Economy of Ukraine trembles before protracted war

The export ban could be fatal for the Ukrainian economy, as the country spends five billion dollars a month because of the war.

Despite having to keep the war economy afloat, Ukraine’s Finance Minister Serhiy Marchenko was very optimistic. News of the occupation or blockade of the country’s main ports by Russian forces, leading to the closure of most businesses in Ukraine, did not make him lose his temper.

“The situation is very difficult, I won’t shy away from it,” he said in a café near his headquarters, “but we can do it.” When an air-raid siren went off, the interview was interrupted The economisthe just ignored it.

There are many reasons for those running the country’s economy not to panic. Before the war, Ukraine was growing at a rate of almost 7% per quarter. Its population has not been hit hard by Covid-19 and exports from grain to iron and steel are all doing well. Their banking sector is also well monitored and the government deficit last year was less than 3% of GDP.

Ukraine’s debt before the crisis was less than 50% of GDP. economist think this is a desirable figure for most finance ministers. The tax and social system here is well digitized. Parts of the economy continue to make steady contributions to the national budget.

All government employees’ pensions and salaries continue to be paid, even in territories currently occupied by Russia. This is thanks to Ukraine’s internet and 3G networks, which are ubiquitous and unaffected by hostilities. Currently, most companies still pay employees even when they are not functioning properly or are completely inactive. Minister Serhiy Marchenko said the payroll tax was reduced by only 1%.

GDP Ukraine over the years and forecast 2022. Chart: Ukraine

GDP growth of Ukraine over the years and forecast 2022. Graphic: The Economist

However, your prospects for this year are not very positive yet. The World Bank predicts that Ukraine’s GDP could fall by about 45% this year. “Our estimate is 44 percent,” Marchenko said. The problem is that none of these estimates are certain.

Customs revenues have fallen by about a quarter from pre-war levels due to lower imports and the suspension of many taxes. Military spending is a heavy burden, even when arms and ammunition are provided free of charge by the West. SMEs now pay taxes on a voluntary basis.

All this costs Ukraine about $5 billion a month. This equates to a loss of 5% of GDP for each month of hostilities. Ukraine printed more money and issued war bonds at around 11% interest below inflation. However, these two solutions are not enough. The main source of income must come from abroad.

And that’s why Mr. Marchenko spends most of his day asking foreign governments for help. In America he has the greatest hope. On April 28, President Joe Biden said he is asking the US Congress to approve an additional $33 billion for Ukraine.

However, $20 billion of that will be spent on supplying more weapons to Ukraine and other frontline states. Only about $8.5 billion is economic support. The remainder goes to humanitarian aid. “This is good news,” Marchenko said. But when the US money package will arrive and how it will be paid out is not clear to him.

The IMF has also stepped in to provide assistance, but is expected to be deployed in the second quarter. In fact, Ukraine has only received a total of $4.5 billion in aid so far, while the fiscal deficit is $15 billion.

Mr. Marchenko acknowledges that the above solutions are not sustainable. He fears that if the war lasts longer than three or four months, the government will have to resort to more stringent measures, such as drastic tax increases and spending cuts. Added to this is the real fear that after many years of efforts to build a market economy, war could unleash a wave of nationalization and undo the progress made.

A Ukrainian soldier walks past a damaged road on the outskirts of Irpin, near Kyiv, after fighting with Russian forces in March Photo: Los Angles Times

A Ukrainian soldier after a battle with Russian forces on the outskirts of Irpin in March. Photo: Los Angeles Times

The first difficulty arose gradually. Across the country, the new crops of wheat, barley, sunflowers, and other grains and staples were sown 80% of the time. The harvest is expected to proceed without many obstacles, but the problem lies in export.

The presence of the Russian Navy in the Black Sea, as well as the use of defensive mines by the Ukrainian Navy, mean that Odessa Ukraine’s main port is completely closed. Two similar ports nearby suffered the same fate. Meanwhile, the ports of Berdyansk and Mariupol are currently under Russian control. Domestic stocks are still full of freshly harvested winter grain due to export bottlenecks.

Deputy Infrastructure Minister Mustafa Nayyem has been tasked with addressing this issue. If grain cannot be exported by sea, the product has to be transported by road and rail through Poland, Romania and Hungary to safe ports on the Black Sea or the Danube. However, this solution is not easy. He said the roads could not handle the necessary traffic. Alternative gateways also have limited redundancy capacity.

And the worst thing is that customs procedures on the border of Ukraine with the EU are very slow. Customs controls and factory quarantine caused traffic jams up to 10 km away. Because Ukraine is not a member of the European Union, the bloc only allows a certain number of its trucks into the EU.

Ukraine said that without creating export conditions for them, Europe and the world will face serious food shortages after the September harvest. “We need every country in Europe. Europe grants free access to Ukrainian trucks to be affected by wheat shortages,” Minister Marchenko said.

Session On (According to The Economist)