Ukraine’s economy, which was recovering from years of political turmoil, has been hit hard by the war with Russia, which began in 2022. The conflict has caused extensive damage to infrastructure, particularly in the energy sector, and has led to a significant decline in economic output. The economy shrank by a third last year, the largest fall since Ukraine’s independence from the Soviet Union in 1991. Despite efforts by the government and international aid, the country’s economy is still struggling.

Impact of the War on Ukraine’s Economy

The war has had a significant impact on Ukraine’s economy, particularly in the energy sector. Russia has targeted power grids and sub-stations across the country, leading to outages during the freezing winter and hitting heavy industry hard. Access to reliable power is a major obstacle for many businesses, and those that cannot run on generators alone will struggle this year. Ukraine’s largest steel mill, ArcelorMittal Kryvyi Rih, said its production was currently at about 25% of pre-war levels amid electricity blackouts.

The economy was failing, and the budget deficit is forecast to hit $38 billion in 2023 following a collapse in tax revenues. The invasion destroyed schools, hospitals, ports, roads, and bridges. The damage to infrastructure due to the war was estimated at $138 billion as of December 2022.

Positive Developments

Tens of billions of dollars in foreign assistance have poured in, both to help plug the budget deficit and arm Ukrainian forces. A massive increase in military spending, including army wages, has also provided a boost to the economy. Ukraine spent 1.5 trillion hryvnias ($40.6 billion) on its defense sector in 2022 – equivalent to around one-third of its economic output – according to the National Security Council. That was around five times higher than its planned pre-war defense budget.

By mid-February, Ukraine’s grain exports for the 2022-2023 season had fallen 29.3% year-on-year to 29.7 million tonnes. However, a UN-brokered grain export deal had saved Ukraine’s agriculture, which accounted for about 12% of GDP and some 40% of overall exports before the war.

Challenges Ahead

The challenges facing Ukraine’s economy are formidable, and recovery will not be easy. Between 40% and 60% of the energy sector has been damaged. Poverty rates have soared, and the government is depending on Western aid to cover the budget deficit. President Volodymyr Zelenskiy’s government has called on donors to start planning for the massive task of reconstruction this year, though it recognizes that large-scale building will be difficult until some peace returns.

Seven economists surveyed by Reuters forecast that Ukraine’s GDP will decline by 5% to grow slightly in 2023. Ukraine’s central bank predicts GDP will grow by 0.3% this year, while the economy ministry forecasts 3.2% growth.

Recovering Economy

Despite the positive developments, the challenges facing the country’s economy are formidable. Recovery will require significant investments in infrastructure and large-scale reconstruction, but this will be difficult until some peace returns.