The Russian invasion of Ukraine had an indelible impact on the world economy—from amplified inflationary pressures to the supply chain constraints that have forced us to redesign global production processes. As the war entry continues without any end in sight, it has undeniably had immense ramifications on the economy of Ukraine too. While the rest of the world tries to reshape its energy and security dependency, how is the economy of Ukraine coping and how would it impact its citizens?
A Background on Ukraine's Economy
As we all know, Ukraine declared independence in1991 as the mighty Soviet Union finally disintegrated. While the move was historic, the economy of a newly formed Ukraine suffered. Being one of the satellite states of the USSR, Ukraine with its many industries, relied on producing commodities for the Union as a whole and then having it supplied back to them with whatever they needed. As a result, in the absence of a central authority to direct them, industrial production plummeted. Moreover, in the early 1990s, Ukraine had no access to international financial markets as existing institutions were apprehensive about setting up a system in a country with limited modern banking facilities. Hence, without adequate investment, Ukraine was not able to tap into its rich natural resources for national development, thereby failing to grow rapidly. The newly formed government tried to alleviate the issue through massive spending that they achieved by printing more currency. Unfortunately, the plan backfired and by 1996, inflation in the country reached almost 500%.
However, after the initial struggles, Ukraine’s economy grew, and by 2007, it was the fastest-growing economy in Europe. Though the 2008 financial crisis affected the country particularly hard, as trade volume shrank by 30%, it witnessed a V-shape recovery and started to grow once again. Due to its fertile soil and apt weather conditions, the country quickly became the breadbasket of Europe and one of the largest exporters of wheat and sunflower oil in the world. With a developed industrial base and highly skilled workforce with quality education, Ukraine’s GDP expanded rapidly. In October 2021, the International Monetary Fund (IMF) estimated that GDP per capita would grow by 3.6% in the following year. Unfortunately, the fairy tale run came to a grinding halt on 24th February 2022.
How Has the War Affected the Economy?
As Russia launched its offensive against Ukraine and dragged the country into a full-scale war, the World Bank estimated in April 2022, the Ukrainian economy had shrunk by 45%. Investor confidence has also plummeted in the country as Foreign Direct Investment which is vital for growth, has continued to be pulled out. In short, due to the war investing in the volatile Ukrainian market became too risky. Domestic estimates from the Ministry of Economy and the Kyiv School of Economics put the economic losses due to the war at close to $600 billion; more than four times the size of the country’s entire economy.
Apart from the falling GDP, the National bank of Ukraine (NBU) has also reported rising inflation in Ukraine, which currently stands at a whopping 20.1%. To cut the spiraling crisis, the NBU has raised its benchmark lending rates from 10% to an all-time high of 25%, making borrowing extremely costly.
Moreover, Russia invaded the industrially productive regions of Luhansk, Donetsk, Sevastopol, Odesa, etc. and captured some key factories and industries that contributed significantly to the Ukrainian economy. Consequently, the Ukrainian PM had said that the country needed at least $500 billion per month in budgetary support and an additional $600 billion for rebuilding efforts.
But even in the case of an economic downturn, can’t Europe or international financial organizations bail it out by providing large stimulus plans like it did in the case of Greece? Well, the reason why they are hesitant to help Ukraine on a monetary basis is corruption—the understanding of which is critical not just to comprehend the economy of Ukraine but also to formulate effective policies against it.
The Plaguing Issue
Infamously called the ‘most corrupt country in Europe’, Ukraine’s economy has long suffered from corruption. With frequent reports stating that government officials increasingly embezzle public funds and funnel them through their private connections, Ukraine ranks at an abysmal 122nd out of 180 in the Corruption Perception Index. According to some estimates, corruption costs the economy approximately $10 billion—a significant figure when the entire GDP is $155 billion. The problem is so widespread that even in 2014, during the Russian annexation of Crimea, the IMF promised to loan $17.5 billion, although only $6.7 billion was paid out. This was because the government was unable to pass sufficient legislation that gave the IMF enough confidence that the money would be utilized properly. Therefore, now as the country reels under the devastating attack of Russia, most of the foreign aid is in the form of humanitarian supplies and military equipment. Even though that is very appreciable, one cannot run an economy on foreign aid alone.
A Post-War Scenario
The ongoing war is going to have a larger impact on the recovery cycle of the Ukrainian economy. With two invasions within a decade, it is safe to assume that no new businesses would want to set up their operations in Ukraine. Future investors, entrepreneurs, and perhaps even tourists, need safety and security and sadly, which sadly is not coming anytime soon. The road to recovery will be difficult. Unfortunately, the Ukrainian population will have to put up with the scars of this war for generations to come once the last bullet has been fired.
(Written by Sashank Rajaram and Edited by Prakhar Singhania)