim's economy and “penetration” into it. Within these ways, various methods can be applied, some of which become systems during the project.

“Collision” implies measures which are aimed at weakening the economy of the victim country without establishing control over its enterprises. Measures are aimed at stopping or complicating the flow of goods and technologies from the victim country to the aggressor country, or in the opposite direction.

“Penetration” into an economy implies establishing ownership or control of its enterprises, and corrosive capital is the most insidious method. It involves direct or indirect investments in enterprises in order to harm a victim country’s economy and national interests, and sometimes to the benefit of the aggressor's own economy. This ultimately has negative consequences for the victim country. Ukrainian exports of raw titanium, for example, are controlled by Russia, providing the aggressor material needed to produce weapons and military equipment used in an open war against Ukraine.

In other words, corrosive investments are investments in an economy that pursue not economic, but political goals, including destroying or subjugating the victimized state.

At first sight, the targets of corrosive investments are particular enterprises. But wider goals include destroying certain sectors of the economy and achieving political goals. The real goals of an aggressor become clear at the final stage of a specific operation, when preventing destructive consequences is difficult, and in certain cases, impossible.

In the 30 years since Ukraine's independence, out of more than 1,500 strategic enterprises about 42% have been liquidated or are in bankruptcy. The most vulnerable areas include manufacturing (in which about 50% of active companies have been liquidated), mining industry and quarry development (about 47%) and scientific and technical activities (about 35%).

Amid the presence of internal factors, such as unprofitability and corruption amongst domestic elites, research reveals the corrosive influence of the Russian Federation on both particular enterprises and entire industries, which were either destroyed or taken under the control of the aggressor.

From 2001 to 2014, the extraction and enrichment of titanium in Ukraine was actually under the monopoly control of a pro-Russian oligarch and the output was used to satisfy the needs of the Russian Federation. Even after the first phase of Russia's open invasion of Ukraine in 2014, when the state returned part of its production facilities, the aggressor improved its methods of influence, which allowed it to maintain covert control over the industry.

The hybrid influence of the Russian Federation in the oil refining industry led to just one of six oil refining enterprises able to function as of 2014, and it was unable to source crude oil from the Russian Federation. The industry was destroyed in four stages: inhibition of Ukrainian production of raw materials by dumping exported versions at low prices; stoppage of oil refining at enterprises, over which control was previously established by the Russian Federation; stopping the pumping of raw materials to other Ukrainian oil refineries; and countering the diversification of oil supplies to Ukraine from other countries.

The liquidation by a pro-Russian politician of the only producer of offset paper in Ukraine at that time caused not only the increase of Ukraine's dependence on Russian imports of this product, but also obstacles in the work of Ukrainian publishing houses. At the same time, conditions were created for an increase in the flow of Russian printed materials, which contributed to a negative influence on Ukrainian society.

If the destruction of a Ukrainian enterprise can cause harm to the victimized country, Russia uses the method of establishing hidden control over this enterprise through the owners or top management of the enterprise (the research provides an example of a strategic enterprise in the energy industry).

The conducted research revealed that the main method of Russian influence on a victim’s economy, corrosive investments, is used in combination with other methods, such as penetration into the top management of enterprises without obtaining corporate rights, the termination of supply of strategic raw materials, or damage to infrastructure.

Based on the research materials, the project team provided a number of recommendations to the authorities regarding the timely detection of hidden corrosive investments in the economy of Ukraine useful to the Russian Federation, and the leveling of their destructive influence, and the improvement of state regulation and protection of strategic enterprises.

Introduction

In the modern global world, we observe a constant struggle between states, which, in our opinion, is conducted in four main domains – political, economic, information, and military.

The struggle is ongoing, even in when conditions are peaceful. It is based on and limited by the framework of laws and treaties. In the civilized world, ideally, it takes the form of a competition. From time to time, conflicts of interest aggravate the relationship and this struggle between the subjects can develop into a more acute phase, in which we observe outbreaks of economic, diplomatic and information wars or conflicts. But all of them take place within the framework of compliance with international treaties, rules and morality. Contradictions are resolved at the level of international law with involvement of international institutions. Learning the bitter lessons of large-scale bloodshed, humanity has developed mechanisms for resolving conflict. Those mechanisms are complex and multifaceted, covering the entire range of possible conflicts from conflicts between states to conflicts between the state and an individual. They combine both the legislative base formed on the principles of international law and the organizational component – from the UN to international judicial bodies.

Such struggle turns into a war in conditions where a party to the conflict of interests is rejecting the existing norms of international law, moral restrictions and legal conflict resolution methods. At the same time, if the military solution, the use of armed forces, is chosen as the main tool for resolving conflict, war is the result, in its classical sense. But if the goal of aggression is achieved through complex measures in the political, economic and informational domains, and military actions are of a limited and auxiliary nature, then we are dealing with a socio-political phenomenon called hybrid warfare

The above-mentioned measures in these areas are carried out by the states in the form of operations which have a planned nature and final goals that are consistent with the main goal of the aggressor state – destruction or subjugation of the victim country. Therefore, project analysts define these areas as operational lines

These operational lines can be considered as separate “theaters of combat” of hybrid warfare. Often it is impossible to single out the one most frequently or regularly used. Under certain circumstances of interstate relations, the enemy can use any of the operational lines as a priority. On the one hand, operational lines are run comprehensively and complement each other, on the other hand, each of them has its own methods of fighting against the victim country.

