The company managers who remained in kyiv all say it: life is almost normal there, at least in appearance. This normality is largely linked to economic life, which is proceeding almost as before. The stores are open and properly stocked, even if the breadth of the ranges of products offered has been reduced a little. The restaurants are working well. The logistics are assured and the people are working. The banking system never stopped. Trains run and traffic jams form during rush hour.
Yet the Russian-led war had a massive macroeconomic impact. According to official Ukrainian statistics, GDP fell by 30.3% in 2022 and unemployment rose to 26% of the working population. Inflation is approaching 30% (40% for food products) while nominal wages are more or less stable (therefore purchasing power has fallen considerably). These figures are spectacular but in no way surprising. Ukraine has an active population of around 18 million people. More than 1.7 million inhabitants have taken refuge abroad, mainly women and children. 700,000 are mobilized, in addition to professional soldiers. More than 100,000 civilians were killed. Perhaps a million Ukrainians live in war-ravaged occupied territories, where economic activity has been reduced to near zero. We can therefore estimate that the working population has decreased by around 15%. The Russian bombings have also destroyed economic capital, such as iron and steel factories in Mariupol and, above all, electricity production capacities. Ukraine lacks about 45% of its nuclear production capacity and 75% of its thermal capacity. The country imported nearly 700,000 electric generators last year, but that is not preventing cuts. The figure of 30% drop in activity and 30% price increase is consistent with these elements.
The Ukrainian Central Bank expects a stabilization and even a recovery in activity as early as the second quarter of this year. Obviously, this anticipation depends above all on military and diplomatic developments. Massive bombardments on economic infrastructure would again affect growth. Similarly, Ukrainian agricultural exports (mainly corn and wheat – the farms are absolutely huge) are linked to the respect and extension of the Black Sea Grain Initiative, this agreement signed in July 2022 thanks to the UN and Turkey, which secures a maritime corridor to export foodstuffs, in priority to the poorest countries (contrary to the obviously false allegations of President Putin).
Despite these factors of unpredictability, my interlocutors in Ukraine all make a similar observation: the resilience of the economy is comparable to that of the army. The adaptation of the logistics sector is striking in this respect. Rail and road transport replaced air and sea traffic in just a few weeks, which explains why Ukrainian stores are operating more or less normally, including in bombarded areas. Alexandre Joseph is the financial director of Centravis, a Ukrainian industrial group located in Nikopol, a city regularly bombed, not far from the Zaporijia power station. It confirms that imports and exports are very dynamic, in particular thanks to the reliability of road freight transport. Commodities are competitive thanks to a currency devaluation this summer. But then, how does a factory operate in an area hit by Russian missiles? “Almost normally, he explains. Shelters have been integrated into the buildings to protect themselves in the event of an alert. The employees are housed in rented accommodation far from the risk areas. Sometimes it is necessary to recruit to replace those called to leave to fight.”
Economic activity, a weapon of resistance to Russia
This resilience also surprised Carlos de Cordoue, the managing director of Crédit Agricole Ukraine, who presents economic activity as a weapon of resistance to Russia. Hours after the Russian invasion, all of its employees agreed to keep bank branches open because it was even more crucial than usual for Ukrainians to be able to bank and pay. The banking authorities feared a bank run (massive withdrawals) which did not take place. Carlos de Cordoue explains it, certainly by the good situation of liquidity and solvency of the banks after a reinforcement of the regulation from 2014, but also by this desire to leave nothing to the aggressor, not even the gift of financial mess.
A year later, the financial system has never broken. Ukrainians leave their savings in the bank – especially since the Central Bank has raised its key interest rate to 25% – withdrawals of capital from the country are controlled, bank branches are open, except in the 15% of the territory which are occupied by the Russians. In the event of an alert via smartphones, employees are required to get off the metro.
The situation was more chaotic in the agricultural sector. This is explained to me by Florian Garnier, who operates a farm of several thousand hectares. “The activity was able to resume about three weeks after the invasion, he says. But the situation of the farms remained precarious until November.” First, it was necessary to keep a large part of the harvest in stock since rail transport capacity is not well suited to cereal exports, which can only be done in large quantities by boat. Supplies of fuel, seeds and fertilizers normalized only slowly. Then, it was necessary for the Black Sea agreement to be fully effective, with reasonable guarantees of sustainability, for the cash flow situation of farms to once again allow more or less normal agricultural work. Things are pretty much in order today.
Humans and capital, two determining factors
The resilience of the Ukrainian economy, even though public aid to businesses is very low, or even non-existent, in agriculture (no CAP in Ukraine!) and there is no partial unemployment scheme, has to do with two factors that have been the bedrock of sound economic analysis for centuries: people and capital. It is many humans, workers, service employees, bankers, peasants who decide to continue to work despite the risks and obstacles. Because to work is to render service to the community and it is to resist the Russians. Carlos de Cordoue says it with a half-smile (we speak to each other on a day of strike in France): “The Russian invasion gives meaning to our work, here in Ukraine”. They are also humans who demonstrate an unbridled imagination to circumvent the difficulties linked to alerts, bombings, lack of manpower. At the start of the war, it was often the companies that equipped the employees who had gone to the front with helmets, protective gear, binoculars… Florian Garnier says that “farms come together to set up solidarity funds in order to financially help the families of those who went to the front”.
As for the financial capital, coming from abroad, it irrigates the Ukrainian economy. Without foreign aid, the public deficit in 2022 would have been, not 17.5% of GDP, but 27.5%. Even though the country’s trade balance is in deficit (imports are higher than imports), its current account is in surplus. This means that the country attracts enough capital to more than cover its trade deficit. It is well understood that this financial aid must be sustained for as long as the war lasts. This is a fundamental aspect of supporting Ukraine and therefore of protecting Europe against the Russian threat.
The liberal economy, because it is based by definition on freedom, works miracles, even (especially?) in times of war. But Ukraine will have two challenges to meet to guarantee its longer-term development and secure its path towards entry into the European Union. The country will have to redouble its ardor in the fight against corruption and in the fight against the oligarchs who would like to divert economic freedom by creating monopolies for their benefit. The rule of law and competition are the two pillars of a liberal economy, which allows prosperity and solidarity.