Ukrainian Economy In War Times: Business Defies The Bombs. October 2022

Ukraine’s economy is not falling as rapidly as predicted at the beginning of the war by a few institutions. In the first nine months of the year, Ukrainian GDP fell by 30%, according to preliminary data from the Ministry of Economy.

This means that the most pessimistic forecasts that were made in the spring (up to 45% decline, as predicted by the World Bank) probably will not be realized. The current consensus forecast for the fall in 2022 is 33%. And even the destruction of energy infrastructure has not yet prompted economists to revise this forecast.

Prices are rising, but not as much as one could expect given the circumstances. Indeed, in September inflation was higher than in August, and overall, over 12 months consumer prices rose by almost a quarter. But given the dependence on imported energy, distorted value chains and currency devaluation, it could have been higher.

Moreover, this is not only a problem for Ukraine – many countries around the world are experiencing record inflation this year. In the Baltic states inflation is at similar levels, and in Moldova, it is even higher. It is expected that by the end of the year prices in Ukraine will grow by less than 30%.

One of the reasons is the behaviour of entrepreneurs. The expectations of business representatives surveyed by the NBU regarding the prices of suppliers are much higher than their expectations regarding the prices of their own products.

This implies that in the face of competition and declining demand, some of businesses may be willing to sacrifice profitability. Similar expectations are for the margins of retailers – they should decrease. It is notable that NBU decreased expected inflation for 2022 in their macroeconomic forecast, released on October 20, 2022.

In August, for the first time since the beginning of the year, more foreign currency was received than spent. This happened simultaneously due to the growth of exports, inflow of international aid and reduction of the financial account outflow. In September, however, aid inflows dropped to the lowest level since the beginning of summer.

But this was not a problem in view of the record figure of August and the expectation of even higher aid inflows from Western partners in October. In total, since the beginning of the war, USD 22,6 billions of aid has been received, and another USD 15,2 billion has been promised.

However, a further increase in exports is questionable. At least, the export of agricultural products. The “grain initiative”, which allowed Ukraine to export grain through Odesa ports, expires in a month. And although Ukraine and Turkey are interested in its continuation, the position of the state on which it really depends is currently unknown. In addition, next year the yield will be harvested from smaller areas, as farmers reduced sowing areas due to higher costs and security risks.

The major risk of autumn and winter – the destruction of energy infrastructure by missiles – continues to unfold. On October 10, the largest strike package since the beginning of the war took place, which led to destruction and damage to energy facilities in the capital and nine other regions. On October 17, there was another strike, but smaller. The risk has increased due to the supply of a large number of kamikaze drones and surface-to-surface missiles by Iran.

The research was conducted with the support of the German Economic Team. Conclusions in this paper are those of its authors and do not necessarily represent the views of the supporting organisation.