how Russia destroyed Ukraine’s economy

Since the start of the war in Ukraine, the impact of economic sanctions against Russia has been constantly debated. The threat hanging over Ukraine is clear. “Ukraine’s 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 numbers are confusing: The Ukrainian GDP fell by 15.1% between the first quarter of 2021 and 2022, and may melt by 35 to 40% in the year 2022, warned the Minister of the Economy* on August 19. “At the beginning of the war, the economy of Ukraine was ten times smaller than that of Russia, and now it is collapsing three times faster”analyzed Nataliia Shapoval, director of the Kyiv School of Economics (KSE).

The direct and indirect effects of the war have driven millions of Ukrainians into poverty. “The phenomenon is huge, but it is difficult to measure, because martial law prohibits the usual collection of statistics”, Nataliia Shapoval explained. There are still polls and estimates, such as those of the Rating* group, where 40% of Ukrainians said in July that they only have enough savings to last a month. The National Bank of Ukraine (NBU)* estimates the unemployment rate at 35% in June, not counting people who are not actively looking for work.

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

The bombings and other offensives caused great destruction. KSE* estimates this direct physical damage (to housing, transportation infrastructure, industry, agriculture, etc.) at around 113 billion dollars as of August 22.

But Moscow also shut down many sectors of the economy whose exports “important for the economy of Ukraine”, according to Maksym Samoiliuk. The most symbolic is undoubtedly agriculture, which accounts for 41% of all products exported by kyiv in 2021, according to the United States Department of Agriculture *. Kyiv and the international community have often accused the Kremlin of blocking, destroying or stealing Ukrainian grain from farms and reserves.

The agreement finally reached in July between Ukraine and Russia (after Turkish mediation and under the aegis of the UN) on maritime exports allowed a small recovery in sales, but the situation is still far from normal: between on July 1 and August 15, Kyiv exported 46% less grain than in 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 products, they can’t pay their debts and keep their farms going.”

Nataliia Shapoval, director of the Kyiv School of Economics

at franceinfo

Another major sector devastated by the conflict is metallurgy. The loss of the Azovstal factory after three months of attack is a symbol of this. Steel production fell by more than 40% between the first half of 2021 and 2022, according to the sector’s professional union*. The country’s largest factory, in Kryvyi Rih (south), has cut almost all of its production due to the threat of Russian troops and rising transportation costs, according to Financial Times*. The lifting of the blockade of Ukrainian ports does not care about steel and “Russia is not very interested in an agreement similar to cereals”according to Maksym Samoiliuk, “because it doesn’t get many advantages from it, in terms of image or changing sanctions”.

Russia is also threatening Ukraine’s energy supply. “All the refineries in the country are destroyed”says Yuriy Gorodnichenko, and 94% of the daily production of the Naftogaz group is at high risk of stopping due to the clashes, according to the company’s estimates, cited by the Interfax agency (in Ukrainian). Kyiv has also accused Moscow of wanting to take production from the Zaporizhia nuclear power plant. Households benefit from frozen prices and cannot be cut off from the network without payment, but the cost of such measures could be prohibitive in the event of an energy crisis this winter.

“Ukraine should save 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 the resources to finance its reconstruction. Ukrainian territories occupied by Russia contain more than 12,000 billion dollars of raw materials, such as coal, metal or oil, according to an analysis report made for Washington post*.

With the collapse of the economy and income, the government must spend money to fund the defense of the country. So an exploding budget deficit: it will reach 5 billion dollars per month, according to Volodymyr Zelensky*, or 2.5% of the national GDP in 2021*.

The gap is half financed by international aid, but the State fills the other half by borrowing, according to CES figures*. Since few investors want to risk 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 more liquidity into the economy, the State runs the risk of causing inflation to rise. It has already exceeded 22% in the last 12 months and may reach 31% in the year, according to the NBU*. “Use the printing board It was reasonable at the beginning of the war, to quickly raise the funds needed to buy equipment, pay the soldiers, and cover other expenses”explained Yuriy Gorodnichenko. “But you can’t rely on it, because it will lead to inflation that will destroy the economy.. For Maksym Samoiliuk, “The government is aware of the danger and is trying to reduce the production of money”.

“The risk of bankruptcy is now low, because the Central Bank has a decent amount of foreign exchange reserves and manages them wisely.”

Maksym Samoiliuk, economist at the Center for Economic Strategy

at franceinfo.

In other respects, the situation is improving slightly. Lines at gas stations are disappearing, businesses are gradually returning to business (60% of businesses surveyed by the US Chamber of Commerce * were fully operational in June) and Ukraine’s economy may recover in 15.5% in 2023, according to estimates provided by the Minister of Economy to Reuters*. But these improvements “totally depends on military scenarios”anger Yulia Svyrydenko.

While waiting for a hypothetical peace, Ukraine relies 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 was added the 4.5 billion pledged 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 for 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”lamented Christoph Trebesch, who heads the Kiel Institute team responsible for monitoring these issues. “The aid promised is delivered too slowly”explained the researcher, “and most of the aid promised by the EU is loans, if they should be grants, given according to a clear timetable”. “It may be expensive, but if Ukraine wins this war, many current problems in the world (increasing energy prices, food prices…) will disappear”assured Yuriy Gorodnichenko.

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

* All these links refer to English content

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