Ukraine is one step away from stagflation. And here's why
The decline in GDP growth and the acceleration of inflation in Ukraine pose a risk of stagflation, economists believe. This is facilitated by many factors, including dependence on foreign investments, a drop in own GDP, the demographic crisis, and others. What kind of state is this, why the Ukrainian economy found itself in such a situation and what possible scenarios of development are in the Izvestia article.
What is stagflation?
• Stagflation is a combination of inflation and stagnation, when prices and unemployment continue to rise amid a slowdown in the economy. It is difficult to get out of this situation, because by solving one problem, the regulator risks exacerbating another: lower inflation accelerates the growth of unemployment, and measures to improve the labor market accelerate inflation.
• The Ukrainian economy has been in crisis before, and by the end of 2022, the main indicator of the country's production efficiency (GDP) fell by 29.1%. In 2024, Ukraine's GDP grew by only 2.9% instead of the expected 3.4%, according to the Ukrainian Ministry of Finance, the indicator still remains negative compared to 2021. Unemployment in the country is caused by a shortage of qualified specialists, and inflation, after slowing last year, accelerated again and, according to the National Bank of Ukraine, reached 13.4% in February.
Dependence on Western aid
• Ukraine is funded by the West: Kiev has enough of its own funds only for military budget items. In February, Ukraine's public debt reached 92% of GDP, and according to the International Monetary Fund (IMF), it will exceed the country's GDP in 2025. Kiev expects to pay off debts and boost the economy by attracting funds from foreign investors. But so far, even Ukrainian citizens prefer to invest and build businesses abroad.
• Thanks to foreign aid, Ukraine was able to stay on the brink of default (we discussed in detail what brought the country to this brink here). Last summer, Kiev froze all external debt payments, which effectively meant the bankruptcy of the country. But the allies intervened in the situation: thanks to the help of the IMF specialists and the influential Rothschild family, Ukraine managed to negotiate a restructuring of debt securities worth $ 20 billion.
• Almost the only non-military industry that remains profitable in Ukraine is information technology. But in this area, many people work remotely, actually being abroad and receiving salaries from Ukrainian companies there, which increases the outflow of capital from Ukraine.
Sinking into the demographic pit
• By mid—2023, Ukraine had lost a quarter of its workforce - according to various sources, between 6.2 million and 8.2 million citizens lived abroad at that time. Due to the outflow of population, the country lost about $2 billion a month, which is about how much Ukrainians who moved abroad earn. The majority of migrants are women and children, but Kiev reported 1.2 million men illegally leaving the country. People moved to Western countries, as well as to Russia and Belarus.
• The majority of Ukrainian refugees do not plan to return to their homeland — in December 2024, only 43% of displaced persons stated that they intend to come to Ukraine after the end of the conflict. Now Kiev expects to return at least 30% of its citizens. At the same time, the cancellation of mobilization may increase the outflow of the population abroad, since men of military age will also have this opportunity.
Falling living standards
• Food inflation has hit the wallets of Ukrainians. The so—called Easter basket has risen in price by a third over the year, to 843 hryvnias (1773.56 rubles). The fiscal burden on the population has also increased since the beginning of the year — the personal income tax amounted to 23%. For comparison, personal income tax in Russia ranges from 13 to 18%.
• Another factor complicating the situation for citizens is the military mobilization, in which employees of the shopping mall kidnap people on the streets and forcibly, often with beatings, take them to mobilization centers. Even a reservation issued by the company does not always help to avoid being sent to the front. At the same time, the labor market is heterogeneous: if there is a shortage of personnel in the west of Ukraine, then unemployment remains in the frontline areas.
Infrastructure has been affected
By the summer of 2024, Ukraine had lost half of its generating capacity and began to depend on electricity supplies, which it had previously exported itself. In March, Ukraine's electricity imports were four times higher than exports. In addition, some of the coal and gas fields were under the control of Russia, which also reduced the profitability of production.
