Ukraine needs systemic support for basic industries to recover at least to pre-war levels

Russia’s full-scale aggression has hit the current development and prospects of the Ukrainian economy. The dynamics of the Ukrainian GDP decline can be seen most clearly in dollar terms. In 2022 against the previous year the economy collapsed by 18.9% – to $162 bln, and in 2023 against the same 2021 – by 10.5%, to $179 bln. In UAH real GDP of Ukraine in 2022 fell by 29.1% y/y, and in 2023 grew by 5.3% y/y.

Ukraine faced the problem of deindustrialization long before 2022, but the consequences of the war threaten to reduce the country’s industrial capacity by at least 20-25%. This is evidenced by the collapse in the performance of certain sectors of the economy in 2022, which was the strongest:

  • steel industry – 66.5% y/y;
  • mechanical engineering – 43.1% y/y;
  • construction – 35.2% y/y.

As a consequence of Russia’s full-scale aggression, Ukraine’s industrial production index (base – 2016) collapsed from 101.7% in December-2021 to 69.4% in June 2024. Ukraine’s industrial production itself fell by 36.7% y/y in 2022. The index of construction output (base – 2016) similarly fell from 199.7% at the end of 2021 to 94.2% in June-2024.

Ukraine is also falling into the investment abyss due to the war. Capital investment in Ukraine in 2022 relative to the previous year collapsed by 48.7%, and in 2023 relative to the same 2021 – by 56.2%. Total underinvestment, which began long before the war, intensified after the war started.

Without a strong industrial base Ukraine will not be able to develop and will not recover after the end of the war even to the pre-war level of socio-economic development and production. Ukraine needs systemic support for the basic industries (machine building, mining and steel sector, chemical industry) of the economy, which fill the state and local budgets and bring foreign currency earnings into the country. This requires the right government policy to stimulate the development of industry and significant investments.

Meanwhile, Ukraine does not even have enough funds for the current recovery processes and has to rely on the funds of international partners. According to KSE estimates, direct infrastructure losses in monetary terms as of January 2024 amounted to $157 billion.