Ukraine Politics April 2022

Ukraine

Ukraine: Ukraine's economy on an uncertain path following Russian invasion

March 8, 2022

The Russian invasion of Ukraine is now well into its sixth week and the military landscape has evolved significantly. Initially, the Russian army overwhelmed Ukrainian armed forces, carrying out numerous attacks on strategic military targets and occupying a number of key regions. Moreover, the threat of a potential nuclear attack in the early days of the war left the U.S. and its allies somewhat sidelined. However, after several rounds of severe sanctions from Western countries, coupled with massive financial and military aid, the Ukrainian resistance has reported some measure of success in fending off the attackers and the conflict has seemingly shifted into a different phase.

The Kremlin recently started pulling back some troops from Kyiv and other areas to the west of the country in order to allegedly focus military efforts in the Donbass region. In addition, a sixth round of peace talks between Russian and Ukrainian diplomats in Istanbul appear to be making cautious progress: NATO membership, EU accession and a ceasefire are all on the table. Despite these efforts, the brutal war has raged on; casualties continue to pile up and a number of parties remain skeptical about the seriousness of these negotiations. Although military efforts have been scaled back in some areas, the Russian withdrawal has left a trail of death and devastation, while some cities have only seen fighting intensify.

On the economic front, the conflict has forced an estimated 6.5 million people to flee into neighboring countries and has resulted in extraordinary damages to infrastructure. Moreover, sustained bombardment of the southern cities of Mariupol, Kherson and Odesa—the country’s main port cities—threaten to completely cut off Ukraine’s access to the sea and potentially pose a significant threat to exports ahead. As such, our Consensus now sees GDP contracting by 29.5% in 2022—with some analysts seeing an up to 50% drop—before rebounding to some degree in 2023. Similarly, our panelists now project inflation to average 24.0% this year, as the Russian military continues to cut off resources and supply constraints are exacerbated, especially in besieged cities. That said, the extent of the Russian military campaign and the scope of territorial loss post-war remain key factors determining Ukraine’s future.

Commenting on the economic outlook for Ukraine, Oleksandr Zholud, chief expert at the National Bank of Ukraine, noted:

“Currently, the invasion and massive shelling have affected more than 10 oblasts: Kharkiv, Sumy, Chernihiv, Kyiv, Kherson, Zaporizhia, Mykolaiv, Zhytomyr, Donetsk and Luhansk oblasts, and the city of Kyiv. Together they produced more than 55% of GDP. However, other regions are also adversely affected. Thus, in addition to the direct impact of hostilities, economic activity is hit via disrupted relationships between regions’ supply chains, a great damage to both population and infrastructure. All these factors will have long-term consequences for the economy. Any quantitative forecast can be made only after the end of hostilities and the estimate of the capital loss.”

FocusEconomics panelists project GDP to contract 29.5% in 2022, which is down 21.2 percentage points from last month’s forecast. For 2023, the panel sees GDP rising 5.6%.


Author:, Junior Economist

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