Entrepreneurship and tech

Ukraine: Economic recovery starts in 2023

Odessa Oblast: A truck with grain in a shipping container broke down on the way to the port of Odessa. (Source: own)

Horrible news came to the houses of Ukrainians in February 24th, many woke up by bombs. In a moment of shock all production and services broke down – and from one day to the other lives changed. The graph below gives a rough measure of the development of production and services on a weekly basis (retrieved from the OECD, the results should be taken with a grain of salt due to measurement errors, though). Output and services in Ukraine already were lowered due to Corona-restrictions. Within a week the economic output dropped by another 16 percentage points, which is stunning, since it means Ukrainians still showed up to work and kept their society running while Russian invasion forces crawled towards the urban centers. Just in April they managed even to produce more than in the April weeks in 2021. Just during the summer months when war was raging on much of Ukrainian soil, metropolitan areas like Odessa or Kharkiv were under siege and the rest under bombing, output dropped again – but recovered strongly in September, right after Ukrainian army’s counter offensive gained momentum and kicked Russian forces out of Kharkiv Oblast and later Kherson. At the same time in the capital Kiev clubs started to reopen. Even the Ukrainian railways send out saving
offers for using their app:

(Source: own, 2022)

The recovery can be also seen on a sectoral level. Cafes and restaurants are reopening and work now on a level close to 80 percent compared to the pre-war level and online product orders are even back to old levels. According to the National Bank of Ukraine, even new enterprises are registered, and subways attract passengers again, which is worth mentioning since, besides Kiev, only the cities of Odessa and Kharkiv operate metro lines – especially the latter was under heavy siege of Russia’s army in July.

Governance and institutions are still working, according to the blueprint for the reconstruction of Ukraine from the Center for Economic Policy Research. The state is capable to collect taxes, hand out social transfers, and payment and banking systems are running.

Ukraine’s toll is still high

However, the war put a high toll on Ukrainians: on a year-on-year-base Ukrainian economy collapsed by 33 percent, mostly in regions close to the warzone in the Donbass, as the map below shows (status of June 2022). Around 422 enterprises are completely or partially destroyed, with an estimated overall value of 8.1 billion US-Dollars, according to the Kyiv School of Economics and the Ukrainian government. When including bridges, roads and further infrastructure the losses amount to over 100 billion US-Dollar. Though, production and economic life stabilized. Foreign funding stabilizes Ukrainian budget to pay for its war expenses, Poland is even spending close to one percent of its GDP to house Ukrainian refugees and send military aid. The Vienna Institute for International Economic Studies predicts growth of economy again in 2023, even accelerating by 12 percent in 2024. However, this comes with the assumptions that war will stay confined in the eastern Oblasts and the agreement with Russia on exporting grain via the port of Odessa remains in force. But also, that international aid will initiate reconstruction.

The destruction affects industrial production and agriculture and therefore, the food supply on the one hand: Ukrainian central bank expects inflation to rise up to 31 percent in 2022 and prices continue to rise another 20 percent in 2023, food prices even scratch at the 50 percent mark this year. That estimate was only in July, most countries in Europe and worldwide revised their inflation forecasts far higher in the meanwhile. Also, the estimates are just an average of all Ukrainian oblasts. Unsurprisingly, prices rose highest in regions, which were affected the most by Russia’s invasion, Kherson all ahead. Depreciation of the Ukrainian currency, the Hryvnia, makes fuel-imports expensive and therefore, mobility and energy. This affects Ukrainian forces, which must remain mobile to counter Russian attacks as well as production, that relies on transportation capacities.

Russia adapts to Ukraine’s shift to normality

After plenty of shameful defeats and without a perspective of military advances in Ukraine, the Kremlin changed strategy seeking to worse Ukrainians social infrastructure on a broad base and more sustainable by targeting civilian infrastructure. As many times before, the Russian regime utilizes the dependence of modern life on energy as a weapon. Recently, it caused havoc and sometimes irreversible damage to Ukrainian electricity infrastructure. With swarms of Iranian drones Russia seeks to shut down electricity hubs as shown in the map below.

