The Russia-Ukraine war had a drastic effect on the economy of Ukraine. A 25 percent interest rate hike by Ukraine’s central bank is the highest in Europe and has more than quadrupled the country’s borrowing costs. Following Russia’s invasion in February, the action is designed to halt rising inflation and prevent the ruble from further collapsing.
Since the start of the conflict, businesses have been forced to shut down and supply networks have been severed. According to the World Bank, Ukraine’s GDP might contract by up to 45% this year.
According to Ukraine’s central bank, the country’s inflation rate has climbed to 17 percent and is expected to grow to 20 percent this year.
Kyrylo Shevchenko, who is the Ukrainian central bank governor, since Russia’s first intervention in Ukraine, decided to increase the benchmark of interest rates from 10 to 25%.
These steps lead Ukraine to drastic changes in terms of economic development. Because of the war, a lot of things have changed.
Now borrowing rates are at their highest level since September 2015 when Ukraine’s economy was still suffering from Russia’s takeover of Crimea. Because of these significant increases in interest rates, it should be stated that nowadays Ukraine in terms of interest rates and its increasing value has reached the highest level in Europe since 2015.
Increasing Interest Rates In Ukraine
The National Bank of Ukraine suggested that raising the benchmark interest rate from 10% to 25% will help safeguard people’s investments against inflation.
Since Russia’s invasion, Ukraine’s currency, the hryvnia, has fallen drastically in value. According to the central bank, it hopes that the increase in interest rates would alleviate some of that pressure and help stabilize the dollar.
As inflation returns to a more manageable level, the bank of Ukraine plans to move to lower rates. It should also be stated that this is the first time increase in interest rates after the war in Crimea, in 2014.
It is estimated that the Ukrainian economy would contract by at least a third this year as a result of Russian aggression.
War has resulted in the closure of enterprises, the destruction of critical infrastructure, the impediment of transport lanes, and the devastation of whole communities.
A fresh assistance package for Ukraine should be discussed with the International Monetary Fund, according to Shevchenko.
President Volodymyr Zelenskiy’s counsel criticized the rise, saying that the rate was too high and detrimental to the economy in wartime.
It wasn’t obvious whether he was speaking on behalf of himself or someone else. According to the Kyiv School of Economics, artillery and airstrikes have damaged Ukrainian cities’ infrastructure by more than $100 billion, forcing 14 million people to evacuate their homes.
According to Kyiv-based investment firm Dragon Capital, the government has swiftly expanded expenditure to strengthen its military defense and help civilians who have lost their livelihoods, driving the budget deficit up 27% month on month to $7.7bn in May.
Increasing the interest rate is seen as a hedge against inflation since it will encourage the government to raise the yield on domestic bonds, which in turn will improve the attractiveness of assets denominated in hryvnia.
According to central bank projections, inflation rose to roughly 17 percent in May from 16.4 percent in April despite the fighting.
Additionally, banks must recognize that loans made to firms in Russian-controlled territories will never be repaid, a severe financial blow to the country’s economy.
According to Vitaliy Vavryshchuk, the director of macro analysis at asset management Investment Capital Ukraine, practically all corporate and retail loans in the regions that are still occupied are likely to be lost.
As a result of growing global prices and the impact of the conflict on local production and supply chains, inflation is expected to double in 2022 from 10 percent in 2021. According to a poll by the European Business Association, the association of Ukrainian firms, the number of small businesses that had ceased operations in April decreased to 26% from 73% in March.
The Impact Of The Russia-Ukraine War On The Global Economy
The war in Ukraine is causing an enormous humanitarian crisis. Estimates put the number of individuals affected by the disaster at around 12 million, and more than 13 million are in urgent need of humanitarian aid.
In Ukraine, the economy is in ruins. People’s lives will be forever changed as a result of the trauma they’ve experienced.
A massive influx of migrants is expected to strain local infrastructure. Because of the increasing number of migrants, it’s most probable that the number of countries will have additional problems, in terms of providing refugees with households.
Russia’s economic woes will have an impact on remittances to several of its neighbors. Growth in the area will be hampered by regional supply chain and financial network disruptions, as well as increased investor risk perceptions.
The Russia-Ukraine war had a great impact on the global economy. This is especially true when we talk about short-term impact.
Commodity markets have had the most initial influence on the global economy. Because many countries refused to import products from Russia, the deficit of commodities, including wheat, oils, and several others has grown in price.
In addition to that, because Ukraine was one of the biggest exporters of the above-mentioned commodities, it’s not a surprise that the price of these commodities is increasing progressively.
Rising food and energy costs have exacerbated poverty and food insecurity in many emerging markets and developing economies (EMDEs) while also increasing inflationary pressures that were already growing.
So what about the long-term impact? Some analysts say that a long-term conflict might have a negative impact on global economic development and food security, as well as raise financing costs and the likelihood of financial crises in certain EMDEs if it continues. There is a risk that policy uncertainty will worsen, and that the global trade and foreign investment networks will become more fragmented, which has been a major source of support for the global economy in the past.
An example of policy uncertainty is the USA, which nowadays sees one of the biggest inflation compared to other countries. In addition to that, most recently, the Euro started to decrease in value because of the Eurozone countries’ poor policy. As it seems, the countries weren’t ready for such a long war.
Current vulnerabilities, such as excessive debt and limited stocks of some commodities, such as wheat and oil, might amplify these threats. A rough decrease in the global economy is possible as a result of these interconnected and mutually escalating dangers.
In order to minimize the negative impact of the conflict on human life, livelihoods, and economic progress, appropriate measures will be necessary. However, are the countries ready to take these measures? The main problem here is that the global economic crisis is near because of the ongoing events in Ukraine.
Building refugee camps, providing them with the essentials they need, and helping them integrate into host communities would require a dedicated effort.
Governments may be inclined to impose price control and subsidy measures in the face of rising food and other basic costs, but these policies may be counterproductive. Instead, a well-calibrated safety net policy may shield disadvantaged populations from rising costs.
While enhancing macroprudential frameworks to defend against financial stress, monetary and fiscal authorities may express clear, data-dependent plans to limit inflation. In order to cope with the global economic crisis, countries need to take measures in economic policy.
Governments should give the businesses chances to work with less regulation, which will have an effect on their revenue and finally, on the countries’ economy positively.
Apart from that, it should be stated that in order to make things simpler and easier, governments should reduce the money for subsidies. Nowadays no one knows what will be in the future, however, it’s always important to be ready for the worst. As a result, governments should take safeguarding measures, in order to avoid a crisis in the country.