Executive summary
The expert poll conducted in April 2023 by the National Institute for Strategic Studies, represents the perception of risks for Ukraine's economic security, which may manifest in the context of war. This analysis highlights priority decisions and actions that the government should undertake to protect the nation's economic security.
During the initial months of the full-scale invasion, Ukraine's economic security was largely ensured by pre-war reserves and margin of strength, as well as the rapid consolidation of society at the regional and local levels. The self-organization and cohesion of Ukrainians facing the existential threat posed by Russian aggression, coupled with unprecedented international support, played significant roles.
As the Russian aggression transformed into a protracted war of attrition, the direct impact of military operations has been engraved by deliberate attacks on critical infrastructure, depletion of financial reserves of both individuals and businesses, and the exacerbation of pre-existing economic disparities characterized this phase. Additionally, the aggressors employed a range of hybrid tools of impact.
Despite the challenging trajectory of socio-economic processes throughout the over-year-long Russian invasion of Ukraine in 2023, the perception of risks to Ukraine's economic security has improved. However, the overall state of economic security remains struggling.
Quantity, (number of threats for 2022 are shown in brackets).
The majority of risks have diminished and are presently assessed as significant or moderate, depending on their specific components. This evolution in expert assessments reflects the fact that the key events that pose the most critical risks to economic security have already occurred, and the economy has demonstrated a sufficient level of adaptability and resilience. The probability of further deepening risks under the expert-reviewed scenarios is limited. Encouraging signs of economic stabilization and the ability of economic actors to adapt to the detrimental impact of the war allow for cautious optimism regarding the gradual enhancement of the state of economic security in 2023.
Nevertheless, the concentration of threats within the yellow-orange zone (indicating moderate to moderately high risks) in 2023 implies that prompt restoration of socio-economic dynamics and the maintenance of external compensatory resources at levels not lower than in the previous year are necessary to avert the realization of negative projections.
The expert assessments reflect the accumulating impact of the protracted Russian aggression, which have resulted in a deterioration of estimates concerning the impact of several threats with medium- to long-term consequences. Notably, risks pertaining to the financial capacity of the state, competitiveness of Ukrainian producers, and the social dimensions of the economic landscape have gained prominence. Consequently, it is imperative to model and forecast Ukraine's economic trajectory in the medium term to inform governmental decision-making aimed at ensuring economic security and directing efforts toward recovery and modernization amidst the ongoing war and post-war time recovery.
Due to the ability to effectively mobilize financial resources, control the situation within the banking sector, and receive extensive financial support from international financial institutions and partner countries, Ukraine has successfully fulfilled its budgetary obligations, preserved banking stability, and maintained a positive business reputation at global financial markets, which had been gained over previous years. This provides a solid financial foundation for continued functioning and establishes the ground for the country's reconstruction. The level of threats to financial security has decreased compared to the previous year and is presently assessed as significant or moderate, with the exception of the risk of an expanding state budget deficit, which remains in the red zone. Significant and deeply concerning threats continue to persist in 2023, encompassing substantial losses in tax and customs revenues for both the state and local budgets, an escalation of public debt and expenditures to service, inadequate funding of some budgetary spending, and a deterioration in the financial stability of the pension system.
The industrial sector of Ukraine has suffered significantly from high-intensity hostilities with the aggressor country, resulting in the destruction or suspension of key export-oriented enterprises, primarily in the metallurgical, chemical, and machine-building sectors. The impact of direct destruction has been exacerbated by disruptions in logistics, both at the domestic market and export routes, substantial increases in the cost of essential processes, loss of labor potential due to forced migration, and the engagement of workers in defense forces, along with challenges in energy supply since autumn 2022. The extensive recovery of the country, already initiated not waiting for the cessation of active combat operations, should serve as a powerful driver for domestic production revitalization. However, to ensure proper production support for recovery, the operational adaptability of domestic businesses, which has already been demonstrated, must be reinforced by their investment and innovation capabilities.
The impact of the large-scale invasion has significantly deteriorated investment and innovation security. The substantial contraction of investment activities in the corporate sector poses substantial medium-term risks associated with the accumulation of wearing of productive assets and technological lags.
The large-scale invasion has posed a significant challenge to the development and preservation of human capital. Among the major challenges are the significant deterioration of the socio-economic situation for vulnerable population groups, narrowing employment opportunities, and deepening structural disparities in the labor market. Negative demographic trends have intensified, including an overall decline in the population, particularly in the working-age, the emergence of new vulnerable categories of citizens due to migration flows, physical losses, and increased disability rates. The acute resource shortage, coupled with extensive damage to social and civil infrastructure, highlights the need to modernize the social protection system to enhance its targeted and risk-oriented feature.
Identifying the circle of threats with a high potential for negative impact, albeit with moderate probability at the current moment, enables the outline of potential triggers for increasing risks. Preventing such risks should be the guiding principle in determining the priorities of policies aimed at ensuring economic security.
These potential risks include an increase in the proportion of war refugees who decide not to return to the country; eroding confidence to public authorities, particularly in the fiscal sphere; decreased capacity of the budget system to fund planned spendings; consistent decline in the competitiveness of Ukrainian manufacturers due to prolonged underinvestment, halted innovation, and growing excess costs; abundant influx of imported consumer and industrial goods due to suppressed domestic production capacity; escalating negative environmental consequences of war; worsening of the economy's capacity to ensure food security due to adverse processes in the agrarian sector and decreased efficiency of food infrastructure (storage, primary processing, agro-supply), resulting in negative social consequences.
This calls for a focused state policy that effectively addresses the range of risks through real-time monitoring of challenges and threats to economic security.
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