KYIV, Ukraine — Two months of relentless missile and drone attacks by Russia have decimated Ukraine’s critical infrastructure and blown a hole in projections for the country’s war-ravaged economy.
Economy
Russia is destroying Ukraine’s economy, raising costs for U.S. and allies
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Before those strikes, Kyiv expected to need at least $55 billion in foreign assistance next year to meet basic expenses — more than the country’s entire annual prewar spending.
Now, with its energy systems severely battered, and more Russian attacks likely, some officials believe Ukraine could end up needing another $2 billion a month, and political leaders have begun trying to brace Western supporters for such worst-case scenarios.
“What do you do when you can’t heat your house, you can’t run your shops, factories or plants, and your economy is not working?” said Oleg Ustenko, an economic adviser to President Volodymyr Zelensky. “We are going to be requiring more financial assistance, and Putin is doing this to destroy unity among allies.”
At a closed-door meeting last week at the National Bank of Ukraine, which now has a military checkpoint just outside its headquarters, central bank officials pondered what might happen if Russia’s attacks intensify. People could flee Ukraine in droves, taking their money with them, potentially crashing the national currency as they seek to exchange their Ukrainian hryvnia for euros or dollars.
The Ukrainian government could be left without international reserves to pay for critical imports and unable to meet its foreign debt obligations — a doomsday scenario known as a balance-of-payments crisis.
One dire scenario predicted that Ukraine’s economy could contract by another 5 percent next year, on top of the 33 percent contraction this year, according to a person familiar with the bankers’ report who spoke on the condition of anonymity because it was not public.
Ukrainian Prime Minister Denys Shmyhal, at an international donor conference in Paris on Tuesday, said the contraction next year could reach 9 percent depending on the severity of continued Russian attacks.
As Russian President Vladimir Putin persists with his 10-month-old war, Ukraine’s survival hinges as much on outside economic aid as on donated weapons, and Putin now seems intent on making such help so costly that Kyiv’s Western backers give up.
Before the infrastructure attacks began on Oct. 10, Ukrainian officials were optimistic that Western financial aid would allow them to close most, if not all, of their enormous budget gap in 2023.
The European Union and United States collectively have pledged to send more than $30 billion to Ukraine next year, though not all of that money is formally approved. On Thursday, the E.U.’s 27 heads of state and government, meeting in Brussels, agreed to provide 18 billion euros, or just over $19 billion, in loans to Ukraine next year.
Some aid promised for this year was slow to materialize, forcing Kyiv to print money and devalue its currency to ensure its economy remained competitive, contributing to a spike in inflation of more than 20 percent.
But this help, even if it does come through, is intended only to keep the country afloat day-to-day. It doesn’t remotely begin to address the hundreds of billions in damage wrought by the war.
Russia’s invasion has destroyed hospitals, ports, fields, bridges and other parts of the country’s critical infrastructure. Agricultural exports have been decimated, despite an international accord to maintain some grain shipments. Huge swaths of Ukrainian industry are now in occupied territory. As much as one-third of the country’s forests have been destroyed.
In September, United Nations officials estimated that nearly 18 million Ukrainians needed humanitarian aid. With the country on the brink of a financial cliff, some advisers to Zelensky in recent weeks weighed asking Western governments to finance direct cash payments to Ukrainian citizens, according to two people familiar with the internal talks.
Now, with energy systems decimated, Kyiv and its partners face a head-splitting challenge. Key pillars of the economy — coal mining, industrial manufacturing, information technology — cannot function without electricity or internet service. The World Bank has warned that poverty could explode tenfold. Unemployment, already close to 30 percent, is likely to climb further.
“In case of full blackouts for longer periods, we will definitely need to get more resources to avoid humanitarian catastrophe,” Sergiy Nikolaychuk, Ukraine’s deputy central bank governor, who attended last week’s meeting, said in an interview.
The dire assessments reflect something Ukrainian officials and their Western supporters do not like to admit aloud: The Kremlin has made Ukraine’s economy a pivotal theater of the war — one in which Moscow is arguably having far more success than on the front lines, where its troops have struggled.
“How does an economy function at all — while supporting the war effort — with this level of damage to civilian infrastructure? I don’t think we’ve ever seen this,” said Simon Johnson, an economist at MIT who is in communication with Ukrainian officials. “I can’t think of any economy that’s ever tried to do this.”
Life without power
Blackouts take up roughly half the workday. Valentyn Nyzkovolosov, co-owner of the Salt and Pepper catering service in Kyiv, and his partner, Andrii Boyarskyy, have their staff arrive at 5 a.m. — as early as possible under the wartime curfew in Kyiv. When the power goes out after sunset — before 4 p.m. these days — employees work with flashlights.
