Ukraine’s crumbling economy set to shrink 45% after Russian invasion

The Russian war against Ukraine made political conditions in Ukraine extremely unstable, with many officials resigning from their posts. Putin’s initial goal was to invade Ukraine and overthrow its government, thus ending Ukraine’s desire to join NATO, the Western defense alliance. After failing to conquer Kyiv, the capital of Ukraine, he shifted his focus to the east and south of the country after a month of failures. The constant invasions not only made the political scenario unstable, but led to difficult economic conditions.

The war brought international sanctions from the international market, which seriously affected foreign relations and trade from Ukraine. As the economic shocks of the war compound the ongoing repercussions of the COVID-19 pandemic, the region’s GDP is now expected to contract by 4.1% this year, against a pre-war forecast of 3% growth . This would be the second contraction in as many years, and it would be twice as large as the pandemic-induced contraction that occurred in 2020.

The crisis has raised expectations of a sharp global slowdown, rising prices and debt, and rising poverty levels. Multiple channels of economic impact were felt, including commodity and financial markets, trade and migration links, and a negative impact on confidence. Ukrainian workers abroad are an important source of foreign cash for the country in normal times. Ukrainian remittances abroad reached $15 billion in 2021, which is about 10% of the country’s GDP. However, in the face of foreign exchange restrictions in official markets, the current demand for foreign currency has led to the creation of parallel foreign exchange markets. The exchange rate is around 31-33 UAH/USD as of March 15.

“The scale of the humanitarian crisis triggered by the war is staggering. The Russian invasion is a blow to the Ukrainian economy and has inflicted enormous damage to infrastructure,” said Anna Bjerde, World Bank Vice President for Europe and Central Asia.

About three million Ukrainians sought refuge in neighboring countries following the Russian invasion. As a result, long queues formed at ATMs as people searched for cash. While the National Bank from Ukraine (NBU) can easily give money in national currency, money in foreign currency is more difficult to obtain.

Providing local currency liquidity to improve financial conditions is not without risk. Ukraine’s economy is heavily dependent on imports and the invasion had a substantial impact on its productive capacity. As a result, the currency is expected to come under even more pressure from excess liquidity. Of course, any depreciation of the currency is likely to produce inflationary pressures, first through the price of fuel and other imported goods, then through the increase in the prices of intermediate goods, which will increase the price of local goods.

The severe humanitarian crisis of the war was the largest of the conflict’s early global shock waves, and it will undoubtedly be one of the conflict’s most enduring legacies. Previous crises are expected to pale in comparison to the influx of refugees from Ukraine to neighboring countries. As a result, the World Bank is creating operational support programs for bordering countries to meet the growing demands for funding resulting from refugee flows. Since Russia and Ukraine have suffered from the war, serious steps must be taken to end the atrocities. This is the only way to lift international sanctions, increase investment and maintain the stability of the economies and trade balances of the two countries.

Christi C. Elwood