The economics of Russia’s war in Ukraine

This is an audio transcript of the FT News Briefing podcast episode: ‘The economics of Russia’s war in Ukraine’

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, February 22nd, and this is your FT News Briefing.

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One of the world’s most dovish central banks is turning into quite the hawk, and we’ll take a deep dive into Ukraine’s economy, a year since Russia invaded. I’m Marc Filippino, and here’s the news you need to start your day.

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Eurozone economies are proving so resilient investors are ramping up bets that the European Central Bank will raise interest rates to all-time highs. The ECB long had some of the lowest interest rates and was seen as one of the world’s most dovish central banks. But recent data shows strong service sector activity and demand for higher wages. Now, the ECB is expected to raise rates substantially. Swap markets are pricing in a jump in the ECB’s deposit rate from the current 2.5 per cent to 3.75 per cent by September. That would match its peak back in 2001. That’s when the ECB was still trying to shore up the value of the newly launched euro.

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It’s been one year since Russia launched its full-scale invasion of Ukraine, and the cost of that invasion has rippled out into so many different places. Our friends at the FT podcast Behind the Money have an episode out this week about those costs. So today on the Briefing, we’re going to play part of that episode for you. Here it is.

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Michela Tindera
I’m Michela Tindera from the Financial Times. Today on Behind the Money, we’ll be examining the different layers of cost that this last year of war has had. To understand what’s happened to Ukraine’s economy, I spoke with the FT’s Europe editor, Ben Hall. He says that first, we need more context.

Ben Hall
Ukraine was one of the poorest, is one of the poorest countries in Europe with a largely Soviet legacy economic structure. And it had been suffering the after-effects of multiple crises through the 30 years of independence, starting with the hyperinflation and brutal transition after the collapse of communism and independence in the 1990s, then the financial crisis, then a very, very severe recession after Russia annexed Crimea in 2014 and stirred up a war in the east of Ukraine, and then the pandemic.

Michela Tindera
For many years, Ukraine’s economy has been dominated by the production of commodities. That’s things like steel, coal and agricultural crops. Those industries have been largely controlled by oligarchs, and that’s led to corruption in business and politics.

Ben Hall
These were men who made their fortunes through political connections largely, and then maintained their fortunes and increased their fortunes by using their political influence to make sure others did not challenge them. And it’s one of the reasons that has held the Ukrainian economy back. It’s made the economy uncompetitive because these are wealthy men who are trying to extract rents from their assets and don’t want competition. And that has meant that the Ukrainian economy has lacked dynamism.

Michela Tindera
Still, at the end of 2021, just as Ukraine was emerging from the worst of the Covid-19 pandemic, things were starting to look brighter.

Ben Hall
Ukraine was beginning to recover and was enjoying some kind of international investor interest as an emerging economy.

Michela Tindera
Then the invasion began. (Sound of explosion)

News clips
Russian president Vladimir Putin has launched a major military operation against Ukraine . . . Russian tanks rolling across the border from Belarus in the north and Crimea in the south . . .

Michela Tindera
Millions of Ukrainians, mostly women and children, fled the country. Five to six million more were internally displaced. Ben estimates that a third of all Ukrainian companies completely stopped production.

Ben Hall
Then there was the direct impact of the fighting itself. Take Mariupol, for example, the city in the southeast of the country. The Ukrainians fought a last-ditch resistance in one of the steel plants there. Those two steel plants were essentially destroyed and those two steel plants alone accounted for 40 per cent of Ukraine’s steel output. The Russians have also bombed all sorts of other bits of heavy industry — oil refineries, other industrial plants. Russia’s effective blockade of the Black Sea has meant that it’s been very, very difficult for the remaining factories working in Ukraine to actually export their goods of steel and farmers to export their grain. So even those bits of Ukrainian industry and agriculture that are working normally have really struggled to get their goods to market.

Michela Tindera
One bright spot in Ukraine’s economy over the past year has been its technology sector.

Ben Hall
It’s been much easier for Ukrainian tech companies to keep going because workers with a laptop can essentially work from anywhere. So this sector has actually done pretty well and even appears to have increased its sales in 2022 and obviously now accounts for a much larger share of Ukrainian exports, which have overall shrunk because of the war. And I suspect what’s happened is a lot of foreign companies have wanted to support Ukraine by employing the tech sector.

Michela Tindera
With the tech sector rising, power started shifting away from the oligarchs who held so much of it, especially away from the ones accused of supporting or colluding with Russia.

Ben Hall
They will have had their TV stations shut down, or they will have been expelled from the country. But also those oligarchs who are not pro-Russia and who are Ukrainian patriots have also suffered in this war, not least because many of their industrial assets have been badly damaged in the fighting or their business activities have suffered because of the problems in getting exports out of the country or because of other disruption caused by the war. You’ve seen the government, for example, seize and nationalise assets owned by oligarchs to serve the war effort. And I think you’ve seen a real shift in Ukrainian public opinion because of the war, which is a desire to want to see Ukraine change for the better over the longer term.

Michela Tindera
Ben says that the war has proven how resilient and adaptable the country can be. Still, as long as Russian missiles are battering Ukrainians and their infrastructure, this year is likely to be another grim one.

Ben Hall
There’s a huge backlog now of infrastructure that needs to be repaired and rebuilt, and that will probably take many months before that work even starts to happen.

Marc Filippino
That was the FT’s Europe editor, Ben Hall, on this week’s episode of Behind the Money, hosted by Michela Tindera. Today’s episode also looks at the war’s impact on food and energy prices and includes a conversation with a Ukrainian who lived through the initial attacks in Kyiv. We’ll have a link to that in the show notes.

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Tomorrow we’ll hear from Ukraine MP Lesia Vasylenko on the Rachman Review podcast. She talks about what it’s like to wake up in a war zone.

Lesia Vasylenko
We were in total denial because what choice did we have? Starting to do what, panic, be scared, evacuate people, evacuate families, cause chaos and havoc in the country? Those were the options on the table.

Marc Filippino
By the way, it’s not just us that’s covering the one-year anniversary of the conflict. The FT across the board is looking into questions like how the war in Ukraine changed the world and what’s next? Tomorrow, FT correspondents and special guests will hold a webinar on these very questions. This is a subscriber-only event, and you can sign up at FT.com/ Ukraineevent. We’ll also have that link in the show notes.

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This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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