When Washington Post journalists arrived at Nyzkovolosov’s business recently, there was no electricity. Moments later, air raid sirens sounded and Salt and Pepper’s staff descended into a cramped cellar that serves as a bomb shelter. “This is the best example of the conditions that we work under,” Nyzkovolosov said. During a previous alert, a few weeks earlier, explosions were heard nearby, employees said.
Ukrainians are adamant that Russia’s missile attacks will not break their fighting spirit. But businesses and workers are struggling to adapt. For many, it is impossible to function without electricity.
Mining and manufacturing — which make up roughly one-fifth of Ukraine’s economy — are among the hardest-hit sectors. Two of the country’s biggest steel plants, located in the industrial southeast, shut down last month because of blackouts. Dozens of coal miners had to be rescued after a power failure trapped them underground.
“For large industrial and metallurgical plants, these blackouts are very dangerous,” said Dennis Sakva, an energy analyst at Dragon Capital, a Ukrainian investment firm, which recently downgraded its economic forecast for 2023 to a 6 percent contraction in economic output from 5 percent growth.
“If you’re in the middle of a technical complicated process with high temperatures and have a power outage, it can cause all sorts of problems,” Sakya said.
Ongoing internet outages could also wreak financial havoc. Information technology, for example, has emerged as a pillar of Ukraine’s economy, and was the only sector to have grown over the past year, said Mykhailo Fedorov, a vice prime minister who oversees digital transformation.
Yet due mainly to the recent attacks, the internet connectivity rate is down to 35 percent of its prewar level. Ukrainians are importing Starlink terminals for internet via satellite, but there are unlikely to be enough to manage widespread outages. And the internet disruptions impair not just the IT sector but basic public and private financial services, such as pension payments, mobile banking, tax collection and digital sales.
The biggest economic threat, however, is not a loss of connectivity but a loss of people. A lack of heat and water service during winter could set off a mass population exodus. Kyiv has already warned residents to be prepared to leave if its heat goes offline amid freezing temperatures. In that scenario, the city would have no choice but to cut off water to prevent pipes from freezing and rupturing.
In the southern cities of Mykolaiv and Kherson, authorities are urging citizens to evacuate, warning of a lack of critical services during winter. European countries are already sheltering millions of war refugees, and experts warn of a new crisis.
“You need to have a place to evacuate so many people,” Sakva, the Dragon analyst, said. “When the number of affected residents is in millions or the tens of millions, that’s a very hard question. I’m not sure anyone has a clear answer to it.”
Pressure on Kyiv and its supporters
Ukrainian Finance Minister Sergii Marchenko was already in the midst of asking Treasury Secretary Janet L. Yellen for billions in aid when he first alerted her to Russia’s bombing of infrastructure.
At the time, on Oct. 16, it appeared that the United States and Europe could help stave off an economic disaster in Ukraine. The Biden administration was helping to close a significant portion of Ukraine’s budget deficit. The E.U., while behind on pledges, was also providing aid.
Dominated by oligarchs and perennially in need of bailouts, Ukraine was a financial mess long before Russia’s invasion. Full-blown war sent its economy into a tailspin.
After Ukraine halted Russia’s assault on Kyiv last spring, the immediate emergency stabilized. By summer, Western officials had even started talking about forcing Russia to pay for postwar reconstruction, which the World Bank estimated would cost $350 billion. Ukrainian officials talked up a modern-day “Marshall Plan” that would also forge closer economic ties to the West.
When he met Yellen in October, Marchenko warned that the energy attacks could unravel previous calculations, but he had no idea how bad things would get. “Even at that week, we couldn’t estimate how far Russia could reach to destroy our energy infrastructure,” Marchenko recalled in an interview at the Finance Ministry on Monday, shortly after he and his team took cover in a parking lot amid another air raid siren.
The Zelensky and Biden administrations were already on edge about the rhetoric from U.S. Republicans who won a slim majority in the House, including the potential future speaker, Kevin McCarthy (R-Calif.), who warned that there would be no “blank check” for Ukraine.
As the humanitarian needs grow, Ukrainian economic officials have sounded out Western officials about the potential for an income support program to provide roughly $50 per person per month — at a cost of $12 billion over six months, one person familiar with the matter said.
They found a cool reception, however, from Western officials who were already wary of appearing to support too much aid for Ukraine, the person said.
After the energy attacks, some experts argue the West may be doing too little, not too much.
