The economy in the times of war. One year after the Russian invasion

The threat was ignored, and now the war has been going on for a year. This is a turning point for people and the world. This date marked a turning point for many people, dividing their life unlike ever before. In the modern world, no event occurs only in the vacuum; instead it permeates all dimensions of life – social, ecological, cultural, political, etc. The economic measurement is also essential because when we talk about losses and support, we also think about the destruction of the economy and infrastructure, the well-being of the population, and the money needed for recovery. When we talk about survival, we also mean businesses that manage to survive and develop. In this article, we will try to present the degree of the damage done to the Ukrainian economy one year on since the conflict began.

The assessment of the economy of any country is usually based on indicators of GDP, inflation, unemployment, and the exchange rate of the national currency (the citizens of Poland also discussed these issues during this year and felt a shock when the value of euro breached the 5 zlotys threshold [1]). So then, what about Ukraine?

In January 2022, the National Bank of Ukraine (NBU) forecasted economic growth of up to 3.4%, and the slowing of the inflation rate to 7.7% [2]. Numbers were based on the assumption that the consequences of previous crises would be overcome. But after February 24th, 2022, the situation changed dramatically, and forecasts at various times indicated a decrease in GDP ranging from 32 to 45% [3,4].

According to the official data from the previous year, the GDP declined by 30.3% [5], which constituted the most significant downfall in the history of the independent Ukraine (Fig. 1). The second quarter was the most difficult, but the fourth was also devastating to the economy due to widespread blackouts. Therefore, the NBU notes that the stability of the energy system is an essential condition for the realization of the forecasts, in particular, the growth of the economy by 4.1% in 2024 and 6.4% in 2025. The Ministry of Economy predicts that the difficulty with ensuring stability may worsen the forecasts by 3-9%.

**Fig. 1. GDP dynamic. Source: Center of Economic Strategy**

In December 2022, consumer inflation in annual terms was 26.6% and was practically unchanged when compared with the rates of price growth in November (26.5%) and October (26.6%) [6,7]. However, there are significant differences in inflation rates for different groups of products, particularly under the influence of increased business production costs and still complicated logistics. Thus, against the background of electricity shortages, the prices of products whose production is energy-intensive requiring heat treatment or cold storage have risen. The examples include meat, dairy, oil products, confectionery, soft drinks, and canned goods. For instance, prices for eggs increased year on year by 76.6%, fruits by 73.8%, vegetables by 51.8%, and fish by 45.8%. Prices for fuel and lubricants increased by 69.4% in the span of 12 months as well. In agriculture alone, the cost of logistics has increased at least fivefold due to the Russian blockade of ports and the destruction of infrastructure [8]. The situation varies also in regards to territorial distribution; for example, in December, prices fell in the Kherson region, of which a large part was liberated in November (-4% m-o-m).

Despite the war, inflationary processes in Ukraine remain under control, and the NBU predicts a moderate slowdown in inflation in 2023. A consistent economic policy will facilitate this with international partners’ support and a global easing of inflation.

At the same time, consumer inflation in Ukraine will continue to remain high. In addition, risks to inflationary processes and deterioration of expectations remain profound, mainly due to a possible escalation on the front, as well as continued missile attacks by Russia which result in electricity shortages.

The Ukrainian private sector is expected to experience a drop in confidence among businesses. Despite headwinds the companies are on the lookout for new development opportunities. Thus, Business Confidence in Ukraine increased to 83.50 points in the fourth quarter of 2022 from 79.50 points in the third quarter of 2022 (Fig. 2).

The war increased risks and uncertainties, creating barriers to the free movement of means of production, including workforce. The war led to the destruction of labor market institutions and negatively affected their functioning. Problems in the economy, combined with significant internal displacement and refugee flows, lead to large-scale losses in employment and income. Rising unemployment, social exclusion, gender inequality, workplace discrimination (including the youth), and the spread of poverty are among the war’s most negative social consequences.

It is difficult to answer the question about the number of unemployed because currently, no state body knows exactly how many Ukrainians live in the country. Usually, the data is prepared by the State Statistics Service, but since February 24th, such studies are not being conducted.

The ILO believes that in 2022 the level of employment in Ukraine will be 15.5% lower than in 2021. That is, there will be 2.4 million more unemployed people than in 2021[10]. This forecast is far more optimistic than the ILO’s estimate in April 2022, shortly after the conflict began, indicating a loss of 4.8 million jobs. The positive change is a consequence of the decrease in the number of territories of Ukraine under occupation or under active hostilities. However, the partial recovery of the labor market is modest and very fragile.

If we consider that, according to the International Labor Organization, 15-17 million people of working age live in Ukraine, then according to the data from fig. 3, almost one in three lost their job.

**Fig. 3 Unemployment, according to the different organization’s assessments, millions of people [11]**

According to the UN data, almost 13 million people left Ukraine after the full-scale invasion, 8.12 million returned, and 4.77 million received temporary protected status in the European Union [12]. However, even these data points do not illustrate the situation in its entirety. In particular, they do not include people who were deported to Russia by the occupiers.

