Ukraine is winning the economic war against Russia

EVERY BUSINESSGDPGDPGDPGDPUNIMFGDPGDPUADAIGWEUGWGDPGDPGEUGEUGDP in Ukraine has a reference point. For Mykhailo Travetsky, a farmer in Pryluky, it was the first six weeks of the . As a Russian column stalled on a nearby highway, his farm became no-man’s land. Locals fought gun battles to keep the Russians off it. Shells whizzed overhead. And Mr Travetsky milked his cows twice a day in body armour, automatic rifle cocked at his side.Since then the farm has constantly adapted to new difficulties. When Russia first bombed , rendering fridges and milking machines unusable, Mr Travetsky pivoted to making soured-milk products and cheeses with longer shelf lives, like feta. When wealthy families disappeared, he cut his prices and started supplying the pensioners who remained, who needed their milk delivered. at large has reinvented itself to navigate wartime realities. It remains one-quarter smaller than in 2021. Yet for the first time since 2022, the start of the all-out invasion, it is healthier than its enemy’s in some key respects. Ukraine’s central bank forecasts to grow by 4% in 2024 and 4.3% in 2025. The currency is stable and interest rates, at 13.5%, remain near their lowest in 30 months. Contrast that with Russia, where rates should soon hit 23% to arrest the rouble’s fall, banks look fragile and is set to grow by just 0.5-1.5% in 2025. But Ukraine faces strong headwinds: the uptick of war, the downtick of domestic resources, and Donald Trump. How long can its economy hold out?Ukraine’s economic history since 2022 has had three phases. In the first, amid heavy fighting, the country scrambled to put out fires. Martial law was introduced and 14m people fled their homes. Russia blockaded Black Sea ports, choking off Ukraine’s exports. The central bank’s actions were subordinated to military objectives. In the first half of 2022 it financed half of the public deficit. It imposed strict capital controls and flooded banks with liquidity. Inflation soared and shrank by a third (see chart 1).The second phase began after Ukraine repelled Russia’s advances in the country’s south, in mid-2022. As confidence improved, stabilised. A -brokered deal allowed Ukraine to ship grain again. The central bank went back to fighting inflation. In early 2023 Ukraine signed a package with the ; the central bank stopped monetising the budget deficit. As aid flowed in, foreign-exchange reserves recovered. Capital controls were eased.The return of macroeconomic stability allowed the government and firms to war-proof their operations. One priority was to protect productive assets against Russian missiles. Industrial parks were built in safer western regions. Businesses invested abroad to war-proof their income. Expatriates have generated income from abroad, too: last year one in ten new firms in Poland was set up by a Ukrainian.Another task was to reallocate resources towards the needs of a protracted conflict. Public spending has more than doubled, and now accounts for two-thirds of , up from 41% in 2021; defence and security alone account for nearly 30% of . Some state firms have overhauled themselves. Naftogaz, the country’s hydrocarbon champion, named a supervisory board in 2023, staffed with independent directors from European blue-chips. It posted 79bn hryvnia ($2.4bn) in losses in 2022 but pocketed 24bn hryvnia in profit in the first half of 2024, thanks to increases in gas output and green-energy investments.Private firms have pivoted, too. After Mariupol, a key port on the Sea of Azov, was obliterated in the spring of 2022, Vitalii Lopushanskyi, an entrepreneur, created amage, an outfit that parses satellite images to build interactive maps featuring every building, road or bridge that has been destroyed. He has since mapped more than 200 cities. He also teaches drones to spot mines and guide robots on the ground to disable the devices.The last piece was to keep hard currency flowing in. In July 2023 Russia refused to renew the grain deal. Ukraine responded by opening its own maritime corridor, securing it through a remarkable campaign of sea deterrence by drones and missiles. That allowed it to resume shipments of not just grain but also metals and minerals, its second-biggest export.These measures, together with Western aid, have prevented Russia from robbing Ukraine of the resources and morale it needs to keep fighting. Now a third phase is beginning, during which the country’s economy faces its biggest threats yet: acute shortages of power, men and money.Take power first. In 2022 and again this spring and summer, Russia relentlessly attacked Ukraine’s grid. Despite continuous repairs, the