• World Bank: Ukraine economy to contract by 45% in 2022 due to Russian invasion.
  • Sanctions on Russia have forced its economy into a deep recession.
  • Emerging economies in Europe and Central Asia are also being affected.
  • The war is adding to concerns of a sharp global slowdown and surging inflation.

The terrible human cost of Russia’s invasion of Ukraine has been harrowing to witness. As millions of refugees flee the war and civilians are killed by indiscriminate shelling, Ukraine’s economy is also being severly damaged.

The World Bank is now predicting Ukraine’s economy will contract by up up 45% in 2022. Critical export routes via Ukraine’s Black Sea ports in Mariupol and Odessa have been cut off. Mariupol has been razed by Russian bombardment and Odessa is effectively under blockade by Russian naval forces. Before the war, these routes acounted for half of Ukraine’s total external trade and 90% of the grain trade. Ukraine is a major exporter of wheat, a mainstay of the economy, but the government has banned the export of grains and other staples as it seeks to ensure food security for more than 6.5 million people who are displaced within the country.

STAKEHOLDER CAPITALISM SERIES

Beyond GDP: read the full transcript here

A chart showing Ukraine annual GDP growth (percentage)
The World Bank predicts poverty rates could reach nearly 30% of the Ukraine population.
Image: Trading Economics

The full level of economic damage will be dependent on how long the war drags on, says the report. Even when it ends, the World Bank predicts a slow recovery and a growing threat of widespread poverty. Citing modelled scenarios from the United Nations, the World Bank predicts that, “a more severe and protracted war could see poverty rates rise to nearly 30% of the population”.

Over the medium term, the damage to production and export capacity coupled with a loss of human capital are expected to have lasting economic and social repercussions.

The regional cost of the war in Ukraine

The economic ripple effect of the war will be felt far beyond the borders of Ukraine, says the World Bank report. “The war’s impacts are cascading through the region’s strong trade, financial and migration linkages, resulting in considerable economic damage to neighbouring countries.”

Russia’s role as the aggressor in this conflict comes at great cost. In addition to funding and supporting its military on the front lines, Russia has been hit with the largest coordinated set of economic sanctions ever imposed on a country. “Russia’s economy will be hit very hard,” says the World Bank report, “with a deep recession looming in 2022. Russia’s GDP is expected to contract by 11.2%, with little recovery in the ensuing two years. Households will be deeply impacted by the crisis, with a projected additional 2.6 million people falling below the national poverty line.”

It’s a sobering reversal from the period before the invasion when Russia’s economy was recovering well from the COVID-19 pandemic.

Two charts. One showing Russian Federation / Real GDP growth and contributions to real GDP growth. Another showing Russian Federation / Actual and projected rates and real private consumption per capita.
Sanctions are hitting Russia’s economic output and increasing poverty levels.
Image: World Bank

Countries in the Causasus and Central Asia will also suffer as the economic impact of the war cascasdes through the region, with the World Bank predicting an economic contraction of 4.1%. This is double the impact the region suffered during the COVID-19 pandemic. Russia is a major export destination for countries in its immediate orbit accounting for over 10% of exports. In central Asian countries supplying foreign workers to Russia, remittances account for close to 30% of GDP.

The global impact of the war

The financial downside of the war in Ukraine is already rippling out into the wider world. The International Monetary Fund (IMF) describes the war as “a major blow to the global economy that will hurt growth and raise prices.”

In Europe, energy is at the heart of the economic fallout as Russia is a major supplier of natural gas. Germany is especially dependent on Russian gas and has suspended the opening of the Nord Stream 2 pipeline which was set to double the flow of gas from Russia.

An infographic showing the percentage of gas supplied by Russia to European countries
Sanctions are limiting the supply of Russian gas to Europe and driving up energy costs.
Image: Statista

Energy prices are soaring across Europe, driving up fuel costs and adding to wider inflationary pressure that began with a supply chain squeeze during the pandemic. The IMF predicts this all adds up to a slower recovery from the pandemic.

Eastern European nations such as Poland are also bearing the costs of caring for millions of refugees who have fled the fighting.

Further afield, countries like Egypt, which normally imports 80% of its wheat from Russia and Ukraine, will see food prices rise and tourist revenues from both countries fall. The IMF warns rising food prices could raise social tensions.

Have you read?

Collective responses to protect economies

Russia’s war in Ukraine piled one shock on top of another, with parts of the world still in the grip of the COVID-19 pandemic. The IMF has stressed the importance of global safety nets to protect against the impact of major events such as conflict and contagion. “We live in a more shock-prone world,” IMF Managing Director Kristalina Georgieva said. “And we need the strength of the collective to deal with shocks to come.”

As the world braces to deal with the economic impact of Russia’s invasion, it should be remembered that the one action that will limit the damage and most importantly, stop the human suffering in Ukraine, is an immediate end to the war.