After more than 18 months of war, Ukraine’s economy is in a shambles. After a 30% collapse in 2022, the country’s economy is projected by the IMF to grow by only 1-3% in 2023. The direct losses from Russian aggression alone are estimated to be $150 billion, almost equivalent to Ukraine’s current total GDP. When indirect effects are taken into account, the figure rises to hundreds of billions of dollars.
Millions of people have fled the country while millions more have been internally displaced. Rates of poverty have increased from 5.5%, before the war, to almost 25% in 2022, with some forecasts saying it will reach 55% by the end of 2023.
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These losses are dire, as is the hardship that millions of Ukrainian families are suffering because of them. What’s even more dangerous, however, is the breakdown in the country’s economic model. The usual ways in which Ukrainians earned money have suddenly become unavailable or much harder to achieve.
Before the Russian invasion several million Ukrainian citizens, mostly but not exclusively men, sought work every year in countries of the EU. Some worked abroad all year, others were seasonal workers; the total number of this pool of migrant workers was estimated to be up to 7 million. In these pre-war years, the income this generated was equivalent to about 10% of GDP. These workers provided the main income for their families with the total number of people directly supported by this huge migrant work system being as high as 20 million, half of Ukraine’s population.
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This system died after the Russian invasion. Ukraine’s government closed the borders for all men eligible for military service, as most other governments would have done in the same situation. At the same time many of those working outside the country rushed back to defend their homeland. This universal push to protect Ukraine’s territory worked – Russian forces retreated from Kyiv and were restricted to areas they had managed to occupy at the start of the invasion. The war turned into a war of attrition, and has been like that ever since.
Yet, the restrictions on leaving have remained in place effectively killing the system of migrant work that put bread on the table for many Ukrainian families. In parallel, Russia conducted a blockade of major Ukrainian ports, cutting off a large chunk of the country’s exports and its income. Yet another element of the pre-war economic model was lost. Exports collapsed by around 30% in 2022, and they have continued to fall in the early months of 2023. Efforts to expand land logistics routes and diplomatic initiatives such as the Black Sea Grain Initiative helped somewhat, but weren’t enough to wholly ameliorate the situation. Another engine of the economy was lost.
To offset these problems, Ukraine’s international partners have provided a generous package of direct financial support, which stood at about EUR 70 billion at the end of May. This roughly corresponds to the losses in GDP and is the primary reason why Ukraine’s economy is still standing and hasn’t collapsed entirely, which would have dragged down the whole war effort with it.
Given the huge financial costs of fielding a million fighting soldiers, this donor aid is essentially the only thing keeping the Ukrainian budget afloat. The way the system is currently set up, domestic revenues from taxes and other sources are mostly taken up by funding the military. All other budget expenses – primarily, wages for public sector employees, pensions and other social payments – are mostly funded by donor money.
This has created a situation where the private sector – Ukraine’s engine of growth for the last 30 years, responsible for most of pre-war employment and GDP – is devoid of its sources of income. The whole country lives off the donor-funded incomes of public sector employees, pensioners and social support receivers, as well as soldiers and their families. This is the only remaining economic engine that is still running, albeit on donor-provided money.
That this engine is way too weak for such a populous country as Ukraine is evidenced by the skyrocketing poverty rate, but also by anecdotal evidence. Almost daily we hear reports of men caught trying to cross the border, often paying thousands of dollars in bribes to “mediators” in the process. While the media tends to label them as fleeing from the draft, it is just as likely that the real reason for their flight is a search for work and income. After all, for the amounts of money involved they could’ve just as easily bribed military commissions or hid from the draft, without the fuss of having to change countries. Businessmen, especially those involved in small and medium-sized enterprises, provide a similarly bleak impression of the state of the economy – low demand, too few consumers, a constant struggle to survive.
Clearly, things on the economic front are not good, and in a war of attrition it’s the economy that will ultimately represent the winning factor. While Russia doesn’t have Ukraine’s Western backing, it still possesses huge revenue from its natural resources, even though it has been diminished by sanctions, and, most importantly, it is still fighting the war on Ukrainian soil, without the drastic domestic measures the defenders have had to take. Ukraine only has the donor assistance going for it, with most other factors tilted in Russia’s favor.
While we can hope as much as we want for reconstruction funding to come in and jump-start growth in the economy, the fact of the matter is that here and now there’s not much that can be done to make things materially better. Essentially, the only really significant policy choice that Ukraine has is to open the borders and let people once again flow freely across it. This will not help restart exports – only the end of Russian maritime blockade can do it, which is not likely to happen in the nearest future. This will also undoubtedly trigger a large initial outflow of people, who’ll rush to earn some desperately needed money in the EU.
Yet, this is the price to pay for something much more important – giving the people of Ukraine an opportunity to earn income once again and keep the economy afloat as Ukraine fights its war of attrition with Russia. Such wars are primarily won by economic, rather than purely military means. It’s time to bring the economy back into the war-fighting equation.
The views expressed in this opinion article are the author’s and not necessarily those of Kyiv Post.
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