The economic operational line is no exception. Here, the aggressor state uses a special type of economic “weapon”: “corrosive investments” to harm the economy of the victim country and sometimes also for the benefit of its own economy.

The purposes of this project were to investigate the methods, procedures and negative consequences of the corrosive effect of aggressor countries’ investments in the national economies of victim countries; to develop a methodology for identifying and analyzing potentially corrosive investments; and to develop proposals for improving the performance of state bodies countering the hybrid operations of the aggressor country.

This research included the study of specific examples of corrosive influence on the economy of Ukraine, a victim country, inflicted by the Russian Federation as the aggressor country. It also included the undisguised signs of the hybrid influence that became recognizable in Ukraine since 2004 and perhaps earlier.

Russia's open military invasion of Ukraine, which took place on February 24, 2022 (in fact, simultaneously with the start of this project), was clearly based on its past results in waging a long-term hybrid war against Ukraine. To a certain extent, it illustrated the direction of the strategy of aggressive hybrid influence on the economy of Ukraine in the pre-war period.

The processes of destruction and seizure of strategic objects of the Ukrainian economy were completed in the course of open wide-scale aggression.

The economic warfare was considered one of the main levers for achieving victory.

For example, at the initial stage of the open invasion, the Chernobyl and Zaporizhzhya nuclear power plants were seized.

The nature of the aggressor's actions indicates that the South Ukrainian nuclear plant was also one more potential target. The aggressor's troops advanced purposefully in this direction, wedged 250 km deep into the territory of Ukraine and were stopped by Ukrainian defense forces in the neighborhood of Voznesensk in Mykolaiv oblast only 30 km away from the plant.

Seizing and taking control of nuclear power plants provided an opportunity to decisively influence Ukraine's energy system and use it to stop resistance of the Ukrainian state to the aggressor.

As Moscow realized the failure of its planned blitzkrieg and the inability to defeat Ukraine quickly, attacks on strategic industrial enterprises began.

According to the Center for Economic Strategy, beginning in the first month after the onset of open aggression, Ukraine's economy suffered catastrophic losses.

Data collected by the Center for Economic Strategy confirm the extent of the damage to Ukraine’s economy within the first month of the attacks. Exports in March 2022 decreased by 50% as compared to February, to $2.7 billion. Imports fell by 30%, to $1.8 billion. Exports of metals stopped almost entirely, while that of agricultural products decreased fourfold. This in large part because Russia moved to block export routes out of the country. Russia imposed a blockade on Ukrainian ports on the Black Sea, shutting down maritime shipping, which had transported 62% of exports by revenue in 2021. Ground methods such as rail (23% of exports) and road (12%) were also curtailed.

More than half of Ukrainian companies have stopped or suspended their activities: 57% according to the European Business Association, or 59% according to the Kyiv School of Economics (KSE) and a “Gradus” research company survey.

Damages from destruction as of the beginning of April 2022 had reached $80 billion, as assessed by the consortium of the KSE Institute, the Center of Economy Studies, the Anti-Corruption Center, the Institute of Analytics and Advocacy, Transparency International Ukraine and ProZorro.Sale. These are losses of transport, infrastructure, and housing.

About a hundred enterprises were damaged or destroyed, with losses valued at $6.7 billion. The 20 most impacted are Illich Steel & Iron Works, Azovstal, Ukrenergomashyny, Antonov’s, Avdiivkoksokhim, Odesa Refinery, Linik, Malyshev Plant, Rubizhne Cardboard Plant, Sumykhimprom, Zhytomyr Armored Vehicles Plant, Kharkiv Tractor Plant, Popasna Repair Plant, “Kharkivyanka” Confectionery and, Coca Cola Beverages, Obio, Kremenchug Refinery, “Zorya” Engineering, Mondelis Ukraine, Vetropak. The last four have been damaged beyond repair.

In terms of industries, the territories occupied in the initial period of the war accounted for 53% of ferrous metal production, 40% of machine building, 18% of rubber and plastics, 23% of agriculture, 16% of wood products, 20% of the chemical industry, 25% of the food industry, 17% of textiles and clothing, 30% of the mining industry, 29% of coke and oil refining and 12% of pharmaceuticals.1

1 https://forbes.ua/inside/vtrata-polovini-eksportu-ruynuvannya-promislovikh-gigantiv-ta-udar-po-derzhbyudzhetu-ekonomikaproyshla-pershiy-misyats-viyni-shcho-dali-golovne-zi-zvitu- tses-12042022-5408

As an example, the destruction of the Kremenchuk oil refinery completed the process of the entire liquidation of the oil refining industry of Ukraine, which began and was effectively carried out by Russia during the hybrid stage of aggression.

By September 2022, when the aggressor lost the opportunity to conduct not only offensive operations but also defensive operations, because of strikes by the Armed Forces of Ukraine, massive strikes were launched on infrastructure facilities, primarily the country's energy supply systems. Russia’s goal was to destroy the country's life support system, create a humanitarian catastrophe and break the will of the Ukrainian people to resist.