More than half of Ukraine’s economy has shut down and infrastructure assets worth $100bn have been destroyed since Russia launched its invasion of the country, according to the chief economic adviser to President Volodymyr Zelensky.
As economists revealed dire predictions for the hit on Ukraine’s economy, Oleg Ustenko said the humanitarian situation was “much worse than anyone can imagine” and urged western nations to tighten sanctions on Russia, including an immediate and complete ban on energy imports.
Speaking from Kyiv to the Peterson Institute for International Economics on Thursday, Ustenko said Ukraine’s economy was “very depressed”, adding: “Currently around 50 per cent of businesses are not operating and the rest are not operating at full capacity.”
Ustenko also described EU gas imports from Russia as providing “blood money” to its president Vladimir Putin. “I understand that Europeans do not want to be cold . . . it is cold in Berlin and Paris, but much colder [for people] underground in Ukraine with no heating.”
Ustenko’s words followed announcements of measures to support Ukraine’s economy. The IMF agreed $1.4bn of “rapid financing” on Wednesday, with the fund acknowledging “additional large support is likely to be needed to support reconstruction efforts” once the war ends.
The US Congress agreed $13.6bn in military and humanitarian assistance to support US troop deployment in eastern Europe, support for refugees and emergency food and health support for Ukraine.
The aid would not stop a devastating hit to Ukraine’s economy this year as Russia destroys infrastructure, prevents businesses ranging from steelmakers to wheat producers operating as normal and forces citizens to take shelter or flee the country.
In a briefing with reporters on Thursday, Kristalina Georgieva, the fund’s managing director, acknowledged the “horrific toll” of the war on Ukraine and pledged to work with the country on “crisis management measures” to ensure the functioning of its economy — something she said was the fund’s “most critical task”.
“Even if hostilities were to end right now, the recovery and reconstruction costs are already massive,” she said. While Georgieva noted it was too early to give an exact estimate of those costs, she said “the order of magnitude is going to be quite large”.
“We are talking about a large country — 44mn people population — with massive destruction in the key cities . . . as well as massive destruction of transport infrastructure,” she added.
An initial survey of forecasts undertaken by FocusEconomics suggested the consensus estimate was for Ukraine’s gross domestic product to contract by 8 per cent in 2022. Its previous survey published in January forecast growth of almost 4 per cent for the year.
Many of the economists surveyed expected drops in GDP of between 40 and 60 per cent, FocusEconomics said.
The key question, economists said, was how long the fighting would continue.
Evghenia Sleptsova, a senior economist at Oxford Economics, said heavy fighting is disrupting activity in 10 of the country’s 24 oblasts (its provinces). Those areas are typically responsible for 60 per cent of Ukraine’s GDP and 59 per cent of its exports, the group said.
Exports, she added, have come almost to a halt. Ports on the Black Sea and the Sea of Azov, which previously handled 77 per cent of Ukraine’s exports, have shut down, either because they have been overwhelmed by the fighting or for fear of mines and piracy by Russia’s Black Sea Fleet, according to GMK Center, a Ukrainian industry research and consultancy firm. Most road routes out of the country are swamped with refugees.
But some activity continues, especially in western and central regions where there has been little fighting so far, analysts said. “Agricultural producers are saying they will go into the fields and start sowing where possible,” Sleptsova said.
The extent of the damage to this year’s grain harvest, and to grains in silos awaiting export, will be critical in determining the damage to Ukraine’s economy and to food supplies globally. Ukraine supplies 12 per cent of the world’s wheat exports, 16 per cent of maize and 40 per cent of sunflower oil, according to the US agriculture department.
If Ukraine were to permanently lose seaports such as Odesa and Kherson, it would have to undergo a far-reaching restructuring of its economy such as opening new trade routes through Poland, said Liam Peach, Capital Economics’ emerging Europe economist.
“We don’t know what to put into GDP,” he said. “There may not even be a country any more.” Oxford Economics would also not make any estimate of the hit to Ukraine’s economy until there is some indication of the war’s outcome.
Any changes to Ukraine’s territory after the war would determine the size and shape of its economy, said Timothy Ash of BlueBay Asset Management. He envisaged a scenario of a Free Ukraine holding western and central Ukraine, with or without Kyiv, and a Soviet-style Democratic Republic of Ukraine under Moscow’s yoke.
As well as the real assets to be carved up between them, he said, a decision would have to be taken, most likely by the IMF, about Ukraine’s financial assets, including its foreign exchange reserves, and its liabilities, including sovereign debt.
“There is a huge challenge coming up for the IMF on this,” he said. “How can Free Ukraine service its debts out of only a third or so of its former GDP?”