Ukraine’s Other Front Line

Russia has flailed on the battlefield. But the damage inflicted on Ukraine’s economy could prove existential without Western support.

By , a national security and intelligence reporter at Foreign Policy.
Ukrainian Prime Minister Denys Shmyhal is displayed on a screen.
Ukrainian Prime Minister Denys Shmyhal is displayed on a screen.
Ukrainian Prime Minister Denys Shmyhal is displayed on a screen during a meeting of finance ministers and central bankers from G-7 nations near Bonn, Germany, on May 19. Federico Gambarini/Pool/AFP/Getty Images

Russian forces failed to capture Kyiv, Ukraine’s capital, and are making but fitful progress in the east, but the economic carnage of the war and Moscow’s blockade of Ukraine’s ports could pose its own existential threat if the country’s partners and multilateral institutions are unable to make up the shortfall. 

Ukrainian government officials estimate the country needs an additional $5 billion each month to cover essential services and pay soldiers’ salaries as tax revenues have nosedived since the beginning of the war in late February. The physical damage wrought by Moscow’s campaign is estimated to have already reached $94 billion, with reconstruction projected to be upward of half a trillion dollars. 

The World Bank has projected that the Ukrainian economy is set to shrink by as much as 45 percent this year. In contrast, the Russian economy, which has been hit with unprecedented Western economic sanctions and a rapid withdrawal of nearly 1,000 Western companies, is set to contract by about 11 percent.

Russian forces failed to capture Kyiv, Ukraine’s capital, and are making but fitful progress in the east, but the economic carnage of the war and Moscow’s blockade of Ukraine’s ports could pose its own existential threat if the country’s partners and multilateral institutions are unable to make up the shortfall. 

Ukrainian government officials estimate the country needs an additional $5 billion each month to cover essential services and pay soldiers’ salaries as tax revenues have nosedived since the beginning of the war in late February. The physical damage wrought by Moscow’s campaign is estimated to have already reached $94 billion, with reconstruction projected to be upward of half a trillion dollars. 

The World Bank has projected that the Ukrainian economy is set to shrink by as much as 45 percent this year. In contrast, the Russian economy, which has been hit with unprecedented Western economic sanctions and a rapid withdrawal of nearly 1,000 Western companies, is set to contract by about 11 percent.

“Eventually, Ukraine will need massive support and private investment for reconstruction and recovery, akin to the task of rebuilding in Europe after 1945,” said U.S. Treasury Secretary Janet Yellen in a speech in Brussels on Tuesday. “What’s clear is that the bilateral and multilateral support announced so far will not be sufficient to address Ukraine’s needs, even in the short term.”

With U.S. officials warning that Russia is settling in for a protracted conflict, Ukraine’s need for economic aid is only set to grow as it seeks to stave off the macroeconomic turmoil that could undermine its performance on the battlefield.

“In order to win the war, you have to have a strong economy because a strong economy means more time to think about the war, better manufacturing, better supply lines, better logistics, better human capital,” said Tymofiy Mylovanov, president of the Kyiv School of Economics, who previously served as Ukraine’s minister of economic development.

So far, Western countries and international financial institutions have ponied up. In early March, the International Monetary Fund approved a $1.4 billion emergency loan, and the World Bank approved a financial package of $723 million in grants and loans. On Wednesday, the European Commission proposed an additional $9.5 billion in loans to help the Ukrainian government keep basic services afloat and to establish a “rebuild Ukraine” platform to help with the country’s postwar reconstruction. On Friday, finance ministers from G-7 nations pledged $20 billion to support the Ukrainian economy, and the U.S. Senate this week passed a $40 billion military and humanitarian aid package to support the war effort, $7.5 billion of which was earmarked for the Ukrainian economy.

The trick will be sustaining this level of support as the war casts a long shadow over the global economy and economists begin to sound the alarm of recession risk. “Fatigue is coming on Ukraine, and Russia is counting on that,” warned Laurynas Kasciunas, chair of the Lithuanian parliament’s committee on national security and defense. Russia’s goal is to “target not only civilian infrastructure but all capabilities of the Ukrainian economy,” he added. 

Ukraine entered the war on a strong economic footing, buoyed by a strong harvest, high currency reserves, and a low debt-to-GDP ratio. That plus some nimble policymaking enabled the country to weather the initial shock of the war, which has, to date, forced more than 14 million people to flee their homes, with 6 million of them leaving the country. “They have done a remarkable job,” said a U.S. Treasury official speaking on condition of anonymity under ground rules set by the Biden administration.

In the first weeks of the war, the government slashed taxes to 2 percent in a bid to help businesses stay afloat as well as eliminated value-added taxes and customs duties on imports to expedite the flow of humanitarian and military aid into the country while capital controls were used to stabilize the currency. Throughout the war, the country’s banking system has continued to operate, as has the internet in much of the country. Andy Hunder, president of the American Chamber of Commerce in Ukraine, said a recent survey of the organization’s members found that 41 percent were fully operational, whereas 88 percent were continuing to pay full salaries to staff. A fifth of the chamber’s members said they had sustained some kind of war damage while 7 percent had at least one employee killed in the conflict.

As the war has dragged on, the costs to the Ukrainian economy have continued to mount, setting off a cascade of economic and logistical challenges. Inflation has spiraled while gasoline is in short supply throughout the country as Ukraine’s ports and its largest oil refinery have been targeted by Russian forces. Ukraine’s ports handled as much as 70 percent of the country’s imports and exports before the war, and Moscow’s ongoing blockade in the Black Sea presents the single biggest threat to Ukraine’s economy. 

“The outcome of this war hinges on the ability of Ukraine to restore its economy, and the only way to do that is to break the Russian blockade,” said Dmitri Alperovitch, co-founder and executive chairman of the Silverado Policy Accelerator think tank.

Efforts by Europeans and the United States to shift exports north via road and rail links can’t compete in volume with what Ukraine’s ports used to handle, exporting 5 million tons of grain a month from entrepôts like Odesa, Ukraine, before the war. Russia and Ukraine account for around 30 percent of the world’s wheat supplies, and the war has contributed to a “perfect storm,” compounding food insecurity for millions of people around the world. “We truly are in an unprecedented crisis,” David Beasley, head of the United Nations’ World Food Program, warned at a meeting of the U.N. Security Council on Thursday. 

Beyond the immediate support required to keep the Ukrainian government afloat, the U.S. Treasury official outlined two further types of support the country is likely to need in the future. In the medium term, Ukraine will need substantial international support to begin rebuilding critical infrastructure damaged in the war, support local governments in caring for returning refugees and displaced residents, and allow economic activity to begin to ramp up. The third phase is the long-term reconstruction of the country, which is hard to price just yet. 

“That is the number we can’t really quantify right now. It could be in the hundreds of billions,” the Treasury official said.

Amy Mackinnon is a national security and intelligence reporter at Foreign Policy. Twitter: @ak_mack

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