The war grinds on in Ukraine with no end in sight. There was the hope a peace fire could be reached in April during the Belarusian talks, but that faded away after the massacre at Bucha* and Ukrainian President Volodymyr Zelenskiy has taken an increasingly hard line: Ukraine will not surrender and not stop fighting until all its territories – both the Donbas and the Crimea – are returned to Kyiv’s control.
The US has also taken a hard line and offered multiple packages of military support. The introduction of the US M142 High Mobility Artillery Rocket Systems (HIMARS) was particularly effective, able to strike deep into Russian control territory, forcing Russia to move both its command posts and ammo dumps back from the front line and effectively trebling its supply routes.
The result has been to bring Russia’s progress to a halt and leave the conflict in a stalemate . At the time of writing Kyiv had launched a large counteroffensive in an effort to retake Kherson that fell to Russia in the first days of the war. However, both sides are looking increasingly exhausted. Kyiv was preparing the Kherson operation for two months and Russia moved troops from Donbas to reinforce the city, thus slowing its operations in Donbas even further. Russia has taken the whole of the Luhansk region but increased its share of Donetsk by only 5% in a month of fighting from 55% to 60%.
While weapons like the HIMARS have caused Russia real headaches and it has had to pause to remake its logistical support, these are high tech, very precise weapons, but they don’t kill a lot of infantry. Russia’s dumber but far more numerous artillery do. It seems increasingly unlikely that the West, and the US in particular, will supply Ukraine with infantry-fatal arms like tanks and planes so the war is likely to drag on, possibly all winter.
Ukraine now has no production facilities at all to arm itself and is entirely dependent on western supplies. But there too there are problems as both Russia and the West do not have the production capacity to make more munitions in the short-term which will lead to supply bottlenecks soon as the existing stocks of munitions are running out fast.
In the meantime, Ukraine’s economy continues to be smashed, although outside of the combat zones life is returning to something that resembles normal.
The budget remains in deep crisis and in July, Ukraine’s budget deficit grew significantly. The National Bank of Ukraine was obliged to devalue the national currency by 25 per cent and is keeping the prime rate at 25%, but after the US released $4.5bn in budgetary aid and the EU promised to add another €8bn in September, the outlook improved significantly. The main ratings agency increased Ukraine’s rating by one notch above default and Kyiv has been given debt holidays for two years by its creditors, as have the major state-owned enterprises.
The resumption of grain exports following the Istanbul grain deal on July 22 has also improved the outlook further
as Ukraine expects to earn some $20bn from grain exports this year.
Reconstruction plans are being formed and International Financial Institutions (IFIs) like the EBRD have already started work, lending money to key infrastructure entities and beginning the task of building residential accommodation to house returning refugees. In a recent poll only 7% of respondents said they did not intend to go home when peace comes.
The government has presented a 10-year plan for a three-fold economic jump following the war at the end of August, but says it needs something on the order of $700bn to fund it plus compensate Ukraine for all the damage Russia has done.
The plan envisages the transition from a transitional economy of $4,000 per capita GDP per year to a developing economy with $12,000 per capita GDP per year. In practice, this will mean the creation of a Ukrainian economic miracle – 7% GDP annual growth over a long period of time, the Ministry of Economy said in a statement. One of the key steps that will ensure reform implementation will be economic liberalisation and creating a free regulatory environment.
But there are many hurdles to overcome first – ending the fighting being preeminent amongst them.
Even with the debt holidays, Ukraine must pay $10bn in debt by the end of the year. In the third and fourth quarter of 2022, the government, the National Bank, and Ukrainian enterprises must pay $10.1bn, of which $7.8bn is the principal and $2.2bn is interest. That is in addition to trying to fund a $50bn-$80bn deficit (circa 60% of GDP) that is expected this year. The government has been trying to avoid a debt restructuring deal, but it is looking increasingly inevitable.
As a result of the worsening economy, one of the ironies is the growing number of Ukrainians travelling to Russian-controlled territory in search of work. Every day, up to 200 cars cross the front lines in the Zaporozhye region. At the same time some refugees have returned to Ukraine as they have been unable to find work in the EU. In order to stem the flow of workers east, a draft law has been submitted to the Verkhovna Rada providing for up to 15 years in prison for Ukrainian citizens who accept Russian citizenship.
According to an official of Russia’s National Defence Control Centre, a total of 2.8mn people have moved to Russia from Donetsk and Lugansk and from other Ukrainian or former Ukrainian territories since the beginning of Russia’s military operation. Millions more are in year-long queues for work permits and citizenship applications in neighbouring Poland or further west in Europe.
Turkey on August 18 introduced another shock rate cut. The USD/Turkish lira (TRY) pair, which had been testing the 18-level for around a month, crashed through the 18/$ threshold towards 18.15.
The war grinds on in Ukraine with no end in sight. There was the hope a peace fire could be reached in April during the Belarusian talks, but that faded away after the massacre at Bucha* and ... more
Russia’s GDP contracted by 4.3% year on year in July 2022, moderating the decline of 4.9% y/y seen in June, according to the latest date by the Ministry of Economic Development. To remind, For 2Q22 ... more