Ukraine’s economy ahead of winter: disrupted exports and growing budget pressures

Brief overview of the current situation based on a recent assessment by Hlib Vyshlinsky, Executive Director of the Centre for Economic Strategy. The main message is that the Ukrainian economy remains operational, but the pattern of Russian attacks has recently created significant new risks for production, exports and public finances.

1. Economic impact of the Russian strikes this summer

Since roughly mid-July, Russia has increasingly targeted economically important infrastructure and businesses. Three areas are particularly important.

First, attacks on shipping in and around the ports of Greater Odesa have effectively disrupted Ukraine’s maritime exports. According to the assessment, Ukraine is currently exporting roughly half of the volumes it was exporting before the latest escalation. This is particularly important for agricultural exports: the grain and other agricultural products have not disappeared, but they are becoming much harder to export.

Second, Russia has increasingly targeted logistics and distribution infrastructure, including large distribution centres and retail networks around Kyiv and other major cities such as Dnipro, Zaporizhzhia, Kryvyi Rih and Odesa. This raises costs for businesses and can disrupt supply chains even where the underlying production facilities remain intact.

Third, and potentially most strategically important, is the damage to the metallurgical sector. Recent ballistic strikes hit major steel producers including Zaporizhstal, Kamet Steel and ArcelorMittal Kryvyi Rih, while Interpipe has also been hit. At the time of the assessment, major metallurgical facilities were shut down and Ukrainian steel production was close to zero.

The significance goes beyond the companies themselves. Agriculture and metallurgy are important sources of exports and tax revenues, so prolonged disruption directly affects the government’s fiscal position. The government has estimated that the recent damage and reduction in economic activity could result in around UAH 70 billion in lost budget revenues over the relevant period. This estimate is highly uncertain because the situation is changing rapidly.

The current damage is difficult to compare directly with 2022. The economic shock is different in nature, but its scale could become comparable to some of the major energy-related shocks Ukraine experienced during previous winters.

2. How is business adapting?

The most important point is that Ukrainian businesses have demonstrated considerable resilience, but the room for adaptation is becoming narrower as attacks increasingly hit physical assets rather than simply creating temporary disruptions.

Businesses can relocate some activities toward western Ukraine, and this is already part of the broader wartime economic adjustment. However, this creates a serious structural problem: companies and capital can move more easily than people. If businesses systematically relocate from central and eastern regions because their facilities cannot be insured or protected, Ukraine risks increasing regional economic disparities and losing economic activity in areas that still have large populations.

Insurance is also a major constraint. Private insurers and international reinsurers are generally unwilling to take on the risks associated with continued Russian attacks, which makes it difficult for companies to rebuild damaged facilities using private capital alone.

The government is therefore considering a mechanism under which businesses would contribute to a kind of insurance scheme and could subsequently receive compensation for damage to fixed assets such as buildings and equipment. The proposed mechanism would be much more substantial than existing compensation schemes, although it is politically and fiscally difficult because it would involve additional taxation.

There is also a broader problem: businesses have low levels of trust in the state, while the state currently has very limited fiscal space to support large companies. This makes the question of business support not simply an economic issue but also one of national resilience: keeping companies operating means preserving employment, tax revenues and economic activity across Ukraine.

One important caveat: the interview provides more detail on the constraints facing business and the policy response than on specific operational adaptations by individual companies. So I would avoid portraying relocation, diversification or other measures as universal business strategies without additional company-level evidence.

3. Preparing for the winter

The coming winter is another major uncertainty. Ukraine has experienced several previous waves of attacks on its electricity and heating systems, and last winter the combination of electricity shortages, attacks on heating infrastructure and unusually low temperatures had a noticeable economic impact.

The previous winter’s energy disruption was estimated to have reduced economic activity by several percentage points of GDP. Many businesses, particularly in Kyiv, temporarily closed during periods without electricity or heating, although most subsequently reopened.

The assessment is that Ukraine is better prepared for the coming winter than it was for the previous one, particularly in terms of energy-system preparedness. At the same time, the threat has evolved: Russia is now using new types of drones, including jet-powered Shahed variants, which create additional challenges for air defence.

The biggest concern is therefore not necessarily a repeat of last year’s disruption, but the possibility of a combination of shocks: attacks on electricity and heating infrastructure occurring at the same time as attacks on major industrial facilities, logistics and other civilian infrastructure.

The impact will also vary enormously by location. Western regions are likely to experience a very different economic situation from cities such as Kyiv, Odesa, Dnipro, Zaporizhzhia or Kryvyi Rih. Kyiv in particular faces additional risks because of the concentration of heating and water infrastructure.

4. Overall economic outlook

The outlook is highly dependent on two factors: the duration of the current attacks and continued international financial support.

Under a scenario in which the current situation persists — maritime exports remain severely constrained, metallurgy remains largely shut down, energy shortages continue through the winter and attacks on civilian infrastructure continue — the economy would likely contract. The assessment is that this would probably be measured in percentage points rather than a collapse of tens of percent, but the consequences for government revenues would be significant.

The more immediate vulnerability is therefore the interaction between the real economy and the state budget. Lower economic activity means lower tax revenues at precisely the moment when defence spending remains exceptionally high.

Ukraine is also facing a substantial financing challenge. If expected external support does not materialise, the government has relatively few options. It can further freeze non-essential spending, reduce some expenditures, or — in an extreme scenario — resort to monetary financing. The latter would mean higher inflation and a reduction in the real purchasing power of salaries, pensions and military payments. This is why continued external financing is so important for macroeconomic stability.

So I would describe the overall outlook neither as an imminent economic collapse nor as business-as-usual. Ukraine’s economy has proved remarkably resilient, but the cost of maintaining that resilience is rising. The current attacks are increasingly targeting productive capacity and export infrastructure, while the state has less fiscal room to absorb the consequences.