Ukraine’s economy under threat of war

Published on : 14/02/2022 – 07:55Modified : 14/02/2022 – 07:56

In Ukraine, despite intense diplomatic activity to avert war, a Russian attack would be imminent. How is the Ukrainian economy reacting to this threat?

Foreign investors were the first to react by quickly shedding their bonds, which had suddenly become much riskier, leading to a sharp rise in interest rates.

To prevent panic from winning over decision-makers, consumers and why not Ukrainian citizens tempted by exile, President Zelensky has constantly put into perspective the alarmist discourse held by the United States on the imminence of Russian attacks. He did it once more yesterday, which is rather effective with Ukrainian opinion: in everyday life, business continues. The stores are rather well stocked, and still busy, the banks remain open.

Companies are preparing for the worst

They build up stocks, they invest in generators. And those who had planned investments in the regions close to the borders with Russia have postponed them, but there is no notable disengagement. According to a survey carried out among more than a hundred foreign companies, only 10% of them will leave the country if hostilities were to break out. For 45% of them the business will continue.

Western expatriates have packed their bags, but not all. Some remain, despite the instructions given by their government. And the Ukrainians who can afford it do not rush for plane tickets, but they remain vigilant: and they too are postponing their investments or the purchase of television or furniture, that is to say superfluous and bulky goods in the event of a hasty departure.

The 2014 conflict destroyed the Ukrainian economy, is it recovered enough to withstand a war?

Between 2013 and 2015, Ukraine’s gross domestic product halved according to World Bank figures, and it still hasn’t returned to its previous level. The pandemic broke the recovery, and it plunged the economy back into recession, with a decline in GDP of around 6% in 2020.

Despite the constant support of the IMF and the European Union, it is still a very fragile country which must face a possible military conflict. With limited budgetary margins. Because of debt service and inflation of the military budget: to face this Russian threat, it has doubled since 2014. But Kiev has a financial advantage compared to 2014: this year its foreign currency reserves are at its highest with 31 billion dollars available, once morest only 5 in 2014. This gives it free rein to support its currency.

Ukraine also has increased financial support from the West.

This year the IMF must release an aid of 2.2 billion dollars, the European Union 1.2 billion euros. In addition, several countries such as Canada and the United Kingdom have already granted guaranteed loans for amounts amounting to hundreds of millions of dollars. The German Chancellor, who is expected in Kiev today, has also promised substantial financial aid, failing to provide arms as the Europeans are already doing.