Ukraine's economy depends on continued aid and that dried up starting in August 2023. The US $61bn aid package failed to pass congress in the last months of 2023 and a four-year €50bn EU package also got snarled up after Hungary vetoed its passage. Both packages are essential for balancing the budget as there is a $29bn hole in the funding plans for 2024, but both packages will be voted on again in January or February.

However, the European Commission (EC) has announced that it can dodge Hungary’s veto by asking willing members to raise money by issuing bonds at the sovereign level, which doesn’t depend on a unanimous EU vote, and contribute that money to the Ukraine fund. That should be enough to allow Ukraine to muddle through 2024 while the West deals with the longer-term funding sources.

In parallel the US has been pushing its EU colleagues to find a way to seize the Central Bank of Russia (CBR)’s $300bn in frozen funds which would be enough to fund the continued fighting as well as go a long way towards paying for reconstruction, but this route remains legally challenging as without an EU declaration of war against Russia it remains technically illegal.

At root of these problems, Ukraine’s summer counteroffensive was a disappointment and little progress was made other than to drive Russia’s Black Sea fleet back far enough from Ukraine’s coastline that Kyiv could open a temporary corridor that allowed seaborne exports to resume, albeit
in reduced quantities.
Ukraine’s grain harvest was up year-on-year in 2023 compared to the previous
year, but exports remained down by a third
adding to Kyiv’s financial pressures.

More generally, the economy performed well, returning to growth as the situation normalised somewhat. Inflation was also falling allowing the National Bank of Ukraine (NBU) to cut rates and remove some capital controls. Western partners fully met Ukraine’s funding needs in 2023 which also saw foreign exchange reserves rise to a recent high of five months-worth of import cover.

However, the outlook for 2024 remains uncertain. If most western funds are not found then the central bank is proposing to fund the budget simply by turning the printing presses back on which would undo much of the economic stability that has appeared in 2023.

The locomotive of positive change in 2023 was the ability of Ukrainian businesses to adapt to the challenging conditions of a full-scale war, according to the NBU. The banking sector has been especially profitable, leading the government to impose a temporary 50% profit tax to help cover the budget deficit. In particular, enterprises quickly and efficiently were able to adjust their production and logistics. In addition, weather conditions led to high yields and a good harvest.

But the war is eating up the government’s resources. Military spending has risen to 20% of GDP and fully half the budget is dedicated to paying for the war, which is also giving the economy a military Keynesianism boost. According to NBU forecasts, real GDP is expected to grow by another 3.6% in 2024, and in 2025, if security risks are reduced, the expected GDP growth may accelerate to 6%. The International Monetary Fund (IMF) recently upped its growth forecast to reach 1-3% in 2023, 3.2% in 2024, and 6.5% in 2025. Concorde Capital, another leading Ukrainian investment bank, predicts 6% growth in 2023 but no more than 3% after
that.

After telegraphing the 2023 counteroffensive, now considered a mistake, the government’s strategy for 2024 remains a secret, but in a December interview Ukrainian President Volodymyr Zelenskiy said that southern Ukraine and especially the Crimea remain a key focus.

Success in the south would widen the currently narrow corridor and allow for more grain exports. Analysts believe that a full resumption of transportation through the Black Sea ports could increase export revenues by $9-10bn in 2024, resulting in a positive impact on real GDP growth of up to 5 percentage points. Ukraine grew 6% of the world’s grain production in 2023, according to the Ukrainian Grain Association (UGA), or 81mn tonnes of grain.