Putin’s invasion of Ukraine has killed tens of thousands of people, traumatized millions more, and destroyed many cities in eastern Ukraine.
And this is all for naught. Putin’s hopes of overthrowing Ukraine’s government and seizing its Black Sea coastline were decisively dashed in 2022.
In addition to the human and material destruction, the economic harm of Putin’s failed war is nothing short of tremendous, as outlined in the first issue of a new Ukrainian Recovery Digest released by the Kyiv School of Economics.
The digest’s findings are in line with an interview I had last November with the school’s president, former Economic Minister Tymofiy Mylovanov, regarding the scope of that damage, as well as Ukraine’s efforts to deepen democracy and fight corruption.
Mylovanov highlighted the report’s key findings in a Twitter thread. This piece provides additional context on their significance.
Ukraine GDP Cratered, Defense Spending Flew
Cumulatively, the loss of territory, business, and people due to Russia’s invasion and bombardments and its occupation or blockade of critical Black Sea ports caused Ukraine to lose 29.1% of its pre-war gross domestic product. Industrial output fell even more, at a 36.9% loss. The only silver lining is that this nosedive is projected to halt in 2023, with GDP expected to grow by 2%.
It is not exactly shocking that Ukraine’s government in 2022 dedicated 80% of its tax revenue to defense and security, spending defense dollars at nine times its monthly rate in 2021. Existential struggles for survival will do that to national budgets. Much of the cost goes to salaries for Ukraine’s mobilized armed forces. These have added hundreds of thousands of personnel to reach roughly 1 million men and women at arms in various services.
The expanding defense budget puts into perspective all the basic services that had to be cut to compensate, with social security and pensions accounting for the next 20% tranche.
Assistance and Resilience
Mylovanov didn’t mince words in my interview last October. He told me Ukraine’s war-wracked economy can only survive with foreign assistance. According to the report, that aid in 2022 amounted to $32.1 billion, with another $16.5 billion allocated from January to end-May 2023.
Ukraine’s national debt, however, increased nearly half over, moving from 54% to 75% of annual GDP. Furthermore, government spending is running a deficit of $25 billion, equivalent to 8% of the Ukrainian GDP before Russia’s February 2022 invasion.
Despite the war, Ukrainian households and small businesses continue to operate — the latter focusing increasingly on international exports to make up for worsening domestic consumption. The percentage of Ukrainian businesses forced to suspend operations declined from nearly half (49%) in May 2022 to roughly one-third (32%) by April 2023. However, only about one out of every six Ukrainian businesses reports sustaining pre-war levels of activity.
Primary causes of disruption for businesses in the first quarter of 2023 were increasing costs of goods, raw materials, and services; decreased domestic demand; and power blackouts and damaged road logistics.
Cruel Impact on Agriculture
Ukraine plays a major role in global agriculture, so declines in its grain output risk causing starvation in some developing countries. Unfortunately, 20% of Ukraine’s grain fields have been damaged in the war. They might be sown with deadly mines, blasted by artillery shells, or set ablaze by cluster munitions releasing clouds of incendiary thermite.
Worse, 93% of Ukraine’s agricultural output was shipped via the Black Sea — a logistical corridor heavily disrupted when Russia seized Ukraine’s southeastern ports of Mariupol, Melitopol, and Berdyansk and unsuccessfully besieged the southwestern ports of Mykolaiv and Odesa. Further, Russian warships blockaded Ukrainian shipping from remaining ports. This caused global grain prices to spike by 60% while huge quantities of grain and of vegetable oil accumulated in silos that were targeted by Russian precision-guided missiles. Attempts to switch to rail or truck transportation raised logistics costs by a factor of four or five, threatening to bankrupt Ukrainian farmers.
Fortunately, a trilateral deal between Kyiv, Moscow, and Ankara in August officially lifted the blockade. However, Russian members of the commission overseeing the deal continue to throttle Ukrainian trade by delaying inspections of Ukrainian ships passing through the Turkey-controlled Bosporus Strait, lessening the deal’s positive impact.
Cumulatively, the war decreased Ukraine’s agricultural output by 75%, a loss equivalent to $34.25 billion. Things may get worse before they get better, with next year’s crop output projected to decline from 70 million to 62 million tons as Ukrainians increasingly shift from grain and corn to oilseed, which is easier to export.
