Economic Reservation Won’t Work: Searching for a Balance Between the Armed Forces and the Economy

Key points:

Relevance of the Issue: The reservation of potential conscripts is being actively discussed due to the need to meet both defense and economic demands. The need for additional funds and the mobilization of critical workers are driving this discussion. For instance, according to the head of the Budget Committee, Roksolana Pidlasa, an additional UAH 322 billion is required for the clothing, training, food, and financial support of 400-500 thousand new conscripts (excluding expenditures on weapons and equipment).

Key Statistics: Over the past 2.5 years, the number of professions and categories of workers subject to reservation has been increasing. Notably, on August 19, Deputy Defense Minister Ivan Havryliuk announced that approximately 930,000 conscripts had been reserved from mobilization. According to his projections, this number is expected to surpass one million within a week. On August 14, Minister of Economy Yuliia Svyrydenko reported about 770,000 reserved individuals. 

Economic Reservation: According to the authors of legislative initiatives, economic reservation is expected to generate an additional UAH 200 billion annually for the budget. To achieve this level of revenue, more than 800,000 people need to be reserved (UAH 200 billion / 12 months / UAH 20.4 thousand military levy). At the same time, MP Dmytro Natalukha noted in his Facebook post that Ukraine’s mobilization reserve currently stands at 5-6 million people.

On the other hand, with a fair and evenly distributed mobilization of 500,000 people from the 5 million mobilization resource (i.e., 10% need to be mobilized), 100,000 men earning over UAH 20,000 (according to the Demographic Strategy, Table 1 below) would be conscripted into the military. These individuals are the most likely candidates for reservation. If these 100,000 people sought to reserve themselves, the revenue to the state budget from the increased military levy would amount to UAH 24.5 billion (UAH 20.4 thousand * 12 months * 100,000 people), or only 7.5% of the annual funding required for the mobilization of 400-500 thousand people, as mentioned above (UAH 322 billion).

Reserving one million Ukrainians (especially if they are the same people already reserved and paying taxes) could have a limited financial effect but negatively impact public sentiment and the potential of the defense forces. Specifically, it may hinder mobilization, reduce the military’s access to the most qualified personnel, and create several potential lines of societal division. More details to follow. 

From 2022 to 2024, the system of reserving those eligible for military service in Ukraine underwent significant changes due to the demands of war and the economy. Initially, the reservation system mainly covered civil servants, law enforcement officers, security personnel, and enterprises fulfilling military orders. However, new challenges, such as attacks on energy facilities and a shortage of workers in the transport sector, required the authorities to revise their approach to determining the economic importance of enterprises and expand the categories of workers eligible for reservation. This expansion included workers in the energy sector, the agro-industrial complex, and logistics enterprises.

In 2024, several legislative proposals on economic reservation were registered in the Verkhovna Rada. According to these proposals, workers from legislatively defined categories and those who pay significant taxes can be reserved. These innovations aim to increase budget revenues during wartime but also carry considerable risks. We will examine this issue in detail below. 

The beginning: 2022

The primary law that defines the possibility of reserving those eligible for military service is the Law on Mobilization Preparation and Mobilization. 

From the beginning of the full-scale invasion and throughout 2022, the law identified categories of workers exempt from being drafted during mobilization. In 2022, these included people’s deputies, law enforcement officers, and employees in the security and defense sectors. Additionally, the law allowed for reserving employees of state and local government bodies and institutions with mobilization tasks. According to the government procedure in effect in 2022, these organizations were required to submit lists, approved by the Ministry of Defense, to the Ministry of Economy, which made the final decision on reserving each individual for up to 6 months. This reservation could be extended for an additional two months (which could be done multiple times) if the relevant government bodies submitted a justified request. 

Approval was at the discretion of the Ministries, without any set quotas for the number of reserved individuals. This led to concerns about the justification for selecting certain enterprises for reservation. In response to these criticisms, the government decided to formalize the criteria for enterprises to obtain “critical” status and to grant them the ability to reserve 50% of their personnel.

