The Ukrainian economy: should we be worried? – Kyiv Post

The whole world is impressed by the advance of the Ukrainian Armed Forces (UAF) in the Kharkiv region, repelling the Russian army and forcing it to flee. This is a key moment of celebration, not only for the people of Ukraine, but for all free nations of the world.

Clearly, Western military aid, on which Ukraine’s survival depends, has not been wasted and is being well used. The UAF showed its strength by being able to break through Russian defenses in a conventional military battle.

However, the capacity to make war does not depend only on the capacity of the army of the country. Ultimately, attrition wars – what the Russian-Ukrainian war has clearly become – are also won by the ability to outlast the adversary with available economic resources and the will to keep fighting. The nature of these wars is fundamentally economic, and the economy is the main front to watch.

So what is happening on this front in Ukraine?

The economic toll of the war

The war caused a huge dent in the Ukrainian economy. GDP fell 19% and 37% respectively in the first and second quarters of 2022, with an overall decline of one-third expected for the year.

Unemployment is also a huge problem. Although the number of officially registered unemployed in Ukraine is low, it is mainly a statistical artifact. Many people have not officially left their jobs but are not actively working (and therefore earning no income), are not registered as unemployed, or have left the country.

Broader data paints a very bleak picture, with 12 people looking for work per advertised vacancy. According to data from job search sites, about 30% of Ukrainians have lost their jobs since the start of the war. Even gloomier are the data on wages, which have risen only 3% during this period, while the official inflation figure stands at almost 20% in August.

The only factors mitigating these terrible labor market conditions are the employment of approximately one million men in the military and the flight of many more millions of women and children to the European Union (EU) where many can receive temporary social assistance. All in all, it is clear that the war has caused terrible hardship to the people of Ukraine and has exhausted the economic resources available to the country.

State of public finances

This drain had a huge impact on the country’s public finances. The state budget operates with a monthly deficit of $5 billion, which the government is trying to reduce to $3 billion. This is mainly covered by financial assistance from friendly governments and international financial institutions (IFIs), but even this is not enough since part of the budget deficit was financed from the money printing of the National Bank of Ukraine ( NBU). The latter is a major source of concern, as it fuels inflation and currency depreciation, further endangering the stability of the financial system.

At the recent YES conference in Kyiv, the dreaded term “hyperinflation” was repeated over and over by officials and experts as a major risk. Capital controls, introduced by the NBU as a means of mitigating capital flight while helping to protect financial stability, inhibit capital inflows and thus further hamper the chances of economic recovery. The overall financial situation can be described as constantly on edge, with Ukraine totally dependent on foreign financial aid.

Export Recovery

On a more positive note, Ukraine has seen improvements in logistics and a rebound in exports, particularly of cereals. Ukraine’s failure to export enough grain when storage depots were full proved to be a major threat to the new crop, some of which was in danger of simply going to waste.

However, thanks to the grain corridor agreement reached at the end of July with the help of Turkey and the improvement of the logistics capacity at the western border, agricultural exports have resumed. Unfortunately, the enemy has taken notice, with Russian President Vladimir Putin already declaring that “the grain corridor is not achieving its goals”. This can be read as a thinly veiled threat to limit the export sea route again, whatever form that might take.

The Russians already created a logistical crisis in Ukraine in the spring and early summer, when they destroyed fuel refineries with missile strikes – it took Ukraine nearly two months to recover. It will be very important to keep the grain corridor fully operational, using all diplomatic and military means available to guarantee it.

Nevertheless, Ukraine has generally managed to maintain the functioning of its logistics system and to improve its operations, despite the very harsh conditions imposed by the war.

Winter is coming

Energy is another critical area for economic sustainability. At present, the situation is viable, with Ukraine managing to keep the energy system running and even transitioning to the pan-European electricity system. But winter is fast approaching and things could get worse.

While the government made the necessary preparations for the heating season, the war made the situation much more complicated. Recent missile strikes on energy facilities that caused blackouts in the east of the country – carried out by Russia in response to a successful Ukrainian advance in the Kharkiv region – clearly show the risks the country faces .

With the arrival of winter, new strikes on energy and heating infrastructure are to be expected. The loss of the Zaporizhzhia nuclear power plant from the Ukrainian power grid is also likely, as the plant remains under Russian control. This would disrupt the energy and heating supply of the population throughout the winter and force Ukraine to purchase additional energy resources, which would lead to even greater financial assistance needs.

Strengthen the economic front

Have no doubt – the current economic environment is extremely difficult, but managing it successfully is essential to Ukraine’s war effort. All possible measures must be taken to relaunch the economy (as far as possible during the war) and put the public finances in order. Since it is unrealistic to expect a serious resumption of investment until the end of hostilities, every opportunity must be given to people and businesses to generate income.

It may be time to reconsider the policy of closing borders for men, as exports and cross-border business activities keep the economy afloat, and these are greatly hampered by people’s inability to travel. Clear agreements with IFIs and friendly governments on the necessary amount of budget funding should be reached, including funding for the supply of emergency energy resources during the winter season.

The economic front tends to attract less public attention than its military equivalent. Yet the economy is no less important than what happens on the military front line. It is only through the combination of a robust and sustainable economic policy coupled with military successes that the war can be won.

The opinions expressed are those of the author and not necessarily of Kyiv Post.

Christi C. Elwood