Ukraine winning economic war against Russia – The Economist

Ukraine's economy is outperforming the Russian economy in several key respects for the first time since the onset of the full-scale invasion in 2022, although it is still a quarter smaller than it was in 2021.

Source: The Economist

Details: The National Bank of Ukraine projects GDP growth of 4% in 2024 and 4.3% in 2025. The currency remains stable and the interest rate of 13.5% is the lowest in 30 months.

In contrast, in Russia, interest rates may soon rise to 23% to curb the rouble's decline. Banks are in a fragile state and GDP growth is projected to be just 0.5-1.5% in 2025.

However, Ukraine is facing serious challenges: an escalating war, dwindling domestic resources and the influence of US President-elect Donald Trump.

Russia declined to extend the Black Sea Grain Initiative, also known as the grain deal, in July 2023. In response, Ukraine established its own maritime corridor, securing it through a maritime deterrence campaign involving drones and missiles. This enabled the resumption of not only grain shipments but also metals and minerals, which are the country's second most important exports.

These measures, along with Western assistance, have prevented Russia from stripping Ukraine of the resources and morale needed to continue its struggle. However, the economy is now entering a phase where it faces its greatest challenges: severe shortages of energy, human resources, and finance.

In December, Ukraine increased its electricity import capacity from the EU by nearly a quarter, reaching 2.1 GW.

Many food producers are fermenting residues into biogas for their own use, while industrial facilities are combining these sources with imports to prevent catastrophic blackouts.

Continuous repairs to the power grid are expected to keep Ukraine's average electricity deficit at 6% of total demand in 2025 and 3% in 2026, according to Andrii Pyshnyi, governor of Ukraine's National Bank.

Another challenge is the labour shortage. Since 2022, mobilisation, migration and war have reduced the workforce by more than a fifth, to 13 million people. Demand for labour remains high, with the number of vacancies reaching 65,000 per week, compared to just 7,000 in the early weeks of the war. However, there are only 1.3 applications per vacancy, down from two in 2021.

The Ukrainian economy and defence ministries are grappling with the balance of mobilisation, trying to allocate resources effectively for the country's future. So far, civilian leadership has refrained from meeting the maximalist demands of the military, which is detrimental to the war effort.

Even industries that are considered critical can now exempt only half of their employees from mobilisation.

Another issue is the lack of funds. Small farms and businesses struggle to borrow enough money to finance their operations and long-term investments have become nearly impossible.

Rising business costs have reduced profits. Companies serving domestic customers are passing some of these costs onto consumers, contributing to inflation. However, exporters competing in global markets cannot afford to do the same.

The government is also spending far more than it receives. In 2025, the budget deficit is projected to be around 20% of GDP, with nearly all of this deficit – US$38 billion – planned to be covered by external financing.

Background: 

• In June, the G7 countries agreed on a US$50 billion aid package to be repaid by Ukraine through interest earned on €260 billion (US$273 billion) of frozen Russian assets in Western countries. However, US support for this plan is not guaranteed.
• Ukraine will likely be able to survive through 2025 without US funding. Along with the €18 billion agreed by the EU, contributions from other G7 countries could fill the gap, said Dimitar Bogov of the European Bank for Reconstruction and Development.
• Ukraine also has substantial foreign exchange reserves, which are expected to grow to US$43 billion by the end of 2024, covering five months of imports. However, if the US refuses to provide funding, Ukraine could face a financial collapse in 2026.

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