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Ukrainian economy in wartime

Ukraine is at war. Regardless of the recent withdrawal of troops from the sites in northern Ukrainе, like Irpin, Hostomel and Bucha, Russian troops still occupy significant portions of the country. Russian troops are shelling and destroying key infrastructure. Ukrainian towns and villages are being bombed using artillery, multiple rocket launchers and ballistic missiles. Yet, Ukrainian schools continue to work, the supermarket shelves remain stacked, and 52% of businesses continue working, whereas 63% of companies continue to pay their workers’ salaries in full. 


 


Ukraine is a developing market economy with diversified industry, agriculture and services forming the basis of its economy. In terms of the structure of the Ukrainian industry, the highest share is composed of ferrous metallurgy, mechanical engineering, electric power, chemical and food industries.


 


Ukraine is the fifth-largest wheat producer in the world, supplying a third of the world’s wheat and a fifth of the world’s corn. The development of agriculture since the Ukrainian independence in 1991 gave impetus to the development of the processing industry. In peacetimes, Ukraine ranked first in the production and export of sunflower oil, tomato paste and egg products. Today, close to two-thirds of Ukraine's annual merchandise exports are under threat due to the blockade of the key Ukrainian ports by the Russian Forces.


 


Many metallurgical enterprises, especially in the east and south of Ukraine have shut down, including the Mariupol Ilyich Steel & Iron Works, and Azovstal, as well as Zaporizhstal, and partly “Arcelor Mittal Kryvyi Rih”, whereas the export of some of the key export goods, such as wheat, oil and iron ore, but also minerals, chemicals and other goods have been made impossible as a result of disturbed logistics.


 


In addition, the supply chains of production components have been broken - fabrics, accessories, microchips, dyes, components for production lines due to the destruction of logistics or the position of contractors who do not want to take risks. This phenomenon is not total, but it is present. This has also led to a decrease in jobs and income for the Ukrainians.


 


According to the Ukrainian Minister of Finance Serhiy Marchenko, the ten areas where hostilities are taking place account for about half of GDP. Many logistics chains have been disturbed, many businesses have been physically destroyed, some cannot operate in wartime, and many workers have left the country.


 


According to the State Statistics Service, inflation accelerated to 1.6%, amounting to 10.7% at an annual rate. Inflationary pressures intensified in February amid the escalation of the military threat and the eventual Russian invasion of Ukraine. First of all, food and fuel prices have risen sharply due to excessive demand and supply chain disruptions.


 


 


In March, core inflation grew by 3.8%. In annual terms, it increased to 10.5%. According to the IMF, Ukraine’s wartime economy could shrink by up to 35% this year if Russia’s invasion becomes a protracted conflict.


 


It is hard to predict, how long Russia’s war against Ukraine will go on, and so Ukraine has had to adapt its existing supply chains to wartime. For now, seaports, the main portals for the export of goods and produce, that allow bringing foreign currency into the country through trade, remained blockaded by the Russian Forces.


 


Ukrainian export now relies primarily on railroads. However, the railroad infrastructure is not as efficient for the export of wheat and food oil as seaports. According to Ukraine Railroads, during the high season before the war, seven million tons of wheat per month were transported to the west through seaports; currently, one million tons of wheat per month is being transported abroad through the railroads. Eventually, given the improvement of this infrastructure, up to 5 million tons of wheat could be transported per month, however, the installation of mobile transhipment facilities, construction of terminals, and creation of insurance programs for international carriers who see risks in working with Ukraine will be necessary to make this possible. It will take time.


 


Car parts are not the biggest portion of the Ukrainian export, yet the global car production is dependent on them. Ukrainian-made cable harnesses account for 7% of the EU's total imports within the car production industry. Volkswagen Group (Porsche and MAN), Opel, Lamborghini, Mercedes, BMW, and Audi depend on the supply of Ukrainian harnesses and cables. At the start of the Russian invasion of Ukraine, factories in Ukraine stopped working, leading to interruptions in the work of the European carmakers, such as Skoda and VW, but on March 22 the Ukrainian producers resumed their activities, guaranteeing the safety of their workers, even though logistics remains an issue.


 


The revenue of Rozetka, the biggest online store in Ukraine, has fallen from UAH 4bn per month to UAH 23m per month in the first three weeks of the invasion. Despite, the online store is starting to reopen its stores and shops in Kharkiv, Sumy, Chernihiv, Zaporizhzhia and other cities in Ukraine. "I believe that we will restore everything and rebuild everything, even better than it was! Because I want to live like never before! Glory to the Armed Forces! Glory to the Ukrainian people! Glory to Ukraine! ”Chechotkin, the CEO of Rozetka, wrote on Facebook.


 


Now, the Ukrainian economy is heavily reliant on foreign aid in the form of financing the budget deficit and replenishing gold and foreign exchange reserves. This allows supporting the macroeconomic stability of Ukraine. After the war, the main task will be to restore business, infrastructure, and jobs. Millions of IDPs will also have to be returned home. Since the beginning of the war, the Ukrainian hryvnia has fallen by 14% against the US dollar, which is half of the demise of the Russian ruble. This is already an important economic victory.


 


At the moment, the Ukrainian government is working on building up the four funds, which will contribute to the rebuilding of Ukraine after the war. These funds are the Fund for the Restoration of Destroyed Property and Infrastructure, the Fund for Economic Recovery and Transformation, the Debt service and repayment fund, and the Affected Business Support Fund. We will ask our partners to accept the so-called "Ukrainian Marshall Plan" for us. We need not just rebuild the economy, we will build a new European country”, said Denys Shmyhal, the Prime Minister of Ukraine.


 


"Ukraine is fulfilling all its obligations today, despite the crisis. On March 1, the Ministry of Finance of Ukraine made a coupon payment of $292 million on Eurobonds. But we believe that the world should help and support Ukraine, understanding what burden is on us today." With regards to the Affected Business Support Fund, Shmyhal said "We all see how many entrepreneurs and companies help our military, doctors and ordinary Ukrainians today. All united for a common goal - to expel the enemy from our land. And we understand that our task is to help businesses return to normal work, normal life, and normal existence. "


 


The strategy of deregulation and liberalisation of business has been the key government strategy for keeping the Ukrainian economy alive during wartime. Today, the government is already implementing its simplified tax system to stimulate and support local businesses.  First and foremost, a reduction of the rate to 2% for the third group of payers was introduced. This will save money that should go to pay taxes and direct them to resume production. Secondly, tax payments for groups 1 and 2 have been made voluntary.


 


Small businesses are the "warriors of the economy" who can and will help themselves and the economy as a whole. They will pay taxes, but only after they see their own recovery and ability. Until then, they will be key elements of the entire consumer chain. Taken together, these measures should stimulate the development of the Ukrainian economy.


 


Despite missile strikes and their constant threat, some business groups in many regions of Ukraine are beginning to resume their activities. Under these conditions, government incentives to do business are one of the key factors in its speedy recovery.


 


In the midst of war, Ukraine is doing a fantastic job of keeping its economy afloat and functioning, together with our Western partners, we will rebuild the country and create an even better than before European state.


 


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