Devastated Infrastructure for Ukraine
The report finds that Russian missile and drone attacks destroyed $147.5 billion-worth of Ukrainian infrastructure, ranging from education and healthcare facilities to industrial complexes and apartment blocks.
Roughly 50% of Ukraine’s energy structure is assessed as damaged by Russian attacks, reducing generating capacity by 5 Gigawatts. Another 16 Gigawatts of capacity now sit in Russian-occupied territory. (The Zaporizhzhia nuclear plant alone has a capacity of 5 gigawatts.) While the report assesses the most pressing repairs would cost $2.1 billion, the longer-term costs of necessary renovation and replacements are estimated at $47 billion.
Nearing the Half-Trillion Mark
A Ukrainian plan presented in July 2022 estimated Ukraine would need $750 billion in foreign assistance through 2032 to achieve a target growth rate of 7% GDP. That figure excludes military-related assistance. Civilian aid would go foremost to transportation and housing, followed by investments in healthcare, energy, social safety nets, and demining Ukrainian soil.
The World Bank calculated that fully restoring Ukrainian GDP would require $411 billion, including $14 billion in 2023. The money would focus foremost on transportation, housing, energy, and social safety nets. Kyiv has also made investment deals with BlackRock and J.P Morgan banks, which between them manage $12 trillion.
Moscow’s devastating attacks create the legal ground for seizures of Russian financial assets abroad that could then go to reconstruction of Ukraine.
Opportunities for Growth in Ukraine
While Ukraine’s traditional agro-industrial base has taken horrific damage, the war has also spurred growth sectors in Ukraine’s economy. Mylovanov believes these include green energy, green metallurgy, digital transformation of government and business services, technology (especially military), and environmental protection. Rebuilding from the devastation left in Russia’s wake should result in growth in construction — especially of transportation infrastructure — social services, and agriculture.
The report estimated that corruption in the past accounted for 20% of past procurement costs, and inefficiency another 20%. It now finds that use of the Prozorro electronic procurement system — designed to eliminate traditional middlemen and associated corrupt kickbacks — has shaved government procurement costs by 7.5%, amounting to $6.4 billion saved.
Those savings are achieved with the system only being used for around half of transactions (54% of transactions numerically, affecting 40% of the money) as the government often bypasses Prozorro on the basis of wartime exemptions.
Looking Ahead
The costs of repairing what Putin has destroyed are considerable and will be cited by those who consistently oppose foreign assistance to other countries as excessively costly, futile, or even counterproductive.
But the history of foreign assistance is not just one of failure. The Marshall Plan — when America invested billions into rebuilding post-World War II Europe — is widely considered the most successful foreign policy initiative in U.S. history. Furthermore, U.S. economic assistance to South Korea helped Seoul transition from one of Asia’s poorest countries to one of the world’s wealthiest democracies.
Consider some factors specific to Ukraine. Its people have united in opposition to Russia’s invasion, it has had multiple peaceful democratic transitions of power, it has an educated and tech-saturated populace, and it possesses a large industrial base. Those factors suggest reconstruction of Ukraine can better resemble the Marshall Plan than the failures in Afghanistan or Iraq. And this time, Western Europe will actually shoulder a large share — as could confiscated Russian assets.
Corruption remains a problem in Ukraine, though some progress was made before Russia’s 2022 invasion. Foreign assistance can help sustain the transition away from the oligarchic old guard by tying aid to technical reforms when appropriate, and by requiring transactions to proceed through mechanisms designed to bypass rent-seeking middlemen.
Helping Ukraine rebuild is the right thing to do, and it is well within the means of the West and U.S. Those who demand self-interested motivations before lending a hand will find plenty. Not only will the reconstruction itself create business opportunities for all parties, but the U.S. and EU will benefit from an economically robust Ukraine that can better defend itself; has replaced damaged infrastructure with more energy-efficient alternatives; can resume starvation-averting agricultural exports to developing countries; and that produces and consumes goods, services, and innovations as part of the Transatlantic economic block.
Sébastien Roblin has written on the technical, historical and political aspects of international security and conflict for publications including 19FortyFive, Popular Mechanics, The National Interest, MSNBC, Forbes.com, Inside Unmanned Systems and War is Boring. He holds a Master’s degree from Georgetown University and served with the Peace Corps in China. You can follow his articles on Twitter.
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