Op-Ed: What would happen to Ukraine’s economy if Russia invaded by force – KyivPost

Russian troops are massing on the Ukrainian border. Western leaders and intelligence officials are issuing warnings and threatening sanctions. The Ukrainian public, politicians and the media are alarmed as the military prepares to defend the country.

This is the image we have seen over the past few months as Russia began its most recent military build-up at Ukraine’s back door.

War is a terrible thing and of course we all hope it will be avoided and this period of tension will end in the same way as the previous ones – with the return of Russian troops to the barracks and the end of the danger (at least temporarily). Nevertheless, we must understand the consequences of a possible Russian invasion, and not just military. The impact on the economy, the backbone of any country, is no less important.

So what would happen to the Ukrainian economy if the Russians did invade?

While instinct tells us the effects would be devastating, the reality is actually more nuanced.

Arguably, the Russians do not plan to get bogged down in some kind of protracted war of attrition (they have already created one in the Donbass). The scenario we are discussing is a relatively short conflict, which would impact the economy in several ways.

First of all, the financial impact. Ukraine depends on foreign funding and foreign investment to keep its public finances and economy afloat. Any kind of open military conflict would drive investors away, posing a threat to financial stability and a risk to the local currency, the hryvnia.

However, thanks to the prudent macroeconomic policies – both monetary and fiscal – adopted after the Maidan revolution, the country is doing relatively well. The reserves of the National Bank recently exceeded $ 30 billion, and they would be used in this kind of crisis to keep the hryvnia afloat and to support the financial system. The projected budget deficit of 3.5% of GDP is relatively small, and there is no doubt that in the event of an open conflict with Russia, the Western partners and the IFIs would provide financial support to the Ukrainian state, as they have called it. ‘did in 2014. If the conflict is short-lived, these resources should be sufficient to mitigate the financial impact of the war.

Second, the impact on the real sector of the economy. Undoubtedly, many industries would have to temporarily switch to military mobilization mode – for example, rail transport would primarily serve military needs, while the energy sector should focus on ensuring a secure and stable supply for support the military effort. Other sectors would be temporarily frozen – fewer people frequenting cafes and places of entertainment, new investment projects ceasing until the conflict is resolved, etc.

In a way, this is similar to the lockdowns induced by COVID, the most recent of which peaked in the country just a month ago. They are quite disruptive, but they are also not fatal to the economy and do not lead to any kind of prolonged economic slump. As soon as normal economic life can resume, it does.

So, is Ukraine’s economic pessimism totally unjustified in the event of open war with Russia? Unfortunately no.

We can only speculate on Russian military objectives in such a conflict. Yet it is clear that among the potential scenarios are those involving the occupation of large areas of Ukraine. In particular, a much-talked-about scenario is the occupation of southern Ukraine’s coastal areas, which would cut the country off from the sea and allow Russia to create a land bridge to already occupied Crimea.

This type of territorial loss would create a massive negative economic impact. This would directly remove the GDP produced by the newly occupied territories. Indirectly, this would sever existing production chains and create a further drop in production in unoccupied areas. To be cut off from the sea would be particularly devastating, as the Ukrainian economy depends on commodity exports, which are mainly carried out through ports.

Ukraine’s economic resilience in the face of the Russian invasion directly depends on the ability of the military and territorial defense units to protect the country’s territory from occupation. If they can deny Russia the ability to take and hold significant areas of Ukraine, the country can weather the storm. If the Russians took significant territory (the South in particular), then the losses would be much greater.

This type of analysis is based on the “as is” world situation. Ukraine is classified as a small open economy which depends on exports (which constitute 40% of the country’s GDP) and foreign investment flows. Such an economy is seriously affected by negative external events. If the world sneezes, Ukraine gets sick.

Eurasia is already in the grip of the energy crisis. The rise in inflation has now affected the whole world. The failures of huge construction companies in China have created fears in major financial markets. In short, there is the potential for a major economic or financial crisis around the world, although we can never know in advance when exactly it will strike.

Such a crisis would automatically make Ukraine’s economic position much more vulnerable. NBU reserves and foreign aid should be spent to keep the economy afloat. The real sector, dependent on exports, would be in a much worse position simply because of the global situation. Under these conditions, it might be enough for the Russians to create a military disruption – without occupying major areas – for Ukraine to suffer a major economic crisis.

Perhaps this is the kind of opportunity the Russians are going to seek. It is important for Ukrainian and Western leaders to understand this strategy and to counter it by strengthening the economic resilience of the country. Intensifying reforms and improving the investment climate in Ukraine is a good way to achieve this.

Found a spelling mistake? Let us know – highlight it and press Ctrl + Enter.

Christi C. Elwood