For the first time since the start of the full-scale invasion, the Ukrainian economy looks healthier than the Russian one.
This is reported by the British magazine The Economist.
The Ukrainian economy is still a quarter smaller than it was before the Russian invasion in 2022, but it outperforms Russiaʼs in several key indicators. Ukraine was able to achieve this thanks to the governmentʼs decisions and Western assistance. However, a new stage is now beginning, when Kyiv faces the greatest economic threats, the publication believes.
The Economist lists indicators that make the Ukrainian economy look better than Russiaʼs. These are the National Bank of Ukraineʼs forecast for GDP growth of 4% in 2024 and 4.3% in 2025, a stable currency, and a discount rate of 13.5%.
At the same time, in Russia, GDP is expected to grow by only 0.5–1.5% in 2025, the discount rate will soon reach 23%, and the entire banking system looks unreliable.
Since 2022, The Economist has identified three stages in Ukraineʼs economy. The first was at the beginning of a full-scale invasion — when martial law was imposed in the country, millions of people left abroad, and the actions of the National Bank were subordinated to military goals.
The National Bank financed half of the budget deficit, imposed strict capital controls, and flooded banks with liquidity. Inflation soared and GDP shrank by a third.
The second stage coincided with Ukraineʼs counteroffensive in Kherson and Mykolaiv regions in August 2022. Then the countryʼs GDP stabilized, and Ukraine was able to export grain again.
The National Bank began to fight inflation, stopped financing the budget deficit, restored foreign exchange reserves, and relaxed controls on capital movements. Production was moved to the safer western part of Ukraine, and resources were redistributed taking into account the protracted nature of the war. And in the summer of 2023, when Russia refused to extend the grain agreement, Ukraine itself opened a sea corridor — this allowed it to maintain the inflow of foreign exchange and export not only grain, but also metals and minerals.
The third stage is now beginning, when Ukraineʼs economy faces the greatest threats: acute shortages of electricity, people, and money, according to The Economist.
Russia is attacking Ukraine’s energy system, but Kyiv is now better prepared. Ukraine has increased its electricity imports from the EU by a quarter, farmers are using diesel generators, and medium-sized businesses are using gas generators, wind and solar power. But the electricity shortage could cut GDP growth by 1% in 2025, says Tymofiy Mylovanov, president of the Kyiv School of Economics.
The lack of people is the most acute problem facing Kyiv, the publication writes. Mobilization, migration and war have led to a reduction in the workforce by one fifth. On average, only 1.3 applications are received per vacancy, compared to two in 2021.
Meanwhile, civil and military authorities are arguing over the scale of mobilization, The Economist believes. Critical industries can only provide reservations for half of their employees, and it is difficult to hire more women. Because the number of women who went abroad is almost the same as the number of men who went to the front, noted Hlib Vyshlinsky, an employee of the Kyiv-based Center for Economic Strategy.
The third problem of Ukraine is a lack of money, the magazine adds. Small businesses are struggling to get loans, financing long-term capital expenditures is practically impossible, and a sharp increase in the costs of doing business has hit its profitability. And budget expenditures are much higher than revenues. Almost the entire Ukrainian budget deficit of about 20% of GDP in 2025 will be covered by external financing.
However, the US participation in this assistance cannot be taken as guaranteed, the publication notes. If Washington refuses assistance, Ukraine will have enough financial assistance from other allies for 2025. But already in 2026, Ukraine may find itself in a difficult situation.
- Since the beginning of the full-scale Russian invasion, all of Ukraine’s own state budget revenues have been used to finance defense; such expenditures account for approximately half of the budget. Ukraine finances all of its civilian state budget expenditures through foreign financial assistance — in 2024, the need for such external financing was $38 billion.
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