Despite the push from US President Donald Trump’s administration to get a peace deal between Ukraine and Russia by midyear, Ukraine’s economy cannot sharply transition from a war-time economy to sudden recovery – no matter how quickly the peace negotiations develop or what demands are levied on Ukraine by foreign partners or adversaries, National Bank of Ukraine Deputy Governor Sergiy Nikolaychuk told Kyiv Post.
Yet the hope that Trump will end the war and broker a peace deal has already pushed Ukraine’s Eurobond price up by 22-71%.
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If Ukraine starts recovering in the first quarter of 2025, the real GDP may skyrocket by an additional 6% instead of the modest 3% currently predicted, Ukrainian investment bank Dragon Capital estimated.
“The National Bank stopped communicating timelines for the end of the war in its forecasts about a year ago… I would prefer not to speculate on this topic,” Nikolaychuk told Kyiv Post.
The impact of the end of the war on Ukraine’s economic activity will take time and require a robust security agreement with allies to give investors confidence in Ukraine’s long-term economic stability and potential for growth.
The war caused a 28,8% drop in Ukraine’s GDP in 2022, according to Ukrstat.
During that period, private consumption dropped due to decreasing incomes – a direct result of Russia’s full-scale invasion – exacerbated by a record migration of Ukrainians both abroad and within the country, the NBU assessed in April 2023.
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Investment banks may be looking forward to a surge after a ceasefire starts. But the NBU does not expect a sharp transition in economic growth projections.
Ukraine’s economic activity unfroze after Russia’s withdrawal from the Kyiv region, but ongoing hostilities prevent total recovery. An end to missile strikes and drone attacks will help business operations to return to normal, but a stable peace is still needed.
“Security risks and their reduction will also be gradual: there won’t be an immediate switch from one mode to another,” Nikolaychuk said.
Investment banks may be looking forward to a surge after a ceasefire starts. But the NBU does not expect a sharp transition in economic growth projections. The NBU’s Inflation report projects 3.6% of real GDP in 2025, and 4% in 2026.
“We don’t believe there will be a specific ‘Day X’ that will completely change the situation. In our view, this process will be rather gradual, impacting macro-financial stability and the return to normal. The reduction of security risks will also be gradual – both in the lead-up to this ‘Day X’ and after it,” Nikolaychuk said.
How war has transformed Ukraine’s economy
Over the course of 2022-2023, Ukrainian businesses were busy tackling a 30% drop in GDP, destruction of supply chains, soaring inflation, and the movement of 10 million Ukrainians within the country and 6 million refugees abroad. In 2023, inflation dropped to 5%.
Most Ukrainian refugees abroad were of working age, which meant Ukraine lost a chunk of employees inside the country after Russia invaded Ukraine. Internally displaced persons worked on enterprises destroyed on occupied territories and there were no same enterprises on territories far away from the frontline.
After two years of war, business solved urgent problems, but two key complaints persisted: working in dangerous conditions and lacking employees, according to the Institute of Economic Research. During 2024, Kyiv alone suffered from a total 1,600 drones and missiles.
Because of constant air strikes, Ukraine’s businesses refrained from large-scale, long-term projects, afraid their large assets would be destroyed, a source in Ukraine’s largest bank told Kyiv Post in the summer of 2024. CBRE, a commercial real estate consulting company, had previously told Kyiv Post that demand in leasing warehouses also depended on the security situation.
Ukraine’s economy also suffered from destruction of electricity generation and transmission, causing businesses to pay more for imported electricity from the European Union.
An energy deficit, migration and workforce deficit – all results of devastating Russia’s military actions against Ukraine, especially strikes in the fourth quarter of 2024 – caused businesses to pay more for electricity and talent acquisition and pass these costs on to consumers. These processes spiked inflation up to 12.9% in January 2025
Labor shortages and surpluses
Ukraine’s Ministry of Social Policy estimated there were 4.6 million internally displaced persons as of January 2025 as a result of Russia’s war in Ukraine. They had worked in destroyed regions, but could not find new jobs on territories where they evacuated. “There was a surplus of labor that could not find employment. Unemployment was estimated at around 20% in 2022,” Nikolaychuk said.
“A large number of enterprises were destroyed, massive internal displacement took place, and many people migrated abroad,” Nikolaychuk explained.
After 2022, satisfaction of recovering labor demand was complicated by continued migration abroad and mobilization to Ukraine’s Armed Forces. Employees who remained in Ukraine did not always have skills that matched the new needs of Ukraine’s economy. “The demand increased in industries that previously didn’t need that much workforce. For example, drone manufacturing,” Nikolaychuk said.
The increased demand for the military enlarged the share of public administration and defense sector in Ukraine’s GDP from 6% to 22%, he said. Military needs fueled industrial machinery manufacturing, drone production, textile industry, and food industry. “And it’s not always the case that you can refocus a metallurgist to a sewing machine,” Nikolaychuk added.
But even in 2024 the NBU estimated unemployment at 13% – a mismatch of labor supply and demand which still creates pressure on the economy. “There remains a high demand for labor, but it cannot find a suitable supply, which is why the unemployment rate remains so high,” Nikolaychuk said.