But even if the consequences are severe for the daily life of the broad population, from lack of electricity to water, the breakdown of electricity and energy can have more severe outcomes in the long run. It disrupts industrial production, agriculture, the financial base of firms, that are credit constrained and already in financial distress and might send them into bankruptcy. Especially Ukrainian industry is under threat. Much of heavy industry and steel fabrication is located in eastern oblasts, which is either under Russian occupation or in range of their drones. Before the war, especially Dnipropetrovsk was the industrial powerhouse of the country, most of the important steel plants are here, car factories, tractors, and plane parts are produced here. The graph below shows the freight transported 2020 in each oblast as a proxy for industrial value creation. Also, Saporischja and Kharkiv are important, for example with their KhTZ Tractor manufacturing.

Contribution of Oblast to Ukrainian GDP

Unfortunately, bad news for Ukraine’s economic self sufficiency do not end here. As one of the world’s major exporters of agricultural raw products, one of its major bread winners is the export of sunflower seeds, where Ukraine regularly contributed about half of world exports. Though, as the graph below shows, much of the cultivated areas for sunflowers, barley and rapeseed are located in Eastern Ukraine, too. Close by the frontlines and under former Russian occupation many of the fields are mined, which creates additional problems for working on fields, sowing, and harvesting – and might do so for a long time. Hence, even with the grain export deal in charge, it will be tricky for Ukrainians to exploit it and receive foreign exchange.

 Sunflower output in thousand tons

Thanks to the COVID-crises also home office experienced a trend. Working from home with their laptops enabled many software developers, engineers to provide IT- and other online-services, like teaching, to foreign companies and foreigners. Even before Corona many startup-hubs plopped up – especially Kharkiv, Ukraine’s second city established itself as an outsourcing hub for multinational tech companies. 95 percent of the cities IT-services are exported – two thirds of it to the United States, so a PwC-study.  IT-engineers could make up to 3 – 4.000 US-Dollars a month, at least until war started. This newly emerged way of generating income helped many locals to supply their families during war.

 

With Russia’s new strategy to paralyse public life, they could hit civil society even harder as many estimated. With constant electricity blackouts and internet outages it will be hard for office workers to meet deadlines or communicate with their customers. IT-companies already report difficulties to coordinate their teams, who often are spread over different cities and therefore have access to electricity to different times. People improvise with power banks and internet hotspots from their mobile phones, IT-staff reports.

Putin’s work and Europe’s contribution

It will be difficult to keep customers under these constraints, regardless of how much solidarity they show. Even after a Ukrainian victory and restoring the electricity, much of these client-relationships might never be revived. This could be a threat for the longer functionality of Ukraine’s society than the bombs themselves. Under the constant pressure of Putin’s bombs making life unbearable, Ukrainian fathers starting to consider, sending their families to Europe to spare them from harsh winters without heating. The large Syrian migration movement also began after the Russian air force entered the war in 2015, which the individual rebel groups were unable to counter. Even after Syria’s state integrity was restored, economic and social life has still not returned to its old structures.

But even though, many of the women are well educated and even still employed in their jobs, they face another hardship: European bureaucracy. Ukrainian refugees must register after 90 days stay within the Schengen area. From that day, the tax and labor laws of the host country applies, which are of course opaque for firms located in Ukraine and distressed from war. Hence, many Ukrainian refugees face a harsh decision: returning or staying in Ukraine, with the threat of losing their jobs. Or remain in Europe – with the threat of losing the job in Ukraine. Only Croatia provides a “digital native”-visa, which suits the demands of home-office workers. Ironically, Ukrainian and Russian refugees pile up in Croatia’s coastal as Split or Dubrovnik.

Highly professional Ukrainians might easily find new work here, but if Europe secures the tenderloins of Ukrainian work force for themselves to fill their yarning gaps of professionals with refugees they could weaken Ukraine’s functionality as a whole, because most of them won’t return to the ruins that Russian bombardment created and rebuild their nation. Instead, many might settle in Europe, leaving hundreds of thousands traumatized veterans without perspectives to their fate. Roughly one fifth of the war’s fatalities until Russia’s full-scale invasion were veterans committing suicide. Life in Ukraine already was tough bread for many of its citizens, but the longer war rages, the more social and economic fabric will fade away. Besides sending weapons, Europe’s job will be to preserve Ukraine’s civil society that is capable of rebuilding the country. We are not doing too well.

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