The Impact of the War on Ukraine's Economy

August 18, 2022
How does Russia's war against Ukraine influence the Ukrainian economy?

UkraineWorld spoke to Serhiy Fursa, an investment banker. Key points -- in our brief, #UkraineWorldAnalysis:

1. On expectations for the Ukrainian war-time economy 

  • The Ukrainian economy suffered the biggest shock in late February and March when Russia started its full-scale invasion;
  • It is expected that Ukrainian GDP in 2023 will be greater than in 2022. However, it will not achieve the pre-war level by the end of the war;
  • The deep economic crisis in Ukraine will last until the end of the war. After that, Ukrainian economy is set for rapid post-war recovery;
  • The Ukrainian government has been printing extra money which increases pressure on the national currency rate; 
  • The current trends of the Ukrainian economy are capital outflow, devalvation, and inflation; * The economic situation is also negatively influenced by the mass displacement of people. The longer the war lasts, the fewer Ukrainian refugees will come back home.

2. On measures needed to deal with the economic crisis in Ukraine

  • To increase budget revenues, Ukraine needs to adapt the interest rate on national debt to the market level;
  • Besides, Ukraine can consider introducing new taxes for real business during the wartime period. It will not solve the problems, but it will reduce the pressure on the Ukrainian economy;
  • It is also important to verify social aid payments, since they carry high corruption risks.

3. On possible confiscation of Russian assets in Western countries

  • Lots of Russian assets in Western countries have been freezed, however it is not likely that they will be confiscated for rebuilding Ukraine's economy;
  • Ukraine's economy will be rebuilt with the active participation and support of Ukraine's international partners, especially the EU states.

4. On impact of Western sanctions on the Russia's economy

  • Western sanctions and import limitations heavily destabilize the Russian financial system. As of July 2022, Russia's budget deficit reached 10% of GDP or 33% of the state budget in annual terms;
  • Besides, Russia is harming its economy on its own by cutting gas supplies to the EU states; 
  • Heavy impact of Western sanctions is the reason why Russia has activated its "negotiate with Putin" narrative in Western counties; 
  • For the Russian economy, which is not capable of attracting outside investment, the only solution to its budget deficit is printing extra money. However, it will necessarily intensify inflation and cause macroeconomic instability;
  • Russian state budget revenues significantly depend on oil prices, that is why it is important to limit Russia's capability to raise money out of oil. The possible ways are decreasing oil prices or limiting Russia's ability to sell oil to the international market.

This material was prepared with financial support from the International Renaissance Foundation.

Serhiy Fursa
Investment banker

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