Ukraine's economy is another victim of Russia's 'hybrid war'

The threat of war has shredded Ukraine's economy, and many Ukrainians are asking why they are the ones suffering instead of Russia

Ukraine The Biggest Loser (Copyright 2022 The Associated Press. All rights reserved)

One by one, embassies and international offices in Kyiv closed. Flight after flight was canceled when insurance companies balked at covering planes arriving in Ukraine. Hundreds of millions of dollars in investment dried up within weeks.

With Russian troops encircling much of the country, Ukrainian businesses large and small no longer plan for the future — they can barely foresee what will happen week to week.

It is Ukraine, not Russia, where the economy is eroding the fastest under the threat of war. Even before Russian troops rolled into rebel-held areas in the country's east and Russian President Vladimir Putin recognized the independence of the separatist region, Ukraine was the biggest loser in the agonizing, slow-motion aggression.

“Why is it that we are suffering consequences already? And Russia, who is actually threatening the whole world, in Europe, is not suffering any consequences?” asked Andrey Stavnitser, CEO of the port operator TIS Group.

The squeezing of Ukraine’s economy is a key destabilizing tactic in what the government describes as “hybrid warfare” intended to eat away at the country from within. The Ukrainian president is also juggling state-sponsored cyberattacks, a Russia-backed separatist movement and the threat of 150,000 Russian soldiers surrounding his country on three sides.

The economic woes include restaurants that dare not keep more than a few days of food on hand, stalled plans for a hydrogen production plant that could help wean Europe off Russian gas and uncertain conditions for shipping in the Black Sea, where container ships must carefully edge their way around Russian military vessels.

Stavnitser said the Black Sea ports are operating as usual for now, but it’s only a matter of time before the same insurance problems that cut off commercial flights start to hit the shipping industry. Ukraine is one of the world’s top grain exporters, loading container ships that carry 12% of the world’s wheat supply and 16% of its corn.

Alex Riabchyn is a former member of Ukraine’s parliament who now spearheads a project to set up hydrogen plants for the national Naftogaz energy company. The idea is to give Europe — and especially its largest economy, Germany — a stable new source of hydrogen, which can be used to produce low-emission energy for transport, industry and other uses.

What he hears from European investors now is “we can buy everything that you can produce, but to come and invest to build these plants, it’s too risky.”

German Foreign Minister Annalena Baerbock over the weekend acknowledged that the constant threat against Ukraine is "having very real effects — on investments, on air traffic, on jobs and on the daily life of people.”

She said the Group of Seven ministers of leading industrial nations promised to ensure Ukraine gets help for financial stability.

Since the beginning of the crisis in January, the national currency, the hryvnia, has steadily lost value, and it plunged 1% Tuesday after Russia recognized the two breakaway regions led by Russia-backed separatists. The United States last week offered a $1 billion loan guarantee, and the European Parliament approved $1.3 billion in loans for Ukraine to cover financing needs this year.

But by late January, Ukrainian President Volodymyr Zelenskyy said that $12.5 billion had been withdrawn from accounts in the country. Last week, he called on members of parliament and businessmen who had fled to return. More than 20 charters and private jets left Kyiv last week, carrying some of the country's most prominent executives.

“The more the government urges not to panic, the more nervous businesses are," said Volodymyr Sidenko, an analyst with the Razumkov Center.

In Russia, Margarite Simonyan, the head of the state-owned Russian RT news network, gloated last week that “Kyiv's economy is in tatters,” calling it "a small but pleasant thing.”

But Deputy Prime Minister Olga Stefanishyna said the destabilization of Ukraine’s economy isn't a side effect of the Russian threat, but the point. It saps faith in the government, and it forces Ukraine to divert attention and resources from needed reforms. It is, she said, an essential pillar of the “hybrid war” Russia is waging.

“It’s really important that we are resilient as we have never been before and we do our best to preserve the stability. But the longer this tension and escalation is taking place, the weaker Ukrainian economy can become,” she said.

The Centre for Economics and Business research estimated this month that the conflict with Russia cost Ukraine $280 billion in lost gross domestic product between 2014 and 2020 — with those loses expected to climb this year.

The United States and Europe worked out a series of limited sanctions on Tuesday, including targeting several Russian officials and banks financing the Russian armed forces, and putting limits on Moscow’s access to EU capital and financial markets.

Additional plans to target trade from the breakaway regions are unlikely to have much of an effect on them or Russia as they've been largely isolated from the international community since 2014.

Daniel Fried, a former U.S. diplomat who helped write sanctions in 2014, said the challenge in designing any new sanctions is that Russia is already succeeding in what he called “the slow strangulation of Ukraine.”

“When we saw the airlines pull out of Kyiv — they’re not pulling out of Russia. They’re pulling out of Kyiv. Putin is getting something that he wants without war.”

Kyiv restaurateur Ievgen Klopotenko said he keeps just a few days worth of stock in his kitchens, to avoid having his money literally rot away if the crisis worsens. Planning more than a year into the future, he said, is folly.

“If something happens, I don’t know, I will be open," he said, gesturing outside the window overlooking one of Kyiv's broad sunlit streets as though imagining a day when they would be filled with soldiers, not families looking for brunch. "If I need to cook for the army, I will cook for the army."

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Yuras Karmanau contributed to this report.

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