How bad will it be? The war in Ukraine and its economic impact

Posted May 12, 2022

The human suffering has been catastrophic during the Ukraine war. Photo: UNDP Ukraine

The implications of the war in Ukraine, the associated sanctions on the Russian Federation (and Belarus), and sky-high food and energy prices are being felt widely across the region. Including by economists, who have been scratching their collective heads about how to adjust their models to properly reflect such shocks.

These shocks concern not only macroeconomics (How big will the hits to GDP be?) and microeconomics (How will households and employers cope?)—they also concern what might be called “sanctionomics”.

For example, Kazakhstan should be well placed to benefit from the high prices for which its oil and grain exports can be sold. But because of sanctions on the Russian transportation companies that connect Kazakhstan’s oil and grain with buyers abroad, Kazakhstan’s economy has suffered along with the Russian sanctions.

Despite these uncertainties, the IMF and World Bank have released updated economic forecasts and projections for 2022 (which, in the IMF case, extend to 2027). These may offer a point of reference (a lighthouse in a storm) that can help clarify differing views on the way forward.

These projections suggest that the impact of the war and sanctions on UNDP’s Europe and Central Asia programme countries may not be as bad as anticipated.

In fact, except for Ukraine, Belarus and Tajikistan, the impact in 2022 is projected to be smaller the impact of the COVID-19 pandemic in 2020 across the region. GDP growth in 2022 is generally projected to slow, but not go into reverse. World Bank analyses indicate that Belarus, Moldova, Tajikistan and Ukraine are the region’s only economies in which the shocks of the war, displacement and high global food and energy prices are expected to boost poverty rates this year.

Fears about large declines in numbers of Russian tourists visiting other countries have thus far been not been realized; instead, countries like Georgia have actually noted large increases in tourism from Russia (and Ukraine and Belarus). Similar trends seem apparent in Armenia, where growing numbers of Russian tourists are credited with helping the dram to gain 15 percent against the dollar in recent weeks. And while the recession in Russia and sanction-related travel obstacles may reduce the numbers of labour migrants working in Russia, central bank data suggest that most remittances from that country to Central Asia, the Caucasus and Moldova are actual sent by diasporas living in Russia, rather than by labour migrants themselves.

These relatively sanguine results should perhaps be qualified, however.

1) The methodological bases for these poverty projections are not always clear, as a number of these economies do not report the household budget survey data that are the generally accepted basis for poverty calculations.

2) Available data for a number of countries indicate that incomes for many “non-poor” individuals are just above the poverty line. Small changes in poverty measures, or the emergence of additional shocks (due, for example, to higher-than-anticipated food or energy prices) could therefore produce significant increases in reported poverty rates.

3)  A majority of the region’s population is located in Ukraine and Turkey. The poverty rate in Ukraine is forecast (by the World Bank) to rise from 2 percent to 20 percent this year. Turkey’s economy is expected to be buffeted by reductions in Russian and Ukrainian tourists, as well as by high prices for imported oil and gas. Back-of-the-envelope calculations suggest that the numbers of people living in poverty in these two countries alone will grow by some eight to eight and a half million this year. As people (rather than economies) are the ultimate focus of UNDP’s work, this may matter more than the numbers of countries in which poverty rates are projected to fall.

4) The scale of the external support these countries can expect in response to these developments seems likely to vary widely. Whereas the international community is pledging billions of dollars in financing to help Ukraine and Moldova, donors are cutting back in other places. Development finance to lower middle-income countries, like in Central Asia, could likewise be curtailed by the reallocation of assistance from donor countries to their own domestic needs, to support Ukrainian refugees displaced by the conflict and to shield households from the impact of higher food and energy prices.

The impact of the war in Ukraine and sanctions on Russia (and Belarus) may well turn out to be “not as bad as expected”. But to the millions of vulnerable people across the region who are living close to the poverty line, other people’s expectations may not matter much. If nothing else, the developments of 2022 seem likely to remind us of the importance both of peace and security as prerequisites for sustainable development, and of the need to focus on those most at risk of being left behind by economic growth that does not lift all boats.

This blog is the first in a series on the impact of the war in Ukraine on the Europe and Central Asian region and areas of sustainable development.