Ukraine’s economy begins to recover as it adjusts to war

As Russian forces approached Kiev at the start of their invasion last year, staff at Zavertailo, a popular bakery in the Ukrainian capital, closed their shop and began preparing free salads for soldiers defending the city. Supplies dwindled as fighting raged in kyiv, and the bakery’s finances collapsed as managers continued to pay staff salaries.

“Business came to a complete standstill and no income was expected,” said Anna Zavertailo, founder of the bakery. “It took a lot of work to slowly restart business.”

But it was worth it. This spring, Zavertailo opened a second bakery in Kiev, driven by growing customer demand as life in the capital gradually adapted to wartime conditions and returned to some semblance of routine. “New opportunities opened up for us,” said Viktoriia Kolomiiets, COO of Zavertailo.

The bakery’s expansion is part of a broader, if modest, economic recovery in Ukraine. Although Ukraine’s economic output remains considerably lower than before the war, the economy contracted. by a third after Russia’s full-scale invasion last year — will grow about 3.5 percent this year, the World Bank predicts. The expansion is fueled by a rebound in domestic spending and supported by a steady flow of foreign financial aid.

Economists say it will take many years for Ukraine’s economy to return to pre-war levels, and forecasts in times of fierce fighting are sure to be uncertain. Huge challenges await us, including Expensive reconstruction of the country’s devastated cities.a government deficit that will continue to increase as the war drags on; and labor shortages caused by an exodus of Ukrainians fleeing the war and the mobilization of working-age citizens to fight it.

Still, local analysts and businesspeople say, a sense of resilience and relative stability has taken hold after nearly 20 months of war, improving confidence among consumers and investors.

“Ukraine’s economy is adapting to the war,” said Olena Bilan, chief economist at kyiv-based investment bank Dragon Capital. She added that people had gone from a “savings mode” to a situation where they now “feel more relaxed and start spending more.”

The World Bank estimated in a recent report that private consumption in Ukraine would grow by 5 percent this year, after contracting by more than a quarter last year. In cities like kyiv and Dnipro, which are far from the combat zone but remain under threat from Russian airstrikes, customers are returning to reopened restaurants and resuming their shopping.

“Today, most Ukrainians understand that the war can drag on and they need to continue living in these new circumstances,” said Andriy Cherukha, founder of Etnodim, which produces vyshyvankas, traditional Ukrainian embroidered shirts. He said sales at his store have tripled this year compared to last, driven in part by a rise in patriotism.

Ukrainians, Cherukha added, “continue to work and buy clothes and other items that may not be considered essential but are a way to maintain a sense of normality.”

Olga Kustenko, co-owner of the First Point Espresso Bar in kyiv’s trendy Podil neighborhood, said people needed routines to cope with the war. Customers have returned to her cafe, she said, because they are looking for a familiar place to spend time. She opened a second coffee shop this spring to meet growing demand.

The higher-than-expected spending has led financial institutions to improve their economic forecasts. Last week, the International Monetary Fund foretold that the country’s total output would rise 2 percent this year, somewhat less optimistic than the World Bank’s forecast but a significant improvement over the initial forecast of a 3 percent drop.

To be sure, Ukraine’s economy is growing from a low base, after the first year of the war devastated the country’s main economic assets. He azovstal steelworkswhich represented a fifth of Ukraine’s steel production, was destroyed in the fighting for Mariupol last year.

Growth rates can also be a poor indicator of a country’s economic health in times of war, as production is often inflated by military production, which is mandated by the government. Ukraine’s government has dedicated much of its budget to covering the army’s payroll and supporting weapons production.

But economists say Ukraine’s ability to adapt to various wartime challenges, such as keeping the electricity flowing Despite Moscow’s winter campaign against its energy infrastructure, it has helped put the economy on a stabilization path.

“We have not had an electricity shortage since mid-February,” said Ms. Bilan of Dragon Capital. “That was the first positive factor that boosted production.”

In another sign of resilience, Ukraine exported more than 110,000 megawatt-hours of electricity last montha record volume by 2023, produced mainly at the country’s nuclear plants, although it remains a fraction of the country’s electricity exports before Russia began attacking energy facilities.

Maria Repko, deputy director of the kyiv-based Center for Economic Strategy, noted that the opening of new trade routes The attempt to circumvent Moscow’s efforts to blockade the Black Sea also contributed to a rebound in agricultural exports, which made up the bulk of Ukraine’s income before the war.

The World Bank estimates that Ukraine’s overall exports will continue to decline this year before growing 15 percent next year and 30 percent in 2025, a potential economic lifeline if the war drags on.

Very similar to Russia, Ukraine’s economy is increasingly restructuring around the war. More than half of the Government spending next year.approximately 46 billion dollars will be dedicated to defense.

But with little tax revenue to finance this excessive spending, Ukraine’s budget deficit will reach 21 percent of the country’s total output next year, Prime Minister Denys Shmyhal said. said last week. He added that his government would need $42 billion in financial aid to cover this shortfall.

That sum may be difficult to obtain, since Support for Ukraine declines in the United States, by far kyiv’s largest financial backer, and while the world’s attention is diverted by the war between Israel and Gaza. “The situation seems really worrying,” Repko said.

Businesses in Ukraine are also facing labor shortages as men are drafted into the military and as a result of the exodus of refugees after the Russian invasion last year. More than six million Ukrainians (nearly 15 percent of the pre-war population) remain outside the country, and nearly a quarter of them are unsure whether they will return once the war ends, according to a study. recent United Nations survey.

At his bakery, Zavertailo said he was struggling to hire more staff, but that months of war had taught him how to turn problems into opportunities.

Last year, the bakery asked its customers to fund free coffee for soldiers, a way to support Ukraine’s fight while reviving its business. The program raised more than $40,000.

“We came up with several solutions that helped us stay afloat,” Ms. Zavertailo said, “providing us with the potential for further growth.”

Daria Mitiuk contributed with reports.