The Russian invasion devastated Ukraine's economy by almost 30%, but it began to recover as early as 2023. The country's authorities, its partners, and experts expected that in 2023 the economy would at best stop declining, but by the end of the year, the GDP grew by more than 5%. This was possible due to the efforts of the economic authorities and a combination of favourable circumstances. Allies and international organisations provided all the promised financial aid. The timely delivery of Western air defence systems protected the country’s energy infrastructure and allowed industrial enterprises to work for most of the year without interruption. Despite fears, Russia's withdrawal from the grain deal did not damage agricultural exports. And the National Bank of Ukraine has made significant progress in stabilising the hryvnia. All these factors together have somewhat reassured consumers: they have started to spend more and save less. But this year, experts and authorities predict that the recovery growth will slow down. Its continuation requires stability in receiving Western financial aid and European efforts to expand the access of Ukrainian products to European markets. In 2023, the Ukrainian economy has demonstrated adaptability to the conditions of a full-scale military conflict and now needs stimuli from external demand and investment.
Alongside the failure of the counteroffensive and the difficult situation on the front that had developed by spring, Ukraine also achieved some successes during the past year of the military campaign. These include, first and foremost, the ousting of the Russian fleet from Sevastopol, which had de facto lost control over the Black Sea, as well as the dramatic expansion and increased effectiveness of Ukrainian air attacks on Russian territory. In addition, an important and unexpected achievement of 2023 was the relative stabilisation of the Ukrainian economy.
In the first year of the Russian invasion, Ukraine's economy collapsed by almost 29%. At the beginning of 2023, it continued to shrink (-10.3% in the first quarter), but then began to recover. As a result, in 2023, Ukrainian GDP, according to the State Statistics Service of Ukraine, grew by 5.3% in real terms, which is significantly higher than the expectations of both the Ukrainian authorities and international experts. For example, at the beginning of the year, the National Bank of Ukraine expected GDP growth by 0.3%, and the International Monetary Fund (IMF) projected changes in the range from -3% to +1%. However, forecasts were revised several times throughout the year: by autumn, the IMF was already forecasting growth of 1-3%, and by the end of the year, growth was projected at 4.5%.
Vitaliy Vavrishchuk, the Head of the Department of Macroeconomic Research at the Investment Capital Ukraine (ICU) financial group, highlights several factors that led to the reversal of economic dynamics. First, at the beginning of 2023, it was unclear how much financial aid Ukraine would receive from its partners, but in the end, the Ukrainian Ministry of Finance attracted $42.5 billion (two thirds in the form of loans) — almost one and a half times more than planned. The EU ($19.7 billion), the US ($11 billion) and the IMF ($4.5 billion) allocated the most. Second, since the end of February 2023, power outages have mostly ceased. Thanks to the cover of allied air defence systems, industrial enterprises operated uninterrupted for most of the year. Third, Russia's withdrawal from the grain deal did not harm agricultural exports. Moreover, by the end of the year, according to Ukrainian authorities, the volume of shipments via the Black Sea exceeded the pre-war level. The front line remained almost static throughout the year: Ukraine did not achieve significant successes in its counteroffensive, but Russia did not make significant progress after it ended either. Finally, inflation, after jumping by 26.6% in 2022, rose by only 5.1% in 2023 and fell below 5% in early 2024. This allowed the National Bank to lower the discount rate to 14.5%. The hryvnia exchange rate has remained stable after devaluation by 25% in July 2022. Prior to October 2023, the National Bank supported it by selling foreign currency. The transition to a floating exchange rate did not cause a collapse, because by this time Ukraine's foreign exchange reserves had not declined, but increased thanks to international aid, as explained in a report by the European Parliament. In January, they were estimated at $38.5 billion, enough to cover more than five months of imports. All these factors combined reassured consumers somewhat. As a result, they began to consume more (by the end of the year, the growth of private consumption was estimated at 6.3%) and save less, fulfilling deferred demand. Consequently, to meet this demand, enterprises are increasing production.
In sectoral terms, the largest recovery growth, almost 25%, was demonstrated by the construction sector. The low base effect of the first year of the war, which experienced a 69% decline, played a role, but significant budget expenditures on rebuilding destroyed infrastructure also contributed to this growth, notes the National Bank. However, the share of the construction sector in GDP is relatively small at just over 1.5% (at constant 2021 prices). The largest contribution is made by the public sector (public administration and defence). This added 5.8% to GDP in 2023, after an explosive growth of 38% in 2022. As a result, its share of GDP soared from 6% to 22% during the first two years of the war. These are signs of a 'war economy', as is the accelerated growth of the steel sector and fabricated metal products. Trade and services (12.6% share of GDP) grew by 6.6%, while manufacturing as a whole (with a share of 8.2%) grew by 13.8%. Agriculture (with a share in GDP of 7.4%), thanks to an exceptionally successful harvest, grew by 7.6%. The main negative factor for economic dynamics was the decline in exports. In 2022, these collapsed by 42% (primarily due to the decline in metallurgy), and in 2023 they decreased by a further 5.4% (due to a pause in supplies caused by the termination of the grain deal). Additionally, declines continued in finance (-8.3%), extraction (-1.9%), and energy (-1.8%). However, the latter two sectors did begin to grow in the second half of the year.
In 2024, according to the National Bank's forecast, the Ukrainian economy may grow by 3.6%, while in 2025 and 2026, growth could reach 4-6%. The IMF shares similar expectations. But, at such rates, without external stimuli, the Ukrainian economy may only recover to pre-war levels by the early 2030s. This year, the main drivers of recovery are expected to be continued growth in private consumption and the restoration of exports (physical volumes at the beginning of the year approached pre-war levels), according to ICU analysts.
However, these forecasts are based on some important assumptions. First, that military hostilities should not intensify. Russian strikes on energy infrastructure, among other things, pose risks to the economy. Second, Ukraine should continue to receive international aid. In 2024 alone, it needs more than $37 billion to cover its budget deficit. At the same time, Finance Minister Serhiy Marchenko has said that the aid needs to come regularly at a level of around $3 billion a month. In January and February, Ukraine received only $1.2 billion, but in March the situation levelled off: the EU, Canada, Japan, the United Kingdom and the IMF allocated about $9 billion, as calculated by the Ukrainian Centre for Economic Strategy.
However, the most important resource for the recovery of the Ukrainian economy is to boost exports as part of its integration into European markets. Although accession to the EU will take many years and will require overcoming numerous challenges, Ukraine's integration into European markets must proceed at an accelerated pace — otherwise the task will be impossible. This will require a conscious strategy and efforts by the EU to overcome internal contradictions. Ukrainian products will compete with those of Central European manufacturers, who will oppose cheap Ukrainian supplies, as evidenced by the blockade of Ukrainian goods by Polish farmers. However, without a sufficient bonus from the integration process, Ukraine will not be able to progress in reforming its economy under war conditions. In 2023, the Ukrainian economy has shown adaptability to the conditions of a full-scale military conflict and now needs stimulus from external demand and investment.