What Happens to Debtors & Creditors in a War Zone?

In a world where films and video games seemingly glorify war, the supposedly mundane realities of conflict are overlooked in the name of entertainment. In this article we look at the reality of war in the context of debt recovery.

Bombing Out

Surprisingly, Britain only discharged its WWII debts in 2006 and WWI liabilities in 2015. So, what happened in 1944 if you came up from the Anderson shelter to find a doodlebug had detonated in the dining room? Private tenants (68%) no longer had a home to rent and, although free of the tenancy, often found themselves homeless. The War Damage Act of 1941 and the subsequent War Damage Commission sought to reimburse the costs of making good or rebuilding homes and businesses. Critics blasted it as inadequate. Thousands of the two million or so ‘bombed out’ home and business owners did not get any reimbursement or received sums insufficient to cover the costs, leaving them stuck paying a mortgage on a pile of rubble

Fast forward to the present day, and what happens if you get bombed out by a cruise missile? The War Damage Act was repealed in 1965, so the state has zero obligation to compensate you. In short, the bank will still expect you to pay the mortgage. Thankfully, insurance is a compulsory requirement on most mortgages. The perceived low chance of war on our shores has given rise to standardised phrases constituting war damage in most policies, such as fire, explosion, damage caused by political disturbances, and impact caused by aircraft or other flying objects. For the 25% of UK homes without insurance, getting bombed out would be even more inconvenient. Take a look at Ukraine, where war damage insurance is, for obvious reasons, hard to come by. Ukraine’s State Emergency Service is now responsible for documenting war damage and reimbursing civilians for their bombed-out homes.

Doing Business in a War Zone

When it comes to doing business in a war zone, size really does matter! In response to the Egyptian civil unrest of 2013, General Motors and Electrolux simply responded by temporarily halting production and evacuating foreign staff. SMEs could only baton down the hatches and hope the curfew prevented looting. Testimony from businesses in Lebanon during the lengthy conflict sheds light on the reality of trading in a war zone. Lebanese restaurant chain Semsom expanded to neighbouring countries and used the stable revenue to help finance their patriotism of refurbishing and launching new outlets in Lebanon. One of their Beirut grand openings had to be scaled back at the last minute to not appear insensitive to the nearby funerals of the fallen. The franchisee of Beirut’s Virgin Megastore had to shut down during the six-month occupation of Martyrs’ Square by protesters and rely on other branches to cover costs.

The Myanmar and Ethiopian–Somali conflicts have been running for over 75 years each. At that time, war has become a normal part of life and business. SMEs in war zones are often deemed collateral damage. As seen in Sudan and Afghanistan, certain types of business and industry become ‘unlawful’ overnight because of extremist religious doctrines. In war, businesses must act quickly to have any chance of survival. It’s things like staffing levels, getting goods in and out, whether trading partners will still exist tomorrow, finding alternative premises, having paperwork for checkpoints, and reaching customers. Business owners keep trading in the hope that better days will come. It’s like being in constant crisis management mode.

In a war zone, debts do not disappear and nor do debt collection agencies. War can make monsters out of otherwise decent people, and sometimes those people are debt collectors!

Doing Business in Ukraine’s War Zone

When the USSR collapsed in 1991, Ukraine gained independence. Since then, international organisations like the EU, UN, IMF and USAID have been supporting Ukrainian businesses and citizens with free trade agreements, aid, and investment. According to USAID, since the outbreak of war in 2022, it has helped more than 12,800 farmers continue working their land. This includes the AGRI-Ukraine initiative helping farmers transport, store, and export their products during wartime. USAID has supplied crop spraying drones and invested in Lviv-based Yarych to scale up food production. It has also funded over 4,000 SMEs in the IT and manufacturing sectors, supporting 55,000 jobs. Ukraine’s tech sector is the only industry to have grown since the outbreak of war. 95% of the client base is overseas, supporting 285,000 jobs. All this is geared to preserving Ukraine’s economy for better days.

