Direct Translation via Google Translate. Edited.
[LB] The cost of damages and losses from Russian aggression has already reached record levels, and the drop in real GDP in Ukraine is deeper than in most countries that have experienced armed conflicts. At the same time, Ukraine managed to maintain macro-financial stability and attract significant amounts of international aid, which will positively affect the prospects of post-war recovery.
by Tatyana Bohdan Tetyana Bohdan , Doctor of Economics, Director of Research at the Growford Institute
Russia's military aggression against Ukraine caused large-scale destruction of production capital and infrastructure, brought human casualties and social losses. The war led to a reduction in jobs and incomes, a decrease in purchasing power and the amount of accumulated assets. In 2022, the national economy lost 29.2% of real GDP, and 13.5 million people were forced to leave their homes. More than 7 million people were below the poverty line, and the poverty level reached 24% of the population.
Experts from the World Bank and the European Commission estimate the damage from the war in Ukraine in the period from February 24, 2022 to February 24, 2023 in the amount of 134.7 billion dollars, and the need for reconstruction - 410.6 billion dollars.
According to the methodology of "Rapid Damage and Needs Assessments" (RDNA2) of the World Bank, damage is direct loss from the destruction or damage of physical assets and infrastructure, expressed in monetary terms, based on the cost of replacing or repairing lost assets at prices valid until the beginning of the war
Needs are the cost of restoring pre-war normality through such works as repair, reconstruction and implementation of modernization efforts, energy efficiency improvement, taking into account inflation, increasing insurance premiums, etc. Needs are calculated at current market prices at the time of assessment.
The World Bank will reassess Ukraine's war recovery needs in early spring
If we talk about damage or direct losses from the first year of the war, according to the estimates of the World Bank and its partners, the housing sector (38% of the total damage), transport (26%), energy (8%), industry and trade (8%) suffered the greatest losses ), agriculture (7%). In particular, during the year of the Russian-Ukrainian war, 1.4 residential premises (separate apartments, houses) were destroyed and damaged, including 135,000 private houses and 39,000 dormitories.
In the total amount of recovery needs ($410.6 billion), the transport sector occupies 22%, the housing sector 17%, the energy sector 11%, the sphere of social protection and life activities 10%, the fight against dangerous situations 9%, agriculture 7%.
In general, economic losses from war include not only the destruction and damage of infrastructure, production facilities, public institutions, but also the loss of human capital and the expenditure of resources on military confrontation. In 2022, national budget expenditures on defense amounted to 23% of GDP, and in 2023 they should amount to 20% of GDP. Along with this, military aid to Ukraine from Western partners until January 15, 2023 amounted to 65.4 billion US dollars or 46.5% of GDP for 2022.
Demographic losses from military operations are also significant, which are still difficult to estimate. But according to the results of the EBRD study in the world, even 25 years after the end of the wars, the population of the affected countries remained significantly smaller than in comparable countries without armed conflicts. The main components of these losses are the victims of military operations, the outflow of refugees and the decrease in the birth rate.
According to the EBRD, on average, war events result in a drop in GDP per capita by 9% relative to the pre-war level. However, the most destructive and large-scale wars ended with a drop in GDP per capita by 40-70% (Transition Report 2022-23).
In Ukraine, it is still too early to talk about the total drop in GDP as a result of the current war, but in 2014-2015, after the first act of Russian aggression, Ukraine already lost 15.8% of GDP, and in 2022, real GDP decreased by 29.2%.
In order to compare losses from the war in Ukraine with losses in other countries affected by hostilities, the indicators of the "Maddison Project Database" of the University of Groningen (Netherlands) were used. Historical episodes that had signs of broad international conflicts (as opposed to local or civil wars) were taken into account. Thus, the sample included 10 episodes from World War II, 2 episodes from the Yugoslav wars, 2 episodes from the Persian Gulf wars, 1 episode from the Arab-Israeli wars, 2 episodes from the Russian-Ukrainian wars, and 1 episode from the Russian-Georgian war.
Table 2 shows data on the rates of decline in real GDP in the first year of hostilities in the countries of the specified sample. The available data indicate that in terms of the rate of decline in real GDP in 2022 (by 29.2%), Ukraine ranks III among the 18 countries in the sample. In the studied historical period, only wars in Iraq in 1991 (fall in GDP by 60.2%) and in Austria in 1945 (by 58.7%) were more destructive.
Giant losses of real GDP in the first year of the war distinguish our country from other episodes of military operations. Thus, the drop in real GDP at a rate of 25-50% in one year of the conflict, as a rule, took place only in countries that had capitulated or suffered a crushing defeat in the war (Germany, Austria, Japan, Iraq), or in countries where combatants actions were carried out on more than 50% of the territory (Bosnia and Herzegovina).
