Ukrainian economy in war times. Investments desperately seeking cover. September 2022

The Ukrainian economy has stabilised. The share of companies that operate, including those operating at full capacity, has not changed compared to the previous rate. Given that more than six months have passed since the beginning of the full-scale invasion, this most likely means that all or almost all who were able to physically do so have recovered from the shock.

No one expects Ukraine’s GDP to fall by as much as 40%, as some pessimists expected. Apparently, the fall will be limited to a third.

In summer, it became clear that Ukraine cannot cope without external assistance. Firstly, it was only thanks to foreign financing, that the balance of payments became almost equalised. Secondly, foreign inflows financed the state budget deficit, the revenues of which have decreased due to the economic downturn.

In contrast, expenditures have increased due to the need to finance military operations. Since the beginning of the full-scale invasion, 31% of the general fund expenditures have been spent on the maintenance of military personnel alone, and 44% on military procurement

. In total, Ukraine has received USD 19.4 billion in external funds this year, and at least USD 12 billion more is expected. But this is still not enough.

The situation will not change next year. The government has prepared a draft budget for 2023, which foresees a record deficit – expenditures are expected to exceed revenues by a factor of two. First of all, this will be due to a significant amount of funding for the Ministry of Defence, which will account for more than a third of budget expenditures and more than two-thirds of the government’s revenues.

Formally, the difference can be covered by debts, but it is obvious that, in reality, the Ministry of Finance is counting on foreign grant financing.

And we are talking only about current expenditures. Meanwhile, there are still needs for recovery, which, according to various estimates, range from USD 216 billion (the project “Russia will pay”) to USD 349 billion (World Bank). Moreover, according to WB experts, in the next 36 months, Ukraine will need USD 105 billion.

According to government estimates, USD 17 billion are needed for rapid recovery, and USD 3.4 billion are required by the end of this year. And this is without taking into account the territories that may be liberated this year.

Economic recovery would help to reduce the burden to some extent, but it is difficult to count on investment in the face of the current military risks. Theoretically, such risks could be addressed by insurance. Please see a special chapter of this issue for more details.

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.