Changes in 2023

At the beginning of 2023, amendments to this law came into effect, extending the reservation provisions to include not only government bodies and enterprises fulfilling mobilization orders but also companies that produce goods and provide services for the needs of the Armed Forces of Ukraine (AFU) and those that are critical to the economy and the well-being of the population. 

In January 2023, following the updated law, the government also amended the procedure for reserving those eligible for military service during the war (Cabinet of Ministers Resolution No. 76). According to these changes, the lists of reserved individuals had to be approved by the General Staff of the Armed Forces of Ukraine (for conscripts registered with the Security Service of Ukraine and the Foreign Intelligence Service, the lists were approved by the SBU and FIS, respectively). As in 2022, the Ministry of Economy made the final list decision. At that time, the government developed criteria (still in effect today) that enterprises must meet in at least three areas to be recognized as critically important. This designation grants them the right to reserve 50% of their military service-eligible employees or more if justified. The criteria are as follows:

• The enterprise is included in the list of objects of strategic importance for the economy and security of the state;

• The enterprise is of significant importance to a sector of the national economy (the criteria for classifying enterprises as critically important are determined by state bodies such as the Ministry of Defense, Ministry of Economy, Ministry of Agriculture, Ministry of Culture, and the Ministry of Community Development) or meets the needs of the local community (as determined by local authorities);
• The enterprise is a resident of Diia City;
• The enterprise has no outstanding debts on social insurance contributions;
• The total amount of payments to the budget during the calendar year exceeds the equivalent of UAH 1.5 million (according to the NBU exchange rate, UAH 58.5 million at the beginning of 2023 and UAH 66 million as of July 2024);
• The amount of foreign currency income for the reporting year exceeds the equivalent of EUR 32 million (UAH 1.25 billion as of January 2023 and UAH 1.4 billion as of July 2024);
• The average salary of employees is not lower than the average salary in the region for the last quarter of 2021 (ranging from UAH 12.2 to 22.8 thousand, depending on the region).

To obtain critical status, an enterprise must apply to the relevant government authority specified in the law, submitting an application and documents confirming compliance with the criteria. Based on the application review, the authority decides whether the enterprise meets the requirements and either grants or denies it critical status. The decision must include justification. A copy of the decision regarding the enterprise’s compliance with the criteria is sent to the Ministry of Economy and the General Staff of the Armed Forces (or the SBU or Foreign Intelligence Service, as applicable). The enterprise must confirm its critical status at least once a year by submitting a corresponding application with supporting documents.

Enterprises in sectors such as energy, healthcare, veterinary medicine, education, media, housing, communal services, and several others only need to meet two of the above criteria to qualify. 

Not all organizations are required to go through this procedure. At the beginning of 2023, certain international-level organizations were “automatically” added to the list of critically important organizations (without needing to meet the above criteria). These include Ukrainian diplomatic missions abroad, UN agencies, representatives of other international organizations, donor organizations, as well as Ukrainian and foreign civil society organizations implementing humanitarian projects in Ukraine with funding from international partners, according to a list approved by the Ministry for Foreign Affairs or the Secretariat of the Cabinet of Ministers of Ukraine.

Unlike other enterprises and organizations, the 50% quota does not apply to energy sector workers and international organizations; they can reserve any number of employees. 

In 2023, in addition to the 50% quota, the reservation was fully extended to the heads of ministries and government agencies, their deputies, and the heads of independent structural units whose jurisdiction covers all of Ukraine. Additionally, it was permitted to reserve employees of ministerial patronage services. 

The State Emergency Service workers were also added to the security and defense sector employees, who have been exempt from being drafted into the military since 2022.

2024: How it works now

Starting in June 2024, the lists of reserved individuals are once again approved by the Ministry of Defense (or the SSU and FIS) rather than the General Staff, while the final approval continues to be handled by the Ministry of Economy. In April 2024, there were significant legislative changes to the list of individuals exempt from conscription based on their profession. Added to this list were judges, the Ombudsman, the Head and members of the Accounting Chamber, diplomats, and civil servants who prepare assessments for draft regulations, ensure cybersecurity, and provide software support in bodies that support the activities of the President of Ukraine, the Verkhovna Rada, and the Cabinet of Ministers.

