Ukraine's economy to shrink 30% as war drags on

Downturn due to be deeper than expected as Russian invasion upends trade in energy and disrupts supply chains

The Grande Pettine Hotel was destroyed by a missile in Odessa in Ukraine, on May 8.

Ukraine’s economy will plunge by almost a third in 2022, more than previously expected, in a scenario in which the war ends this year, the European Bank for Reconstruction and Development, or EBRD, has said.

The expected downturn is deeper than the 20% contraction the EBRD estimated in March because of a “larger-than-previously-expected contraction in Ukraine as the war drags on”, it said in its report.

Russia’s invasion has upended trade in energy, agricultural commodities and fertilisers and disrupted supply chains, resulting in slower growth across eastern Europe. 

Gas prices in Europe have risen to historic highs, fuelling inflation across the continent  and putting manufacturers at a disadvantage compared with US-based companies where gas is as much as four times cheaper, the EBRD said.

“Aside from direct war damage, agricultural production is hampered by lack of fuel, access to seeds, fertiliser and equipment,” the bank said in its report. 

Poor forecasts

Ukraine, which accounts for almost 10% of global wheat exports, 14% for corn and 37% of sunflower oil, is not expected to be able to plant or harvest up to 20%-30% of its agricultural land.

The forecasts assume that a ceasefire will be negotiated this year and reconstruction of the country can begin in 2023, with the economy projected to grow 25% next year.

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The war has also revealed vulnerabilities in global supply chains, according to the EBRD. 

Two Ukrainian companies account for about 35% of the global supply of purified neon, a key component for the manufacture of semiconductor chips.

Russia’s economy is expected to shrink 10% this year and stagnate in 2023, according to the EBRD. 

Liquidity gap

Meanwhile, the European Commission is considering new joint debt issuance, two EU officials said, to cover Ukraine's liquidity gap of €15bn over the next three months.

A Commission proposal is to be published on May 18, one EU official said. 

The new joint EU borrowing, if agreed, could be based on the EU's Sure scheme for financing unemployment benefits during the Covid-19 pandemic, officials said.

This would mean that Ukraine would get very cheap loans from the EU, and EU governments would need to provide guarantees that the joint borrowing would be repaid.

"It is one of the models under consideration, but nothing has been decided yet," one senior EU official said.

The EU expects that the US would join the effort and provide around €5bn, which would leave the EU to raise some €10bn through the joint borrowing, officials said.

The idea is will be discussed at the Group of Seven finance ministers meeting in Bonn on May 18-20, officials said.