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Threat of the Russia’s military invasion has become the major risk for the Ukrainian economy


Olga Pindyuk is Economist at the Vienna Institute for International Economic Studies. Her research focuses on foreign trade, in particular trade in services, and financial markets. She is also country expert for Ukraine and the Commonwealth of Independent States (CIS). She has extensive experience with services trade data and does research on modelling trade costs in services trade and on linkages between producer services trade and manufacturing. Previously, she worked as a consultant with the World Bank (Ukraine office) and the DFID Ukraine Trade Policy Project.


What do you think about the escalating situation in Ukraine?

Ukraine's economy would suffer significantly from a military conflict. It has already been affected by the threat of an invasion. Hryvnia has depreciated, while the risk premiums for government and other securities on capital markets have risen. Suppose military intervention by Russia does take place. In that case, its impact on economic activity will be regionally differentiated with Western parts of the country, located further away from military activity, being less affected. However, the possible destruction of key parts of the country's infrastructure would have repercussions for the whole economy. Ukraine might lose access to its main ports around Odesa, which handle almost half of its exports and imports. If a part of the transit pipelines infrastructure is damaged, it will cause significant interruptions of energy supplies to a large part of the country.

Though the economic linkages between Ukraine and Russia got drastically reduced in the aftermath of 2014 events, rising energy prices due to the sanctions will strongly affect the economy, as energy bills account for a substantial share of household expenditures and the country has limited fiscal space to shield households from price spikes. The conflict also severely affects private investment activity and interrupts foreign direct investment inflows. The country will need solid Western support to ensure macro-financial stability. The EU and the International Monetary Fund have promised billions in new aid, and more will be needed.


Has the West done enough to support Ukraine's economic development? Is there more that can be done?

Ukraine has not been offered a prospect of EU membership, a very strong policy anchor, which greatly benefitted many Central and Eastern Europe countries. The second-best policy anchors, such as the EU-Ukraine Association Agreement and cooperation with the IMF, have still supported the reform process, though not as effective as a promise of EU accession.


Has the Ukrainian government moved the Ukrainian economy in a positive direction since 2019?

As the whole world, Ukraine has had to deal with the COVID-19 pandemic. Thus, the last two years were more about rescuing efforts rather than focusing on the long-term development goals. Ukraine has much more limited fiscal space than affluent developed economies to offset adverse shocks of the pandemic on households and businesses. Despite the significant economic disruptions, relative macro-financial stability could be seen as an achievement by the National Bank of Ukraine. Still, the government could have done more in the reforms progress. In particular, the lack of judicial reform remains one of the main roadblocks to uprooting corruption and creates the biggest obstacles to business.


What should Ukraine do to strengthen its economic development and sovereignty?

If we put aside the threat of the military escalation by Russia, Ukraine would need to significantly improve its investment climate to assure acceleration of economic growth and catching up with its Western neighbors in terms of welfare levels. The economy's medium-term prospects depend primarily on substantial investment in new technologies and the government's ability to advance digitalization. To achieve this, it will be crucial for the government to continue with its comprehensive reform agenda, especially to overcome the high levels of corruption and the vast influence of vested interests.

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