This Ukraine Outlook 2024  has been prepared by bne IntelliNews as part of a series of annual reviews providing updates on the geopolitical, macroeconomic and commercial state of countries in Central, Eastern and Southeastern Europe, and the Caucasus and Central Asia. 

 

Read the executive summary below. Find the full report via the links at the bottom of the page. 

 

Ukraine’s economy started to make a strong recovery in 2023 from the contraction that the invasion shock in 2022 caused. The country returned to growth in 2023. Inflation was falling faster than expected, allowing the National Bank of Ukraine (NBU) to put in a series of growth-boosting rate cuts, and the international foreign exchange reserves rose to an all-time high.

However, the outlook for 2024 looks less good, as Ukraine is entirely dependent on international aid that appears to be drying up after the summer’s much vaunted counter-offensive failed to make any progress at all. That has led some of Ukraine’s allies to ask “What next? How can we end this expensive war?” And that has fuelled the Ukraine fatigue that was already palpable in August, when the transfers to the budget began to fall dramatically.

Ukraine’s 2024 budget has a $41bn deficit that has to be entirely funded by international donors, but the Ministry of Finance (MinFin) has admitted that $29bn of those funds are unallocated. A $61bn package proposed by US President Joe Biden in December was not approved before Christmas and may not get through at all as funding Ukraine becomes a domestic campaign issue in the upcoming US presidential elections in November 2024.

In an ominous sign, Biden’s rhetoric changed in the December manoeuvring to get his $61bn bill through, changing from “We will stand with Ukraine for as long as it takes,” to “We will stand with Ukraine for as long as we can.” Ukrainian President Volodymyr Zelenskiy himself has pointed to the Israeli war with Hamas that broke out on October 7 as being a major distraction. While the White House said that it could supply both allies at the same time, Kyiv reported that the delivery of the key 155mm artillery shells fell by a third in October as shipments earmarked for Kyiv were diverted to Israel instead.

There are problems with EU support too, where a motion to start formal accession talks overcame a Hungarian veto after the European Commission (EC) released a €10bn payment of frozen funds to Budapest. However, Hungarian Prime Minister Viktor Orban vetoed a proposed four-year €50bn aid package during the same December summit, holding it in ransom for another €30bn EC payout to Budapest of more frozen money. The EU package will now not be decided until a vote slated for February.

In the meantime, US military experts said that US funding for Ukraine would dry up completely on December 30 and after that weapons supplies would also start to fall away, starting with the long-range missiles that have allowed the Armed Forces of Ukraine (AFU) to hold the Russian Black Sea fleet at bay. Then air defence ammunition will run out in the first two months of 2024, before Ukraine will run out of artillery shells in the summer. If these problems are not resolved before then there is a possibility of Ukraine being forced to capitulate in the summer of 2024.

However, given the amount of political capital invested into the Ukrainian cause, especially by the EC executive, led by European Commission President Ursula von der Leyen, it is likely that some sort of fudge will be found to keep the AFU in the field for another year.

For its part, the Kremlin has said that it is not interested in starting peace talks and it is widely believed that Russian President Vladimir Putin wants to wait to see the outcome of the presidential elections in November first. At the time of writing, former President Donald Trump was leading the deeply unpopular Biden in the polls and has said that he would “quickly end the war in Ukraine” as well as take the US out of Nato.

In the event of the end of Western support, Ukraine’s government has worked out a contingency Plan B that boils down to turning on the printing presses to pay for the government’s operations, a course of action that was employed in the first six months of the war and which will buy some more time. But that would also dramatically undermine the health of the economy and is not a sustainable solution.

Nevertheless, life in much of the country not close to the front line on the Dnipro is returning to normal. Businesses are reopening, and the war damage in the rest of the country is being repaired.

The main obstacle to growth is remaking the transport sector to get Ukraine’s key exports – grain and metal – out of the country to international markets.

Ukraine enjoyed a bumper harvest in 2023, but grain exports were down by a third due to Russia’s naval blockade on Ukraine’s main ports. Kyiv found a workaround via a temporary corridor that leads to the Danube where goods can be shipped to Europe, but this route remains under the threat of Russian bombers.

Likewise, more goods are being exported by truck, but a dispute with Poland, due to the waiver of permit restrictions in 2022, closed the border in November. An earlier dispute that broke out in April 2023, after the Polish market was flooded with cheap low-quality grain, also resulted in a ban on imports of Ukrainian grain that has also cut into Ukraine’s desperately needed foreign exchange reserves.

If the status quo is maintained then Ukraine is expected to continue on its recovery path; however, the downside risks due to the war are extremely big. Ukraine is on track to register 5% growth in 2023, but the NBU forecasts GDP growth will slow to 3.6% in 2024, while in 2025, if security risks are reduced, the expected GDP growth may accelerate to 6%.

Even if the war stopped in 2024, Ukraine faces a Herculean rebuild challenge. It needs to persuade millions of refugees, now comfortably settled in EU countries such as Germany, to return home, as the economy is already suffering an acute labour shortage.

At the same time, hundreds of billions of dollars will have to be found somewhere to pay for reconstruction. The frozen $300bn of Central Bank of Russia (CBR) reserve money has been taken off the table over European property right law concerns, and the international financial institutions (IFIs) can only provide a fraction of the needed money. At the Recovery conference held in London in June 2023 Zelenskiy appealed to the private sector to invest, but as long as the threat of renewed Russian aggression remains, little international investment will arrive.

Underlying that risk is the fact that Ukraine still has a very serious corruption problem that kept foreign direct investment (FDI) into Ukraine very low even during the post-EuroMaidan in 2014 to the outbreak of war in February 2022 period of relative prosperity, after Ukraine committed itself to the European path.

Both Ukraine and Moldova were formally cleared to start EU membership negotiations on December 15, opening up the way for their eventual membership, despite Hungarian objections.

While the decision was largely symbolic – no one actually expects either country to join for years – the decision was an important part of maintaining the support for Ukraine in its war with Russia in the face of growing Ukraine fatigue that is threatening its funding.

On the political front there were two major developments in 2023. The first was the arrest of oligarch Ihor Kolomoisky on September 2, who emptied his bank, PrivatBank, of $5.5bn, causing it to be nationalised in 2016. None of that money was ever recovered. The second was an apparent split at the top after Zelenskiy clashed with Ukraine’s top general Valerii Zaluzhny, who claimed the war was at a stalemate.

Kolomoisky, Zelenskiy’s former business partner and mentor and who is widely credited with using his media empire to put Zelenskiy into office, returned to Ukraine from Israel after the 2019 elections and continued his nefarious activities with impunity. His arrest by the Ukrainian Security Service (SBU) was the first ever detention of any oligarch, and as such a major event in Zelenskiy’s anti-corruption campaign.

It remains to be seen if Kolomoisky’s case will actually go to trial but the fact of a crackdown on the oligarchs is a very encouraging development. Ukraine continues to have a very severe corruption problem and Zelenskiy is well aware that it will be the major obstacle to raising the hundreds of billions of dollars from the private sector needed to rebuild the country.

With Ukrainian presidential elections slated for 2024, Zelenskiy remains the most popular politician in the country, but Zaluzhny is also much admired and could threaten Zelenskiy politically. On top of this there has been some commentary that Zelenskiy is starting to show some authoritarian traits as he seeks to bring more of Ukraine’s organs under his direct control, but this is not a widely held view.

Ukraine’s outlook for 2024 remains up in the air and will depend heavily on both the events in the conflict and the amount of international support the country receives.

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