Ukraine economy to contract 46% amid devastating impact of Russian invasion

The Ukrainian economy will contract by 46.5 per cent this year amid the human casualties and the destruction of infrastructure caused by the Russian invasion.

The bleak assessment, contained in a report by the Economist Intelligence Unit, also suggests Ukraine’s gross domestic product (GDP) will not recover to pre-war levels for more than a decade and probably not until the late 2030s.

While the situation remains fluid and subject to uncertainty, the economic consequences are already very serious with sea ports and airports closed and damaged while many roads and bridges have already been destroyed.

Ukraine has already requested emergency financing of $1.4 billion under the IMF's Rapid Financing Instrument.

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The EIU’s report forecasts the Russian economy will contract by 10 per cent this year.

“Sanctions have made the rouble plunge, fuelling inflation and weighing on households’ purchasing power,” it said.

“ Investment will sink amid huge capital outflows and plunging confidence. Declining oil exports, caused by some traders avoiding Russian oil and some countries imposing a ban on Russian energy imports, will further depress growth,” it said.

While Russia will seek China's support, this will only partly compensate for the departure of Western firms, the EIU said.

Russian president Vladamir Putin upped the ante last week by insisting Russia would only accept payments in roubles for natural gas deliveries to "unfriendly countries", which includes all European Union members.

The move appeared designed to prop up the rouble and but has been rejected by Western countries, leading to a stand-off.

Economic fallout

In its report, the EIU said European economies were the most exposed to the fallout from war in Ukraine.

“For now, the negative effects of sanctions on the EU will be limited, as those sanctions that have been imposed do not target oil and gas imports from Russia,” it said.

“However, the spike in global commodities prices (not only for hydrocarbons, but also for metals and grains) will add to already high inflation and supply-chain disruptions, weighing on the post-coronavirus recovery,” it said.

The think tank revised its forecast for growth in the euro zone sharply downwards for 2022, to about 3.3 per cent (from 4 per cent previously).

"This revision stems from our expectation that the supply and energy shock stemming from the war in Ukraine will shave nearly 1 percentage point from growth in Germany (0.8 percentage points), France (0.7 percentage points) and Italy (1 percentage point)," it said.

In North America, it said the impact of war in Ukraine will mostly stem from a rise in commodities prices.

Higher inflation will dent the purchasing power of households and prompt the US Federal Reserve – the US central bank – to tighten monetary policy aggressively, it said.