Russia is destroying Ukraine’s economy, raising costs for U.S. and allies

By Jeff Stein and David L. Stern Updated December 15, 2022 EST|Published December 15, 2022

Liudmyla Tsybulska, 26, and her daughter Zlata, 5, at their balloon shop awaiting customers during a power outage in Dnipro, Ukraine, on Nov. 29. (Heidi Levine for The Washington Post)

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.

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.

They survived Russian occupation, then were hit by explosives left behind

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.

An electricity worker fixes power lines in a residential neighborhood in Dnipro on Dec. 1. (Heidi Levine for The Washington Post)

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.

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