Ukraine Country Report Jul22 - July , 2022

July 11, 2022

The war drags on and Ukraine is losing ground to Russia in the face of incessant shelling. Russia has already taken all of Luhansk and is now in the process of trying to take the half of Donetsk it doesn’t already control. Will Russian President Vladimir Putin stop then? It’s possible. It would be the clever thing to do as he could declare victory and stop the bleeding of men, materiel and money. But Putin has become so unpredictable since the start of this year anything remains possible.

In the first phase of the war Russia attacked on too many fronts and never managed to take control of more than roads. That left its columns of men and amour vulnerable to the hit & run of small teams armed with the deadly Javelin missiles, which were used to such devastating effect.

But in the second phase things have changed. The war has become a classic large scale set piece confrontation, with fortified positions and dug in troops that are extremely hard to dislodged. The fighting has changed from the fast-moving low-profile hit & run teams to slugfest of an artillery duel. And there the Russians have the advantage out gunning the Ukrainians ten-to-one. Even if the Ukrainian troops are dug in, the sheer volume of lead the Russians can throw at them means that it will slowly wear down the resistance and advance, inch by inch.

For its part Kyiv has been calling on the west constantly for heavy weapons, but it hasn’t received them. In the meantime, Ukraine has put up a heroic defence, but unless Nato sends heavy weapons the outlook for Kyiv hanging onto the rest of Donbas looks poor.

Unless something changes – and according to reports the US doesn’t have the manufacturing capacity to provide enough of the heavy weapons Kyiv needs to turn the fight around for at least a year – the only hopes for a Ukrainian victory are if the Russian economy collapses, there is a mutiny by the Russian soldiers, or if Putin dies of cancer. As the sanctions are not having the desired effect and actually Russia is earning more money than ever, the first is unlikely, but the other two could still happen.

A new problem has surfaced as the war drags on longer than anyone expected: Kyiv is running out of money. Ukraine has received a total of about $9bn from the West to support budget expenditure, but it is running a deficit of around $5bn a month. The government has already tapped the country’s reserves to the tune of $3bn and the National Bank of Ukraine (NBU) is printing the rest. With only $30bn pledged by the donors to the rest of the year, but government estimates of $65bn in spending this will be a problem. Although it seems likely the donors and the IMF will cover the shortfall.

The economy is in tatters. The NBU expects Ukraine's economy to contract by “only” 35-40% in 2022. According to the National Bank, Ukraine’s GDP fell by 15.1% in the first quarter of 2022 compared to the first quarter of 2021, after growing by 6.1% in the fourth quarter of last year. The World Bank forecasts a 45.1% decline in Ukraine’s economy this year, while the National Bank of Ukraine says the downturn will be at least 30%. No one really knows and it's all a bit academic while the fighting is still going on.

However, thoughts are already turning to what comes next. There was a Ukraine Reconstruction Conference in the first week of July to begin the process of building a “platform” to revive the country when peace comes. Ukraine’s Prime Minister Denys Shmyhal says the country needs $750bn and Russia and the oligarchs should be made to pay. Some sort of Marshall Plan is on the cards. The physical damage to housing and infrastructure needs to be fixed first and indeed work on housing has already started as the flood of refugees has turned into an ebb as Russia’s attacks outside of the Donbas dwindle.

The government of Ukraine has announced a new economic strategy. A total of 8 programs will be launched to create jobs through business support, government procurement, construction, lending, and employment of the unemployed.

In particular, the program will include non-refundable grant aid to small and medium-sized businesses, support for Ukrainian producers, and the construction of new infrastructure. Prime Minister Denys Shmyhal talked about six grant programs for now:

The first program is in the form of microgrants to start your own business.
The second initiative is grants, not to be repaid, for equipment for the development of processing enterprises: woodworking, furniture production, production of clothing or accessories, building materials, agricultural processing, etc.
The third initiative is a program in the agricultural sector that provides partial compensation for the cost of greenhouses.
The fourth program is also related to the agricultural sector in the form of grants for planting new orchards and berries under co-financing from the state and businesses.
The fifth program is aimed at the IT sector. The Ukrainian Startup Support Fund provides financial assistance for newly established companies to assist in current activities as well as acceleration programs.
The sixth program will finance the training of 60,000 IT specialists. Ukrainians who want to qualify as a junior developer, graphic designer, or other technical specialties will be eligible.

The work will be phased as once peace arrives housing will be a top priority. But what comes next will be a long and complicated topic. Clearly Ukraine is about to receive a once in a generation opportunity to build the country of their dreams as the financial assistance will be massive. But they will have to be clear about what that dream is and that remains an open question.

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