The Eurozone in particular is feeling the economic consequences of the war that Russia unleashed exactly one year ago by invading Ukraine. But what about the economy in the homeland of the two opponents? In the report 'Russia's war economy', our research department takes a closer look at the economic situation in Russia and Ukraine.
With the second and third quarters last year showing negative growth (twice -4%), the Russian economy officially entered a recession last year. But the first quarter still showed growth of +3.5%. Overall, last year gross domestic product (GDP) only contracted by -2.1%. We base this on data from Rosstat, the Russian statistical data agency. The question is how reliable this data is.

In any case, -2.1% is better than expected, but that does not mean that the sanctions against the country are not working. Data from the European Statistical Office show that trade between Russia and the EU (imports from Russia as well as exports to Russia) has roughly halved. That is a significant blow to the Russian economy. The country has lost a significant part of its suppliers and outlets. Mainly due to the sanctions, the EU imported less oil, gas and steel from Russia. Russia itself also reduced the trade in gas to European countries.

The downturn in the Russian economy is being mitigated by sharply increased government spending and numerous fiscal incentives. The country also benefited last year from record revenues from energy exports, thanks to rising oil and gas prices. China, India and Turkey are now the main buyers of Russian oil. Some of this oil is resold in a roundabout way to sanctioning countries. Our research department expects production of Russian oil and oil products to be about -5% lower in 2023 compared to 2022. Russian gas revenues will also fall significantly. In early February 2023, the EU ban on Russian oil products came into effect. This is expected to further weaken domestic refinery production.

Another factor that played a role last year was the favourable exchange rate of the rouble (partly due to intervention by the Russian central bank, which raised interest rates from 9.5% to 20%). The rouble has now reached its lowest level since April last year. Our researchers believe that Russia is in for another difficult economic year. We base this on a forecasted contraction of -1%. As the war continues, so does economic uncertainty. Businesses continue to postpone investments and consumers keep their purse strings tight. We also expect Russian oil revenues to fall because of lower prices and export volumes.

How is Ukraine's economy doing? Last year was of course dramatic. Ukraine's economy contracted by -34% last year. Not only because of the Russian invasion, harvests were also smaller due to bad weather. According to our researchers, the free fall will end this year. We expect economic growth of around +1% in 2023. Of course, we must make some reservations about this because of the risk of war.

Inflation in Ukraine increased to an average of +26.6% last year due to the Russian invasion of the country, according to data from the Ukrainian statistics office. As a result, inflation was lower than expected, because an increase of up to +30% had been expected. In 2021, inflation was +10%. Both the slowdown in growth and inflation put considerable pressure on the country's budget. Ukraine's government deficit quadrupled last year. The Ukrainian currency (hryvnia) has also lost a fifth of its value against the dollar.

While the war is still in full swing, work must already be done on reconstruction, according to our research department. This recovery work is necessary to strengthen the socio-economic resilience of the country. The war undermines the country, not only through human suffering, but also through the destruction of infrastructure. Production processes are disrupted and trade flows shift. We estimate that reconstruction costs for Ukraine could amount to €1 trillion in the next 10 years. Ukraine cannot afford that itself. The costs of the reconstruction of the country are largely borne by Western countries (governments and also private investors). Even though the Russian war of aggression continues and much damage will still be done, the most important building blocks of this international effort will have to be designed now.
The emphasis of the recovery work will have to be on investments in infrastructure, health services, housing, schools and digital accessibility. This gives the country a future again and may make Ukrainian refugees decide to return home. Logistic and trade connections with Europe will also have to be restored and improved. Because Western countries take the lead in reconstruction, the interest of private investors to invest in the reconstruction of the country will also increase.

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