How the war in Ukraine unfolds in its second year will be decided as much by dollars and cents (or rubles and hryvnia) as by bombs and bullets, say experts who warn the economic battlefield in Eastern Europe has become a critical front in the conflict.
Ukrainian President Volodymyr Zelenskyy’s repeated calls for donations of weapons continue to dominate headlines as the Russian Army carries on a grinding offensive in the eastern Donbas region.
“Ukrainians, when I talk to them, they say there are three fronts to the war,” said Matthew Schmidt, an expert at the University of New Haven Connecticut, who also taught at the U.S. Command General Staff College. “There’s the eastern front, there’s the southern front, then there’s the economic front.”
On Monday, U.S. Treasury Secretary Janet Yellen visited Kyiv to reaffirm the American economic aid crucial to keeping the Ukrainian government afloat and continuing the war effort.
CBC News has been on the ground covering Russia’s invasion of Ukraine from the start. What do you want to know about their experience there? Send an email to [email protected]. Our reporters will be taking your questions.
“I know people talk about war in terms of the battlefield, right?” said Schmidt, who wrapped up his own visit to Kyiv last weekend. “They talked about tanks and planes and troop movements. I taught military theory [at the command college] and I can tell you what we talked about was politics and economics.”
The Ukrainian economy “cratered” after Russia’s full-on invasion last year, said Schmidt — a roughly 30 per cent contraction driven by the displacement of people and businesses and the attacks on infrastructure.
The Russian military’s reputation has taken a massive hit due to its failure to conquer Ukraine. But when you consider the drive to exhaust Ukraine’s economy, said Schmidt — an aspect of Russia’s war efforts that rarely gets talked about — the results look much different.
“If you look at the purpose of the Russian kinetic force, it’s actually achieved a lot because its purpose is not just to kill Ukrainians but to crater the economy, and then create an economy to change the political situation,” he said.
The Ukrainians themselves realize they’re fighting an economic war for survival, Schmidt said — which is why Zelenskyy’s government recently wiped out half the regulations required to open a new business in Ukraine.
In a very real sense, Schmidt said, the war has been reduced to a question of which economy will collapse first — Ukraine’s or Russia’s.
Howard Shatz, a senior economist at the U.S non-profit think-tank RAND Corporation, said Russia’s economy has performed better than expected during the war, despite the effect of western sanctions.
Right before the full invasion, the Bank of Russia had been projecting that the country’s 2022 gross domestic product would rise by two or three per cent. Right after troops crossed the border, the bank projected Russian GDP would fall by eight or 10 per cent.
For Russia, a ‘slow degradation’
The World Bank and the International Monetary Fund issued similar forecasts.
By October, the Bank of Russia was saying the country’s GDP in 2022 would “only fall by three or three-and-a-half per cent, something close to what happened [with] COVID,” said Shatz.
Higher-that-anticipated world oil prices have helped to cushion Moscow’s economic slide. They’ve mitigated the effects of western sanctions — the ones many world leaders, including Prime Minister Justin Trudeau and U.S. President Joe Biden, predicted would bring the Kremlin to its knees.
Shatz said he believes the sanctions will bite more in 2023 than they did last year but still won’t be the economic “smart bomb” the West was hoping for.
“I don’t think there’s going to be, you know, a switch [in the Russian economy], where all of a sudden it’s falling off a cliff,” he said. “I think what we’re looking at is a slow degradation.
“We’re looking at a downward slope in the Russian economy. Because bit by bit, it’s just going to fall behind the West more and more in the level of technology.”
For Ukraine, it could have been much worse
In Kyiv, the stocktaking among economic experts is mixed. On the one hand, there’s a sense that the 30 per cent plunge in GDP could have been worse, given the circumstances.
Given the mass exodus of Ukrainians to other countries, the roughly 5.3 million people displaced within Ukraine and the massive damage to infrastructure, including the electricity grid, a 30 percent drop is a “very good result, actually,” said economic analyst Yuliya Pavytska.
It helped that Ukraine’s central bank moved decisively early in the war to keep the country’s financial institutions solvent, she added.
“We didn’t have any bank runs,” said Pavytska, an analyst at the Kyiv School of Economics.
She said she hopes the economy has hit bottom now and can begin to grow again. As late as last fall, Ukraine’s central bank had been predicting four per cent GDP growth for 2022.
That changed when Russia began blowing up the electricity grid.
Those attacks led to a lot of suffering as Ukrainians struggled to cope with mid-winter blackouts. But the destruction of up to half of the national grid also had dire economic consequences, forcing the central bank to revise its GDP projection for 2022 to roughly 0.3 per cent.
“Definitely, the pressure on the economy is huge,” said Pavytska.
“And definitely Ukraine is now relying on the West, in terms of financial aid, to cover the expenditures. But this doesn’t mean the Ukrainian economy will not survive in these circumstances.”
As Russia tightens its hold on the occupied Ukrainian city of Mariupol, its government leaders are living in exile. They refuse to give up on the city or its residents.
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