“We’re already giving them just enough to avoid hyperinflation,” said Jacob Kirkegaard, a senior fellow at the German Marshall Fund of the United States. “But there’s clearly a risk of a more serious economic contraction, and the only way to stop that will be to provide more financial assistance.” But, Kierkegaard added, “I don’t know if the will is there.”
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The ‘poor borrower’ narrative rules in media coverage of the Bank of Canada and high interest rates, and that’s appropriate.
A lot of people have been financially slammed by the rate hikes of the past couple of years, which have made it much more expensive to carry a mortgage, lines of credit and other borrowing. The latest from the Bank of Canada suggests rate cuts will come as soon as this summer, which on the whole would be a welcome development. It’s not just borrowers who need relief – the boarder economy has slowed to a crawl because of high borrowing costs.
But high rates are also a big win for some people. Specifically, those who have little or no debt and who have a significant amount of money sitting in savings products and guaranteed investment certificates. The country’s most well-off people, in other words.
Lower rates will mean diminished returns for savers and less interest paid by borrowers. It’s a stretch to say lower rates will improve financial inequality, but they do add a little more fairness to our financial system.
Wealth inequality is often presented as the chasm between well-off people able to pay for houses, vehicles, trips and high-end restaurant meals and those who are driving record use of food banks and living in tent cities. High interest rates and inflation have given us more nuance in wealth inequality. People fortunate enough to have bought houses in recent years are staggering as they try to manage mortgage payments that have risen by hundreds of dollars a month. You can see their struggles in rising numbers of late payments and debt defaults.
Rates are expected to fall in a measured, gradual way, which means their impact on financial inequality won’t be an instant gamechanger. But if the Bank of Canada cuts 0.25 of a percentage point off the overnight rate in June and again in July, many borrowers will start noticing how much less interest they’re paying, and savers will find themselves earning less.
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AS INDIA GOES to the polls, Narendra Modi, the prime minister, can boast that the world’s largest election is taking place in its fastest-growing major economy. India’s GDP, at $3.5trn, is now the fifth biggest in the world—larger than that of Britain, its former colonial ruler. The government is investing heavily in roads, railways, ports, energy and digital infrastructure. Many multinational companies, pursuing a “China plus one” strategy to diversify their supply chains, are eyeing India as the unnamed “one”. This economic momentum will surely help Mr Modi win a third term. By the time he finishes it in another five years or so, India’s GDP might reach $6trn, according to some independent forecasts, making it the third-biggest economy in the world.
But India is prone to premature triumphalism. It has enjoyed such moments of optimism in the past and squandered them. Its economic record, like many of its roads, is marked by potholes. Its people remain woefully underemployed. Although its population recently overtook China’s, its labour force is only 76% the size. (The percentage of women taking part in the workforce is about the same as in Saudi Arabia.) Investment by private firms is still a smaller share of GDP than it was before the global financial crisis of 2008. When Mr Modi took office, India’s income per person was only a fifth of China’s (at market exchange rates). It remains the same fraction today. These six books help to chart India’s circuitous economic journey and assess Mr Modi’s mixed economic record.
Breaking the Mould: Reimagining India’s Economic Future. By Raghuram Rajan and Rohit Lamba. Penguin Business; 336 pages; $49.99
Before Mr Modi came to office, India was an unhappy member of the “fragile five” group of emerging markets. Its escape from this club owes a lot to Raghuram Rajan, who led the country’s central bank from 2013 to 2016. In this book he and Mr Lamba of Pennsylvania State University express impatience with warring narratives of “unmitigated” optimism and pessimism about India’s economy. They make the provocative argument that India should not aspire to be a manufacturing powerhouse like China (a “faux China” as they put it), both because India is inherently different and because the world has changed. India’s land is harder to expropriate and its labour harder to exploit. Technological advances have also made services easier to export and manufacturing a less plentiful source of jobs. Their book is sprinkled with pen portraits of the kind of industries they believe can prosper in India, including chip design, remote education—and well-packaged idli batter. Both authors regret India’s turn towards tub-thumping majoritarianism, which they think will ultimately inhibit its creativity and hence its economic prospects. Nonetheless this is a work of mitigated optimism.
