For two years Ukraine has been living in a state of war, and the economy is surviving under martial law. During this time, some sectors of the domestic economy suffered especially hard. And there is certainly not a single one that has improved its position since the Russian invasion began.
Stability with a bitter aftertaste
Two years of a big war did not destroy our economy, no matter how much our enemy wanted it. There is no shortage of goods, enterprises, restaurants and even nightclubs are open, people receive salaries and pensions without noticeable delays. Of course, prices are rising, but there was no hyperinflation even in the first months after the Russian invasion began.
It should be noted that in terms of economics, the first and second years of the war differ significantly from each other. If in the first year, or, more precisely, in its first months, the situation rapidly deteriorated in almost all directions, then in the second year a certain stability emerged, as far as this is possible in principle in the conditions of repelling military aggression. So, for example, if in 2022 the country’s GDP fell by 29.1%, then in 2023 it grew by more than 5%. Prices in 2022 increased by 26.6%, and in 2023 - by only 5.1% (according to official data).
The collapse of the hryvnia also occurred in the first months after the invasion. At times, the dollar exchange rate on the “black” market jumped to 45 hryvnia, but then decreased. And in 2023, the rate did not even exceed 39 hryvnia per dollar, and now remains in the same positions. What is important is that the national currency has not collapsed (for now, at least) due to the lack of promised - and budgeted - Western financial assistance, primarily from the United States.
All the above figures indicate that the Ukrainian economy was able to adapt to the war. However, the ability of the economy - and the country as a whole - to adapt to wartime conditions and learn to live in them should not be misleading. The situation is actually very difficult.
“In numbers, the consequences of two years of war for Ukraine look quite tragic,” Maxim Oryshchak, an analyst at the Center for Exchange Technologies (CBT), said in a commentary. — The country’s economy has shrunk by about 20%. The labor force was reduced by 20-25%. External public debt increased by 41%. The hryvnia weakened by 37%. Overall inflation over two years was about 31%.”
Unfortunately, according to the expert, as long as the war continues, the economic situation will only get worse, since “war and the economy are antagonists.”
Oryshchak emphasized that the Ukrainian economy over the past two years has managed not to slide into the abyss only thanks to the colossal financial support of its allies.
“Without it, the damage could be catastrophic,” the expert warned.
Indeed, if we analyze the budgets of our country over these two years, it turns out that foreign financial assistance accounts for half of all budget expenditures and even a little more (in 2022 it was at the level of 59% of the state budget, in 2023 – 49%). The same dependence on the financial support of our foreign partners is reflected in the 2024 budget.
Sectoral collapse
As for the consequences of the war in an industry context, then, according to Maxim Oryshchak, retail trade was the least affected - its turnover decreased by about 10%. At the same time, the greatest damage was caused to the transport industry - cargo turnover fell by 37%.
Everything is clear here: with the beginning of the big war, the sky was closed in the country, as a result of which air transport completely stopped operating. In turn, maritime transport has significantly reduced traffic volumes due to the Russian blockade of the Black Sea. Other modes of transport are also experiencing difficulties, given the fact that a significant part of Ukraine is occupied, and transportation in the front-line zone has either fallen or been reduced to zero.
Two years of war took a toll on the construction industry. It decreased by about 36%. Industrial production was also under attack. There was a drop of one third.
Maxim Oryshchak clarifies that the above calculations were made based on statistical data for 2022 and three quarters of 2023. And it is likely that when information for the fourth quarter of 2023 becomes available, the overall situation will look a little better (again, due to the achievement of relative economic stability in the past year - “Apostrophe”). However, the overall trend will not change.
In addition, when talking about the damage caused by the war to various sectors of the economy, one cannot help but recall the energy sector.
During the first military winter of 2022-2023, Ukrainian energy infrastructure facilities were subjected to massive missile attacks, as a result of which almost the entire country was plunged into darkness for long hours, and sometimes entire days. During the spring and summer, many energy facilities were restored. In addition, since that time, Ukraine’s air and missile defense has been significantly strengthened by Western weapons, primarily American Patriot anti-aircraft systems. Apparently for this reason, and also, which is not excluded, because of the enemy’s shortage of high-precision missiles, this winter there were significantly fewer defeats of energy infrastructure facilities. And so far, blackouts have been avoided.
True, Russia has recently stepped up attacks on our energy infrastructure. According to Deputy Prime Minister for Reconstruction Alexander Kubrakov, he is now focusing his efforts on defeating industrial enterprises.
Damage to the Ukrainian energy sector, which continues to suffer from constant enemy shelling, is also caused by the very fact of occupation of the territories.
“The main energy problem over the past two years is the loss of about 16 gigawatts of generating capacity,” Vladimir Omelchenko, director of energy programs at the Razumkov Center, told Apostrophe. — First of all, this is the largest Zaporozhye nuclear power plant in Ukraine, which is now under occupation. In addition to it, a number of thermal power plants, large “green” generation capacities (wind and solar), as well as the Kakhovka hydroelectric power station, the destruction of which was not only a loss for the energy sector, but also the cause of an environmental disaster, came under occupation.”
At the same time, the energy industry has learned to survive in war conditions. After the unification of the energy systems of Ukraine and the European Union, we had the opportunity to import electricity from EU countries. Coal production is gradually increasing. At the same time, we are going through the current heating season without gas imports (although, as Vladimir Omelchenko noted, this is not due to an increase in its production, but to a drop in consumption).