The conducted research showed that the average level of cumulative losses of real GDP during the war was 40%. At the same time, the average drop in real GDP in the first year of the war was equal to 20%. We will remind that the drop in the real GDP of Ukraine in 2022 reached 29.2%, and the drop in industry - 38%. This speaks both to the brutality and massive destruction from the Russian aggressor, which Ukraine suffered, and to the low adaptive capacity of the Ukrainian economy to the conditions of martial law and the lack of broad state support.
One of the mechanisms that determined the potential for the recovery of economic activity after the end of the war was the amount of destruction of infrastructure and production capital. According to the EBRD, in countries affected by the war, the stock of physical capital 5 years after the end of the war was on average 12% smaller than before the war.
However, a key factor in a successful recovery is the achievement of a secure and lasting peace. Along with this, according to the EBRD, other factors have a positive effect on the speed of economic recovery after the war: the short duration of the war, dynamic economic growth and strong institutions on the eve of the war, a slight decline in the economy during the war.
Ukrainian industry suffered significant losses from the war. In 2022, the industrial production of Ukraine fell by 38%. And the amount of losses in industry and trade is estimated by experts of the World Bank at 10.9 billion dollars. At the same time, the recovery needs for these sectors for the period until 2033 amount to 23.2 billion dollars. USA. 80% of this amount is the projected costs for reconstruction and modernization of production premises, machines and equipment, restoration of warehouse stocks.
The destructive consequences of the war are manifested not only in the economy and social sphere, but also in the financial system of the country that is waging an armed struggle. In Ukraine in 2022, the average annual inflation was 20.2%, which almost corresponds to the average annual inflation rate in 9 European countries most affected by World War II (20.1%). At the same time, the rate of inflation in Ukraine contrasts with the average annual inflation during the war in Croatia in 1991-1995 (471.7%), in Iraq in 1991 (181%), and in Italy in 1941-1945 ( 77.3%).
Fairly moderate inflation in 2022 in Ukraine, with large-scale destruction of the production base and infrastructure, was due to the fact that the western border of Ukraine remained open, and neighboring countries were not engulfed in war. In this way, a significant part of consumer demand in Ukraine was met at the expense of imports. Imports compensated for some of the lost domestic supply (while real GDP fell by 29.2%, dollar imports decreased by only 4%), and large-scale foreign aid helped to maintain the purchasing power of the population relative to imports. The freezing of energy tariffs in Ukraine in the face of rising global energy prices also helped to curb the rate of inflation.
Tariff plan. How does the government plan to increase the cost of electricity?
Monetary financing of the budget deficit in the amount of 8% of GDP for 2022 did not significantly affect the acceleration of inflation rates, since the expansion of the hryvnia supply was sterilized by the NBU's currency interventions at the expense of international reserves. Official reserves were again replenished with foreign loans and grants. In 2022, Ukraine received more than $32 billion in foreign aid from official donors.
The structure of sources of financing of public expenditures of Ukraine in 2022 looks as follows: 41% of expenditures were financed by tax and non-tax revenues of the budget, 35% by external loans and grants, 13% by monetary financing and 9% by attracting loans on the domestic market (diagram. 1).
That is, the expenses of the state for the conduct of military operations and the functioning of the social and humanitarian sphere were divided almost equally between Ukrainian taxpayers and external creditors/donors. The NBU also made its contribution by covering part of the deficit through issuance. However, the internal creditors of the Government played a minimal role, especially when counting the net borrowings of the Government.
At the same time, as the experience of other warring countries shows, the contribution of the state's internal creditors and monetary emission is usually more significant, and external donors do not always play as important a role as in Ukraine.
For example, in Israel during the war of attrition (1967-1970), 53% of government spending was financed by internal revenues, 20% by central bank issues, 22% by external loans and grants, 5% - at the expense of loans from banks and other domestic sectors.
In the US economy during the Second World War, 30.2% of public expenditures were financed by tax revenues of the budget, 10.1% by monetary financing of the central bank, and 46% by domestic borrowing by the Government. That is, in the USA, in the structure of public expenditure financing, the share of the Government's internal creditors was several times larger than in Ukraine, the share of money emission was slightly smaller, external donors were absent, and taxpayers had a comparable share in the total financing.
So, the Russian invasion of Ukraine in 2022 started one of the largest and most destructive wars in the world since World War II. The cost of damages and the need for restoration have already reached record levels, and the rates of decline in real GDP and industrial production exceed the indicators of most countries during the wars of the second half of the 20th century - the beginning of the 21st century. On the other hand, in 2022-2023, Ukraine managed to avoid macro-financial destabilization and diversify the sources of financing expenditures, which will keep the economy from further decline and have a positive impact on the prospects of post-war recovery.
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