New India: Reclaiming the Lost Glory. By Arvind Panagariya. Oxford University Press; 288 pages
This book provides a useful foil for “Breaking the Mould”. Arvind Panagariya took leave from Columbia University to serve as the head of a government think-tank set up by Mr Modi to replace the old Planning Commission. The author is ungrudging in his praise for the prime minister and unsparing in his disdain for the Congress-led government he swept aside. Mr Panagariya also retains faith in the potential of labour-intensive manufacturing to create the jobs India so desperately needs. The country, he argues in a phrase borrowed from Mao’s China, must walk on two legs—manufacturing and services. To do that, it should streamline its labour laws, keep the rupee competitive and rationalise tariffs at 7% or so. The book adds a “miscellany” of other reforms (including raising the inflation target, auctioning unused government land and removing price floors for crops) that would keep Mr Modi busy no matter how long he stays in office.
The Lost Decade 2008-18: How India’s Growth Story Devolved into Growth without a Story. By Puja Mehra. Ebury Press; 360 pages; $21
Both Mr Rajan and Mr Panagariya make an appearance in this well-reported account of India’s economic policymaking from 2008 to 2018. Ms Mehra, a financial journalist, describes the corruption and misjudgments of the previous government and the disappointments of Mr Modi’s first term. The prime minister was exquisitely attentive to political threats but complacent about more imminent economic dangers. His government was, for example, slow to stump up the money required by India’s public-sector banks after Mr Rajan and others exposed the true scale of their bad loans to India’s corporate titans. One civil servant recounts long, dull meetings in which Mr Modi monitored his piecemeal welfare schemes, even as deeper reforms languished. “The only thing to do was to polish off all the peanuts and chana.”
The Billionaire Raj: A Journey Through India’s New Gilded Age. By James Crabtree. Oneworld Publications; 416 pages; $7.97
For a closer look at those corporate titans, turn to the “Billionaire Raj” by James Crabtree, formerly of the Financial Times. The prologue describes the mysterious late-night crash of an Aston Martin supercar, registered to a subsidiary of Reliance, a conglomerate owned by Mukesh Ambani, India’s richest man. Rumours swirl about who was behind the wheel, even after an employee turns himself in. The police tell Mr Crabtree that the car has been impounded for tests. But he spots it abandoned on the kerb outside the police station, hidden under a plastic sheet. It was still there months later. Mr Crabtree goes on to lift the covers on the achievements, follies and influence of India’s other “Bollygarchs”. They include Vijay Mallya, the former owner of Kingfisher beer and airlines. Once known as the King of Good Times, he moved to Britain from where he faces extradition for financial crimes. Mr Crabtree meets him in drizzly London, where the chastened hedonist is only “modestly late” for the interview. Only once do the author’s journalistic instincts fail him. He receives an invitation to the wedding of the son of Gautam Adani. The controversial billionaire is known for his close proximity to Mr Modi and his equally close acquaintance with jaw-dropping levels of debt. The bash might have warranted its own chapter in this book. But Mr Crabtree, unaccustomed to wedding invitations from strangers, declines to attend.
Unequal: Why India Lags Behind its Neighbours. By Swati Narayan. Context; 370 pages; $35.99
Far from the bling of the Bollygarchs or the ministries of Delhi, Swati Narayan’s book draw son her sociological fieldwork in the villages of India’s south and its borderlands with Bangladesh and Nepal. She tackles “the South Asian enigma”: why have some of India’s poorer neighbours (and some of its southern states) surpassed India’s heartland on so many social indicators, including health, education, nutrition and sanitation. Girls in Bangladesh have a longer life expectancy than in India, and fewer of them will be underweight for their age. Her argument is illustrated with a grab-bag of statistics and compelling vignettes: from abandoned clinics in Bihar, birthing centres in Nepal, and well-appointed child-care centres in the southern state of Kerala. In a Bangladeshi border village, farmers laugh at their Indian neighbours who still defecate in the fields. She details the cruel divisions of caste, class, religion and gender that still oppress so many people in India and undermine the common purpose that social progress requires.
How British Rule Changed India’s Economy: The Paradox of the Raj. By Tirthankar Roy. Springer International; 159 pages; $69.99
Many commentators describe the British Empire as a relentless machine for draining India’s wealth. But that may give it too much credit. The Raj was surprisingly small, makeshift and often ineffectual. It relied too heavily on land for its revenues, which rarely exceeded 7% of GDP, points out Tirthankar Roy of the London School of Economics. It spent more on infrastructure and less on luxuries than the Mughal empire that preceded it. But it neglected health care and education. India’s GDP per person barely grew from 1914 to 1947. Mr Roy reveals the great divergence within India that is masked by that damning average. Britain’s “merchant Empire”, committed to globalisation, was good for coastal commerce, but left the countryside poor and stagnant. Unfortunately, for the rural masses, moving from rural areas to the city was never easy. Indeed, some of the social barriers to mobility that Mr Roy lists in this book about India’s economic past still loom large in books about its future.
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