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Ukraine’s economy, like its people, resists

But looming energy shortages are likely to provide the toughest test yet

December 6, 2024

7 min read

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December 6, 2024

By

7 min read

Since the Russian invasion of February 2022, Ukraine’s economy has faced extraordinary challenges, reshaping nearly every sector and testing the limits of resilience.

A sharp contraction in 2022 gave way to surprising growth in 2023, but the road ahead remains fraught with uncertainty. International aid, strategic adaptation, and the mobilisation of human resources have been pivotal.

Beyond immediate wartime needs, Ukraine’s focus is shifting towards reconstruction and modernisation, with the IT sector and digitalisation emerging as critical pillars.

The initial shock of the invasion saw Ukraine’s gross domestic product (GDP) shrink by an alarming 29.1 per cent in 2022. This contraction, one of the steepest in modern European history, was driven by disrupted supply chains, lost territories, and the destruction of key industrial and agricultural assets.

However, 2023 surprised many analysts. GDP expanded by 5.3 per cent, outpacing expectations. This rebound can be attributed to rapid adaptability within the private sector, targeted international financial aid, and concentrated efforts to restore critical infrastructure.

Businesses relocated from conflict zones to western regions, while international organisations provided funds to stabilise the financial system and support key industries.

According to the Vienna Institute for International Economic Studies (wiiw), however, growth is expected to slow in 2025 to 3.3 per cent, taking into account energy shortages and the decline in agricultural exports following this summer’s drought,

Economic activity is also been stifled by the continued tightening of the labour market, which has intensified on account of the military mobilisation, wiiw says.

The role of international aid

International support has been the backbone of Ukraine’s economic stabilisation since Russia’s invasion began. Western allies, led by the United States and the European Union, have collectively provided over 300 billion US dollars in aid since the start of the war, much of it directed towards military needs. Financial assistance has included grants, concessional loans, and investment guarantees.

It remains to be seen if US aid will continue at current levels once Donald Trump is sworn in as president in January, however. the EU, and international finance organisations may need to fill the breach.

Already, the International Finance Corporation (IFC) has launched a two billion US dollars Economic Resilience Action programme to bolster Ukraine’s private sector. Its investments in agriculture, finance, and telecommunications have created new lifelines for businesses to continue operations amidst the chaos.

Moreover, the G7’s recent decision to release a 50 billion US dollars loan, expected to be backed by interest from frozen Russian assets, underscores the long-term commitment to Ukraine’s recovery.

Sectoral winners and losers

Agriculture, once the backbone of Ukraine’s economy, has suffered considerably. Blockades at Black Sea ports, labour shortages, and destroyed farmlands have severely hampered the sector.

Exports of grains, traditionally a significant revenue stream, fell by 50 per cent compared to pre-war levels in 2022. Despite these setbacks, efforts to restore supply routes, particularly through alternative land corridors, have kept the sector from complete collapse and allowed it recover slightly.

Indeed, according to wiiw, agri-food products have become Ukraine’s main export sector: their share reached 63.1 per cent in January-July 2024. During that period, the sector’s exports recorded 7.6 per cent year-on-year growth in US dollars terms.

Industrial production, especially in steel and metals, has also faced severe disruption. Ukraine’s steel industry, traditionally among the largest in Europe, contracted by over 80 per cent in 2022 due to the occupation of key facilities. While a modest eight per cent growth was recorded in 2023, the sector’s recovery remains slow, hampered by energy shortages and infrastructure damage.

In contrast, retail and construction sectors have seen growth, particularly in western Ukraine. Businesses relocating from the east and increased demand for housing and commercial infrastructure have driven investments in these areas. New construction projects have also laid the groundwork for long-term economic resilience.

IT and digitalisation

One of Ukraine’s surprising success stories has been the IT sector. As physical infrastructure suffered, digital services thrived. Ukraine’s IT industry, which generated 7.3 billion US dollars in export revenues in 2023, has become a crucial pillar of economic stability.

