Ukraine’s economy begins to recover as it adapts to the war

Ukraine's economy begins to recover as it adapts to the war

When Russian forces closed in on Kiev at the beginning of their invasion last year, employees at Zvertelo, a popular bakery in the Ukrainian capital, closed up shop and began preparing free salads for the soldiers defending the city. As fighting escalated around Kiev, supplies became scarce and the bakery’s finances collapsed as managers continued to underpay employees.

“The business completely shut down, and no revenue was expected,” said Anna Zvertelo, the bakery’s founder. “It took a lot of hard work to slowly reopen businesses.”

But it bore fruit. This spring, Zvertelo opened a second bakery in Kiev, driven by growing customer demand as life in the capital gradually adjusted to wartime conditions and returned to some degree of routine. “New opportunities opened up for us,” said Victoria Kolomiets, Zvertelo’s chief operating officer.

The bakery’s expansion is part of a broader, albeit modest, economic recovery in Ukraine. Although Ukraine’s economic output is still significantly lower than before the war – the economy shrank by a third after Russia’s full-scale invasion last year – the World Bank estimates it will grow by an estimated 3.5 percent this year. This expansion has been driven by increased domestic spending and a continued flow of foreign financial assistance.

Economists say it will take years for Ukraine’s economy to return to pre-war levels, and forecasts will certainly be uncertain at a time of fierce fighting. Major challenges lie ahead, including the costly reconstruction of the country’s devastated cities, a government deficit that will continue to grow as the war progresses, and labor shortages and the mobilization of working-age citizens due to the exodus of Ukrainians fleeing the war. Fight him.

Still, local analysts and businessmen say, a sense of resilience and relative stability has taken hold after nearly 20 months of war, improving confidence among consumers and investors.

“Ukraine’s economy is adapting to the war,” said Olena Bilan, chief economist at Kiev-based investment bank Dragon Capital. He said people have moved from “savings mode” to a situation where they now “feel more relaxed and start spending more.”

The World Bank has recently estimated report Private consumption in Ukraine will grow 5 percent this year after declining by more than a quarter last year. In cities like Kiev and Dnipro, far from the war zone but under threat from Russian air strikes, customers are returning to open restaurants and resuming shopping.

“Today, most Ukrainians understand that the war may drag on, and they will have to continue living in these new conditions,” said Andrey Cheryukha, founder of Etnodim, which produces vyshyvanka, the traditional embroidered Ukrainian shirt. He said sales at his shop have tripled this year compared to last year, partly due to the increased sense of patriotism.

Ukrainians, Mr Cherukha said, “continue to work and buy clothes and other goods that may not be considered essential but are a way to maintain a sense of normalcy.”

Olga Kustenko, co-owner of First Point espresso bar in Kiev’s trendy Podil neighborhood, said people need routine to cope with the war. Customers have returned to his cafes, he said, because they are looking for a familiar place to spend time. She opened a second café this spring to meet growing demand.

Stronger-than-expected spending has prompted financial institutions to upgrade their economic forecasts. Last week, the International Monetary Fund Predicted The country’s overall output will grow 2 percent this year, which is slightly less optimistic than the World Bank’s forecast, but a significant upgrade from the initial forecast of a 3 percent decline.

Certainly, Ukraine’s economy is growing from a low base, after the first year of war destroyed the country’s main economic assets. The Azovstal steelworks, which accounted for one-fifth of Ukraine’s steel production, was destroyed in the Battle of Mariupol the previous year.

Growth rates in wartime can also be a poor indicator of a country’s economic health, as output is often boosted by military production, which is ordered by the government. The government of Ukraine devotes the majority of its budget to covering military payroll and supporting arms production.

But economists say Ukraine’s ability to deal with various wartime challenges, such as keeping the electricity on despite Moscow’s winter campaign against energy infrastructure, has helped put the economy on a stable path.

“We have had no electricity shortages since mid-February,” said Ms. Bilan of Dragon Capital. “That was the first positive factor that increased output.”

In another sign of resilience, Ukraine exported More than 110,000 megawatt-hours of electricity last monthA record volume for 2023, mostly produced at the country’s nuclear plants, although it remains a fraction of the country’s electricity exports before Russia began attacking energy facilities.

Maria Repko, deputy director of the Kiev-based Center for Economic Strategy, said the opening of new trade routes to circumvent Moscow’s efforts to block the Black Sea is also helping agricultural exports, which provide much of Ukraine’s pre-war income. It’s a big part. ,

The World Bank estimates Ukraine’s total exports will continue to decline this year before rising 15 percent next year and 30 percent in 2025 – a potential economic lifeline if the war drags on.

Like Russia, Ukraine’s economy is also rapidly restructuring around the war. more than half government spending next yearAbout $46 billion will be devoted to defense.

But with reduced tax revenues to finance this spending spree, Ukraine’s budget deficit will reach 21 percent of the country’s total output next year, the prime minister, Denis Shmyhal, said. said last week, He said that to meet this shortfall, his government would need financial assistance of $42 billion.

Securing that amount may prove difficult as support for Ukraine has waned in the United States, by far Kiev’s biggest financial supporter, and the world’s attention has been distracted by the war between Israel and Gaza. “The situation looks really worrying,” Ms Repko said.

Ukrainian businesses are also facing labor shortages as men are being drafted into the army, and as a result of an influx of refugees following Russia’s invasion last year. More than six million Ukrainians – about 15 percent of the pre-war population – live outside the country, and about a quarter of them are unsure whether they will return after the war ends, according to a recent united nations survey,

At her bakery, Ms. Zvertelo said she was struggling to hire more staff, but months of war had taught her how to turn problems into opportunities.

Last year, the bakery asked customers to order free coffee for the troops – it was a way to support Ukraine’s fight while reviving its business. The event raised over $40,000.

“We came up with a number of solutions that helped us move forward,” Ms. Zvertelo said.

Daria Mittyuk Contributed to the reporting.

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