When Ukraine’s economy contracted by over a third in 2022, its national bank (NBU) implemented emergency measures such as fixing the exchange rate and providing economic support to the industry. Even now, taxes and social security payments are still being collected. The NBU has launched Joint Banking which brings Ukraine’s main banks under one network at the branch level. This is to ensure individuals and businesses can access their money at any branch, no matter who their bank is. Some businesses have been able to pivot and supply goods for the war effort. Ukraine’s spirit of pushing on was shown by NBU governor Andriy Pyshnyy who recently recounted finalising an IMF agreement during a missile attack!

Agriculture & War

Agriculture is humanity’s oldest economy, and as abstract as it sounds, there is a clear link between it and war. When the war starts, food production and distribution are threatened. Inflation rises, and imports reduce. Britain’s dig for victory campaign of WWII recognised that. When war breaks out, agencies seek to provide food, medicine, and equipment in the form of humanitarian aid. A starving country will snowball from war to civil unrest as society self-destructs from within. Agriculture is also fundamental to how a country recovers from war. Lord Shackleton’s economic study after the 1982 Falklands War ultimately led to the majority of foreign (UK) owned farms and industries being brought into local ownership, setting the Falklands up for long-term prosperity after a brutal 74-day war.

Recession & War

If war broke out tomorrow, the UK economy would immediately go into a recession. So, how could businesses react?

1) Transparency – the pandemic taught businesses they couldn’t sugar-coat duck droppings, so in telling employees how they can help for the greater good, you’re going to instil loyalty and motivation.

2) Conserve cash – some suppliers and staff may accept and even prefer equity or goods in lieu of cash.

3) Small cutbacks now can make a big difference later – it’s the little things like unused software licenses, selling unused equipment or renting out space you don’t need.

4) Look at different revenue sources – you could start selling goods/services that are suddenly hard to come by or directly supply the war effort.

5) Keep hiring and training to replace staff churn – you’ll also create loyalty if the training is seen as career development.

War Reparations

At the end of WWI, Germany agreed to pay $31.5 billion in compensation to Allied forces. At the end of WWII, Germany agreed on some cash compensation, but most of it took the form of surrendering territory, equipment, trains, ships, and raw materials. It was only after WWII that Reparations became international law for members of the UN Security Council (UNSC). Reparations are the equivalent of the losing side paying your costs in court. The ‘illegal aggressor’ is obliged to pay for the cost of destruction and restoration.

Iraq’s 1990 invasion of Kuwait saw it pay $52.4 billion in reparations. In 2021 Sudan paid $335 million in reparations for the targeting of Americans and US embassies during the rule of President Bashir. The US initially agreed to pay reparations for the Vietnam War, but the deal later fell through. By the UNSC’s own admission, the 2003 US-led invasion of Iraq was illegal, but it has stopped short of demanding reparations. Although exact figures are shrouded in secrecy, the UK’s MoD is said to have paid out at least £20 million to date for civilian harm claims in Afghanistan and Iraq. As a ballpark figure, civilian rights groups have suggested parents of an injured child are being offered around £600, grieving parents £1,600 and a widow £8,000.

It would be nice to think that Russia will pay reparations to Ukraine, but it’s going to take an uprising on the scale of 1917’s Revolution before an appetite emerges. The only reparations expected are cash incentives for the eventual return of those Western businesses forced to sell up or write off their Russian assets.

The War Playbook

If war is sustained long enough, the relationship between debtors and creditors becomes desensitised to the conflict and a new normal ensues. In the aftermath of a coup d’état, civilian legal structures and the relationship between debtors and creditors become governed by Martial Law, i.e., the dictator’s opinion is imposed as law. When civilians have extremist religious rule thrust upon them, the playbook is written from a minority’s interpretation of holy scripture. Democracy is neither an assertion nor a guarantee that you won’t get bombed out. The wealth and global alliances typically afforded to a democracy mean they are more likely to have the tools to both deter and defend against hostile forces. The threshold for a smoking gun is woefully low. History teaches us that it only takes one crackpot to start a war. Again, democracy is no guarantee that a lunatic warmonger won’t be one of our own elected officials!