The economic impact of the Russian invasion on Ukraine

Added to a large debt, large-scale migration, a deep recession and severe damage to industrial capacity will hit Ukraine hard, says David Dalton

The course of the Russia-Ukraine war will determine the political, social and economic future of its main protagonists, but will also have a significant impact across the Eurasian continent more broadly. It is already possible to judge the scale of the damage done to Ukraine by an assessment of the war’s economic impact so far.

Probably the most striking development is the huge population movement the February invasion triggered. The UN estimates that almost 11 million Ukrainians – around one quarter of the country’s inhabitants – have been internally displaced or turned into refugees. This figure comprises 6.5 million who have travelled within Ukraine away from the worst of the fighting, alongside more than four million who have fled abroad, many to neighbouring Poland, in what the World Bank describes as “the largest refugee crisis in Europe since World War II”. The Ukrainian government, moreover, suggests that thousands of its citizens may have been deported by the Russian army to ‘filtration camps’ inside Russia. From the perspective of economics, the removal from the economy of a large part of the labour force represents a severe disruption to both production capacity and household consumption.

The Ukrainian government has pared back its activities to the basics – ensuring military and food supplies and keeping the banks open – while reducing taxes to aid businesses, and offering a small stipend of UAH6,500 (hryvnia, the national currency – about £170) to those displaced. These efforts have been greatly aided by increased funding commitments from Western governments and international financial bodies such as the IMF and the World Bank.   

On the day of the invasion, the Ukrainian government fixed the exchange rate of the hryvnia to the US dollar and introduced exchange controls, limiting the sums of hryvnia that can be converted into foreign denominations. As with the Russian rouble, which has been subject to similar restrictions in response to the imposition of unprecedented economic sanctions, the exchange rate of the hryvnia can no longer be read as a barometer of economic actors’ confidence in the country’s prospects. On the one hand, by preventing a more drastic fall in the currency, the level of inflation imported through the higher cost of foreign goods is likely to be constrained. On the other hand, since this is only achieved by restricting the ability of firms to obtain inputs from abroad, the damage to supply chains and the fall in output that this induces are likely to boost prices sharply, undermining living standards, while the uncertainty of full-blown interstate conflict scares off investment and forces households to refocus their diminishing resources on day-to-day survival.   

As well as these exchange controls, the naval blockades of Ukrainian Black Sea ports, through which large volumes of trade usually pass, and Ukrainian government restrictions on agricultural exports to try to forestall food shortfalls at home caused a fall in the value of exports by half (in US dollar terms) between February and March and the value of imports by two-thirds, according to the Ministry of Economy. For January-March as a whole, the ministry says, national output contracted by 16% compared with the same period last year. Officials now suggest that Ukraine’s real GDP could fall by at least one-third this year, while the World Bank recently forecast a still steeper drop of 45%, threatening sharp increases in unemployment and poverty. (During the 1930s Great Depression, real GDP in the USA fell by a cumulative 30%.)

Alongside migration and deep recession, Ukraine’s production facilities and infrastructure are major concerns. The damage here already appears extensive because, alongside strikes on military, civilian and administrative targets, numerous reports suggest that the Russian military is targeting Ukraine’s industrial capacity and transport infrastructure to undermine its capacity to fight. Moreover, the Ukrainian military has blown up bridges to hinder the Russian advance. A cautious assessment by the Kyiv School of Economics (KSE) in mid-March costed verifiable war damage to infrastructure such as airports, bridges, power plants, factories, warehouses, housing and hospitals at US$63bn. Government ministers say the cost is much higher: at the end of March, economy minister Yuliya Svyridenko reported Ukraine’s losses as US$565bn, apparently combining estimates of lost income and the destruction of productive assets. (As national wealth was in the range of US$500bn-600bn in 2021, this looks high, and may involve some double accounting.)

In conclusion, large-scale migration, a deep recession and severe damage to industrial capacity are among the main economic effects of the invasion for Ukraine. Whether the actual fall in Ukrainian living standards this year reaches the worst forecasts will depend on the duration and geographical spread of the conflict. By contrast, the pace of any post-war recovery will depend on the damage done to the country’s physical capital, the speed and scale of refugees’ return and the level of reconstruction funds and debt relief available.

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