As this month’s report goes to press Berlin has given the go ahead to send
modern main battle tanks (MBTs) to Ukraine that could change the course of
the war.
As of the end of January a total of 174 have been promised which is more than
a brigade of tanks. Of these there are firm commitments of 77 of which the first
28 are due to arrive in February and another 28 will arrive sometime in March.
The tanks represent a major change in policy where the West will go from
giving Ukraine defensive weapons to make sure it doesn’t lose the war to
Russia, to giving it offensive weapons so that it can win the war.
As bne IntelliNews has reported, the change in heart is partly due to the fact
that following Russia’s partial mobilisation that started on September 21 the
front line has stabilised and Russia was making incremental gains around the
epicentre of the conflict in Bakhmut in Donbas.
Tanks will likely break the deadlock. It also appears that fractures within the
German government – German Chancellor Olaf Scholz doesn’t want to risk an
escalation, but German Foreign Minister Annalena Baerbock is fully behind
Ukraine – also helped Ukraine’s cause. Plus the Poles seemed to have
outmanoeuvred Germany after Warsaw threatened to unilaterally send some
its circa 250 tanks and present that to Berlin as a fait accompli. As Scholz had
little response to that move, he persuaded the US to also commit to sending at
least 31 of its Abrams MBTs.
But it will take time to transfer the tanks to Ukraine and Russia is also clearly
getting ready for a second mass mobilisation in the spring where some
500,000 new recruits are expected to be conscripted as a counter. The war
could become a lot bigger and bloodier this summer as a result.
In the meantime Ukraine’s economy continues to be pounded by shell and
missile fire. Estimates for the drop in the economy in 2022 have been raised
from 30% to 35%, caused by the drop in exports of everything from wheat to
steel. Ukraine’s infrastructure has been smashed after a Russian campaign to
make life a living hell for the population.
Russian attacks on Ukrainian energy infrastructure have created issues with
food storage. Ukraine can currently export only about 5 to 6mn tonnes of grain
per month, down from nearly 8mn tonnes before the full-scale invasion.
Beyond food exports, Ukraine has also historically been a major exporter of
metals and raw materials. However, nearly all of Ukraine’s large factories
producing steel and other key metals are located in the eastern part of the
country and were severely damaged or destroyed by Russian attacks. In
particular, Russians destroyed two large metallurgical enterprises located in
Mariupol: the Azovstal and Ilyich iron and steel plants, which are now beyond
repair, the owners told bne IntelliNews.
Despite all of this damage to the Ukrainian economy, the war has prompted
Ukrainians to quickly adjust and restructure parts of the economy, as
companies relocate their operations or explore new business models. That has
fostered an extraordinary amount of economic adaptability and creativity that is
setting the groundwork for post-war reconstruction.
Work has already started to prepare for a post-war recovery, but nothing
concrete can be done until the situation on the battlefield is resolved.
With relations between Moscow and Brussels continuing to deteriorate the two
sides are further away from each other than ever and all business activity has
either gone into survival mode or suspended.
But the morale of the population is high and its determination to overcome
Russia as resolute as ever. Support for Ukraine's accession to NATO has
reached a historic high. In a referendum, 86% of Ukrainians would support this
initiative, 3% would be opposed, and 8% would not vote, according to a study
from the Rating group. In addition, 87% of
respondents would support Ukraine's accession to the EU in the event of a
referendum, with 3% against and 8% that would not vote. According to
sociologists, support for joining the EU and NATO is almost unanimous among
representatives from all macro-regions, age, and property groups.
The economic outlook for this year is poor. The West has already agreed to
backstop the estimated $38bn budget deficit in 2023 so the government can
function. The National Bank of Ukraine (NBU) forecast for growth is only 0.3%
in January as the economy remains on life support, but the regular upgraded
its forecast for international reserves to $27bn this year and more international
aid is expected to be committed over the year.
Fitch Ratings forecasts the growth of Ukraine's economy in 2023 at 2% in
2023, as the war prevents the return of large numbers of refugees or
large-scale investment, and power outages create an additional deterrent.
Inflation is forecast to ease to 21% in 2023 from 26.6% in 2022, as the loss of
manufacturing capacity, power shortages, and gradual elimination of supply
chain disruptions offset weak domestic demand.
At the same time, Fitch believes that the budget deficit will decrease to 15.2%
of GDP in 2023 from 20.1% in 2022. Fitch also forecasts a rise in total public
debt to 84% of GDP by the end of 2023 as a significant part of the money sent
to Ukraine is in the form of loans not grants.
The agency expects that the goal of attracting $38bn in external budget
financing in 2023 will be fully achieved. And international reserves at the end
of 2023 will be 3.8 months of current foreign receipts compared to 4.0 at the
end of 2022.
As of September 2022, the total amount of direct documented damage to
residential and commercial real estate as well as other infrastructure amounted
to more than $127bn. According to the assessment carried out by the Kyiv
School of Economics, the largest share in the total volume of damages
belongs to residential buildings ($50.5bn) and infrastructure ($35.3bn).
However, estimates for the cost of rebuilding Ukraine is already well over
$500bn and could rise as high as $1 trillion – some ten-times the value of the
entire economy.