On the fuel market, before the start of the great war, our country received significant volumes of fuel, primarily diesel fuel and liquefied gas, from Russia and Belarus. After the invasion, this supply channel was closed, causing shortages of petroleum products in the first months of the war. The enemy's destruction of domestic fuel production facilities only aggravated the problem.
Starting from the second half of 2022, the automotive fuel market was stabilized due to imports from European countries.
Of course, fuel prices have increased, including due to the devaluation of the hryvnia, since almost all petroleum products in Ukraine are now imported. However, the deficit was overcome, and prices not only stabilized, but also fell slightly.
The situation on the automobile fuel market was not worsened either by tax increases or by protesters blocking the border with Poland. In each of these cases, there was a slight and short-term increase in prices, which was offset over time by a similar decrease.
Today, fuel prices remain stable. True, in recent days they have been growing a little. And there are fears that oil products will soon become even more expensive. One of the reasons for this is the blockade of the border with Poland by farmers who do not allow any cargo to pass in both directions, including automobile fuel. Tensions in the Middle East and the Red Sea may also contribute to price increases.
Battles for the harvest
Very soon the demand for petroleum products in Ukraine will increase, as the sowing campaign is just around the corner. Domestic farmers continue to sow and grow crops, despite all the difficulties associated with the war.
But the damage the war caused to agriculture is enormous. The enemy understands perfectly how important the agricultural sector is for our country, and therefore seeks to destroy granaries, agricultural equipment, and crops.
According to Roman Neiter, an analyst at the Center for Food and Land Use Research at the Kyiv School of Economics, losses in the domestic agricultural sector after the invasion can be divided into two categories: the loss of physical assets and lost profits.
In the first case, we are talking about losses resulting from the direct destruction of material assets - elevators, agricultural machinery, grain, and so on. In a conversation with Apostrophe, the expert estimated the damage at $10.3 billion. And the lost income of Ukrainian farmers is currently estimated at $69.8 billion.
“These figures take into account losses due to the inability to cultivate the land in territories that came under occupation, as well as in front-line territories mined and contaminated with explosive objects. It is estimated that Ukraine lost 20-25% of its arable land as a result of the Russian invasion. This same figure ($69.8 billion - “Apostrophe”) also includes the losses of producers due to lower prices on the domestic market, which occurred due to the fact that it was impossible to export the harvest,” says Roman Neiter.
However, despite all the difficulties, there has been no mass bankruptcy of enterprises in the agricultural sector. And for two years, farmers managed to ensure the country’s food security and even send their products for export.
The export of agricultural products by sea, like any other product, was difficult in the first months after the invasion due to the Russian blockade of sea trade routes. The situation was resolved thanks to the “grain deal” concluded between Ukraine, Turkey, the UN and Russia on July 22, 2022. The deal did not solve all the problems of Ukrainian exports, but still made it possible to carry them out. However, in July 2023, the Russian Federation unilaterally withdrew from the “grain deal.”
Nevertheless, Ukraine continued maritime exports, using the safest transport corridors. And today the volume of supplies to the world market is even greater than during the “grain deal”.
“In recent months, the sea corridor has ensured export volumes almost at the pre-war level - 5-6 million tons per month, which makes it possible to export most of the future harvest,” says Roman Neiter. “True, the cost of transportation along it is still higher than before, but it is gradually decreasing.”
In addition, there are opportunities for export by land, across the western border. Despite the fact that this way you can export significantly less than by sea, it helped us a lot during the blockade of the sea.
However, recently the Ukrainian border has been blocked by Polish protesters - at first they were truck carriers, later they were replaced by farmers. The latter do not allow Ukrainian agricultural products into Poland. And sometimes it comes to outright barbarity, as in the cases of grain spilled from trucks and railway cars.
Non-military rails
One of the main problems of Ukraine today is the shortage of weapons and ammunition. The shortage is due to the fact that our allies have significantly reduced supplies in recent months. And the United States, due to the inability of American legislators to pass an appropriate law, generally took a pause for an indefinite period.
As for the domestic military-industrial complex, it is currently unable to compensate for the supplies of our foreign partners. Not least because of the losses suffered by defense industry enterprises.
“The capacity for the construction and repair of tanks, which were based in Kharkov, has been completely lost. And, most likely, it will no longer be possible to restore these productions, since they used unique equipment, often existing in one copy,” military expert Mikhail Zhirokhov told Apostrophe. “In addition, there may be no need for this, since Soviet-style tanks were produced in Ukraine, for which many components were supplied from Russia and other post-Soviet countries.”
However, military production is gradually reviving. Although, for a country at war, especially one with powerful production potential, it is too slow.
“It’s hardly possible to talk about transferring the economy to a war footing,” says Zhirokhov. “I can’t give an example of a civilian enterprise switching to producing military products.” The production of military ammunition - bulletproof vests, helmets and the like - is growing. But this also happens at specialized enterprises that were originally designed for this.”
According to him, we can talk about increasing the production of armored vehicles.
“Before the full-scale invasion, it was essentially a garage production. It is now dispersed across different regions and has grown. However, it’s still too early to talk about mass production,” says the expert. “Domestic self-propelled guns Bogdana and Neptune missiles are also produced, but also in small quantities.”
The production of unmanned systems is developing most dynamically in Ukraine today. However, in this sector we cannot yet fully cover the needs of the army.
