Russia’s War Leaves Ukraine’s Economy in Ruins

Welcome to today’s Morning Brief, where we’re looking at the economic impact of Russia’s war in Ukraine, Indian Foreign Minister S. Jaishankar’s Washington visit, and more news worth following from around the world.

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As Russia’s war in Ukraine continues with no end in sight, the economic cost of Russia’s campaign is beginning to come into focus.

On Monday, the World Bank forecast a staggering 45.1 percent drop in Ukraine’s GDP, as the war severely constrains the country’s imports and exports, public and private investment collapses, and household spending dries up amid a refugee and displacement crisis. The speed of the drop is unheard of in modern conflicts; it wasn’t until two years into Syria’s war that its GDP eventually halved from prewar levels.

Although less steep, the downturn in GDP is not only set to impact Ukraine. Russia’s economy, under heavy Western sanctions and experiencing the flight of international capital, is also expected to contract by 11.2 percent.

The story is similar but milder across the former Soviet region, where economies are expected to decline by 4.1 percent, a more than 7 percent swing from prewar projections of 3 percent growth.

Globally, the war in Ukraine is set to damage recovery prospects following the shocks at the outset of the coronavirus pandemic. The World Trade Organization announced on Monday that the war could lower global GDP growth by as much as 1.3 percent this year and cut global trade growth from 4.7 percent to between 2.4 and 3 percent.

Those dire predictions are in line with domestic estimates from Ukraine’s Ministry of Economy and the Kyiv School of Economics, which put current economic losses between $564 billion and $600 billion—or nearly four times the country’s annual GDP.

As FP columnist Adam Tooze wrote last week, the war’s economic impact beyond the battlefield needs to be watched closely. “Taken together with the uneven recovery from COVID-19, the surge in inflation, and the tightening of monetary policy, the war adds to an already inhospitable environment for fragile, heavily indebted low-income and emerging market economies,” Tooze writes.

“For the future shape of the world economy, how the world deals with debt crises triggered by this war in places as far apart as Sri Lanka and Tunisia are likely to be at least as important as Russia’s desperate efforts to circumvent sanctions in its trade with China and India,” he notes.

Whether Ukraine’s economy continues to tumble depends on whether the war ends this year or continues to drag on. The World Bank estimates Ukraine could see 7 percent growth by 2025 (albeit with a smaller economy than before the war) as long as recovery begins soon and refugees can return.

Of course, when a country is fighting for its survival, lines on an economic chart—whatever the trajectory—will be of little consequence. Still, that hasn’t stopped Ukrainians from considering ways to raise funds. On Monday, Oleg Ustenko, chief economic advisor to Ukrainian President Volodymyr Zelensky, said negotiations were underway with several countries to conduct a “mass attack” to seize major Russian assets, including oil tankers, as a form of war reparations.

In an interview with the Financial Times, the Ukrainian finance minister called for immediate financial support from the international community to help cover a government spending shortfall likely to climb as high as $7 billion a month heading into the summer.

Even though the war still shows no signs of stopping, with a renewed Russian offensive readying in Ukraine’s east, the subject of how Ukraine rebuilds is under debate. David Frum, writing in the Atlantic, suggests that Western countries should begin reconstruction plans now and consider any aid to be a “mutually beneficial investment.” Frum compares Ukraine’s future trajectory to that of 1950s Italy, when a postwar boom spurred by Marshall Plan aid helped encourage further growth across Europe.

How much would Europe and others need to spend to rebuild Ukraine? Between $220 billion and $540 billion, according to estimates from experts in a recent paper from the London-based Centre for Economic Policy Research. However, the authors warn “the cost of reconstruction increases with every additional day of the war and at an increasing rate, as people spend more time away from their homes, children become more traumatised, and private sector companies disintegrate.”

Putin meets Lukashenko. Russian President Vladimir Putin holds talks with Belarusian President Aleksandr Lukashenko at the Vostochny Cosmodrome, a spaceport in Russia’s far east. The meeting comes as Lukashenko has demanded to be part of any negotiations to resolve the war in Ukraine and said “there can be no separate agreements behind Belarus’s back.”

Tai meets Jaishankar. U.S. Trade Representative Katherine Tai meets with Indian Foreign Minister S. Jaishankar in Washington today. Jaishankar’s meeting follows one on Monday with U.S. Secretary of State Antony Blinken and comes after U.S. President Joe Biden and Indian Prime Minister Narendra Modi held a video call.

White House Press Secretary Jen Psaki said Biden “made clear” to Modi that “he doesn’t believe it’s in India’s interest to accelerate or increase imports of Russian energy or other commodities.” At a press conference with Blinken, Jaishankar said Washington’s ire when it comes to Russian energy purchases should be focused on Europe instead. “I suspect, looking at the figures, probably our total purchases for the month would be less than what Europe does in an afternoon,” he said.