Ukraine economy to shrink 30% as war drags on

Ukraine’s economy will plunge by almost a third in 2022, more than expected, in a scenario in which the war ends this year, the European Bank for Reconstruction and Development, or EBRD, has said.

The expected slowdown is deeper than the 20% contraction estimated by the EBRD in March due to a “bigger than expected contraction in Ukraine as the war drags on”, it said in its report.

The Russian invasion disrupted trade in energy, agricultural products and fertilizers and disrupted supply chains, leading to slower growth across Eastern Europe.

Gas prices in Europe have reached historic highs, fueling inflation across the continent and putting manufacturers at a disadvantage against US-based companies where gas is up to four times cheaper, the EBRD said.

“In addition to direct war damage, agricultural production is hampered by lack of fuel, access to seeds, fertilizers and equipment,” the bank said in its report.

Bad predictions

Ukraine, which accounts for almost 10% of global wheat exports, 14% for corn and 37% for sunflower oil, is unlikely to be able to plant or harvest up to 20-30% of its agricultural land.

Forecasts assume that a ceasefire will be negotiated this year and the country’s reconstruction can begin in 2023, with the economy expected to grow by 25% next year.

The war has also exposed vulnerabilities in global supply chains, according to the EBRD.

Two Ukrainian companies account for around 35% of the world’s supply of purified neon, a key component for making semiconductor chips.

The Russian economy is expected to shrink by 10% this year and stagnate in 2023, according to the EBRD.

Liquidity gap

Meanwhile, the European Commission is considering a new joint debt issuance, two EU officials said, to cover Ukraine’s liquidity shortfall of 15 billion euros over the next three months.

A Commission proposal is due out on May 18, an EU official said.

The new EU joint borrowing, if agreed, could be based on the EU’s Sure scheme for funding unemployment benefits during the Covid-19 pandemic, officials said.

This would mean that Ukraine would get very cheap loans from the EU, and EU governments would have to provide guarantees that the common loan would be repaid.

“It’s one of the models under consideration, but nothing has been decided yet,” said a senior EU official.

The EU expects the US to join the effort and provide around €5 billion, which would leave the EU with the option of raising some €10 billion through borrowing. spouse, officials said.

The idea will be discussed at the Group of Seven finance ministers’ meeting in Bonn from May 18-20, officials said.

Christi C. Elwood