Aside from the tragic human casualties and infrastructure devastation, Ukraine is facing a massive economic crisis that the World Bank estimates will shrink the country’s economy by 45.1% this year.
With Putin’s war already succeeding in shutting down half of Ukraine’s businesses, the World Bank’s new estimate is a serious blow when compared with the pre-war forecast of 3% growth.
In a recent report, Anna Bjerde, World Bank Vice President for the Europe and Central Asia region, said the magnitude of the contraction will depend on the duration and intensity of the war.
"The magnitude of the humanitarian crisis unleashed by the war is staggering. The Russian invasion is delivering a massive blow to Ukraine's economy, and it has inflicted enormous damage to infrastructure," she said.
A continuation of the war would cause even larger falls in GDP, with the bank predicting a downside 20% contraction in Russia’s GDP and a 75% contraction in Ukraine’s GDP.
Since the start of the invasion, roughly 3 million people have lost their jobs while the Ukraine government’s preliminary estimates suggest that the economy may have already lost approximately $565 billion.
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With millions of Ukrainians fleeing the country or joining the fight against Russia, the workforce has shrunk dramatically, making it difficult to keep the wartime economy going.
More than 4 million people have fled Ukraine, mostly to Poland, with an additional 6.5 million displaced within the country.
The blockage of Black Sea shipping from Ukraine has cut off some 90% of the country's grain exports and half of its total exports. Global food prices have risen as a result, with Ukraine being the world's biggest exporter of sunflower oil, followed by Russia. All in all, Ukraine’s ports have already suffered a fall in traffic of more than 75%
The World Bank says Ukraine needs "massive financial support immediately". The Bank has already sent some $1 billion to help the government provide critical services to citizens, and has promised a further $2 billion in the coming months.
At the same time, the World Bank says Russia has already plunged into a deep recession due to Western sanctions, projecting Russia's economy would contract by 11.2% this year.
The US has banned all Russian oil and gas imports and the EU has proposed a plan to make Europe independent from Russian fossil fuels before 2030. However, the block still pays Russia nearly $884 million for energy daily. That alone amounts to nearly 40% of Russia's income.
Experts agree that Russia’s invasion of Ukraine will have lasting and negative effects on the world economy and the rises in global energy and food prices and inflation will hit millions of people.
The war is set to inflict twice the amount of economic damage across Europe and Central Asia than the pandemic did in 2020.
In addition to Russia and Ukraine, neighboring Belarus, the Kyrgyz Republic, Moldova and Tajikistan are projected to fall into recession this year. The growth projections have been downgraded in all economies due to spillovers from the war.
By Michael Kern via Safehaven.com
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1- The World Bank estimates that Ukraine’s economy will shrink by 45.1% this year as a result of the Ukraine conflict. And since Ukraine’s GDP is estimated at $155.6 bn, the shrinking will amount to $70.18 bn. Yet the Ukraine government is claiming that the economy has lost approximately $565 bn. How could an economy lose almost four times its size? There is a huge credibility gap between the World Bank’s figure and the Ukraine government’s.
2- I doubt the World Bank’s claim that Russian economy will contract by 11.2%. My reasoning is that Russia was far better prepared than in 2014 to face Western sanctions. Moreover, it is still exporting the same pre-conflict amounts of gas and oil but at much higher prices. Furthermore, its other exports like wheat, fertilizers, processed uranium food materials and precious metals are fetching much higher prices than before because of the conflict. And since Russia is virtually self-sufficient in almost everything, it is saving a lot by hardly importing anything. Therefore, it is very possible that Russia’s economy might not contract at all but may not grow either this year.
3- The price premium that the Ukraine conflict has added to the prices of oil, gas and coal along with rises in food and commodity prices could cost the global economy dearly or 1%-2% of its growth with the economy of the United States and the EU’s suffering most. Growth of the EU economy could be reduced to almost 1% this year. The United States is the world’s second largest importer of crude oil after China importing 9.0 million barrels a day (mbd). Therefore, it is more vulnerable to oil price shocks than other major economies. It will pay a very high oil import bill and its economy will be affected by rising inflation already hitting 8.5%.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London