In April 2024, the list of individuals exempt from being drafted for professional reasons was significantly changed at the legislative level. The new list now includes judges, the Ombudsman, the Head and members of the Accounting Chamber, diplomats, and civil servants involved in preparing reports for draft regulations, providing cybersecurity, and supporting software in agencies that support the activities of the President of Ukraine, the Verkhovna Rada, and the Cabinet of Ministers.

In 2024, the list of organizations whose employees can be reserved also changed. Notably, the following were automatically classified as critically important (without needing to meet the criteria): the Research Service of the Verkhovna Rada, institutions that support the activities of the President of Ukraine, the Verkhovna Rada, and the Cabinet of Ministers, and enterprises in the prosthetic and orthopedic sector (designated as critically important by the Ministry of Social Policy). Additionally, “to ensure the proper fulfillment of the powers of Members of Parliament of Ukraine, no more than two assistant consultants of each MP whom the Verkhovna Rada Secretariat employs may be reserved.”

Starting in May 2024, it became permissible to reserve more than 50% of specialists in electronic communications and digital networks (such as providers and system administrators) at enterprises recognized as critically important by the Ministry of Digital Transformation, provided there is a justified need. Conversely, employees of the National Police, NABU, ESB, SBI, and the State Emergency Service were removed from the list of security and defense sector personnel exempt from the draft due to their profession. These categories, along with employees of the prosecution and judiciary, were transferred to the list of individuals who can be reserved (up to 50%, except for the National Police and the State Emergency Service, which, if justified, are allowed to reserve a larger proportion of their employees). 

As of June 2024, the following categories of employees can be fully reserved (100%): 

• In addition to fuel and energy sector enterprises, this also includes companies that maintain essential systems, particularly those involved in constructing and repairing energy equipment and networks, along with their subcontracting organizations.

• Emergency recovery teams from companies that ensure communication and internet services during power outages.
• Enterprises involved in constructing fortifications (lists approved by regional military administrations in coordination with the Ministry of Defense) and critically important enterprises in the defense industry (as determined by the Ministry of Strategic Industries).
• Institutions that include official teams for Olympic, non-Olympic sports, and sports for people with disabilities.

Problems with the current reservation system

The current reservation system, particularly the classification of enterprises as critically important based on meeting three of the previously mentioned criteria (such as paying all taxes, providing salaries not lower than the regional average, and having no social contribution debt), has sparked public controversy. This is because some enterprises of questionable criticality to the economy, Armed Forces, and society have taken advantage of it. For example, based on the fulfillment of three criticality criteria, the Ministry of Economy reserved employees of Glovo, Visa, Favbet, and some other tech companies for six months but later had to revoke this decision.

At the same time, the reservation process has increasingly triggered adverse reactions from businesses. According to a survey by the American Chamber of Commerce, for 80% of companies, reserving military service-eligible employees is the key challenge to conducting business in 2024. The Ukrainian Business Council has raised concerns about the reservation procedure, such as the lack of automatic reservation extensions and the inability to correct errors when entering data into the “Oberih” system. It has proposed allowing the reservation of managers of critically important enterprises without the 50% quota. The European Business Association is urging the government and Parliament to permit unrestricted reservation of workers in the transport sector (currently limited to 50%) who are directly involved in cargo transportation, as well as to allow individual economic reservation (according to the legislative proposals discussed below) for the most valuable employees. 

What are MPs proposing?

Parliamentarians have already taken some steps regarding economic reservation. They passed on June 18, 2024, and on July 27, the President signed the law on the so-called “White Business Club.” This law includes, among other provisions, a recommendation to the Cabinet of Ministers to incorporate into the reservation procedure the possibility of automatically reserving up to 25% of employees eligible for military service from enterprises that are members of the “White Business Club.”

Additionally, on June 11, 2024, a bill was registered that proposes allowing the reservation of employees in the automotive transport sector. 

