KYIV — VYACHESLAV STESHENKO, a businessman in Kyiv, first noticed a drop-off in customers visiting his restaurant chains a few weeks ago. Perhaps this was normal, he thought: a new covid-19 variant was ripping through Ukraine, so people must be staying home. Then he heard from colleagues in the industry that restaurants in Lviv, Ukraine’s westernmost city, near the border with Poland, were filling up with out-of-towners “from Kyiv, Kharkiv, Zaporizhia”–places closer to Russia. Next Mr Steshenko noticed that his petrol stations had sold out of 20-litre gas canisters, the largest size.
Ukraine is not in the middle of a full-blown panic, Mr Steshenko stresses. But the remarkable calm shown by ordinary Ukrainians throughout the months-long crisis with Russia is starting to dissipate. The news suggesting a possible Russian invasion grows more unnerving by the day. That, in turn, is having a dire effect on the economy, which is “already being strangled”, in the words of a diplomat. Conflict with Russia cost Ukraine $280bn between 2014 and 2020, according to one estimate. But the damage from the past few months is of a different order.
A spokesperson for Vladimir Zelensky, Ukraine’s president, says that the crisis is costing the country $2bn-3bn a month, plus an extra $1.5bn-2bn from the sagging currency. Recent modelling by the Kyiv School of Economics (kse) indicates that if the threat of war is perceived to be high, gdp will shrink by more than 5% before any shots are fired. Indeed, the economic toll from the threat of invasion is so high some Ukrainians wonder whether the entire Russian mobilisation is intended simply to inflict economic damage.
Virtually every Western country has instructed its citizens to leave Ukraine and to avoid travelling there. Expat haunts in Ukraine’s big cities have thinned out. After European insurance firms stopped covering flights to Ukraine, the national government had to stump up 16.6bn hryvnia ($580m) to keep planes coming and going. Several airlines have stopped flying anyway, in part because their staff are petrified.
The doomsday atmosphere has had a predictable effect on foreign investment. Capital, foreign and domestic, is fleeing. On January 28th Mr Zelensky claimed that $12.5bn had left the country since the crisis began. Trade has also been affected, since three-fifths of Ukraine’s exports pass through the Black Sea, where the cost of insuring ships in Ukrainian waters has increased, especially since the areas were declared to be high-risk by a key London insurers’ committee on February 17th.
The longer the crisis drags on, the worse all these effects will become. Business deals and investments currently on hold will be put off for good. Rising yields on government debt and corporate bonds (the yield on ten-year bonds has jumped from 6.9% in November to 10.9% now) have a compounding effect, making life ever harder for the Ukrainian treasury and big businesses alike. Workers suffering from the psychological strain may no longer feel willing or able to work as usual. Domestic demand will wilt as workers hoard cash and curb their normal leisure activities.
The Ukrainian government has tried to persuade its citizens to keep calm and carry on. Officials complain that breathless Western press reports have deepened the economic gloom by spreading panic, citing headlines like “Russia planning ‘extremely violent’ operation to ‘crush’ Ukraine”. Mr Zelensky, who has described America’s communications strategy for the crisis as “very expensive for Ukraine”, proposed a “stability and reconstruction fund” during a speech on February 19th to the Munich Security Conference. Canada has offered a $400m loan. In a sign of how dire things are, the EU, which typically attaches a lot of strings to its loans, is offering €1.2bn ($1.4bn) with barely any conditions.
Ukraine might have suffered even more had Mr Zelensky not played down the risk of an invasion until recently. His nonchalance may yet come back to haunt him. It may also have left millions of Ukrainians mentally unprepared for what seems to be on the way. But it kept Ukrainians going to work and living normal lives in a way that has astounded many foreign observers.
Resilience has also come from the surgery that reformists performed on Ukraine’s financial industry after the Maidan revolution of 2014. That has allowed Ukraine to enter the crisis with swelling foreign reserves, a liquid banking system and national debt of less than 50% of gdp. These achievements have now been undermined.
The cost of the stand-off, however, will be as nothing compared to the cost of a war, if one does occur. Russian troops are rolling into the breakaway statelets of Donetsk and Luhansk; Western countries are imposing fresh sanctions on Russia and Ukraine is threatening to sever diplomatic ties. Tensions have never been higher. Even if they ease, Ukraine will have already paid a high price.
By The Economist