country can count on less than half of the 36 gigawatts () in generation capacity it could tap before the war. And lately Russia’s campaign has resumed. On December 13th it sent 93 missiles and nearly 200 drones to transmission assets and thermal power plants. Twelve missiles got through, forcing blackouts. On November 27-28th, in a reckless escalation, Russia had already struck transmission facilities alongside nuclear power stations. That cast a darker shadow over Ukraine’s wintertime energy capacity, around 70% of which comes from nuclear power.On a more positive note, the country has become better equipped to absorb such shocks. In December it expanded its electricity-import capacity from the by almost a quarter, to 2.1. Many food producers ferment residues from their operations into biogas that they use on-site. A lot of farmers also have diesel generators. Mid-sized firms often have natural-gas plants, which they sometimes pair with wind and solar power. Industrial firms use all these, together with imports, to avoid catastrophic outages.Coping strategies and ongoing repairs will contain the country’s average power deficit to 6% of total demand in 2025 and 3% in 2026, says Andriy Pyshnyi, the governor of Ukraine’s central bank. Heavy users complain of multifold increases in power prices since the start of the war, even when there are no shortages. Timofiy Milovanov of the Kyiv School of Economics reckons electricity problems could shave up to one percentage point off growth next year.The second problem—and the thorniest—is the lack of labour. Since 2022 mobilisation, migration and war have caused the workforce to shrink by over a fifth, to 13m people. Demand is strong: the number of job openings has reached 65,000 a week, up from 7,000 during the first weeks of the war—but the average opening attracts only 1.3 applications, compared with two in 2021. Wages are rising. The economy and defence ministries are locked in a tug of war over mobilisation: where to strike the right balance for the country’s future. Ukraine’s civilian leadership has so far declined the maximalist demands of military leaders, to the detriment of the front line.There are no easy fixes. Now even industries deemed critical can protect only half of their workers from the front line. Hiring many more women is tricky: there are nearly as many of them who have migrated abroad as men who are at the front or have come back from it unable to work, says Hlib Vyshlinsky of the Centre for Economic Strategy, a think-tank in Kyiv.It does not help that money is scarce—the third problem. Small farms and firms struggle to borrow enough to finance their operations. Financing long-term capital spending is virtually impossible. The soaring costs of doing business have hit profits. Companies with domestic customers are passing through some of the increases, pushing up inflation. Exporters, which compete in global markets, do not have that option. Mauro Longobardo, who runs ArcelorMittal’s local branch, says he has burnt $1bn in cash since the war started—just to keep his facilities maintained. Half his steelworks are down.The government, too, is spending much more money than it pockets. In 2025 its budget deficit is projected to near 20% of . In principle nearly all of it—$38bn—will be financed from external sources. In June the 7 agreed to a $50bn debt package for Ukraine, to be repaid from interest generated by Russia’s €260bn-worth ($273bn) of sovereign assets frozen in the West. America’s commitment to the deal cannot be taken for granted.Ukraine can probably survive without American funds in 2025. Together with an €18bn tranche the agreed to provide under a previous programme, contributions from other 7 members would plug the gap left by Uncle Sam, says Dimitar Bogov of the European Bank for Reconstruction and Development. Ukraine also has healthy foreign-exchange reserves. These are projected to grow to $43bn—five months’ worth of imports—by the end of 2024. Were America to pull out, however, Ukraine could run out of road in 2026. Cash-strapped and politically weak, governments may struggle to foot another big bill. And Ukraine’s ability to collect more at home is limited: a proposal to raise taxes by 4-5% of was withdrawn this summer after strident opposition.Military developments could cause a crunch before 2026. Yet businesses are cautiously optimistic. Mr Travetsky says he turned a small profit this year, the first since taking on the farm. He is thinking about starting a new line in parmesan cheese. “I’ve done the training, and I know the recipe,” he says. But the obstacles remain daunting: “Try making it when you don’t have electricity 12 hours a day.”