Battered and Strained by War, Ukraine’s Economy Adapts to Survive

Piles of corn and wheat are stuck in silos, as Russia’s invasion stifles critical exports. Metal-producing factories in Ukraine’s bombed-out east have ceased operating. And through nearly a year of war, over a third of Ukraine’s spending is being directed at beating back the enemy.

Despite major battlefield defeats in its invasion, the Kremlin’s relentless war effort has sown economic havoc atop a devastating humanitarian toll in Ukraine. The country’s economy shrank by 30.4 percent in 2022, its economy minister said Thursday, the largest decline since Ukraine declared independence from the Soviet Union in 1991.

“It’s easier to say what we lost” than what survives in Ukraine’s economy, said Hlib Vyshlinsky, the executive director of the Centre for Economic Strategy, a think tank in Kyiv.

Swaths of the country’s industry and infrastructure have been partially or fully destroyed, and may not be rebuilt. Many businesses based in territory controlled by Russia, or in areas of heavy fighting, are not producing near their capacity, if at all. Consumers across the country are buying less because of high inflation and economic uncertainty generated by the war.

But the war has also spurred Ukrainians to restructure parts of their economy at lightning speed, in ways big and small, as companies pack up operations or pivot to new business. That has fostered an extraordinary amount of economic adaptability that is not reflected in the dire numbers, and is setting the groundwork for potential rebuilding even before the war ends, the government argued.

Yulia Svyrydenko, the economy minister, said in a statement Thursday that the “indomitable spirit” of the Ukrainian people, along with financial support from international donors, had allowed the government in Kyiv to “maintain the economic front and continue our movement toward victory.” And while the damage has been profound, the hit to the economy was slightly lower than the worst forecasts.

The biggest damage has come in Ukraine’s major export sectors, which before the war made up the bulk of the country’s income. The conflict caused a 35 percent drop last year in exports of everything from wheat to steel.

Agriculture, once a pillar of Ukraine’s economy — making it known as a breadbasket of the world — has been dealt an especially harsh setback as Moscow continues to block most shipments, despite a U.N.-brokered deal.

Compounding the problem, Russia’s attacks on the country’s energy grid have disrupted the flow of food, contributing to a global food crisis. Storage has run out for many harvests, leaving Ukrainian farmers scrambling for makeshift solutions. On average, Ukraine can now export only about 5 to 6 million tons of grain a month, down from about 8 million tons before the war.

Ukraine had also been a major exporter of metals and raw materials, such as iron ore. But nearly all of Ukraine’s large factories producing steel and other key metals were located in eastern territories that were captured or severely bombed by Russia. A vast majority of those facilities have more or less stopped operating, said Tymofiy Milovanov, the president of the Kyiv School of Economics.

Russian missiles have struck cities and facilities across the country, dealing heavy damage to a huge amount of the nation’s housing, transportation and energy infrastructure. The Kyiv School of Economics has estimated that the direct costs of war-related damage to Ukraine’s infrastructure were $127 billion as of September.

Rebuilding the country will run to some $750 billion, Ukrainian officials have said, while the World Bank has put the reconstruction estimate at closer to $349 billion.

In order to revive its economy and manage a sustained recovery once the fighting ends — and it has no end in sight — Ukraine is expected to amass large debts.

The International Monetary Fund and the World Bank had both estimated that Ukraine’s economy would shrink by 35 percent in 2022. The I.M.F. had predicted modest economic growth for this year, but that is subject to huge uncertainty about the course of the war: The I.M.F. set the range of outcomes at a potential decline of more than 10 percent, in the pessimistic scenario, to growth of 10 percent in the more optimistic case.

Ukrainian officials are clinging to the sunnier outlook, in large part because a type of shadow economy has developed amid the war, said Mr. Milovanov. That has kept economic activity, powered by donated generators or volunteer efforts, for instance, humming beneath the radar of the dry statistical figures, he said.

“In some ways, the entire notion of a G.D.P. calculation during wartime is silly, because it assumes year-to-year preferences and production are constant, while shifts like a drop in services or people joining the military is seen as a negative,” Mr. Milovanov said in a phone interview from Kyiv. In fact, he said, economic activity in Ukraine has become “much more agile” to adapt to wartime.

Ukrainian farmers, for example, have continued to plant and harvest crops despite the threat from Russian rockets and land mines, and have adapted planting to cultivate more in-demand crops, like corn.

The industrial sector has adapted, too. Factories producing everything from mattresses to trucks have relocated from cratered regions of the east to the relative safety of Ukraine’s western frontier.

Hundreds of plants that had been in Russian-occupied areas were packed up in the summer and moved on trains and trucks to Ukraine’s west. Outside the city of Lviv, close to Poland — Ukraine’s gateway to Germany and western Europe — many of the reborn businesses are forging ties with the European Union, which Ukraine hopes to join soon.

Ukrainian tech start-ups are writing software for foreign companies and now have direct lines to major companies in Europe and the United States, where many want to help Ukraine through the war.

Thousands of Ukrainians displaced by war have also set up as entrepreneurs elsewhere in the country to try to forge new lives and add to the local economy. Even restaurants have adapted: Many have stayed open for business despite power outages through innovations like “candlelight menus,” or meals that don’t require cooking.

“Ukrainians are resilient,” said Mr. Vyshlinsky, the think tank director. During blackouts in the capital, he said, the soundtrack of a walk through the city is an “orchestra of power generators.”

And with vast amounts of Ukraine’s national budget having been redirected toward military spending, hundreds of new small businesses have sprung up to cater to the wartime economy’s needs.

“The nature of demand is now coming from the Defense Ministry, so if you can produce bulletproof vests, military training, services for medical training or even cybersecurity equipment, many new companies have been created, and they are profitable,” Mr. Milovanov added.

Yet Russia’s destruction of critical infrastructure has dealt Ukraine a setback heading into the second year of the war. The path of Ukraine’s economy this year will depend heavily on the ability to keep electricity flowing, limiting the length of blackouts and the need to ration power, according to Mr. Vyshlinsky.

He forecasts economic growth to be flat this year — a less optimistic outlook than many forecasters, but also not as pessimistic as those who think that another big drop is in store.

In the meantime, international donors are circling Ukraine, which has laid out a blueprint for an eventual Marshall Plan to help rebuild once the war has ended. Ukrainian leaders have also made plans for the short term, recognizing that President Vladimir V. Putin of Russia appears determined to continue with the invasion.

Ukraine has found ready supporters in the West, where leaders have largely remained unified despite the soaring energy prices caused by the war. So far, countries and institutions in the European Union have committed nearly 52 billion euros, about $55 billion, in military, financial, and humanitarian aid, while the United States has pledged some $51 billion, according to data compiled by the Kiel Institute for the World Economy, a German research organization.

Many governments and international companies, eyeing the prospect of a vast bounty of postwar contracts, are rushing to help Ukraine now, in the hopes of renewed deals when rebuilding starts in earnest.

Jason Karaian contributed reporting.