Home Finance The Impact of the War on Ukraine and the Possibilities That Lie Beyond

The Impact of the War on Ukraine and the Possibilities That Lie Beyond

by internationalbanker

By Jürgen Rigterink, First Vice-President and Head of Client Services Group, European Bank for Reconstruction and Development (EBRD)




The war in Ukraine that began when Russia invaded on February 24, 2022, is radically altering the way the economies in the region and around the world will develop over the next year or two.

Inside Ukraine itself, the impact has been devastating. The cost of the damage to infrastructure around the country is already estimated at US$60-80 billion. While the banking sector remains resilient thanks to the good work of the National Bank of Ukraine (NBU), some 85 percent of businesses have been affected by the war, and between 35 and 50 percent have had to close. This has been accompanied by the greatest forced displacement of people since the Second World War. By the beginning of April, more than seven million people had been displaced within Ukraine alone. The terrible human cost of this war has a financial cost. Tax revenue has plummeted, leading to an unsustainable budget deficit. By April, Ukraine’s fiscal gap was in the range of US$4-6 billion per month, or about 4 percent of its gross domestic product (GDP). The worsening fiscal situation is accompanied by a substantial external deficit, covered in the short term by lending from international financial institutions. Estimates of the likely contraction of the economy throughout 2022 vary with assumptions regarding the length of the conflict. The EBRD’s Regional Economic Prospects estimates a decline in GDP of around 30 percent in 2022, while the International Monetary Fund (IMF) projects a 35-percent contraction in the event of a protracted conflict.

Beyond Ukraine’s borders, more than four million Ukrainians had sought refuge in neighbouring countries by the beginning of April. The refugee influx is challenging authorities in the most affected countries as they rush to scale up essential services, such as housing and healthcare. These neighbouring countries are also particularly exposed to rising prices in the regional gas market, which have pushed inflation up to double-digit levels in some countries. With Russia as a leading gas supplier in Central and Eastern Europe, concerns about energy security and the need to diversify supply have also increased sharply. And, since economies in Central Europe are closely integrated with Ukraine through manufacturing supply chains, the war has seen several car factories in affected countries reduce production in the face of supply disruptions.

More broadly still, the Russian invasion of Ukraine has led to the greatest negative supply shock to the global economy in the past half-century. Russia and Ukraine supply a disproportionately high share of the world’s commodities. As a result, the prices of food, hydrocarbons and metals have increased sharply in anticipation of reduced supply. In addition, supply chains in industries as varied as aircraft manufacturing, meat production and batteries have been disrupted, fuelling already rising inflation regionally and globally.

These impacts have been felt particularly strongly in the (Central, Eastern and Southeast European; Central Asian; North African) regions where the EBRD works, even in those not directly affected by refugee movements. Although commodity-exporting countries benefit from higher prices, most EBRD countries are negatively affected. In general, household spending on utilities and food is higher in these countries than in more advanced economies, leading to significant economic and social impacts, particularly in Central Asia and North Africa. These countries also tend to be highly dependent on Russian and Belarusian raw materials and, in many cases, on Russia as a significant export market (notably those nations in the Caucasus and the Baltics). Russian tourist spending is important in many countries—whether in Southeast Europe’s Bulgaria and Croatia or the Caucasus and Turkey—and remittances from Russia add up to 5-30 percent of GDP in Armenia, the Kyrgyz Republic, Tajikistan and Uzbekistan.

As markets have started reassessing geopolitical risks, pressures have grown on the currencies of some EBRD countries—including the Caucasus, parts of Central Asia and beyond—while bond yields and, hence, borrowing costs have risen. The implications of war are well illustrated by the rising yields on Egypt’s dollar-denominated government bonds, reflecting the vulnerability of the Egyptian economy to steeply rising food and energy prices.

The war in Ukraine is reshaping the economic geography of the EBRD’s regions.

The need to address and mitigate these changes goes right to the heart of our work at the European Bank for Reconstruction and Development. The EBRD was set up three decades ago to deal with a crisis of similar magnitude—the collapse of communism—by fostering the development of the private sector across the eastern side of Europe. It has since turned its skills in transition to nimble handling of subsequent major issues for its growing roster of countries of operations, including the financial crisis of 2008-09, the fallout of the Arab Spring of 2011 and the green economic transition. The war in Ukraine now brings us back to our core territory and our core expertise.

Ukraine is a key territory for us—one of the three biggest partners of the EBRD (along with Turkey and Egypt)—with economic importance that stretches far beyond its own borders, as its grain exports play a key role in feeding the world. We stand by Ukraine and its neighbours in these challenging times, with the perspective of also supporting the country’s reconstruction as soon as conditions allow.

