Together with colleagues, we assessed the potential consequences of escalation for the economy. In short — the outlook is not so great, it will be tough. However, without the supportive shoulder of international organizations, EU countries, and other partners, it is hard to imagine our economic (and not only) future. I hope that all government bodies will mobilize efforts to secure the funding that is practically on the table, and that partners will organize additional support.
The main points below, details via link.
We expect a reduction in real GDP by 0.5% this year and 1.0% next year — compared to the pre-escalation forecasted growth of 1.5% and 0.5% respectively.
The blockade of sea ports will reduce annual real GDP by 2.2%. If grain exports by sea resume by the start of the spring planting season as a result of a “grain corridor”-like agreement, these losses could decrease to 0.7% of GDP.
Steel production has practically stopped following targeted ballistic attacks and is unlikely to recover due to the threat of repeated strikes. With ports blocked, it is impossible to redirect ore for export. Another minus 1.5% of real GDP (in addition to the port blockade).
Attacks on the energy sector will significantly complicate the economic situation in winter. Russia renewed such attacks even before the onset of cold weather and will likely try to destabilize the Ukrainian energy system, creating significant obstacles for electricity supply to certain regions.
Economic activity will be depressed not only by the shutdown of individual enterprises and disruptions in logistics and energy supply but also by slower growth in household incomes, deteriorating consumer sentiment, and restrained private investment due to high security risks.
Increased budget expenditures on defense, particularly domestic defense companies, may support economic activity, but this will only be possible with the involvement of planned external financing.
At the same time, due to the prioritization of defense spending and likely declines in tax revenues, opportunities for other budgetary support will remain extremely limited. The government’s idea to create a fund to cover initial losses in a fiscally neutral way seems like a sensible option.
The destruction of assets and loss of inventories will force businesses to raise prices for final products, despite the expected slowdown in consumer demand. Inflation forecast is raised to 10% by the end of 2026 and 8% in 2027.
Loss of exports of grain, steel, and ore + increase in imports of energy equipment for recovery and components for the defense sector + high energy prices worldwide = a record foreign trade deficit of about $70 billion or 31% of GDP.
External financing remains critically important for macro-financial stability. However, of the $50 billion of external financing available to Ukraine to cover the budget deficit as of the end of September, only $22 billion has been received (update: now $25 billion, still only half of what’s available). The reason is the slow fulfillment of previously undertaken commitments.
For 2027, the uncovered need for budget financing is $30-35 billion. With additional off-budget defense expenditures, this figure could be much higher, as the enemy is rapidly increasing its war expenditures.
There are not many realistic sources — partners’ money and/or frozen Russian assets.