Moreover, several bills have been registered in Parliament proposing the introduction of economic reservation. Under these proposals, enterprises or individual entrepreneurs (FOPs) could gain the right to reserve their employees or themselves by meeting certain conditions, such as paying higher taxes or fees, offering higher wages, and having no tax arrears.

For example, Bill 11308 proposes the automatic reservation of those eligible who are officially employed or engaged in entrepreneurial activities and pay taxes of no less than the minimum wage in Ukraine (UAH 8,000 as of June 2024). 

In contrast, Bills 11331 and 11332 propose allowing the reservation of an employee for whom the enterprise pays an increased military levy of UAH 20,400 per month. Alternative bills (11331-1, 11331-2, 11332-1, and 11332-2) have also been introduced, offering different models. These alternatives include a model for reserving employees with a salary over UAH 35,000 or a mixed model—requiring a salary of UAH 36,000 for an employee and a UAH 20,000 military levy for individual entrepreneurs (FOPs). In the latter case, the FOP must have been registered for more than six months, with their monthly income exceeding three times the amount of the levy for reserving potential draftees (61,200 UAH).

Pros and cons of economic reservation

Reserving those eligible for military service during a full-scale war is a process of finding a balance between defense and the economy. It is clear that without adequate tax revenues, we cannot fund the military, and at the same time, without military protection, the economy and the country cannot survive. So, where is the “golden mean”? Today, there is an ongoing debate between politicians and businesses about expanding the opportunities for reserving employees of “non-critical” enterprises or organizations, provided they contribute a certain amount of money to the state budget.

The advantages of economic reservation, as discussed in the public sphere, include:

• Economic reservation has allowed the retention of employees in the energy sector. It could further help retain workers in the agro-industrial complex and transport sectors (or even attract more workers to these sectors, given Ukraine’s high unemployment rate). This would ensure the uninterrupted operation of vital economic sectors.
• Reserving those who make significant tax contributions could help sustain the state budget during the war. According to the Head of the Verkhovna Rada Committee on Economic Policy, budget revenues from economic reservation could amount to around UAH 200 billion annually (approximately 1/8 of the planned defense and security expenditures in 2024).
• The ability to reserve employees allows businesses to forecast their operations better, which would encourage investment.

The negative aspects of economic reservation include:

• The introduction of the economic reservation may seem unfair to service members who had high salaries in civilian life but are now risking their lives on the front lines for many months without the prospect of demobilization.
• Excessive reservation of civilian workers could lead to a shortage of military personnel, which could negatively affect the country’s defense capabilities.
• There is a risk of fraudulent employment and obtaining reservations for employees who do not play a critical role in the survival of a particular business. A similar issue was observed with the “Shliakh” system for volunteers, where some individuals used it not for volunteer activities but to leave the country and avoid mobilization.

Why won’t economic reservation work?

For many people, economic reservation is a lifeline to hide their fear of being mobilized behind the rational argument, “I’m more needed in civilian life.” However, more than economic reservation is needed to solve the existing problems at the state level; instead, it creates even more significant challenges.

Firstly, this decision would be perceived as unfair

Individual economic reservation creates or reinforces several lines of division within society: 

• Between civilians and service members who had or currently have salaries exceeding the amount required to secure a reservation. Current military personnel cannot “buy” their way out of service, putting them at a disadvantage compared to those who have avoided mobilization for two years and can now continue to do so for a fee.
• Between civilians with big enough salaries, making qualifying for the reservation, and those with lower incomes possible. This conflict could fuel the narrative of a “war for the poor,” as it implies that those with lower incomes or deemed less valuable by their employers are more likely to risk their lives.
• Between employers with income sufficient to reserve employees and those with minimal resources, including those forced to relocate their business from the combat zone, affected by shelling, or struggling for other reasons.

Overall, such a system would be perceived (and is already being perceived) as a way to “buy” a deferment from military service, undermining the army’s and society’s morale.

Secondly, economic reservation would need more funding to support mobilization efforts.

According to our calculations, based on publicly available information (which may not be entirely accurate), the additional tax revenues generated by economic reservation would not be sufficient to meet the army’s mobilization needs.

