Two years after Russia launched its full-scale war of aggression, Ukraine is still holding the line militarily, and even beginning to recover economically. As much as Vladimir Putin wants the world to think he has shielded the Russian economy from blowback, recent financial and economic developments suggest otherwise.
BERKELEY – Two years into its full-scale war of aggression, Russia continues to attack Ukraine’s manufacturing and infrastructure, and Ukraine continues to demonstrate its resilience in the face of a massive military and economic toll. By the end of 2022, Ukraine’s GDP had shrunk by about 30%, and inflation had skyrocketed from 10% to 26.6%. More than ten million Ukrainians had been displaced, and the unemployment rate was as high as 24.5%. The National Bank of Ukraine had devalued its currency from 29 to 36.57 hryvnia to the US dollar.
But since this dark opening chapter, the Ukrainian economy has shown signs of resilience and recovery. In December 2023, the International Monetary Fund found that despite myriad challenges, Ukraine’s macroeconomic indicators were “stronger than expected.” The IMF revised up its 2023 GDP growth projection for Ukraine from 2% to 4.5%, and it expects inflation to fall to 5.5%. With inflation slowing, the National Bank of Ukraine has replaced its fixed exchange rate with a “managed flexible” one. Interest rates have fallen to around 15%, down from 25% at the beginning of 2023.
Meanwhile, Russia’s economy has been showing signs of strain. A report from the US Treasury Department finds that Russia’s economy is 5% smaller than it would have been if President Vladimir Putin had not invaded Ukraine. The same report notes that sanctions have indeed limited the growth of Russia’s economy, leading to high interest rates (16% in December 2023) and a weakening ruble. Between the beginning of 2023 and last October, the exchange rate increased from 69 rubles per dollar to 100 per dollar.
More recently, the exchange rate has decreased to the 88-93 range, owing to the Russian central bank’s efforts to strengthen the currency by imposing capital controls. Russian exporters across 43 industries are now required to exchange 90% of received foreign currency into rubles. Such drastic tactics – applied in a hurry – suggest that a cloud of uncertainty will continue to hover over Russia’s financial system, threatening further destabilization to the exchange rate.
The proximate causes of Ukraine and Russia’s respective economic challenges are vastly different, even though they all ultimately stem from Putin’s personal decision to launch a war.
For Ukraine, the central fact is that the fighting is almost exclusively on its territory, with Russia directly striking its production facilities, transportation routes, educational institutions, and civilian infrastructure. The damage from Russian airstrikes on Ukrainian energy infrastructure in the winter of 2022 extended far beyond just the assets that were destroyed. In addition to the $8.8 billion in direct damage was the harm to small businesses, many of which were forced to close or significantly alter their operations. These disruptions had far-reaching macroeconomic implications, putting the economy at risk of “losing more than $200 million” each day a blackout occurred, according to the chairman of the Ukrainian Parliament’s finance, tax, and customs policy committee.
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At that time, Ukraine persevered. It has since repaired at least 62% of the destroyed thermal power plants, 68% of hydropower plants, and 80% of power lines. However, Russian airstrikes remain an acute threat in those parts of the country that lack adequate air defense.
Russian attacks have also disrupted Ukrainian export activities. Ukraine is one of the world’s major grain suppliers, and grain exports account for approximately 10% of Ukraine’s annual GDP, on average. After February 2022, the Russian navy prevented 20 million tons of grain from being shipped through the Black Sea, and destroyed “thousands of tons of grain” housed at Ukraine’s ports.
But after Russia pulled out of the United Nations-backed Black Sea deal in July 2023, Ukraine managed to establish a new shipping corridor the following month. Bridget A. Brink, the US ambassador to Ukraine, reports that as of mid-January, 16.5 million tons of grain have already been shipped along this route, whereas the defunct UN-brokered deal resulted in only 33 million tons shipped over an entire year. Ukraine’s economic outlook remains bright despite Russia’s efforts to cloud it.
On Russia’s side, most of the economic losses are the result of its own mismanagement and Western sanctions. Analysts note that, due to military casualties and the exodus of individuals fleeing conscription, Russia faces a “demographic crisis.” In addition, its economy has been weakened by declining oil and gas revenues and pervasive, crippling shortages of Western-produced parts and tools. While economic sanctions have not managed to stop the war, they have succeeded in straining the Russian economy.
Russia, of course, brought all these problems on itself. It most certainly is not winning the war, either militarily or on the economic front. Ukraine is recovering from the initial shock, and if robust foreign assistance continues, it will have an upper hand in the war of attrition.
But make no mistake: Ukraine urgently needs stronger military capabilities to protect its citizens and economy from Russian airstrikes. Air defenses provided by the United States, Norway, Germany, and others played a vital role in neutralizing Russian attacks on Ukrainian energy infrastructure this past winter. Moreover, Ukraine needs greater capabilities to strike at Russia’s own military-industrial complex to reduce the intensity of Russian airstrikes.
For its part, the West must continue to provide Ukraine with financial and military aid, and it should continue to tighten the screws of economic sanctions to deny Russia the resources it needs to wage its war of aggression. Secondary sanctions can play a central role in enforcing existing constraints on Russian trade and finance. All these elements are not only feasible but urgently necessary to help Ukraine defend itself.
