Ukraine Country Report Jun22 - June, 2022

June 7, 2022

Russia’s war destroys, damages over 200 factories, large enterprises in Ukraine. Ukraine will also need to restore 12 airports, over 1,000 educational institutions, and almost 300 bridges and overpasses that have been damaged, destroyed, or seized as a result of Russia’s war against Ukraine, according to Prime Minister Denys Shmyhal.

The latest batch of forecasts released in April and May see the Russian economy contracting by roughly 10% over the course of this year or continuing partly into next year. Most forecasters expect the recovery in GDP to begin only in 2024. Due to large discounts on Urals-grade crude oil in recent months, Russian forecasts see relatively little increase in the average oil price this year compared to 2021 (Bank of Russia expects 9% higher oil prices, while Russia’s economy ministry sees an increase of 20%).

According to the CBR and World Bank, Russia’s total imports should drop by about a third this year, while the IMF expects a decline by about a quarter. The CBR and IMF see the volume of Russian exports falling by a fifth this year, while the World Bank’s forecast, which includes announced import bans on oil & gas and a considerable drop in Russia’s other exports, says the decline could be as much as a third.

Household consumption is expected to fall by about 10% this year (CBR and World Bank). Inflation, which erodes household purchasing power and dampens consumption, is widely expected to average about 20% this year and continue next year at 7−10% (CBR) or even more rapidly at 13−14% (IMF and World Bank). Fixed investment is generally expected to fall by nearly a fifth this year.

Forecasters at the IMF and World Bank expect Russia’s government budget spending to rise significantly this year (although inflation will swallow the increase) and a turn of budget balance into deficit. Depending on budget revenue expectations, this year’s budget deficit could be limited to about 2% of GDP (World Bank), or plunge to around 4% of GDP if, among other things, the government goes ahead with proposed tax breaks (IMF).

Few forecasts include predictions of unemployment. The consensus forecast compiled by the CBR expects the unemployment rate to climb this year to nearly 8%, while the IMF sees unemployment exceeding 9%.

Ukraine came into this crisis with a decent macro and public finance profile - a fiscal deficit of 3-4% of GDP and public sector debt to GDP ratio of sub-50%. It ran a close to balanced current account position and held close to $30bn in FX reserves. Market external debt due to year end was pretty light at a few billion bucks. But the war has decimated public finances and estimates are that Ukraine has a budget financing shortfall of close to $5bn a month. Now so far it has received around $11bn in Western financing and this week got another promise from Western allies of close to $17bn in additional financial support. This should see it through to the fall, at least, if fighting continues. But unfortunately most of this Western support has come in the form of loans - sad that the West is only lending Ukraine the money to fight this war which is really providing a bulwark for the West against Russian aggression. But assuming that remains the case, and if the war continues to year end, with a possible 30-40% real GDP contraction, Ukraine’s debt/GDP ratio could well then be over 100%.

Unblocking seaports will allow Ukraine to reduce the decline in GDP. Ukraine's GDP will fall by 30% in 2022, but unblocking seaports would reduce the economic downturn to 22-25%, according to Dragon Capital Chief Economist Olena Belan. According to her, "A 50% GDP decline at the end of the year is a very pessimistic estimate. We can talk about a 30% drop if military action subsides. And if the ports open, we can expect a GDP decline of 22-25%.” At the same time, Alexander Parashchiy, Head of Concorde Capital's Analytical Department, estimates the country's economic downturn in 2022 at 35-40%. "Even if the war ends today, we will be able to restore a maximum of 80% of what was before February. So, on average, during the year we will have a GDP decline closer to 35-45%," he said.

Russia is blocking 22 million tons of food in Ukraine ports. Volodymyr Zelenskyy has accused Russia of blocking the export of 22 million tons of food products and warned that many countries will face a food crisis if its ports are unblocked. "The world community must help Ukraine unblock its seaports otherwise, a food crisis will follow the energy crisis, and many more countries will be faced with it," said Zelenskyy. "We can unblock them in different ways. One of the ways is a military solution. That is why we turn to our partners with inquiries regarding the relevant weapons,” Zelenskyy said. The Ukrainian president also accused Moscow of systematically stealing grain products and subsequent attempts to sell them.

The EBRD has downgraded Ukraine's economic downturn in 2022 and improved its outlook for 2023. The European Bank for Reconstruction and Development (EBRD) has downgraded the forecast for Ukraine's economic decline due to the war to 30%, while at the end of March, the forecast was minus 20%. At the same time, the EBRD forecasts a 20% recovery of the Ukrainian economy in 2023 compared to the previous forecast of 23%. However, the real GDP growth rate will depend on how long the war in Ukraine will last, the terms of the peace agreement, the scale of reconstruction, and the number of refugees returning home, the bank added. At the same time, by the end of 2023, Ukraine's GDP will be 12.5% ​​lower than before the war, the bank predicts. All forecasts may be revised downwards in the event of an increase in hostilities or restrictions on exports of gas or other raw materials from Russia, warns the EBRD.

The number of businesses closed in Ukraine decreased from 32% to 17%. As of the end of April, the number of enterprises that had entirely ceased operations fell to 17% from 32% at the beginning of the full-scale war, as stated in the monthly macroeconomic and monetary review of the National Bank of Ukraine (NBU). The number of enterprises that have completely ceased operations has almost halved since the beginning of hostilities, however, 60% of enterprises operate below their pre-war levels. At the same time, small and medium-sized businesses are recovering more slowly than larger ones. According to the NBU, most enterprises operating in agriculture, transport, and processing resumed operations at the end of April. The most challenging situation is observed in the construction and mining industry, where trade congestion remains well below the pre-war level.

Ukraine has asked Germany to take the lead in helping Ukraine become an EU member. Ukrainian Foreign Minister Dmytro Kuleba called on Germany to take a lead in the process leading to Ukraine becoming part of the European Union, reported CNN. According to Kuleba, during his visit to Berlin earlier in the week, he had a very rational discussion with the German delegation about Ukraine becoming a part of the EU. "I told them it will happen anyway, and Ukraine will inevitably receive candidate status sooner or later. The German elites have a choice to either lead this process and inscribe their names in the history of Europe, or it will still happen but without their leadership,” he added. The minister also discussed the Russian oil embargo, currently being debated by EU member states, and the issue of a Russian gas embargo also came up during his visit.

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