For 2024, the estimated need for new recruits ranges from 100,000 to 500,000 people, based on various assessments and statements from government representatives. The actual need is likely closer to the upper limit. According to the head of the Budget Committee, Roksolana Pidlasa, mobilizing 400,000-500,000 people would require an additional UAH 322 billion for clothing, training, food, and financial support (excluding expenditures on weapons and equipment). However, according to the forecasts of the authors of the legislative initiatives, economic reservations are expected to generate an additional UAH 200 billion annually for the budget. To achieve this level of revenue, more than 800,000 people would need to be reserved (UAH 200 billion / 12 months / UAH 20.4 thousand military levy). 

Currently, 565,000 men potentially eligible for mobilization have already been reserved. Ukraine has approximately 11.1 million men aged 25 to 60 who could be drafted. Taking into account those who have been demobilized, individuals with disabilities, and those with the right to a deferment, the estimated mobilization resource in Ukraine is around 5 million men, according to research by Texty.org (MP Dmytro Natalukha also mentions the figure of 5-6 million).

How many Ukrainians could take advantage of economic reservation opportunities?

According to data from the Ministry of Finance (National Revenue Strategy 2030) (Table 1), 1.9 million Ukrainians earn over UAH 20,000. It can be assumed that slightly more than half of them (approximately 1 million) are men (since men’s labor force participation rate is historically higher than women’s). How many of them could be mobilized? Suppose we consider the lower bound of the mobilization potential (5 million men) and the upper estimate of the need for new recruits (500,000 men). In that case, it turns out that, for example, in 2023, it would have been necessary to mobilize 10% of those who could potentially be called to military service.

If mobilization were conducted randomly (e.g., through a lottery), 100,000 people (10% of 1 million) from this group would need to be drafted. If these 100,000 individuals wanted to reserve themselves, the state budget would receive UAH 24.5 billion in additional revenue from the increased military levy (UAH 20.4 thousand * 12 months * 100,000 people), which is only 7.5% of the annual funding required for the mobilization of 400-500 thousand people mentioned earlier (UAH 322 billion). Of course, we have not considered other factors, such as the possibility that individual entrepreneurs (FOPs) could obtain an economic reservation, that some of the 1 million people earning over UAH 20,000 might already be reserved as valuable specialists, and that companies would be paying not only the military levy but also other taxes. However, even these simple calculations demonstrate that the revenues from economic reservation do not cover the previously stated mobilization needs.

Source: State Pension Fund of Ukraine data from the National Revenue Strategy 2030 

At the same time, the possibility of reserving employees who pay higher taxes could lead to an uneven distribution of labor resources. This could result in enterprises in important but less profitable sectors (such as postal services, retail, and light industry) being forced to scale back their operations or even close, while all employees in the financial sector or IT would be reserved.

Thirdly, this decision would not be sustainable

We are already facing challenges with mobilization. 

Economic reservation would not motivate new people to join the military; on the contrary, it would provide a legal means for those with relatively high incomes to avoid mobilization. As a result, the pool of individuals who can be mobilized would shrink.

As a result, the authorities would soon face the need to revise the categories of reserved individuals and those with deferments, likely reducing their numbers. Also, the amounts required to remain reserved would likely be increased, and those who cannot pay these higher amounts would be mobilized. This would appear as a breach of the government’s “promise” not to mobilize those who pay a certain amount of taxes (some people might even use their savings to arrange for fictitious employment with a higher salary). Such actions would erode public trust in the government.

Qualification of personnel in the defense forces 

Suppose the most educated and skilled Ukrainians are widely reserved. In that case, the defense forces may face a shortage of qualified personnel, particularly as the war becomes increasingly high-tech and requires expertise in new weapons and equipment, understanding the principles of electronic warfare, drone operation, and more. 

Thus, contrary to its minor economic benefits, economic reservation could significantly negatively impact the defense forces, society, and trust in the government. 

