Espreso. Global

Ukraine’s economy outpaces Russia for first time since invasion

19 December, 2024 Thursday
14:50

Ukraine is winning the economic war against Russia, but its resilience depends on overcoming critical shortages of power, labor, and money

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The Economist writes about it. 

For the first time since 2022, Ukraine’s economy is healthier than Russia’s in key ways. Ukraine’s GDP is set to grow by 4% in 2024, while Russia faces higher interest rates (23%) and stagnant growth (0.5-1.5%). But challenges loom: worsening energy attacks, labor shortages, and funding gaps.

A three-phase economic shift

Ukraine’s economy has passed through three phases since 2022. The first phase saw chaos: fleeing civilians, blocked exports, and soaring inflation. 

The second, in mid-2022, brought stabilization after Ukraine pushed back Russian forces. Foreign aid surged, the central bank tightened inflation controls, and businesses adapted. For example, industrial parks moved westward to safer regions, and some Ukrainian firms relocated production abroad. Entrepreneurs created AI tools to map war damage and clear mines. Ukraine opened its own maritime corridor for grain and metal exports after Russia blocked Black Sea routes.

“Now a third phase is beginning, during which the country’s economy faces its biggest threats yet: acute shortages of power, men and money,” the article writes. This phase is also marked by resilience and ingenuity — many food producers now rely on generators and biogas to offset power shortages. 

Power problems and rising costs

Russia’s relentless attacks on Ukraine’s grid have halved its energy capacity. Blackouts and missile strikes threaten businesses. Still, Ukraine has expanded EU electricity imports and leaned on renewable energy and gas plants to bridge the gap.

Coping measures have softened the blow, but high energy prices could cut GDP growth by 1% in 2025, Timofiy Milovanov of the Kyiv School of Economics notes.

Labor shortages and shrinking resources

With a fifth of Ukraine’s workforce gone — due to war, migration, or injury — industries struggle to find workers. Job openings outpace applicants, and wages are rising. Even critical industries can only protect half their workers from the front lines. 

“Hiring many more women is tricky: there are nearly as many of them who have migrated abroad as men who are at the front or have come back from it unable to work,” as stated by Hlib Vyshlinsky of the Centre for Economic Strategy.

Meanwhile, small businesses face borrowing challenges, and exporters can’t pass rising costs onto global buyers. Firms like ArcelorMittal have spent billions just to maintain operations, while Ukraine’s government deficit nears 20% of GDP, reliant on foreign aid.

A fragile future

Western aid has been crucial, with the G7 committing $50 billion, partly tied to frozen Russian assets. But U.S. support is uncertain, and without it, Ukraine could face a funding crisis by 2026.

Despite hurdles, optimism persists. But the obstacles are daunting, the article concludes. 

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