Ukraine Country Report Jun23 - June, 2023

June 8, 2023

The ongoing occupation of approximately 18% of Ukraine's territory continues to have significant economic and social repercussions on Ukraine.mns of people are still affected by the occupation, which is costing around 12% of the country's pre-war GDP. The occupation, coupled with the fighting, has led to supply disruptions, logistical challenges due to Russia's sea blockade, and a large exodus of refugees.

The Ministry of Social Policy has reported that the number of internally displaced people (IDPs) in 2022 exceeded 5mn, while over 8mn individuals have fled Ukraine altogether. This mass displacement has put immense strain on resources and social infrastructure. Unemployment rates have also skyrocketed, increasing from approximately 10% at the end of 2021 to around 25-26% in 2022, based on data from the National Bank of Ukraine (NBU).

The impact of the occupation and conflict is evident in the country's economic indicators. Real GDP fell by a staggering 29.1% in 2022, according to detailed data from the State Statistics Service of Ukraine. This decline can be attributed to widespread infrastructure destruction, disruptions in logistics chains, and the persistence of external factors such as high energy and food prices.

Despite the challenging circumstances, Ukraine managed to maintain relative stability in its consumer inflation rate. In 2022, inflation reached 26.6%, which, while significant, did not spiral into hyperinflation. This performance can be attributed to weak consumer demand, a restrictive monetary policy, frozen tariffs on housing and utilities, and a stable foreign exchange market. The National Bank of Ukraine played a crucial role in maintaining stability by implementing an official fixed exchange rate for the hryvnia. This measure helped control exchange rate expectations and alleviate market pressures, despite the uncertainties faced by businesses during the conflict. The exchange rate for the dollar has been fixed at 36.57 UAH/USD since July 21, 2022, resulting in a 25% devaluation.

The impact of the conflict on Ukraine's exports has been significant. Goods exports decreased by 35% in 2022 compared to the previous year, totaling 100mn tons with a total value of $44.2bn, according to NBU data. Services exports also declined by 28.3%, amounting to $9.2bn. The decline in exports can be attributed to the impairment of export-oriented companies' capacities and logistical obstacles caused by the closure of Black Sea ports by Russia. Efforts to mitigate the negative effects, such as the implementation of the Grain Corridor and the creation of new transportation routes along Ukraine's western border, have only partially alleviated the impact of the port closures.

Ukraine is now well funded with aid enough to cover the budget deficit and keep the government running. Donors and the International Monetary Fund (IMF) have ensured that the $38bn needed to cover the budget deficit this year is in place. A new IMF extended fund facility (EFF) has started and Kyiv is about to get the second $900bn tranche. Gross international reserves (GIR) topped $33bn in May – the highest level in 11 years and as the economy stabilises the Ministry of Finance has started to remove some of the exemptions and wartime breaks as a little normalcy returns.
On the battlefield the stalemate continues. Ukraine lost control of Bakhmut to Russia after eight-months of fighting in what is little more than a symbolic defeat as nothing of the city remains standing. Russia expended somewhere between 20,000 and 60,000 soldiers killed in action to take the city, but the cost to Ukraine was the expenditure of veteran soldiers and a lot of materiel it can ill afford to use.
The gradual escalation continues with the West now not only promising main battle tanks but also the F-16 jet fighter that Ukrainian President Volodymyr Zelenskiy has been asking for since day one.
Everyone is now waiting for the long expected counteroffensive that could turn out to be a hammer blow for Russia as Kyiv has clearly been stockpiling large amounts of arms and ammo.
After that ceasefire talks are possible as both sides seem exhausted. But the Ukrainian determination to fight to the bitter finish should not be underestimated.

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