What the Ukrainian economy needs now

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In an interview with EURACTIV, the Ukrainian Business and Trade Association (UBTA) argued for support to its agricultural industry, help with transport infrastructure and a Marshall plan for after the war.

It might seem misplaced to talk about the economy of a country that is being pummelled by cluster bombs and cruise missiles, but a country of more than 40 million and several large cities needs food for its population, foreign currency to sustain the war effort and functioning transport links to get the stuff to where it is needed.

In short, the economy needs to work somehow.

“A lot of enterprises are still operational, especially those that are located in the central part of Ukraine,” Olena Kudliak, UBTA’s executive director, told EURACTIV.

Getting logistics up and running

Nevertheless, the overall situation is dire, explained Dmytro Los, chairman of the board at UBTA.

“We are losing 50% of our GDP right now,” he told EURACTIV.

“The biggest issue is that some parts of Ukraine are under attack, so companies simply can’t operate. The second big issue is that logistic chains have broken down.”

With the exception of agrifood products, Ukrainian exports to the EU are still officially possible. However, due to the war, transport is much harder.

“To export steel, you need a huge amount of carriages, to export grain, you need a huge amount of carriages, and then, of course, the ports are blockaded,” Los said. And while ports are blockaded, road transport is difficult as well at the moment.

“Ukrainian trucks can’t go out, simply because our drivers went to war,” Los said, explaining that conscription law meant that men aged 18-60 had to stay in Ukraine.

“European buyers and logistic companies have to find a new model of operating,” he said.

According to Los, European drivers should be paid more for driving into Ukraine to be compensated for the risk and there should also be insurance for the drivers and the trucks that take this journey.

Additionally, Los argued for more logistics centres right at the border, with easier border procedures. This would allow trucks and drivers to deliver their goods without crossing the borders.

Prevent starvation

He also sounded the alarm bell about the food situation.

“There is no food shortage for the moment, but this might appear in one or two months,” Los told EURACTIV.

One of the reasons, according to him, was that agricultural companies were giving food away for free and did not have the resources to buy enough seeds, fertiliser, and fuel for the tractors.

He therefore called for financial support from the European Commission for Ukrainian food producers.

“If food producers stop, there will be no food in the country, and it means that people will start to starve,” Los said, warning that up to 20 million Ukrainians might flee to the EU.

“No type of charity operation will be able to feed a country of more than 40 million,” he said.

According to Los, whose association also includes Ukrainian food producers, such financial support could come in the form of long-term loans at near-zero interest rates that could be paid back after the war.

Marshall plan

After the war, Los argued further, there should be a Marshall plan to rebuild the Ukrainian economy. He stressed that such a plan would have to be done in close coordination with Ukrainian experts.

“The biggest mistake, which the EU has been doing for the last ten years, was that the EU experts thought they knew better what Ukraine needed than Ukrainian experts,” he said.

“Let’s combine our efforts to create a plan for our industries, including them into European supply chains. That will give us the possibility to even fight against China,” Los said, arguing that the lower wage levels in Ukraine would help the European industry to be more price competitive.

However, for this to become a reality, the war must stop first. But Dmytro Los is convinced: “There’s no doubt Ukraine will win,” he said.

 

Chart of the Week

While the EU is congratulating itself for acting in a fast and united way to the Russian invasion of Ukraine, it should be kept in mind that none of the sanctions have really cost the EU economy much.

The EU economy is still expected to grow, albeit less than expected before the start of the war. On 2 March, the European Central Bank (ECB) published its latest GDP projections, saying that the eurozone economy was likely to grow by 3.7%.

It also calculated a “severe scenario”, in which the high energy prices and energy supply shortages would ripple through the economy. In this scenario, European income would only rise by 2.3% of GDP this year.

Graph by Esther Snippe

The Ukrainian economy, meanwhile, can be expected to shrink by as much as 35%, according to the International Monetary Fund, or by 50%, according to the Ukrainian Business and Trade Association.

Of course, the EU economy was meant to get up to full steam this year, fully recovering from the pandemic, but, well, there is a war now, and the EU patting itself on the back for its supposedly harsh sanctions looks a little misplaced, considering that the EU is expecting to get richer this year.

Moreover, the EU is still sending record amounts of money to Russia every day to pay for Russian gas, oil, and coal due to the increase in prices. In February, for example,  Russia benefited from a record current account surplus.

While the EU is proud to have agreed on a total €1 billion in military aid to Ukraine, it is buying Russian gas for the value of €2 to €4 billion a week, providing precious foreign exchange for the Russian state coffers, and helping to keep the exchange rate of the Russian ruble afloat.

The most significant opposition against a ban on Russian energy comes from Germany, which is highly reliant on Russian gas but also imports coal and oil from Russia. In the past two weeks, a debate has raged among German economists about how much the German economy would suffer from a ban on Russian energy imports.

While one group of economists argued that a slight economic downturn of around -0.3% was likely, and a more severe downturn of -3% was possible, other economists argued that the ripple effects could lead to a downturn that was comparable to the corona pandemic, which led to a sharp downturn of around -4.6%.

German Economy Minister Robert Habeck warned of the social consequences of rising energy prices and an economic downturn. However, the real hardship posed by rising energy prices for low-income households could be tackled by means of redistributive policies. It is a question of political will.

Of course, the EU has presented ambitious plans to become independent from Russian energy in the long run.

However, the war is happening now. There is a fitting quote by the British war-time economist John Maynard Keynes about thinking for the long-term in times of crises: “In the long run, we are all dead.”

 

Literature Corner

Russia under sanctions: The political economy of Putin’s war in Ukraine: In this 20min-video (also available as a podcast), a Russian economist and professor at SciencesPo talks about what the sanctions do to the Russian economy.

The Future is Vast: Longtermism’s perspective on humanity’s past, present, and future: Having degraded long-term thinking somewhat in this Economy Brief, this link should be something of a counterweight. It is a truly mind-boggling account of how many human beings there are, were, and could be. Did you know that of all human beings that have ever walked this earth, more than 7% are alive today? Well, now you know.

War in Ukraine: a conversation with Oleg Ustenko: The Ukrainian President Volodymyr Zelenskyy’s economic advisor Oleg Ustenko talks to Bruegel’s Guntram Wolff.

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