how russia devastated ukrainian economy

how russia devastated ukrainian economy

Since the start of the war in Ukraine, the impact of economic sanctions against Russia has been regularly debated. The threat hanging over Ukraine is clear. “The Ukrainian economy is going through the biggest crisis in its history”summarizes Maksym Samoiliuk, economist at the Ukrainian think tank Center for Economic Strategy (CES).

The figures are dizzying: Ukrainian GDP fell by 15.1% between the first quarter of 2021 and 2022, and could drop by 35 to 40% over the year 2022, warned the Minister of Economy* August 19. “At the start of the war, the Ukrainian economy was ten times smaller than Russia’s, and now it is collapsing three times faster”analyzes Nataliia Shapoval, director of the Kyiv School of Economics (KSE).

The direct and indirect effects of the war drive millions of Ukrainians into poverty. “The phenomenon is enormous, but it is difficult to measure, because martial law prohibits the usual collection of statistics”, explains Nataliia Shapoval. There remain the polls and estimates, like those of the group Rating*, to whom 40% of Ukrainians said in July that they had just enough savings to last a month. The National Bank of Ukraine (NBU)* estimated the unemployment rate at 35% in June, not counting people who are not actively looking for work.

And this is not just a side effect of the Russian offensive. “It’s part of Moscow’s plan”says Yuriy Gorodnichenko, professor of economics at the American University of Berkeley, for whom “Russia is trying to destroy Ukraine militarily, but also economically”.

Bombings and other offensives caused massive destruction. The KSE* estimates this direct physical damage (to housing, transport infrastructure, industries, agriculture, etc.) at nearly $113 billion as of August 22.

But Moscow has also shut down several economic sectors whose exports are “vital for the Ukrainian economy”, according to Maksym Samoiliuk. The most emblematic is undoubtedly agriculture, which accounted for 41% of all products exported by Kyiv in 2021, according to the US Department of Agriculture*. Kyiv and the international community have regularly accused the Kremlin of blocking, destroying or looting Ukrainian cereals in the fields and in the reserves.

The agreement finally reached in July between Ukraine and Russia (after Turkish mediation and under the aegis of the UN) on maritime exports has allowed a slight recovery in sales, but the situation is still very far from normal: between July 1 and August 15, kyiv exported 46% less cereals than over the same period in 2021, according to the Ukrainian Ministry of Agriculture quoted by Reuters*. And in the medium term, the entire sector is threatened.

“If farmers can’t sell their produce, they won’t be able to repay their loans and keep their farms going.”

Nataliia Shapoval, director of the Kyiv School of Economics

at franceinfo

The other major sector devastated by the conflict is metallurgy. The loss of the Azovstal plant after three months of siege is its symbol. Steel production fell more than 40% between the first half of 2021 and 2022, according to the professional union of the sector*. The country’s largest factory, in Kryvyi Rih (south), has cut almost all of its production because of the threat of Russian troops and rising transport costs, according to the FinancialTimes*. The lifting of the blockade on Ukrainian ports does not concern steel and “Russia is not very interested in an agreement similar to that on cereals”according to Maksym Samoiliuk, “because it would not derive as many advantages from it, in terms of image or renegotiation of sanctions”.

Russia is also threatening Ukraine’s energy supply. “All the refineries in the country have been destroyed”says Yuriy Gorodnichenko, and 94% of the daily production of the Naftogaz group is at high risk of stopping because of the clashes, according to company estimates, quoted by the agency Interfax (in Ukrainian). kyiv also accuses Moscow of wanting to take over production from the Zaporizhia nuclear power plant. Households benefit from frozen prices and cannot be cut off from the network in the event of non-payment, but the cost of such measures could become prohibitive in the event of an energy crisis this winter.

“Ukraine should be able to accumulate enough gas for the winter, but we expect Russia to target power plants, heating systems or other critical infrastructure.”

Maksym Samoiliuk, economist at the Center for Economic Strategy

at franceinfo

Finally, Moscow is depriving kyiv of resources that could finance its reconstruction. The Ukrainian territories occupied by Russia would contain more than 12,000 billion dollars of raw materials, such as coal, metals or oil, according to an analysis report carried out for the washington post*.

As the economy and revenues collapse, the government must spend lavishly to fund the country’s defense. Hence an exploding budget deficit: it reaches 5 billion dollars per month, according to Volodymyr Zelensky*, i.e. 2.5% of national GDP in 2021*.

The gap is half financed by international aid, but the State fills the other half by going into debt, according to the CES countdown*. Since few investors want to take the risk of investing in a country at war, it is the printing press of the Ukrainian Central Bank that lends most of this money (31% of the deficit is financed in this way ).

However, by injecting so much liquidity into the economy, the State takes the risk of causing inflation to take off. It has already exceeded 22% over the last 12 months and could reach 31% over the year, according to the NBU*. “Use the printing board makes sense at the start of the war, to quickly raise the funds needed to buy equipment, pay soldiers, and finance the rest of the expenses”explains Yuriy Gorodnichenko. “But you shouldn’t depend on it, because it will lead to inflation which will destroy the economy.. For Maksym Samoiliuk, “the government is aware of the danger and is trying to reduce monetary creation”.

“The risk of bankruptcy is currently low, as the Central Bank has a decent amount of foreign exchange reserves and manages them prudently.”

Maksym Samoiliuk, economist at the Center for Economic Strategy

at franceinfo.

In other respects, the situation is improving slightly. Queues at service stations have disappeared, businesses are gradually starting to operate again (60% of businesses surveyed by the american chamber of commerce* were fully operational in June) and the Ukrainian economy could rebound by 15.5% in 2023, according to estimates given by the Minister of Economy to Reuters*. But these improvements “completely depend on military scenarios”tempers Yulia Svyrydenko.

While waiting for a hypothetical peace, Ukraine is relying on Western financial aid to keep its finances afloat. As of August 3, nearly $32 billion in budget support has been pledged by 41 countries and international organizations, according to the Kiel Institute for the World Economy*. To which are added 4.5 billion promised by the United States on August 8. The country is also in negotiations with the IMF to obtain a loan of 15 to 20 billion dollars over two or three years, the governor of the Central Bank told Reuters*.

But “Military and financial aid is still insufficient in relation to Ukraine’s vital needs”deplores Christoph Trebesch, who leads the Kiel Institute team responsible for monitoring these issues. “The aid promised is disbursed too slowly”explains the researcher, “and the majority of the aid promised by the EU is loans, when it should be grants, provided according to a clear timetable”. “It may seem expensive, but if Ukraine wins this war, many current global problems (rising energy prices, food prices…) will disappear”assures Yuriy Gorodnichenko.

One essential point remains: the reconstruction of the country. Ukraine will need 197 billion dollars to rebuild the only infrastructure destroyed so far, according to the KSE*. kyiv is thinking even bigger and has presented Western countries with a $750 billion plan to rebuild and modernize its economy. “These reconstruction programs are important”concedes Christoph Trebesch, “but the country must first be able to meet its most urgent needs”. Namely his own survival.

* All these links refer to content in English

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