Ukraine and the price of economic reconstruction

Are we underestimating the financial support Ukraine and the wider region will need to recover from Russia’s invasion?

April 14, 2022
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The World Bank in Washington DC. Image: Philip Scalia / Alamy Stock Photo

Worries in the west about the impact of the war in Ukraine range from humanitarian concerns to renewed geopolitical tensions and how to manage the displacement of people. Of course there are also economic anxieties, particularly in relation to recession, prices and energy and food security. But those are all mostly indirect effects, which rich countries and the international financial institutions will hopefully be able to deal with. For Russia and the Ukraine, the impact is more direct—and significant—both for the short and long term. 

The humanitarian catastrophe that we all see on our screens, read about in the papers or hear on the radio is staggering. But wars are also expensive. Analysis by the Centre for Economics and Business Research, undertaken for the Ukrainian government, estimated the long-term cost to the country of the conflict with Russia between 2014 and 2020 to be some $280bn. The calculations took into account the cumulative capital losses in Crimea and the Donbas, reflecting assets that have been lost or damaged, along with diminished tax revenue, loss of investor confidence and lower foreign direct investment as a result—all, in other words, “forgone output.” 

And that cost has now increased exponentially. In late March, the European Bank for Reconstruction and Development (EBRD) forecast a 20 per cent drop in GDP for Ukraine and a 10 per cent drop for Russia this year, and lowered its growth forecasts across the area in which it operates. It has developed a Ukraine resilience package as a response. 

More recent forecasts have been even more pessimistic. The World Bank’s latest assessment for Ukraine predicts a fall of 45 per cent in GDP this year—before the war the forecast was for a 3.4 per cent increase. Poverty levels will rise hugely, not just in Ukraine but across the whole region of Europe and Central Asia, which will see an overall contraction of 4.1 per cent this year. Again, the previous forecast was for a rise of 3.1 per cent. It is obvious that Ukraine, however it emerges from the conflict, will need substantial recovery support—from the World Bank, the IMF and western governments more generally. But so will the wider region, particularly those countries physically and politically closer to Russia.

Indeed, the World Bank notes that the hit to emerging and developing countries in Europe and Central Asia could be considerably more significant than for the west. The lingering—and possibly permanent—economic scarring caused by the restrictions and inactivity during the pandemic was bad enough. But the war has also exposed the overall dependence of the region on exports from the two countries at the centre of the conflict. Central Asia and the South Caucasus import some 75 per cent of their wheat from Russia and Ukraine. Many of these countries are now suffering runaway inflation and food insecurity. 

Worryingly, a number of them also rely heavily on remittances from their citizens working in Russia. These will dry up if the Russian economy shrinks as expected this year, and sees longer-term growth affected by western sanctions and the withdrawal of foreign investment. There are similar concerns for the tourist industry. Visitors from Russia and Ukraine have traditionally accounted for a large share of tourism earnings for the likes of Georgia, Montenegro and Turkey, along with many other neighbouring countries. 

What does it all mean? For aid agencies it means they will be busy—how busy is of course still unclear. The west has already contributed some $1.5bn of support for Ukraine’s war effort and has pledged to do more. The World Bank is already disbursing some $925m to cover wages for hospital workers, pay pensions and support the most vulnerable. This is part of a bigger package of $3bn which is being put in place. It is expected that this will also start to focus on dealing with the huge number of refugees from Ukraine and, at some stage, the 7.1m Ukrainians internally displaced since the start of the war.

The IMF will have to deal with the country’s sovereign debt. And other institutions, plus the US, EU and other western nations, will need to step in and help with the post-war reconstruction. An enormous effort will be required. It is clear now that it isn’t just a case of helping Ukraine rebuild itself. As the EBRD and the World Bank have highlighted in their recent reports, a whole region is blighted and the effects will be long-lived. 

Once again, as we saw during Covid, flexibility will be needed in dispensing support across the board, including being relatively lax in the conditions attached to any loans or grants. That is how we overcome this new economic crisis, which has hit us before we had the chance to get over the one in 2020.