Estimates of the cost of physical damage have also risen from around $100bn mid-year to some $400bn in November and new forecasts of up to $630bn by some analysts in December.

There is no way that Ukraine can pay for this reconstruction and currently it can’t even pay for the maintenance of its own economy. The government forecast revenues of some $36bn equivalent in 2023, but that is only a third of what it has as budget spending. The forecast deficit is $38bn, which the West has promised to cover. Finance Minister Sergey Marchenko has said just one-third of Ukraine’s budget revenue comes from domestic sources, while the rest consists of foreign grants and loans. Even if the war were to end soon, Ukraine will be heavily dependent on international aid for years to come. A new comprehensive IMF programme is due to be agreed in the spring but even this will be a moving target.

Poverty due to the collapse of the economy was already in double digits in the second half of 2022 and the World Bank estimates it could rise to 50% in 2023.

Labour shortages were already an issue after some 3mn Ukrainians left the country prior to the war to look for better paid work in neighbouring countries such as Poland and Romania. However, after the war broke out an estimated additional 7mn people have left and recent polls say that a third of them don’t intend to return. On top of that, Ukraine was already suffering from a demographic crisis that will only get worse now.

The economy is struggling with a massive trade deficit, reliant on international aid to shore up its FX reserves, which had fallen to $25.2bn in December. The hryvnia has already been heavily devalued, but analysts expect the National Bank of Ukraine (NBU) to allow further depreciation of the hryvnia in the first half of 2023 as the financial crisis deteriorates.

With business on its back the budget is now entirely dependent on external aid. The Ministry of Finance estimates next year’s deficit will reach $38bn and Ukraine’s Western allies have said they will cover all of this. But again, as the economic situation continued to deteriorate further in December, bigger estimates of the deficit were already appearing, with some saying the deficit could reach $50bn in 2023, creating the need for more funding to be raised from partners.

Public expenditures have been driven by defence and essential social spending and have led to an unprecedented fiscal deficit of about 20% of GDP in 2022. Since the war began until the end of October, Ukraine has disbursed $23bn in financial assistance to the population.

The EU has confirmed it will provide Ukraine with €18bn in 2023, distributed in tranches of €1.5bn per month, according to Prime Minister Denys Shmyhal. At the same time, the USA has promised to match the EU and send $9.8bn in 2023, bringing a combined $28.7bn. Other donors like the International Monetary Fund (IMF), World Bank and other multilateral agencies have all promised more funds.

There is still no sign of peace talks starting any time soon. The initial attempt in March and April came close to striking a deal, but after that failure the two sides have too much distance between them to be able to come to the table. In November and December the Kremlin signalled that it was ready to start talks, but Ukrainian President Volodymyr Zelenskiy was adamant that no talks could start until Russia had quit Ukraine’s territory entirely – a position the Kremlin rejected out of hand.

Negotiations could start in the New Year as a certain Ukraine fatigue was appearing in November, according to the US, as the cost of the war and the associated polycrisis it has fuelled start to weigh on Europe. The cost-of-living crisis in the West has already spurred demonstrations, although the energy crisis in 2022 seems to have been contained as Europe’s gas tanks were filled to the brim by the start of the heating season. However, energy analysts are already warning that the energy crisis in the winter of 2023 could be even worse. Russia sent the EU 60bn cubic metres of gas in the first half of 2022, but since the two Nord Stream pipelines were blown up in September the volume of gas Russia can send will be dramatically reduced. The International Energy Agency (IEA) forecasts that Europe will go into next year’s heating season with a 30 bcm deficit that will cause an even bigger energy crisis.

Political outlook