How Russia's war has reshaped Ukraine's economy

• Ukraine's economy faces difficulties ranging from inflation to trade struggles due to war with Russia.
• Central bank data show that Ukraine is running a persistent trade deficit, with a widening gap between imports and exports.

Since President Vladimir Putin launched his "special military operation" in February 2022, Ukraine's economy has undergone dramatic changes in the face of war and a shifting geopolitical landscape.

In the last 17 months, Moscow's aggression has killed thousands and displaced millions of Ukrainian citizens. It's also destroyed key export hubs, disrupted trade routes, and rattled financial markets.

Central bank data cited by The Brookings Institution show how Ukraine's trade deficit has expanded since the war started. Last February, the country's imported $5.9 billion worth of goods and exported $4.9 billion.

That gap has doubled as of May 2023.

This month, Russia bombed the port of Odesa, and announced it would back out of its agreement to allow Ukraine exports safe passage in the Black Sea, pushing wheat prices sharply higher.

Given how much exports have already fallen since before the war, July's events could make the trade deficit even worse, Brookings' senior fellow David Wessel told Insider.

Meanwhile, war-time government spending has far outpaced revenue, which has hamstrung Ukraine's ability to fund its economy.

"Government spending exceeds revenue a lot, making Ukraine reliant on support from other countries — extraordinary amounts of money and military equipment and, especially in Europe, the welcoming of thousands of Ukrainian refugees," Wessel said.

Declines have been measured in tax and non-tax revenue, and income from capital transactions, which includes money from the National Bank of Ukraine, according to Brookings.

The US, meanwhile, has led the way in supporting Ukraine during the war, contributing 42.8 billion euros in military aid and 24.46 billion euros in financial aid in the form of loans or grants. Europe and the United Kingdom have offered the the second- and third-most, per Brookings.

All the while, Ukraine's central bank has dragged on the economy and boosted inflation by printing more money, Wessel explained.

Though still high at 12.8%, inflation has fallen faster than anticipated from its more than 26% peak last year, which gives officials reason to loosen policy. Price growth slowed for the sixth consecutive month in June, and local companies forecast better business conditions in the year ahead.

After more than a year of emergency measures, such as devaluing the local currency and hiking interest rates to 25%, change could be coming starting with a 2% interest rate cut, according to Bloomberg. Deputy Governors Yuriy Heletiy and Sergiy Nikolaychuk said earlier in July that the government is weighing whether to allow foreign shareholders to repatriate 2023 dividends, too.

"What happens in the next six months to the economy depends heavily on the course of the war and the Ukrainian counteroffensive, the continued willingness of the U.S. and Europe to send money and arms to Ukraine, and the skill and resolve of the Ukrainian central bank in supporting the economy while keeping inflation from rising," Wessel said.

To be sure, Russia's economy has seen its own share of tumult. Sanctions have isolated it from the global financial system, barred it from lucrative trade routes, and minimized its might as an energy superpower.

Putin, for his part, has cannibalized the country's bedrock industries to fund military efforts, and has ultimately turned Russia into a pariah state.