Sophia Yi-Dan Lao, a research fellow with Economists for Ukraine, contributed to this commentary.
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BERKELEY – Two years into its full-scale war of aggression, Russia continues to attack Ukraine’s manufacturing and infrastructure, and Ukraine continues to demonstrate its resilience in the face of a massive military and economic toll. By the end of 2022, Ukraine’s GDP had shrunk by about 30%, and inflation had skyrocketed from 10% to 26.6%. More than ten million Ukrainians had been displaced, and the unemployment rate was as high as 24.5%. The National Bank of Ukraine had devalued its currency from 29 to 36.57 hryvnia to the US dollar.
But since this dark opening chapter, the Ukrainian economy has shown signs of resilience and recovery. In December 2023, the International Monetary Fund found that despite myriad challenges, Ukraine’s macroeconomic indicators were “stronger than expected.” The IMF revised up its 2023 GDP growth projection for Ukraine from 2% to 4.5%, and it expects inflation to fall to 5.5%. With inflation slowing, the National Bank of Ukraine has replaced its fixed exchange rate with a “managed flexible” one. Interest rates have fallen to around 15%, down from 25% at the beginning of 2023.
Meanwhile, Russia’s economy has been showing signs of strain. A report from the US Treasury Department finds that Russia’s economy is 5% smaller than it would have been if President Vladimir Putin had not invaded Ukraine. The same report notes that sanctions have indeed limited the growth of Russia’s economy, leading to high interest rates (16% in December 2023) and a weakening ruble. Between the beginning of 2023 and last October, the exchange rate increased from 69 rubles per dollar to 100 per dollar.
More recently, the exchange rate has decreased to the 88-93 range, owing to the Russian central bank’s efforts to strengthen the currency by imposing capital controls. Russian exporters across 43 industries are now required to exchange 90% of received foreign currency into rubles. Such drastic tactics – applied in a hurry – suggest that a cloud of uncertainty will continue to hover over Russia’s financial system, threatening further destabilization to the exchange rate.
The proximate causes of Ukraine and Russia’s respective economic challenges are vastly different, even though they all ultimately stem from Putin’s personal decision to launch a war.
For Ukraine, the central fact is that the fighting is almost exclusively on its territory, with Russia directly striking its production facilities, transportation routes, educational institutions, and civilian infrastructure. The damage from Russian airstrikes on Ukrainian energy infrastructure in the winter of 2022 extended far beyond just the assets that were destroyed. In addition to the $8.8 billion in direct damage was the harm to small businesses, many of which were forced to close or significantly alter their operations. These disruptions had far-reaching macroeconomic implications, putting the economy at risk of “losing more than $200 million” each day a blackout occurred, according to the chairman of the Ukrainian Parliament’s finance, tax, and customs policy committee.
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At that time, Ukraine persevered. It has since repaired at least 62% of the destroyed thermal power plants, 68% of hydropower plants, and 80% of power lines. However, Russian airstrikes remain an acute threat in those parts of the country that lack adequate air defense.
Russian attacks have also disrupted Ukrainian export activities. Ukraine is one of the world’s major grain suppliers, and grain exports account for approximately 10% of Ukraine’s annual GDP, on average. After February 2022, the Russian navy prevented 20 million tons of grain from being shipped through the Black Sea, and destroyed “thousands of tons of grain” housed at Ukraine’s ports.
But after Russia pulled out of the United Nations-backed Black Sea deal in July 2023, Ukraine managed to establish a new shipping corridor the following month. Bridget A. Brink, the US ambassador to Ukraine, reports that as of mid-January, 16.5 million tons of grain have already been shipped along this route, whereas the defunct UN-brokered deal resulted in only 33 million tons shipped over an entire year. Ukraine’s economic outlook remains bright despite Russia’s efforts to cloud it.
On Russia’s side, most of the economic losses are the result of its own mismanagement and Western sanctions. Analysts note that, due to military casualties and the exodus of individuals fleeing conscription, Russia faces a “demographic crisis.” In addition, its economy has been weakened by declining oil and gas revenues and pervasive, crippling shortages of Western-produced parts and tools. While economic sanctions have not managed to stop the war, they have succeeded in straining the Russian economy.
Russia, of course, brought all these problems on itself. It most certainly is not winning the war, either militarily or on the economic front. Ukraine is recovering from the initial shock, and if robust foreign assistance continues, it will have an upper hand in the war of attrition.
But make no mistake: Ukraine urgently needs stronger military capabilities to protect its citizens and economy from Russian airstrikes. Air defenses provided by the United States, Norway, Germany, and others played a vital role in neutralizing Russian attacks on Ukrainian energy infrastructure this past winter. Moreover, Ukraine needs greater capabilities to strike at Russia’s own military-industrial complex to reduce the intensity of Russian airstrikes.
For its part, the West must continue to provide Ukraine with financial and military aid, and it should continue to tighten the screws of economic sanctions to deny Russia the resources it needs to wage its war of aggression. Secondary sanctions can play a central role in enforcing existing constraints on Russian trade and finance. All these elements are not only feasible but urgently necessary to help Ukraine defend itself.
Sophia Yi-Dan Lao, a research fellow with Economists for Ukraine, contributed to this commentary.