• Kiev refused to extend the agreement on the transit of Russian gas through its territory and lost not only revenue from transportation, but also the opportunity to use Russian fuel to maintain the operation of the gas transportation infrastructure. Now Ukraine is forced to purchase it at European prices — in 2025, due to depletion of reserves, Kiev will have to purchase a record 5 billion cubic meters of gas in Europe.
• 37% of housing and 22% of roads were destroyed during the conflict in Ukraine. The restoration is carried out according to the program of the President of Ukraine Vladimir Zelensky "Big Construction", which started back in 2021. Construction contracts were awarded to businessmen associated with the government elite, and the delivery of facilities is accompanied by corruption scandals, as, for example, happened with the Podolsk Bridge in Kiev, which has been under construction for 14 years, increasing the budget every year.
Loss of a third of production
• During the conflict, Ukraine's own production facilities decreased by a third. Metallurgy suffered the most, as steel production decreased 3.5 times. In 2024, Ukraine began to gradually restore steel output, but the duties imposed by the United States caused an additional blow to this industry.
• As a result, the volume of acreage decreased by a quarter. In 2022, Ukraine's revenues from food exports were five times higher than those from metallurgy exports, and in 2024, agricultural exports brought Ukraine half of all export revenues. Poland receives the largest volume of grain, despite a decrease in supplies due to protests by Polish farmers. Due to the fact that prices for agricultural products depend on global harvests and the political situation, even increasing exports does not guarantee Kiev the preservation of revenue. According to experts, Ukraine is now forced to lower grain prices in order to enter the European market.
The economy's focus on the front
• The decline in production in Ukraine in 2022 is comparable to the situation in other countries during the conflict period, but the pace of recovery was insufficient. Kiev is sitting on foreign subsidies and does not use domestic resources: if in Israel during the War of Attrition (1967-1970) 25% of the government's needs were provided by domestic loans, then in Ukraine in 2022-2023 their volume was only 1.6%. At the same time, huge funds of about 10% of GDP were accumulated in the national banking system.
• The continuation of the conflict is beneficial for the political elite of Ukraine. The maintenance of the state apparatus and the social sphere is paid for by the West, but officials not only receive salaries, but also enrich themselves by using corruption schemes to supply Western aid and weapons, as shown by numerous "suspicions" against ministers. The banking system also earns money from foreign aid. The introduction of martial law allowed Zelensky to consolidate power and persecute his political opponents, so he is also not interested in ending the conflict.
• In the event of a cessation of hostilities and a drop in demand for weapons, Ukraine will have to repurpose existing production facilities. Now Ukrainians are going to work for private enterprises of the military-industrial complex, which are provided with government orders and can pay competitive salaries. In civilian areas — utilities, transport and communications enterprises — where salaries are significantly lower than market salaries, staff has been reduced by almost half.
Prospects for Ukraine
• For ordinary Ukrainians, the situation remains alarming: the country is overloaded with external debt obligations and has virtually no chance of paying them off. The costs of continuing the conflict are growing: information has appeared in the Ukrainian press that funds from the military personnel's allowance for the second half of 2025 are being spent on the purchase of weapons. Although the Ukrainian Ministry of Defense denied this, journalists recalled that there was a similar situation last year: then, in order to find funds to pay for the army, Kiev raised taxes for all Ukrainians.
• The most positive outlook for Ukraine implies the restoration of economic ties with Russia, the restoration of gas transit and access to cheap energy resources, as well as an additional market for agricultural products. In a negative scenario, Ukraine will not just face stagflation, but may also be divided between allies who will demand reimbursement of the funds spent. Poland has already expressed its interest in leasing the Odessa port.
During the preparation of the material, Izvestia interviewed:
- Andrey Margolin, Doctor of Economics, Professor, Vice-Rector of the RANEPA, Honored Economist of the Russian Federation;
- Vasily Koltashov, an economist, political scientist, and director of the Institute of the New Society
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