Ukrainian economy in war times: stars from the bottom of a well. July 2022

Ukraine completely lost control of the Luhansk region. Besides, June exacerbated most of the Ukrainian economy’s problems and resulted in two major policy actions in July: the NBU’s upward move of the FX rate and the government’s appeal for a standstill to bondholders.

Steel and iron ore production dropped by ¼ in June compared to May. Metinvest, Ukraine’s largest steel producing company, closed two of its three plants. ArcelorMittal Kryvyi Rih, the other big steel producer, is also talking about a possible scaling down of its operations.

Taken together, the steel and iron ore mining industries contributed approximately 6% to the pre-war GDP, also providing a potent multiplier effect to other sectors, and this loss will be painful indeed.

Inflation rose in June, the trade gap widened, and foreign currency continued to flow out of the country through trade loans and the cash market. The National Bank was burning an average of a billion dollars per week but was unable to stabilise the exchange rate.

Even with a high interest rate and massive interventions, the hryvnia weakened to UAH 37 per USD as of July 21, and the National Bank of Ukraine moved its fixed FX rate higher from 29.25 UAH/USD to 36.6 UAH/USD to stop the reserves depletion and support local business.

In June, the government was only able to cover less than 30% of its expenditures with taxes and other own revenues and taken a hard decision to ask the Eurobond holders for a standstill in July for two years.

It was not until late June and early July, together with the start of the successful operation of newest artillery HIMARS on Russian arms depots along the front line, that international financial assistance has accelerated significantly. Negotiations in Turkey on a corridor in the Black Sea through the ports of Odesa gave a chance for the partial opening of grain exports. This, together with the return of import taxes starting from July 1 and the NBU’s actions, could alleviate the balance of payments crisis and relieve some of the pressure on the exchange rate. And for the world, it would mean reducing the likelihood of a food crisis, to which we have devoted a separate section, “World Hunger”.

One of the most prominent international events of the current month was the Ukraine Recovery Conference in Lugano. It was dedicated to the post-war reconstruction of Ukraine. Ukrainian authorities presented the Economic Recovery Plan envisaging hundreds of billions of dollars obtained from the West and spent on the reconstruction of Ukraine.

But from the side of partner-countries the actual pledges were much more modest. It seems that another problem, besides the sourcing of reconstruction funding, would be the donors’ coordination.

But the war is far from over, uncertainty is looming, and, sometimes, the overall reconstruction and recovery sentiment reminds one of attempts at observing the stars from the bottom of a well. The CES director has visited the conference and reviews the discussion in the section on “The Big Reconstruction”.

But the biggest news, however, is that on 23 June 2022 Ukraine was granted EU Candidate status by a decision of the European Council. Geopolitically, it is hard to overestimate – it means that both Ukraine and the EU have finally decided on a global coalition of which Ukraine should be a part.

But to move forward on its chosen path, Ukraine needs to complete seven tasks to implement reforms, mostly in the rule of law field. For this monthly review we asked a German researcher to contribute, Dr André Härtel, Associate Partner, German Institute for International and Security Affairs (SWP), who has presented his view on Ukraine’s EU perspective.

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.