The physical destruction of objects also causes unemployment. According to the European Business Association, 53% of its members work with restrictions, and 3% have stopped working. As a result, 15% of the companies surveyed by the association reduced employment or sent its staff on unpaid leave. The predicted reduction in employment at agricultural enterprises in 2023 will be 22%, including formal and informal employment [8].

Also, because of the war, there is a decrease in wages since there are significantly more unemployed people as opposed to the vacancies. The share of the population with incomes lower than the actual living wage, which for working-age persons in 2022 is UAH 2,481, can reach 70% [13].

According to one of the academics at the National Academy of Sciences of Ukraine E. Libanova: “Ukraine will lose many people: due to the increase in mortality and the decrease in the birth rate. Many children who would have been born were not born in 2022, and even more so, will not be so in 2023. If the war drags on even longer, such a trend might continue into 2024 . And the most significant influence (on the number of the population – ed.) will be the numerical migration”[14] According to her expectations, after the end of the war, more than a third of those who left due to hostilities abroad may return to Ukraine, and the rest will remain outside the country for a temporary shelter.

The devaluation of the national currency, though expected, was also one of the more destabilizing factors in 2022. To avoid panic, on July 21, 2022, the NBU adjusted the official exchange rate of the hryvnia to the US dollar by 25% to UAH 36.5686 per US dollar because of the change in the fundamental characteristics of Ukraine’s economy during the war and the strengthening of the US dollar against other currencies.

In particular, it was a response to panic forecasts regarding the exchange rate growth for the psychologically uncomfortable mark of UAH 50 per US dollar [15]. It is not the secret how much panicky moods accelerate devaluation and lead to currency shortages in bank cash registers (a classic manifestation of a self-fulfilling prophecy).

Also, according to the NBU’s comment, such a step made it possible to increase the competitiveness of Ukrainian manufacturers, bring exchange rates closer to different groups of businesses and the population, and support the economy’s stability in wartime conditions [16]. Several restrictions were also introduced; in particular, a monthly limit was established for payments abroad using hryvnia payment cards for UAH 100,000 (equivalent) from all client bank accounts opened in the national currency.

Among the turbulences caused by Russian aggression against Ukraine, the hryvnia is also being pressured by the lack of funds at the state’s disposal. The economy is shrinking; profits are falling, while spending, primarily on defense and social support for various population segments, is growing disproportionately. For example, it has already been announced that authorities want to provide at least a trillion hryvnias in the 2023 budget for national security and defense alone (versus 287 billion hryvnias, as was the case under the “pre-war” Law on the State Budget-2022).

All in all we can confidently say that 2022 was both challenging and unpredictable. Despite these manifold issues Ukraine proved adept at slowing the downfall, and the macroeconomic results of the year proved better than expected. However, they still remain the worst in the entire history since the independence (except for inflation, because Ukraine already has had a period of hyperinflation in its history). The data is as follows the fall in GDP – 30.3%, inflation – 26.6%, unemployment – 28.3%, devaluation of the national currency by 35.5%.

It is worth summarizing with economic expectations for the next year, 2023 [17], the year of the war. Two scenarios of further developments are proposed for macroeconomic forecasting. Basic – provides for a relatively quick restoration of the power system thanks to repairs and operational supplies of equipment. Pessimistic – considers more significant destruction of energy-generating enterprises and main networks, temporary shutdown of some NPP units due to reduced system adaptability, significant losses in heat and gas supply, and long-term power outages in those regions of Ukraine most vulnerable to energy shortfalls.

According to governmental expectations and forecasting, in 2023, inflation will slow to 18.7%, and real GDP will grow only marginally – by 0.3%. Inflation will continue to decline in the coming years, and the economy will fully recover primarily due to the expected reduction in the risks associated with security. [5]. The unemployment rate in Ukraine in 2023 will remain at the level of 26%. In the following years however, it is expected to decrease, to 20% in 2024 and 17.6% in 2025.

At the same time, forecasts conducted during a full-scale war do not give an accurate picture (for example, the IMF predicts GDP growth of 1%, the Ministry of Economy of Ukraine by 3.2%, Oxford Economics by 2.3%, and Dragon Capital by 5%). In the foreseeable future, Ukraine will continue to fight, the economy will continue to work, and this intensification will directly depend on the intensity and nature of military operations (and here, international assistance is essential and badly-needed). Ukraine and Ukrainians already have a year of experience of opening new businesses during the war, paying taxes in order to support the Armed Forces, and adapting to new places, conditions, and logistics. It won’t be immediate changes for the best, but everyone contributes to ensure the economy continues to operate. All this means that a military victory, safeguarding of our independence and rebuilding of Ukraine can be achieved in concert.

Foto: PAP/Abaca

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