Technology companies have rapidly adapted to the new reality, with many relocating to safer regions or operating entirely remotely.

Digitalisation has also played a transformative role. Initiatives like the government’s Diia platform, which allows citizens to access over 100 public services online, have streamlined administrative processes and improved efficiency. Digital-first approaches have not only reduced corruption but also attracted international investors eager to support modern, transparent governance systems.

Women driving economic resilience

With millions of Ukrainian men mobilised for military service, women have stepped into roles previously dominated by men.

This shift has been especially evident in agriculture, healthcare, and education, where women now form the majority of the workforce.

Female entrepreneurs have also risen to the challenge, establishing businesses that cater to wartime needs, from food processing to logistics.

Government programmes and international organisations have supported these transitions. For example, initiatives to provide microloans and training for female-led businesses have been instrumental in sustaining small-scale industries.

Women’s increasing economic participation represents a significant shift in societal norms and could have long-term implications for Ukraine’s post-war gender dynamics.

Fiscal challenges

To finance its wartime expenditures, Ukraine has relied heavily on foreign aid but has also implemented domestic fiscal measures.

In late 2024, the government introduced its first wartime tax hikes. The war tax on personal income rose from 1.5 per cent to five per cent, while taxes on banking profits increased to 50 per cent.

These measures aim to generate an additional 3.4 billion US dollars annually, which will be directed towards defense and critical infrastructure.

While necessary, these policies have raised concerns about the burden on citizens and businesses already strained by the war. Balancing immediate fiscal needs with long-term economic sustainability remains a delicate task.

Energy, Ukraine’s Achilles heel

Energy infrastructure has been a consistent target of Russian missile strikes, causing widespread power outages and increasing production costs.

To address these vulnerabilities, Ukraine has sought alternative energy sources, including renewables. The country has also received international support to repair damaged power plants and enhance energy security.

However, energy-intensive industries, such as steel and chemicals, continue to face significant challenges, limiting their recovery potential.

According to the International Energy Agency (IEA), this winter will be a crucial test of Ukraine’s energy resilience.

Intensified attacks over the summer and autumn have left Ukraine’s energy infrastructure in a very fragile state. Once temperatures begin to fall, it will become much more difficult to live and work with limited access to electricity and heat.

Home to roughly 70 per cent of the population, Ukraine’s urban centres are particularly vulnerable to unreliable electricity supply, given the strong concentration of high-rise buildings that need electricity for elevators and water pumps.

Oil-powered generators are a common winter sight on the streets of Kyiv and other cities, powering shops, restaurants, and cafes.

Reconstruction

Ukraine’s long-term reconstruction needs are immense, with estimates suggesting around 500 billion US dollars will be required over the next decade. The private sector is expected to play a central role, supported by international aid and investments.

The World Bank and the European Bank for Reconstruction and Development (EBRD) have already pledged substantial funds to kickstart reconstruction efforts.

Key priorities for reconstruction will include infrastructure (repairing roads, bridges, and housing in conflict-affected areas); Expanding renewable energy capacity to reduce dependence on fossil fuels; Building on the success of the IT sector to create a modern, tech-driven economy.

Deeper integration with the European Union is also likely to shape Ukraine’s future. EU accession talks have gained momentum, with economic reforms aligned to meet EU standards.

This process could unlock new opportunities for trade, investment, and institutional modernisation.

There’s hope for the future

Ukraine’s economy has weathered the storm of war with a resilience that few could have anticipated.

The adaptability of its citizens, the resourcefulness of its businesses, and the unwavering support of international allies have been crucial.

While challenges remain—energy shortages, fiscal strain, and regional inequalities—the foundations for recovery and growth are being laid. The coming years will determine whether Ukraine can not only rebuild but also reimagine itself as a modern, dynamic, and inclusive economy at the heart of Europe.

Marek Grzegorczyk

Marek Grzegorczyk

Marek Grzegorczyk is an analyst at Reinvantage.

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