How has Russia's War Against Ukraine Affected the Ukrainian Economy?

March 23, 2022
Being at war takes up huge amounts of money, along with causing many other problems. Ukraine’s case is no exception, but the Ukrainian financial system adapted quite quickly.
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Under martial law...

During war-time, the economy is run in accordance with martial law. This means a significant increase in the state's participation in the economy, as well as the mobilization of financial resources, a reduction of non-military expenditures, and an increase in public procurement for Ukrainian public and private enterprises for socially-important and military goods. The state must become and has already become the main customer of critical goods, which need to be distributed among vulnerable groups or sold at reduced prices. A lot of businesses have had to be commandeered for military production. For instance, if in peacetime a company produced high-quality textiles, then during the war it must be used to manufacture cheap blankets and pillows for the army.

International organizations, along with individual countries and charities, have sent  Ukraine a great deal of material support.

The IMF has already approved a $1.4 billion loan to Ukraine. The next tranche  will come from a new program aimed at rebuilding Ukraine that will not be conditioned upon reforms.

Compared to the Russian economy, which has no prospects of recovering any time soon, the Ukrainian economy is coping well with the war and has a bright future. Western analysts and politicians are already discussing the need to develop a new Marshall Plan for Ukraine worth up to 100 billion euros. If all goes well, private investors will also contribute to Ukraine's economic recovery, and the country will become an attractive investment destination.Under martial law...

During war-time, the economy is run in accordance with martial law. This means a significant increase in the state's participation in the economy, as well as the mobilization of financial resources, a reduction of non-military expenditures, and an increase in public procurement for Ukrainian public and private enterprises for socially-important and military goods. The state must become and has already become the main customer of critical goods, which need to be distributed among vulnerable groups or sold at reduced prices. A lot of businesses have had to be commandeered for military production. For instance, if in peacetime a company produced high-quality textiles, then during the war it must be used to manufacture cheap blankets and pillows for the army.

What about the hryvnia?

Thanks to the coordinated work of Ukraine's  Ministry of Finance, the National Bank, and  its tax and customs services, the country has managed to organize all essential processes in the country even under martial law. Electronic payments have not been interrupted, the liquidity of the banking system remains high, and banks are working smoothly. The hryvnia has certainly taken a hit in its value, but this has been contained to under 10%. The Central Bank of Ukraine moved to a fixed exchange rate right when the war started — UAH 29.25 per dollar and UAH 33.17 per euro. Even though there is speculation on the black market, there have been no dramatic spikes in hryvnia exchange rates. The hryvnia has also been helped out by the huge financial assistance provided to Ukraine by its international partners. Trading on the interbank market was suspended, and customers could not officially buy currency on the cash market. But on 13 of March, Ukrainian banks reopened currency operations on the market. The volume of these operations remains quite small at only around $10 million per day, but this is an important basis for further adjustment of market mechanisms. By issuing war bonds, the National Bank has secured enough money for the needs of the economy, which is currently in a very critical moment. Companies are continuing to pay taxes, but the government has canceled punishments for non-payment of taxes and non-reporting when it is not possible or simply too complicated to do so. This way, businesses which are able to continue their operations can do so without undue government pressure.

(Un)employment

Danylo Getmantsev, the Chairman of the Committee on Finance, Taxation and Customs Policy has stated that unemployment issues are being handled. The state will try to employ evacuees from regions with active fighting in Western Ukraine. With businesses converting to military supply operations, there is a need for new workforce participants.

International organizations, along with individual countries and charities, have sent Ukraine a great deal of material support. The IMF has already approved a $1.4 billion loan to Ukraine. The next tranche  will come from a new program aimed at rebuilding Ukraine that will not be conditioned upon reforms.

Compared to the Russian economy, which has no prospects of recovering any time soon, the Ukrainian economy is coping well with the war and has a bright future. Western analysts and politicians are already discussing the need to develop a new Marshall Plan for Ukraine worth up to 100 billion euros. If all goes well, private investors will also contribute to Ukraine's economic recovery, and the country will become an attractive investment destination.

Sofiya Maksymiv
Communications coordinator at Internews Ukraine

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