International financial institutions are working together to alleviate the difficulties Ukraine faces. Some, such as the World Bank (WB) and the International Monetary Fund (IMF), provide budget finance directly to the Ukrainian government. The EBRD occupies a distinctive place in the international financial and development system, reflecting its mandate and business model, characterised by its deep local knowledge and presence on the ground. The EBRD’s mandate to support the private sector does not allow it to provide budget support. Its complementary skill set supports the real economy and vital infrastructure in the short term, which is crucial to avoid the collapse of the Ukrainian economy and to support economic activity and livelihoods. Our job is to finance projects and companies.

How we – and our shareholders and/or donors who support us in this effort – do this, even in this acute phase of hostilities, is first to take a constructive approach to forbearance with clients in the private and sub-sovereign sectors, and second, to focus on five areas we have identified as crucial to the economy.

A leading priority for us is to keep trade going for companies still operating through trade facilitation and trade financing. This is for both essential goods and food and agricultural goods. The maximum risk allowed to be taken in Ukraine under our Trade Facilitation Programme has been raised by around 40 percent to €330 million, permitting the EBRD to support at least €500 million of export and import transactions by Ukrainian companies via 10 EBRD partner banks on an annual basis.

To provide energy security in both gas and electric power, allowing the lights and heating to stay on—vital preconditions for the economy to function—we are looking at providing liquidity to the Ukrainian electricity company Ukrenergo. And we are supporting plans by the gas entity, Naftogaz, hit by the loss of imports from Russia, to buy emergency supplies from EU (European Union)-based gas traders that will ensure there is enough gas in the system for next autumn’s heating season. The replenishing of gas stocks must start in the spring to avoid serious consequences in the autumn.

We are also working to support vital infrastructure. With the current blockade of the ports along Ukraine’s southern coast, for instance, it is crucial that the railway company keeps operating because it has an indispensable role in the movement of people and freight.

It is equally vital to support the entire agribusiness value chain—particularly primary farming now that the spring sowing campaign is ending and harvest will come between and October – but also by facilitating the export of foodstuffs and retail of food. Our enhanced Trade Facilitation Programme (TFP) is part of this, and a dedicated food-security package is also currently being finalised.

Finally, we are supporting the pharmaceutical supply chain and the provision of medical supplies that are, unfortunately, indispensable now by working with local producers.

These crucial needs are very much interrelated. Consider, for instance, the needs in the agricultural sector, where a huge amount of grain stored in Ukraine cannot be exported at the moment because of logistical issues. Most used to be exported through the ports, which is not currently possible as they are under blockade. That creates an enormous burden on railway infrastructure. Therefore, there is a need to support rail transport as part of the assistance to the agricultural sector. In the same way, it is impossible to keep the economy going without gas and power, and, therefore, energy security becomes pre-eminent.

With this in mind, in March, the EBRD’s board of directors approved an initial €2-billion resilience package covering Ukraine and its affected neighbouring countries. Once conditions permit, the bank stands ready to work on the country’s reconstruction. While we are currently focusing our activities on the five areas that we have identified—trade, energy security, vital infrastructure, agribusiness and food security, and pharmaceuticals and medical supplies—these efforts are coupled with significant activity in policy engagement to support reforms, which has been a long-term element in our work in Ukraine.

Initiatives such as the Ukraine Reforms Architecture (URA) project, born in 2016 to put reform experts into government ministries to help Ukraine fulfil its aspirations, and the Business Ombudsman Council (BOC) have, since the war began, channelled their efforts into providing for more immediate needs. These include humanitarian aid, support for the relocation of companies within the country, facilitation of imports and exports, support for internally displaced persons and defining the country’s reconstruction plans after the conflict.

Likewise, at Chernobyl, which saw the world’s worst nuclear accident in 1986, the EBRD has managed the international funds that have financed the effort to make the site safe since the mid-1990s and is now in talks to ensure the site is secure after Russian tanks briefly entered the area early in the war. In April, the bank participated in the first meeting of the International Chernobyl Cooperation Account since the start of the war, during which the assembly requested that Ukrainian authorities and the EBRD identify priority reconstruction projects before a high-level assembly meets in June to consider donor pledges to fund them.

In Ukraine and neighbouring affected countries, the EBRD continues to operate based on three principles. One is sound banking. The second is that we still need to help the economies where we operate move towards better governance and more inclusive, integrated and greener economies, a principle we follow even in this context. Thirdly, our work needs to be supplementary to that of the private sector, which, unfortunately, is very limited in the current conditions.

In today’s very difficult circumstances, the Ukrainian people and leadership are showing incredible resilience, composure and strength, all of which will play a significant role once the most acute phase of the conflict is over. The authorities’ longer-term aims are EU accession and acceleration of the country’s reform. Reconstruction, when it comes to that, will be a steep learning curve for all of us. Yet, in the EBRD’s interactions with the country’s leaders, I see strong determination, clear vision and structured approaches to the new post-conflict Ukraine, which makes me optimistic that we will get there.



Jürgen Rigterink is First Vice President and Head of the Client Services Group at the European Bank for Reconstruction and Development. Prior to joining the EBRD in 2018, Rigterink was the Chief Executive Officer and Chairman of the Management Board of FMO, the Dutch development bank.


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