Soaring inflation in Ukraine deepens economic toll of Russia’s invasion

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The war in Ukraine has driven up prices in Canada and around the world. But spare a thought for people in Ukraine, where inflation is closing in on 30 per cent, interest rates are 25 per cent and around one-third of the work force is unemployed.

The economic devastation caused by Russia’s invasion was laid bare last week by the country’s central bank, the National Bank of Ukraine (NBU). In its first detailed assessment of the economy since the war began, the NBU said it expects inflation to reach 31 per cent by the end of the year and the economy to shrink by 33 per cent. Unemployment has hit 35 per cent, and those who still have a job have seen their wages drop 27 per cent in real terms. And if the war continues into 2023, the NBU said, the country won’t have any meaningful increase in gross domestic product.

“The message is that the GDP decline is going to be catastrophic,” said Vitaliy Vavryshchuk, an economist with ICU Group, a Kyiv-based asset-management firm.

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No one needs to tell Lyubov Fedirivna how bad things have got. She’s been selling fruit in Bessarabska Square in central Kyiv for 36 years.

The market closed when the war started on Feb. 24, but reopened in April. “Since then, the prices have been rising and rising,” Ms. Fedirivna said on Tuesday as she sat next to her stall in the near-empty market.

She’s paying about 20 per cent more to buy produce from wholesalers, but she can’t pass all of that increase on to customers. “If we raise the price, then no one will come,” she said. By noon she’d made 240 hryvnya, a fraction of the roughly 6,000 hryvnya she would have pocketed by now before the war. “Fruit has become a luxury,” she said with a shrug.

Compounding the soaring inflation is the decreasing value of the currency. Last month, the NBU cut the official exchange rate by 25 per cent. It was the first devaluation by the bank since the start of the war, and it increased the cost of a U.S. dollar to 36 UAH from 29.25 UAH.

Mr. Vavryshchuk said the central bank had little choice because it was facing a steady fall in foreign reserves; down to US$22.8-billion at the end of June from US$29.1-billion at the end of January.

Many exporters had been holding on to whatever foreign currency they’ve earned from international sales because the NBU’s rate was far below the market rate. “The market rate was 36 or higher, but they had to sell dollars at 29,” he said.

Importers, meanwhile, were snapping up foreign currency from the NBU to buy goods from abroad. And Ukrainians who had left the country were pulling foreign currency out of their bank accounts, further draining the supply of dollars and euros. “The banks have to convert UAH into foreign currency, so they go to NBU and they buy dollars from NBU. That was a channel for US$4-billion that left the country,” he said.

By setting the currency closer to the market rate, Mr. Vavryshchuk said, the NBU is hoping exporters will be encouraged to sell more dollars to the bank. And the expectation is that importers will buy less foreign currency because it has become more expensive.

“We have to wait for a couple of months to see whether these imbalances persist,” he added. “My expectation is that this devaluation will help reduce but it will definitely not eliminate the deficit.” He added that another devaluation before the end of the year was likely, which could push inflation up even higher as imports become more pricey.

Artem Vradii, 29, knows all too well how difficult the currency devaluation has been. He co-owns Mad Heads Coffee and he has spent years developing a network of coffee bean farmers in Central America and Africa. He used to travel regularly to Kenya, Uganda and a host of other countries to encourage farmers to grow specialty beans for Mad Heads, which has a roasting facility in Kyiv.

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Importing anything since the war began has become a logistical nightmare. His beans used to arrive on ships via Ukraine’s Black Sea ports, but the ports have been closed since Russia’s invasion. Now he has to funnel bean shipments through ports in Spain, Belgium and Germany, and then on trucks to Ukraine.

On top of that, he can’t get insurance for shipments to Ukraine and the Ukrainian government wants him to make sure that none of his coffee bean suppliers has ever had dealings with Russia. “There are a lot of super strange new rules, new everything now,” he said.

All of that was costly enough, but the NBU’s currency devaluation has piled on even more expense because Mr. Vradii’s bean contracts are priced in U.S. dollars. Over all, he said his costs have climbed 20 per cent or 30 per cent.

He worried about raising prices to cover the increased costs. “I was afraid of this moment,” he said. “But our customers were super kind in trying to support us. It seems like everything is okay.”

Mr. Vradii has marvelled at how businesses across Ukraine have pulled together to help each other. “It’s like a special relationships right now,” he said. “That really helps.”

Despite the financial pressures, Mr. Vradii hasn’t had to lay off any of the company’s 19 staff, and he’s even managed to keep paying the salaries of two employees who joined the military. “We send money to their wives in Poland,” he said. “Everyone working here is my friend.”

When asked how he copes with the seemingly endless business challenges, Mr. Vradii smiled and replied: “It’s interesting. All of the problems I had before the war seem like nothing now.”

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