Ukraine, economics: war damage to trade and infrastructure, Apr 2022
Foreign trade falls precipitously in March, while accumulated war damage will hinder post-war recovery
(for the EIU)In March, the value of Ukraine’s goods exports tumbled by almost 50%, to US$2.7bn, from US$5.3bn in February, according to the economics ministry. Goods imports fared worse still, dropping by two-thirds, to just US$1.9bn, from US$5.9bn a month earlier.
While Russian attacks on key Ukrainian ports, alongside its erection of naval blockades in the Azov and Black seas, in large part explain the precipitous decline in foreign trade, another factor will have been the Ukrainian government’s restrictions on agricultural exports to try to prevent food shortages at home.
Nevertheless, for a relatively open economy such as Ukraine’s, in which the exports and imports each tend to equal 40-50% of GDP, a drop in trade on this scale corresponds to severe cut in income, while signalling also severe disruption in production supply chains. Based on estimates of this kind, Ukrainian officials now suggest that national output for the year could fall by 35-40%.
Whether Ukraine’s real GDP actually does fall by that much will depend on both the duration and geographical spread of the war with Russia. Conversely, the pace and scale of economic recovery—on the other side of any peace deal, which does not appear to be likely soon—will depend on the scale of the damage done to productive capacity and infrastructure; the scale and speed of return of the displaced Ukrainian population; and the scale and ease of access to any reconstruction funds made available.
On war damage, numerous reports suggest that, for the Russian military, targeting industrial and transport infrastructure has been a way of trying to undermining Ukraine’s capacity to fight. A high-profile example of this is the Azov steel plant, one of the largest in Europe, in the besieged eastern coastal town of Mariupol, which its deputy mayor claims has been destroyed. One likely implication of the war, therefore, is the further de-industrialisation of the Ukrainian economy, accelerated already by Russia’s de facto takeover of part of the Donbas region in eastern Ukraine in the conflict of 2014-15.
Towards the end of March, according to a conservative assessment by the Kyiv School of Economics (KSE), the cost of verifiable war damage to infrastructure such as airports, bridges, power plants, factories, warehouses, residential housing and hospitals came to US$63bn. To put this in context, pre-Covid data for Ukraine point to a wealth-income ratio in Ukraine of around 3.5, implying total national wealth of perhaps US$500bn-600bn.
One positive development that should aid the continuation of economic production is the connection of Ukraine in mid-March to the European electricity network, a year ahead of schedule.Regarding post-war reconstruction, the European Council has already announced plans to establish a “Ukraine Solidarity Trust Fund” to this end. For their part, Ukrainian officials have suggested that the assets of Russian oligarchs and of the Russian Central Bank (RCB) frozen by Western financial institutions in response to Russia’s invasion of February 24th should be reallocated as reparations for the same purpose.
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