Economic consequences of the Ukraine war

The World Bank has projected a contraction of the Ukrainian economy in 2022 to be 45 per cent and that of Russia to be 11.2 per cent. This is directly related to the war, triggered by Russia’s invasion of Ukraine, on February 24. According to Russia’s economic ministry estimates, the Russian economy is estimated to contract by 8.8 per cent, or 12.4 per cent according to another estimate, which is more conservative. The earlier estimate was a contraction of 10 per

cent in 2022, according to former finance minister Alexei Kudrin. “The official forecast would be for more than around a 10 per cent contraction,” Kudrin said. Before the declaration of the war, economic ministry expected the economy to grow by three per cent compared to 4.7 per cent in 2021. The ministry has projected the economy to grow by 1.3 per cent in 2023, 4.6 per cent in 2024, and 2.8 per cent in 2025. Inflation stood at 17.62 per cent on April 15, and it is expected that it would go up to 22.6 per cent this year. The central bank’s interest rate, which stood at a high of 9.5 per cent before the war, was raised to 20 per cent after the war broke out. But this has been brought down to 17 per cent on April 8 and it is expected to go brought down further to 15 per cent at the bank’s rate-setting committee meeting on Friday (April 28).

The problem of contraction of the economy and fall in output is not confined to Russia and Ukraine. According to the World Bank, the economic contraction in the Eastern European region comprising Ukraine, Belarus and Moldova will be around 30.7 per cent. And in the Central European region comprising Bulgaria, Croatia, Hungary, Poland, Romania the GDP growth is likely to come down to 3.5 per cent compared to previous estimate of 4.7 per cent. And the overall impact of the war in Europe and Central Asia region comprising emerging markets and developing economies is likely to be 9 per cent, according to the World Bank.

Anna Bjerde, World Bank vice president for Europe and Central Asia, said of the impact of the war on Ukraine: “The Russian invasion is delivering a massive blow to Ukraine’s economy and it has inflicted enormous damage to infrastructure.” She also said, “Ukraine needs massive financial support immediately as it struggles to keep its economy going and the government running to support Ukrainian citizens who are suffering and coping with an extreme situation.” The World Bank has already marshalled around $923 million through loans and grants, and a package of $1 billion is under preparation.

There is little doubt that Western countries, especially the United States, are not only supplying arms to Ukraine, but it is also extending huge financial support. The United States Treasury Secretary, Janet Yellen, said, “Rapid IMF and World Bank assistance has allowed Ukraine fiscal space to pay salaries for civilians, soldiers, doctors, and nurses, while also meeting its external debt obligations.”

The West might go all the way to help Ukraine facing the Russian onslaught, but it may not be sufficient to recover its economic growth momentum for a long time. After the irreparable damage done to the people and to the infrastructure, Ukraine will not be able to recover despite the generous financial help from the West. What is needed is an end to the war, and there has not been much progress on that front. It was hoped that Russia would be ready for peace talks once its military goals are achieved. But it is evident that Russia has not achieved the military victory it had hoped for in Ukraine, and the war is likely to linger longer than expected.