Some Ukrainian economists call Yuriy Gorodnichenko a legend.
He edited the Review of Economics and Statistics and Journal of Monetary Economics and is now coediting the American Economic Review. He is also an affiliated scholar at the National Bureau of Economic Research (NBER).
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Ukraine’s media outlets RBC-Ukraine and Ekonomichna Pravda talked with him about how Ukraine will tackle raising taxes, manage stable monetary and fiscal policy during wartime and switch to internal resources since Russia’s economy is too big to be crushed under the current pressure of Western sanctions which only gradually impact its markets.
Here are some of the key takeaways from the interviews:
Ukraine is at war of attrition with Russia
The world has provided Ukraine with a substantial amount of international aid, but this will eventually decrease compelling the country to increasingly count on its own resources.
Raising taxes is the only way to achieve this – Ukraine has already increased excise taxes but is planning to increase other direct and indirect taxes to cover an extra Hr.500 million ($12,5 million) of budget expenditures needed for the war.
This is why having the highest level of central bank reserves in history is critically important. They are too large for peaceful times, but war creates a huge amount of uncertainty, and this is a significant problem.
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“Our foreign trade balance is minus $3 billion per month. This is a huge amount of money that needs to be covered somehow,” Gorodnichenko told Ekonomicha Pravda.
Liberalized capital policy may undergo further restrictions
In February 2022, Ukraine’s central bank, the National Bank of Ukraine, imposed FX restrictions to prevent capital outflows. Less than a year ago, NBU started easing the restrictions and launched the so-called Managed Flexibility of Exchange Rate policy.
Businesses can repay interest on foreign loans and pay for import-export operations, but Gorodnichenko warned this may not last for long due to uncertainty.
“Money always flees from countries where there is a war,” he told RBC-Ukraine. “On the other hand, the country will need foreign currency if the world decreases financial aid."
He said that the prospect of having a stable inflow of aid is becoming a dimmer prospect. The EU still hasn’t agreed on how it will provide Ukraine with the promised $50 million loan from frozen Russian assets. Ukraine also doesn’t get any certainty from the US regarding $7 billion of aid the States should provide in 2024.
Recovery and Reconstruction policies must be realistic and use limited resources effectively
The future recovery of Ukraine’s economy will be pressured by extremely difficult circumstances.
Ukraine has faced a rapid decline in population and a wave of refugees who temporarily left the country to seek a safe-place free from air raid alarms. The workforce deficit is further exacerbated by the needs of mobilization.
“A shortage of workers is a limiting factor for the economy, but we also have a lot of unemployed – about 15 percent. Why do we have a shortage of workers and such a huge unemployment rate? We use resources inefficiently,” Gorodnichenko told Ekonomichna Pravda.
Russian strikes on energy generation create a new challenge - it is hard to talk about recovery when there is insufficient or no electricity.
Ukraine still does not have an effective institution that will take ownership for reconstruction; an organization to coordinate all other institutions involved in the process.
The country should hold overall ownership of the needed reforms. Rebuilding roads in the villages damaged from Russia’s occupation is necessary for its local citizens, not western partners. Decentralization and market economy are keys to success in the process.
Macroeconomic stability is a cornerstone of Ukraine’s victory.
There is way too much uncertainty because of the war. Stabilizing inflation and the FX currency rate is already an achievement.
In Ukraine the average market interest rate is above 10-15 percent, and the key interest rate was 25 percent in March 2022, but decreased to 13 percent in summer 2024.
“In economic theory, there is a principle that if, under conditions of uncertainty, you calculated that you should lower the interest rate by 2 percentage points, then you should do half of it,” Gorodnichenko commented on the central bank’s decision in Ekonomichna Pravda.
Businesses complain that the interest rates are too high and urge the NBU to lower the key rate. But no one knows the “right” interest rate since there is no theory in handbooks for Ukraine’s circumstances.
Another major reason for this is considerable uncertainty. With inflation at approximately 3 percent in summer 2024, economists in Ukraine expect inflation to be 10 percent. Ukraine is also having a large infusion of money for military expenditures and social wages.
Interest rates cannot be low in this situation to keep inflation on a short leash. That being said, money will remain expensive until the end of the war.
Russia is a “gas station masquerading as a country”
Sanctions that affect Russia's energy sector, reducing its income from gas and oil, will be the most effective. Without the flow of dollars, Russia will fall within a year.
The West made a mistake making sanctions gradual. Russia’s economy did not collapse with a strategy of a thousand cuts and Ukraine does not have time to wait for the Russian economy to collapse.
The philosophy should be different – impose maximum possible restrictions at once and then weakening them a bit only if they’re effective. A total embargo on Russian energy can be imposed as an example – the Group of Seven (G7) oil price cap mechanisms were not effective enough. Russia had enough time to adapt by creating its shadow fleet that exports oil despite sanctions.
About 90% of Russian oil exports go through two main routes: the Baltic and Black Seas. If these channels were closed, it will be difficult for Russia to reorient its export flows. Denmark controls the exits from the Baltic Sea, and Turkey the Black Sea. The political will to close the seas is the last thing remaining.
Ukraine can still hope for a bright future.
In relative terms Ukraine’s sovereign debt is not so high and its maturity is stretched over time. After the end of the war the debts will undoubtedly be restructured.
Most refugees currently don't want to return to Ukraine. But during the active phase of recovery, Ukraine may become a land of opportunity. Some time ago, Poland and the Czech Republic had a boom in economic growth simply because they had the prospect of joining the European Union.
“That is, you will be able to achieve much more in Ukraine than, for example, in Germany or Poland. This will be the force that keeps people coming back,” the economist told Ekonomichna Pravda.
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