Ukraine’s war-torn economy faces a renewed threat as Russia’s intensifying war takes its toll on power plants and forces Kyiv to send key workers to the frontline, the European Bank for Reconstruction and Development has warned.
In its latest economic update, the EBRD cut its growth forecasts and said more than two years of fighting in Ukraine was affecting not only the warring countries but also their neighbours.
Beata Javorcik, the EBRD’s chief economist, said the war was “casting a long shadow” as she announced the bank had cut its growth forecast for the regions in which it operates from 3.2% to 3% this year.
The EBRD was set up to help rebuild the economies of the former Soviet Union and eastern Europe after communism collapsed in the early 1990s, but subsequently expanded to offer support to countries in the Balkans, the Middle East and north Africa.
Interviewed by the Guardian after Russia’s offensive towards Ukraine’s second city, Kharkiv, Javorcik said: “The war has intensified. Mobilising additional men to fight will hit the economy, and the destruction of power generation is something that will have repercussions. The situation is challenging.”
Heavy bombing in March and April had cut Ukraine’s electricity production by 40%, with many thermal and hydro plants destroyed, she said.
Ukraine’s economy contracted by almost a third in 2022 before rebounding modestly in 2023. The EBRD is expecting it to grow by 3% this year. Javorcik said the good news for Kyiv was that $61bn of US financial aid had covered the gap between government spending and revenue this year and that the Black Sea corridor was open for its exports.
“The authorities have managed to keep the macro economy stable and that’s a big achievement.
“The war is the big unknown. In the initial phase of the war the military fighting took place in an area that generated 60% of Ukraine’s economic activity. Subsequently, the fighting moved to a much smaller area. If the area affected by the fighting goes back to the early days of the war that would take its toll of the economy.”
The EBRD has revised up its 2024 growth forecast for Russia this year from 1% to 2.5% but Javorcik said the exodus of foreign firms and skilled workers would eventually be felt.
“While the short-term outlook for Russia has improved, in the medium term Russia is going to feel the effects of the war. Sanctions and the impact of the brain drain will affect its productivity growth.”
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The EBRD said the weakness of the German economy, wariness among central banks about cutting interest rates and the running down of savings accumulated during the Covid pandemic had also contributed to weaker growth in its regions.
“Geopolitical tensions are having a profound impact on the EBRD regions and beyond, leading to rapid fragmentation of trade and investment and a notable rise in defence spending”, it said.
“Bridging” economies that traded with both eastern and western blocs had been large recipients of foreign direct investment and stood to benefit from fragmentation. China accounted for half of greenfield inward investment by value in the EBRD regions, Javorcik said.
