Russia launched a full-scale invasion of Ukraine in February 2022. Roughly two years on and with no end to the conflict in sight, the economic landscape in both countries has changed notably—for the worse. That said, the Russian economy today and the Ukrainian economy have proved more resilient than initially expected by our panelists at the outset of the war.
After it shrank just 2.1% in 2022, the Russian economy in 2023 regained pre-war levels—a much better performance than our panelists’ mid-2022 projections of large contractions in both years. Our panelists see a near-3% GDP expansion in 2023—faster than any economy in the G7. Key drivers behind this better-than-expected performance were resilient crude output, high oil prices, stronger defense and social spending and the country’s ability to partially circumvent Western sanctions and offset lost trade with the West by strengthening ties with Asia. Ukraine’s economic downturn in 2022 was also softer than initially anticipated, though the economy has lost steam since due to repeated Russian attacks on critical infrastructure and waning Western aid.
Russian economy to grow at a tepid pace:
Our Consensus is for GDP growth to slow to slightly above 1% over our forecast horizon to 2028, around half the pace that panelists were forecasting before the war. Severed trade ties with the West, together with population decline, will be behind the meek reading. Even in the unlikely event of a near-term end to the war, there appears little prospect of trade with the West returning to pre-war levels. The country’s vast energy reserves will continue to provide the government with a vital fiscal cushion, though, and our panelists see both the budget deficit and public debt remaining low in the coming years, despite likely ongoing war-related expenses.
Ukrainian economy unlikely to recover pre-war size:
Following 2022’s 29% contraction, our forecasts are for Ukraine’s economy to remain around 6% smaller than its pre-war size as late as 2028. Both public debt and the budget deficit will remain perilously high—with the former expected to run close to 100% of GDP—and the economy will be dependent on Western financial support. A near-term, durable end to the conflict would cause Ukraine’s economy to recover far quicker, however, as investment and Ukrainians currently living abroad would likely pour in.
The evolution of the conflict will be the key determinant of economic activity in both Russia and Ukraine in the coming years. And though at FocusEconomics we pride ourselves on the value and accuracy that our Consensus Forecasts provide, in this particular instance—for the good of everyone involved—we hope they are overly pessimistic.
Insight from our panelists:
On Russian inflation in light of recent strong economic activity, Goldman Sachs analysts said:
“Economic growth in Russia has been running well above potential, with strong demand pressures in the labour market in particular. Though both monetary and fiscal policy were significantly tightened in 2023H2, the size of the output gap, renewed fiscal spending pressures ahead of the March presidential election, as well as the ongoing military conflict in Ukraine, will all contribute to keeping inflation sticky, in our view. Furthermore, we expect further pressure on inflation from a weaker Ruble following the election.”
On Ukraine’s economic prospects in 2024, EIU analysts said:
“Private consumption will be supported by the normalisation of labour conditions in the vast majority of the country, as well as increased demand for Ukrainian goods and services both domestically and abroad. Steady external financial flows and fiscal expenditure will drive investment. Deepening ties with the EU as part of Ukraine’s accession process will also have a positive effect on the country’s ability to realise its export potential and as a recipient of investment.”