To attract labor, enterprises also increased salaries by 14.4% in real terms last year, passing the increase on to consumers through increased costs of their products. But when they attracted the labor, businesses had to survive the lack of energy for operations, also caused by Russia’s war in Ukraine.
Losing Zaporizhzhia nuclear power plant – Europe’s largest nuclear facility – and thermal plants were the most “painful” losses for Ukraine’s energy system.
Increased energy demands
The energy sector has also been heavily impacted by the war. Ukraine has lost more than half of its power generation capacity (around 9 megawatts or more) due to infrastructure being damaged or destroyed by Russian attacks or co-opted by invading Russian forces.
Ukraine’s energy sector has lost $14.6 billion in direct damages from Russia’s war. Key power facilities, including the Kakhovka and Dnipro Hydroelectric Power Plants (HPPs) and the Trypillia and Zmiiv Thermal Power Plants (TPPs), were destroyed by Russian attacks.
The indirect losses for the energy sector due to lost revenues, higher electricity prices and disruptions of operations due to blackouts reach $43.1 billion, according to the Kyiv School of Economics (KSE).
Nikolaychuk said that losing Zaporizhzhia nuclear power plant – Europe’s largest nuclear facility – and thermal plants were the most “painful” losses for Ukraine’s energy system. “Thermal stations play a crucial role in supplying electricity during peak consumption,” he added.
More than half of Ukraine’s energy is generated by remaining nuclear stations, the other half is generated by co-generation plants, small generators purchased by businesses and households, and alternative energy sources. Thanks to various governmental and private initiatives to counter these issues, the energy deficit decreased from 25% on average in 4Q2022 to 4% in 2024, Nikolaychuk said.
But the energy gap “will be with us for a long time,” he added.
Russia destroyed so many facilities that it is impossible to restore all energy generation swiftly, and Ukraine will be experiencing blackouts until stable peace helps rebuild the infrastructure. “We understand that during peak consumption and low temperatures we will face blackouts. The system will most likely be unable to fully meet demand,” he said.
To cover the losses of the war, the government increased electricity prices for Ukraine’s business by 60% in the second half of 2024. Increased electricity prices created extra cashflow for energy companies to cover losses, but also created higher production costs for enterprises that they passed on to consumers, fueling inflation inside the country.
Curbing Inflation
During 2022-2024, Ukrainian enterprises had to deal with electricity deficits, hurdles in talent acquisition and higher costs for raw materials – all a direct result of Russia’s war in Ukraine. After electricity prices for Ukraine’s business increased by 60%, the war-torn economy experienced additional pressure on prices, caused by drought in 2024.
Grain harvests by 4.6 million tons, and vegetable harvest volumes decreased by 0.7 million tons compared to 2023, according to NBU estimates in the January 2025 Inflation report.
It caused a chain reaction of price increases in raw food products, processed food products, and the cost of meals Ukrainians eat outside their homes. Prices of raw food products also impacted the rising costs of livestock feed, fueling prices of livestock products.
Inflation increased from 3,2% in March-April last year to 12,9% in January 2025. Back in summer 2024, the NBU had expected peak inflation at merely 9.7% in the first quarter of 2025, but prices surged higher than the forecasts.
NBU expected that drought would cause additional price pressure, but underestimated the extent of its impact on prices. “These factors turned out to be stronger than we had expected,” Nikolaychuk said.
“The intensity of military activity in the fourth quarter of 2024 was higher than we had anticipated, and this factor intensified inflationary pressures” Nikolaychuk said. “These increased costs, combined with other factors, have been passed on to prices to a greater extent.”
To curb inflation, NBU increased the key rate by 1.5 percentage points (pp) over two Monetary briefings to 14.5% in response. It aims to lower inflation to 5% – Ukraine’s central bank inflation target.
Inflation in Ukraine will decrease gradually to 8,4% during 2025, according to the NBU forecast. But the full-scale war continues to be the main risk for the economy. The duration and intensity of Russia’s war in Ukraine will impact “the economy’s return to normal functioning”, the January 2025 NBU Inflation report says.
Still, Ukraine’s central bank writes “there is a possibility” that international partners will reach agreements “on a just and lasting peace for Ukraine.”
If hostilities persist, more refugees will leave Ukraine, workforce deficit will deepen due to fleeing and mobilization, energy infrastructure may suffer more losses, leaving enterprises with the need to spend more cash on energy supply. Altogether, it may cause a surge in inflation.
But if the war ends, Ukrainian refugees may return. A lasting and stable peace will enable faster repairs at energy facilities and scaling energy production capacities, the NBU January Inflation Report says. IER estimated that 87.8% of businesses think business climate will improve after the war ends. “At the same time, for the necessary macro-financial conditions to fully materialize, it is most likely that we will need to rely on a just and lasting peace,” Nikolaychuk said.
“Security risks and their reduction will also be gradual: there won’t be an immediate switch from one mode to another,” he added.
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