Ukraine's War Economy, 1 Year In

How Russia's Invasion Has Devastated the Ukrainian Economy and People

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One year ago, Vladimir Putin announced that Russia was launching a full-scale invasion of Ukraine, starting the largest European war in a generation and arguably the largest armed conflict of the 21st century.

In the time since then, hundreds of thousands of civilians and military personnel have been killed or wounded in the war and tens of millions of Ukrainian civilians have been forced out of their homes by the conflict. The UN estimates that more than 8 million Ukrainians—1/5 of the nation’s prewar population—have currently fled the country, making this one of the largest refugee crises in human history.

The Ukrainian economy has also suffered extraordinarily from the pressure and devastation caused by the war. Accounting for the loss of territory and population, preliminary data suggests that Ukraine’s real gross domestic product shrank by more than 30% in 2022, with IMF staff forecasts expecting the country’s total output losses to exceed 40% before any significant recovery begins. That’s despite the significant amount of financial, economic, and military support given to Ukraine by foreign governments and individuals throughout the year—without which economic losses would be much larger. Still, a rapidly-shrinking economy represents a significant reduction in Ukraine’s ability to defend itself, meet its citizens’ basic needs, and maintain its independence. Ultimately, the bulk of the war’s economic pain remains primarily borne by the Ukrainian people—and as the war drags on Ukraine’s economic resiliency will continue to be tested.

Ukraine and the Global Food Crisis

When the war started, one of the greatest risks was that Ukrainian crop production and food exports would be severely harmed at a time of acute global food shortages. As the “Breadbasket of Europe” agriculture plays an outsized role in Ukraine’s economy—the industry represents represented 10% of prewar Ukrainian GDP, compared to an average of 4.3% across the globe—and Ukrainian crops were a key source of local and global food staples. Fears of a ruined season partially came true—Ukrainian corn harvest volumes fell 49%, with wheat and sunflower volumes sinking 36% and 37% in 2022.

However, the absolute worst-case scenario was avoided. Ukrainian agricultural exports—a critical source of food and food oils for countries across the world while also a key pillar of Ukrainian economic strength—fell sharply at the start of the invasion but have partially recovered since then. That reflects a recovery in gross export volumes but it also reflects a downturn in gross imports—with fewer mouths to feed at home a larger share of the remaining production could be sent abroad.

The Black Sea Grain Initiative, an agreement between Russia, Ukraine, Turkey, and the UN designed to ensure the safe passage of key maritime food cargo shipments out of Ukraine, was instrumental in that rebound of Ukrainian food exports. Exports of food staples that had previously been locked in port were allowed to resume, and though volumes have trended downward recently thanks to a dispute with Russia it remains a lifeline for Ukraine and low-income nations across the world.

Combined, these efforts have helped reduce the risk of a rapid increase in world hunger and further jumps in global food prices. The UN’s Food Price Index, especially the cereals and oils components, rose significantly in the immediate aftermath of the invasion but has stabilized and even declined since. However, the overall losses to Ukrainian agricultural output remain enormous—and industries that were not afforded the same treaty protections have been increasingly vulnerable to Russia’s intensifying attacks on basic Ukrainian economic infrastructure.

Ukraine’s Battered Industry

Indeed, Ukrainian industrial output has fallen more than 35% over the last year, and manufacturing output has fallen a staggering 40%. Ukraine is now producing less than 20,000 tons of cast iron, steel, and rolled steel each day—down from between 50,000 and 60,000 tons a day each before the war—and output of coke & refined petroleum products, chemicals, and rubber & plastic products have each fallen around 60%. That’s partly why imports of nonenergy goods rebounded so quickly from the initial shock of the invasion—damage to domestic industry forced many customers and businesses to turn to imports.

Companies, broadly, still see the situation as getting worse before it gets better. Short-term growth expectations have tumbled since attacks on Ukrainian electrical infrastructure started causing widespread blackouts back in October, and growth expectations now sit at the lowest level since 2021 despite the significant drop in output since then. A large majority of Ukrainian businesses expect their economic activity and staffing levels to drop over the next 12 months, with year-ahead expectations remaining worse than during the height of the pandemic.

Unsurprisingly, the war is the biggest impediment to Ukrainian economic growth with 85% of companies citing it as a major reason why they cannot increase output. However, it’s remarkable that the stabilization of the frontline and the securing of major population centers like Kyiv has not alleviated any of the war risks—Russia’s efforts to damage civilian infrastructure are counteracting the economic benefits of Ukraine’s improving military situation. Also, since the start of the war, Ukrainian manufacturing firms have consistently said that they lack the ability to easily meet a hypothetical surge in demand—even as their output has fallen tremendously. In other words, Ukrainian industrial capacity is being permanently scarred by the conflict.

In particular, the attacks on civilian electricity infrastructure and ongoing intermittent blackouts have been major issues for Ukrainian companies. More than three-quarters of firms now cite blackouts or other utility interruptions as a major problem, making it the most common issue ahead of materials shortages. 40% of companies have cut production thanks to unstable electricity access, and more than 60% have turned to new work schedules in order to better cope. Imports of power banks, generators, transformers, and other energy equipment have surged recently and now represent 14% of all Ukrainian machinery imports. Companies also increasingly see their work as dangerous thanks to the invasion, with almost half fearing for their and their workers’ safety.

Conclusions

All of that likely means Ukraine’s economy will get worse before it gets better—and the country is not being helped by the rapid deterioration in global economic conditions. As the conflict drags on, Ukraine will likely remain dependent on foreign aid for much of its economic needs—and those needs are likely to grow. 43% of all households in Ukraine have now completely exhausted their personal savings—leaving more than 65% of internally displaced persons without sufficient financial support and 20-30% struggling to obtain basics like food, diapers, medicine, clothes, and heating appliances. The UN estimates that 18 million Ukrainians—essentially half the remaining population—are in need of humanitarian aid. Though the amount of support Ukraine has received is large, many nations are already failing to meet their stated military and financial commitments, let alone the yawning gap in humanitarian aid. There are some comparatively easy ways to alleviate the pressure—the growing integration of Ukrainian refugees into European labor markets should be a win-win, and improvements in Ukraine’s military security will also pay dividends in the form of economic security—but one year into the war Ukraine’s economic fortunes still remain dependent on the decisions of its neighbors.