Ukraine, economics: Russia's recognises "People's Republics", Feb 2022

What will be the economic fallout for Ukraine?

(Feb 2022, for the EIU)

On February 21st the Russian president, Vladimir Putin, signed a decree recognising the independence of the “People's Republics” in Ukraine’s Donetsk and Luhansk regions. The following day, he ordered regular Russia troops into these areas, on “peacekeeping duties”.

Even before Russia’s latest move, heightened geo-political tensions were costing Ukraine US$4bn-5bn per month, according to the estimates of officials from the presidential administration, reported in Ekonomichna Pravda, a Ukrainian business news outlet. They cite the dampening effect on investment, the impact on tourism and air traffic, as well as of higher inflation and the cost of supporting the exchange rate. To scale this figure, Ukraine’s GDP last year came in just below US$200bn.

Following an earlier rally, the hryvnia had already begun to depreciate again from the middle of February, perhaps in line with the failure of Russia to withdraw its military forces from positions close to the Ukrainian border, at least on the scale it had said. On February 23rd the Ukrainian currency was trading at close to HRN29:US1, down from HRN27.9:US1 mid-month, according to the National Bank of Ukraine (NBU, the central bank).

Otherwise—and short of another large-scale military attack by Russia, the chances of which have risen sharply—the economic effects on Ukraine will be similar to, but perhaps stronger than, those experienced over the past two months. Some of the key channels through which the increased geo-political risk may be felt include:
  • increased uncertainty, undermining business and consumer confidence, deterring investment and household spending;
  • higher than usual capital outflows undercutting the Ukrainian currency, adding to inflationary pressure by pushing up import prices, while depleting reserves;
  • a further rise in energy import costs;
  • a slowdown in the pace of real wage growth, owing to higher inflation, undercutting the recovery in consumer demand; and
  • a reduction in tourism spending.
Although some of the impact of these effects may be offset to some degree by higher than planned public spending linked to war preparations, in combination, in 2022 Ukraine’s GDP growth rate is likely to be lower, its inflation higher, and its fiscal deficit and trade gap wider than would otherwise have been the case. (The net effect on external trade will depend in part on whether the crisis also pushes up global prices for key Ukrainian export goods, such as grain and iron ore, so offsetting the impact of higher energy costs).

At the same time, the rising threat to Ukraine’s financial stability is likely to elicit further offers of external financing, alongside existing offers of bilateral and multilateral assistance. For example, on February 23rd, Liz Truss, the UK’s foreign secretary, announced that the UK government would offer Ukraine US$500m in loan guarantees, following in the steps of the US and Canada [link to previous article]. One the one hand, the announcement by the German Chancellor, Olaf Sholz, in response to Russian actions of a halt in certification of Nord Stream 2—the pipeline by which Russia would have been able to supply gas directly to German, bypassing Ukraine—means that Russian gas may keep flowing through the Ukrainian pipeline system, contributing to government revenue through transit fees. On the other hand, over the medium term, Germany, and the EU more widely, are now likely to aim to reduce reliance on Russia energy supplies in order to bolster their energy security.

With geo-political tensions between Russia and Ukraine now at their highest level since early 2015, realising even the not very favourable short-term economic prospects sketched above depends on whether the Russian leadership decides to escalate further. The launch by Russia of another large-scale military attack, leading to the loss of more people and territory, alongside the destruction of infrastructure and productive facilities, would push Ukraine back into deep recession, as in 2014-15.

Comments

Post a Comment

Popular posts from this blog

Ukraine: The politics of institutional reform: Zelenskyi’s “de-oligarchisation” drive, Dec 2021

The president's “de-oligarchisation” drive addresses issues vital for Ukraine’s development, but is unlikely to produce lasting change (December 2021, for the EIU) The president’s claim that a Russian-linked coup is being organised against him may be part of a wider domestic political struggle set off by his “de-oligarchisation” drive.  De-oligarchisation addresses the key developmental issue facing Ukraine. This is that, by restricting political and economic competition, the collusive, behind-the-scenes politics of Ukrainian elites has acted as a fetter on economic growth, helping to explain the country’s low living standards. Concerns have been raised that the policy could be applied selectively to damage the president’s political rivals.  The measures may be too limited to produce lasting change. Moreover, Zelenskyi appears to lack both the resources and the durable domestic political alliances that would be required to affect a long-term transformation of national governan...
Read more

Falling between two stools

A review of Marko Bojcun’s Towards a Political Economy of Ukraine: Selected Essays, 1990-2015; Ukrainian Voices, vol 3; Ibidem-Press, Stuttgart. A. The history of post-Soviet Ukraine could be written as that of a succession of self-serving political leaderships, and of inspiring but failed popular protests, resulting in chronic economic underperformance that has left the country’s dwindling population among the poorest in Europe. A glance at IMF data, for example, shows the country vying for bottom place in the European income rankings with Moldova. In these essays, written close on the events they analyse, Marko Bojcun reminds us that this need not have been the case, and that other trajectories at times seemed possible. One example is to be found in an article from 2001, in which the prospect of Russia’s European integration is still in the air, just about, whereas from the vantage point of today, this is almost unthinkable. B. The collection covers key waypoints in the politic...
Read more

Ukraine: EU begins to disburse next tranche of financial assistance, Oct 2022

In late September, EU bodies approved an additional €5bn in macro-financial assistance (MFA) to Ukraine, and in early October, Ursula von der Leyen, the president of the European Commission, announced that the first payment, of €2bn, would be made shortly, with the rest to follow by the end of 2022. This is the second instalment of a €9bn package first announced in May, and follows the delivery of €1bn in early August. It is designed to address the substantial budgetary shortfalls facing the Ukrainian government linked to the ongoing war with Russia, which has closed off access to capital markets, but led also to agreements with creditors for delays in debt repayments. The latest EU funding comes in the form of “highly concessionary” long-term loans—that is, at a low interest rate, but still adding to the stock of public debt. The form of the final €3bn of the facility—whether it will be offered as a loan or a grant—has yet to be decided among the 27 EU member states. As the EU Commiss...
Read more