The $6 billion Accounting Error that Helped Save Ukraine

The $6 billion Accounting Error that Helped Save Ukraine

By Dan Rice, President, American University Kyiv

Accounting seldom plays a role in the outcomes of wars, but in this instance, an accounting error became an unexpected boon for Ukraine during a tumultuous Congressional period. With the removal of the Speaker of the House in October, there was potential for a temporary gridlock of Congressional budget approval. This raised concerns among Ukraine supporters that military aid might be interrupted.

However, an unforeseen Department of Defense accounting discrepancy, which reconciled aid for the war’s first year, emerged as a significant asset for the President of the United States at a critical juncture in this Congressional chaos.

Now that the DOD employs “book value” over “replacement cost”, there’s a business case for supplying Ukraine with the nation’s older, albeit operational, weapons and ammo, rather than the newest equipment. This encompasses tanks, fighting vehicles, anti-aircraft weapons, anti-tank weapons, artillery, small arms, ammunition, radars, and the like.

Consider an anti-tank weapon. The most advanced is the Javelin, produced in collaboration between Raytheon and Lockheed Martin. One such anti-tank missile is priced at $100,000. Its predecessor, the TOW, which was first produced in 1974, is nearing its lifespan end, and its book value approaches zero. Yet, there are tens of thousands of these stored globally. For those responsible for taxpayer funds, it’s more prudent to dispatch thousands of TOW missiles rather than simply discard them. In 2022’s accounting, the DOD estimated a Javelin’s replacement cost at $100,000. The recent correction assessed the TOW’s book value, hypothetically, at $10,000.

With Congress basing its approval of the 49 separate aid packages for Ukraine on a pay-as-you-go accounting system, any Congressional disruption might have paused the aid. The accounting error, however, provided the President of the United States with a “credit” of $6 billion, ensuring unwavering support for Ukraine until the election of a new Speaker of the House and the resumption of bipartisan support for Ukraine.

Given the shift in aid accounting for Ukraine to “replacement cost”, there’s a compelling case for offering older weapons in larger volumes. The US holds vast reserves of weapons, ammunition, and systems that, while no longer in use by the US military, remain potent tools to counter Russia in Ukraine. Why deliver weapons that taxpayers will later need to replace when there are effective, older weapons that won’t need replacement?

The US has in its possession thousands of M1126 Stryker Fighting Vehicles. These vehicles, now outdated, have been replaced in the US military with newer models. Ukraine has expressed a need for 500 of them. In addition, the US arsenal includes MRAPS, M1A2 Bradley Fighting Vehicles, M1A1 Abrams tanks, and a substantial cache of cluster munitions for Howitzers and HIMARS rocket launchers.

With the decision in place to arm Ukraine with cluster artillery shells and rockets, there exists a clear business case to promptly supply them in vast quantities, thus propelling Ukraine towards victory. The US stockpiles millions of 155mm Dual Purpose Improved Conventional Munitions (DPICM), cluster artillery shells with a range of 26 kilometers. After the President’s approval on July 7, 2023, Ukraine has employed these with efficiency and responsibility.

Furthermore, the decision to supply HIMARS rocket launchers has equipped Ukraine with three distinct rocket types. Their strategic use has significantly hampered Russian supply chains, marking a monumental strategic success for Ukraine.

Interestingly, from an accounting perspective, these cluster rockets possess a negative book value. Initially marked for destruction, supplying them to Ukraine aligns with both war objectives and fiscal responsibility.

Economics is often framed as a ‘competition over scarce resources.’ Yet, this situation, especially the distinction between “replacement cost” and “book value”, indicates otherwise. In reality, it’s more like an artillery war. HIMARS cluster rockets are abundant, and to the US taxpayer, they hold minimal value. The US possesses more than enough HIMARS rockets, capable of decimating the Russian military multiple times. These rockets, destined for destruction without replacement, emphasize the straightforward business case for shipping these conventional munitions.

In summation, the US boasts ample 155mm cluster munitions and HIMARS rockets to decisively influence the war. These are essentially cost-free. The focus should now be on providing Ukraine with enough firepower to reestablish their 1991 borders. This $6 billion accounting oversight inadvertently bolsters the President’s objectives in Ukraine.