Will the Ukrainian economy survive Russia's war of attrition? - opinion

NBU building in Kyiv
NBU building in Kyiv

Last week, I visited Lviv. The strongest impression was that everything appeared normal. With the war, Lviv’s population had increased greatly, leading to big traffic jams. As in most parts of Ukraine, everything was functioning: electricity, water, shops, restaurants, transportation, phones, and internet. The Ukrainian infrastructure has survived and is likely to just improve. I could cash money with my US credit card. New warehouses and factories had surged on the outskirts of Lviv. The only signs of the war were a few check points and a curfew from midnight to 5 am.

Yet, the Ukrainian economy has suffered enormously. Last year, GDP fell by 31 percent, while the Russian economy declined by only 2 percent, and the Ukrainian economy was far smaller to begin with. The Russia assault in 2014 reduced the Ukrainian economy by 17 percent and rendered Ukraine the poorest country in Europe in GDP per capita terms.

Read also: Ukraine's economy shrinks over 35% in 2022, UN reports

Still, Ukraine has already answered the question whether it will withstand Russia’s war of attrition by having done so in 2014. The Russian attack inspired Ukraine to substantial structural reforms mainly in 2015-16, and they have persisted. Russia, by contrast, has become not only more authoritarian but also more kleptocratic and seriously sanctioned. Its official growth has only been 0.7 percent a year since 2014.

Strange as it may sound, in spite of Russia pursuing war in Ukraine, it appears easier to predict the nearest future of the Ukrainian economy than what will happen to the Russian economy. Most forecast a stagnant or stable Ukrainian economy in 2023. Inflation remains high but has fallen from 27 percent late last year to 25 percent in February, and it is likely to continue to decline gradually as long as Ukraine receives sufficient international financing, which now appears likely.

Last year, GDP fell by 31 percent, while the Russian economy declined by only 2 percent

Last October, President Zelensky stated that Ukraine needed $38 billion in international budget support – excluding military expenditures – and Ukraine appears likely to receive such an amount. The European Union has committed $19 billion for this year and the United States $10 billion for the first nine months. The International Monetary Fund is about to adopt a four-year stabilization program with $4 billion of financing for this year. Adding smaller amounts from bilateral and multilateral donors, the Ukrainian budget should be fully financed this year.

The big Russian destruction of Ukraine occurred at the beginning of the war, when several big industrial plants were bombed and ceased working. They will not recover any time soon, but nor will more factories stop working. The Ukrainian hi-tech industry and much of the small and medium-sized enterprises that are disproportionately located in the West continue to operate. Agricultural production will fall substantially also this year, but much less than in 2022.

Read also: Pushing off the bottom: What will 2023 be like for the Ukrainian economy

A positive factor is that Ukraine has reoriented its economy from the East to Europe. Before the war, just over 40 percent of Ukraine’s exports went to the EU. Now that share has risen to two-thirds and it is likely to stay that high. In 2022, the EU relaxed all import quotas for Ukrainian goods, and now it may offer Ukraine full access to the European Single Market, which could initiative a qualitative transformation of the Ukrainian economy.

Ideally, the EU should offer Ukraine to start negotiations on EU accession this year. The EU has formulated excellent conditions for Ukraine’s EU candidacy, focusing on the building on the rule of law by cleansing the top judicial bodies from unethical judges. If Ukraine succeeds in fulfilling these conditions, it should be able to attract private investment after the war by offering secure property rights.

Financing is a major concern. Currently, the World Bank assesses the cost of reconstruction in Ukraine at $411 billion. Since Russia has launched this war of aggression, it must pay war reparations. The obvious source should be $316 billion of Central Bank of Russia currency reserves that have been frozen in Western central banks. These funds should be confiscated and transferred to Ukraine for its reconstruction.

Read also: Real change needed. Postwar Ukraine and its economy

Meanwhile, the question is how much the Russian economy will decline. The severe export controls on electronics should secure technological deterioration. The price caps for oil and gas are likely to reduce Russia’s total export revenues by about one-fifth this year and state revenues by about as much. The consensus appears to be that GDP shrinks by about 4 percent.

Ukraine has suffered badly, but it will persist and gradually recover. Russia will remain wealthier, but not much and it will continue to decline.

Anders Åslund is co-author with Andrius Kubilius of the book Reconstruction, Reform and EU Accession for Ukraine.”

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