It is often forgotten that Ukraine has successfully transformed into a wartime economy, even while it has been under a sustained and destructive blitz of Russian attacks. That’s not to minimize the huge effort that will be needed as part of the $1.1 trillion reconstruction program needed to rebuild the country, including its economy, but it is at least to indicate that Ukraine has successfully grappled with the big stuff and had some success.
The country’s challenges extend far beyond bricks and mortar. While the early focus will be on post-war rebuilding, Ukraine’s long-term strategic economic goals will be to ensure the appropriate use of aid funding and to establish trust and transparency, with those in Western governments and debt markets that will extend the funds. Extensive anti-corruption raids including seizures and dismissals of officials on February 1 indicated that the Zelenskyy administration is keen to start the clean-up.
As of October, tax provided only slightly more than half of Ukraine’s budget revenues, demonstrating the key role of foreign macro-financial assistance in supporting its economy. While the National Bank has put forward solutions designed to prevent the outflow of capital from the country, it would default without this assistance, according to Maksym Vavrin, who teaches economics at the Catholic University of Ukraine.
When S&P upgraded Ukraine to CCC+ from selective default with a stable outlook in summer 2022, it said the assessment “reflects strong committed international financial support to Ukraine, coupled with eroding, albeit still relatively high, foreign exchange reserves.” The economy’s reliance on Western aid was clear.
The statistics make grim reading. Analysis by the Center for Economic Strategy shows Ukraine’s GDP fell by 41% in 2022. Product prices increased by an average of 33%, and overall inflation for 2022 was 26.6%. Real wages have decreased significantly and the conditions of war have forced many to leave the country because they can’t survive financially. The number of registered unemployed per vacancy has jumped from 6 to 12 since the invasion, and the unemployment rate has grown to 40%. The United Nations says 17.7 million Ukrainians are currently classified as “people in need” — more than the population of many European countries.
Despite the difficulties, steps have been taken to optimize available resources. The state has created venture funds to accumulate finance for reconstruction, with support from large international partners. In turn, the Ministry of Economy has a program to relocate enterprises in or near the war zone to safer regions in the west of Ukraine. As well as helping locate alternative sites, it provides assistance with transporting equipment, resettling and recruiting employees, logistics, and finding raw materials and markets.
The ministry is also offering grants to encourage new companies as part of its strategy to combat unemployment. Both experienced and first-time entrepreneurs will be able to apply for funds to create their own businesses, with an emphasis on IT and food production. The program is aimed at helping people who have relocated and lost their jobs to start working, helping both themselves and the economy.
But there is no reason to be starry-eyed about the pre-2022 Ukrainian economy. While it has an engineering and electronics base that has proved extremely valuable in, for example, producing the Neptune anti-ship missiles that sank Russia’s Black Sea flagship Moskva, the economy failed to change sufficiently after the Soviet collapse. Poland, poorer than Ukraine in 1992, has now achieved gross national income per capita four times greater.
So while the war has been a disaster, it might yet provide an opportunity to finally say goodbye to the Soviet mentality and craft a more prosperous Western economy. Given that the reconstruction effort will be reliant on the West, and given that there are already concerns about corruption (better than Russia’s but still awful), the government and its funders will have to introduce new institutions and ensure the system works and is graft-proof.
There is clearly limited room for improvement while Russian invading forces remain engaged in a high-intensity war against the Ukrainian defenders, and while Russian and Iranian missiles continue to rain down on the country’s infrastructure. Any victory is predicted to be at least one-and-a-half years away, assuming military aid increases, and Vavrin says that, after defeating Russia on the battlefield and regaining access to its borders, Ukraine will have to devote significant resources to build up its defense industry.
“Even after the end of the war, we expect to be under constant threat from a neighboring country until its regime changes,” Vavrin said. “We will have to arrange our lives and economy according to the example of Israel, realizing that the shelling may not stop even after the end of the war.”
The Israeli system can also serve as a template for a new approach to military service in Ukraine, he said. Through the restructuring of the education system, qualified personnel will be trained at schools and institutes, and with more seriousness than in the past.
“Everyone’s a conscript and everyone receives high-quality military training,” he said. “In addition to a civilian profession, everyone also has a military one after graduating from university, so that if necessary, a person can be immediately called up in the event of a new war.”
Ukraine will need many fresh-thinking construction specialists, who will be able to look to a future working with the developed Western world. In order to maintain the economy and well-being of the country, jobs will also need to be created for people who return from the front.
But the work must begin now, and it must involve Western experts. At best, this will allow it to select the best post-war reconstruction strategies, avoid the mistakes made in the Balkans and Afghanistan, and create its own unique Western-style economic system. Once it makes progress, it will be time to reward the people who have sacrificed so much for their country, and the Western countries who stuck with us when it mattered.
Kateryna Panasiuk is an author and journalist studying politics at the Ukrainian Catholic University. When war came to her home, she chose to do what she knew best and started a volunteer project to collect and share stories of Ukrainians affected by the war.
Mykyta Vorobiov is a freelance journalist studying politics at the Ukrainian Catholic University. Forced to leave Kyiv when war broke out, he has since combined work at Lviv City Council with coordinating a journalism project and editing articles.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.