Dr. Gülsüm Akbulut

The Russian invasion of Ukraine on February 24, 2022, has had a significant and lasting impact on the economies of both countries. Although Ukraine is economically and militarily less powerful than Russia, the country was able to withstand the invasion for an unusually long time, thanks to support from Western partners. However, the economic and humanitarian consequences of the war for Ukraine have been extremely severe.

Ukraine’s economy was significantly affected by the conflict. By 2022, the country’s gross domestic product had fallen by 29.1 percent and the poverty rate had risen from 5.5 percent to 24.1 percent, according to the World Bank. This dire situation is attributable to the widespread destruction of infrastructure, the loss of strategically important regions to Russian forces, internal displacement and migration, and logistical problems caused by Russia in transporting key export products. The costs of the war, including increasing military spending and infrastructure repair expenses, have led to growing budget and current account deficits. Ukraine is trying to meet its financing needs by borrowing in domestic and foreign markets and seeking financial support from Western alliances. The fiscal deficit is estimated at about 19.4 percent of GDP in 2023 and will remain elevated in the coming years. Fiscal pressures are expected to be reflected in Ukraine’s gross debt. The IMF estimated that the debt-to-GDP ratio will rise from 50 percent in 2021 to 100.7 percent in 2025. (Table 1)

The damage to Ukraine’s infrastructure has accelerated. The assessment conducted by the World Bank indicates  that direct damage will exceed $135 billion in 2023. Sectors such as housing, transportation, energy, trade, and industry have been particularly hard hit. Regions along the front lines, such as Donetsk, Kharkiv, and Luhansk, are particularly affected by the destruction. The cumulative economic impact, including war-related spending, is estimated at about $290 billion. The World Bank indicated that total reconstruction needs over the next decade would be $411 billion. The primary areas requiring financial investment for reconstruction include housing, energy infrastructure, social protection, livelihood improvement, and agricultural revitalization. Other estimates put  the prospective cost of reconstruction to escalate to $1 trillion. European Investment Bank President, Werner Hoyer, indicated that Ukraine’s pursuit of self-sufficiency as a viable candidate for European Union membership would necessitate an immense financial commitment. Hoyer contends that Ukraine could necessitate up to $1 trillion in funding for reconstruction. This substantial infusion of funds is considered imperative not only to sustain the ongoing military operations but also to fulfill the requirements of budgetary commitments.

The defense of Ukraine against Russian attacks has received significant support from the United States and the European Union. According to the Kiel Institute for the World Economy, major European donors inside and outside the EU have provided a total of 156 billion euros ($167.5 billion) in emergency and multiyear assistance since the conflict began. The United States has provided about 70 billion euros (about $75 billion) in short-term assistance. The contributions of Norway, Lithuania, Estonia, and Denmark were substantial relative to their GDPs, with Norway being the largest donor at 1.7 percent of its GDP. Despite these substantial contributions, however, the immediate and medium-term assistance was insufficient to meet the demands of the ongoing war and the reconstruction of devastated areas.

Russia, on the other hand, is struggling with the economic and military costs of the conflict, which are exacerbated by the sanctions. Restrictions imposed by Western countries, particularly the EU, such as banning Russia’s access to EU capital and financial markets, restricting energy imports from Russia, limiting the price of maritime transport of Russian oil, and prohibiting the export and import of key goods and technologies to and from Russia have caused significant difficulties. Nevertheless, Russia has managed to find alternative markets, particularly in Asia, to secure its energy revenues. It appears that the $60 per barrel price ceiling for Russian oil could not be maintained in July and August, as the Urals crude price reached $76 in early September. The resilience of Russia’s main source of revenue, energy, means that estimates for the Russian economy point to modest positive economic growth of about 1 percent in 2023 and the following two years, according to the IMF’s World Economic Outlook. However, the budgetary costs of the war are reflected in a persistent budget deficit. With government spending rising and revenues falling, the budget deficit in 2023 is expected to be higher than in 2022, and the country’s debt will rise. The debt-to-GDP ratio is projected to increase from 16.5 percent before the conflict in 2021 to 25.3 percent in 2025. (Table 2).

In summary, the Russian-Ukrainian conflict has had profound and lasting economic effects on both countries. Ukraine has faced the devastating consequences of widespread infrastructure destruction, growing poverty, and escalating budget deficits. These widespread economic impacts underscore the urgent need for continued international assistance, reconstruction efforts, and economic resilience in Ukraine. Russia is also struggling with economic problems due to both the costs of the war on budget and Western sanctions. However, the country has adapted to the crisis by seeking alternative markets for energy exports and new alliances in the face of Western adversity.

Dr. Gülsüm Akbulut

Director of Global and Turkish Economic Studies

FPI- Foreign Policy Institute

12 September 2023