The trust would decline not only among service members who cannot leave service in exchange for paying taxes but also among individuals with incomes below the specified level, employers who cannot afford to pay the required amount to reserve valuable employees, and those initially granted economic reservation but later mobilized due to an increasing shortage of personnel in the defense forces.

Therefore, economic reservations would not strengthen Ukraine’s confrontation with Russia.

Therefore, we propose that the government focus on the following policies:

• Enhancing motivation to join the military: In a survey conducted by Info Sapiens for Texty.org.ua, potential draftees cited the risk of being sent to the front lines with poor or no preparation, inadequate commanders, insufficient material support, and uncertainty about the length of service as the main reasons for their reluctance. The state can and should address these issues. 
• Consistency and predictability in conscription policies: Defending the state is the duty of all citizens. It is essential to cultivate the idea that everyone should be ready to join the Armed Forces of Ukraine (AFU). Policies aimed at mandatory training for young people are a logical and necessary step. Training for adults, including those who are currently reserved or have deferments, should also be considered.
• Pre-mobilization training could eliminate another factor deterring people from mobilization. Currently, joining the army is an almost irreversible decision, which prevents those who are not obligated to be mobilized but could see themselves in a military profession if given the chance to test it before signing a contract with the AFU. Therefore, offering training before mobilization for those with deferments could attract motivated volunteers to the AFU.
• Increasing engagement with women who could voluntarily join the Defense Forces: There is no clear procedure for women to obtain their desired positions in the AFU. While the Ukrainian military has developed a recruitment process and a referral system from military units, these do not always function effectively. After appropriate training, women could replace many men in staff positions and on the front lines. Given that the full-scale invasion has lasted over two years and shows no signs of ending soon, starting training now would be beneficial to build a reserve of personnel for the future.
• Quotas for critical enterprises without income-based criteria are already in place, and this reservation practice should be maintained.

In addition, to support business activity and, consequently, tax revenues, it is essential to take well-known and long-awaited steps such as ending unwarranted inspections, property seizures, and the blocking of business operations and reforming customs and tax authorities. The vast majority of cases against businesses never make it to court, meaning that such actions by law enforcement negatively impact businesses without benefiting consumers or the state.

Finally, businesses and the government must acknowledge that the Ukrainian labor market has changed permanently. This would require hiring employees without the necessary skills and training them, increasing the involvement of women (including those who are single parents and thus need flexible work schedules), older individuals, and people with disabilities. This may involve reconfiguring workplaces and revising processes to accommodate these changes. 

Not everyone can fight simultaneously, but the division between military and civilian roles must be as transparent as possible. First, society must understand and accept that certain individuals who meet specific criteria will benefit more outside the Armed Forces (e.g., energy sector workers). Second, those in the military at a certain point should understand why this happened (e.g., because of a lottery system) and what will happen afterward, i.e., how training and service will proceed when they might be demobilized, etc. Creating this understanding requires the government to communicate effectively with the public rather than relying on slogans about “fair mobilization” (a term that few can likely explain practically).

In summary

Between 2022 and 2024, the state attempted to address two primary challenges simultaneously: maintaining defense capability (ensuring sufficient military personnel to protect the country) and ensuring economic stability (keeping government institutions and enterprises functional). 

During this period, Ukraine’s system for reserving potential draftees underwent significant changes as it sought to meet the evolving needs of the military and the civilian sectors. Initially, the reservations were applied to civil servants, law enforcement officers, and critically essential enterprises. By 2023-2024, the state effectively introduced economic reservations, as it became sufficient for businesses to meet three economic criteria to be recognized as critical. 

There is a debate about expanding economic reservations—allowing businesses or individual entrepreneurs to reserve employees or themselves by paying a certain amount into the budget. In our opinion, this idea would not be practical. The funds collected in this way would be insufficient to support mobilization efforts and could diminish the motivation of service members while undermining the sense of social justice. Moreover, economic reservations are unlikely to be sustainable, and those who take advantage of them might eventually feel deceived, further eroding trust in the government. Instead, the government should honestly dialogue with society (including businesses) about the most effective way to allocate human and financial resources to help win the war.