Ukraine Faces Economic Crisis Amid Russian Strikes and Soaring War Costs
Impact of War on Ukraine's Economy and Financial Stability
By Olena Harmash
Russian Strikes Devastate Key Industrial Cities
KYIV, Oct 5 (Reuters) - Kryvyi Rih, the hometown of Ukrainian President Volodymyr Zelenskiy, is struggling to survive. Russian airstrikes have brought the city's huge steel plant and mines to a standstill, dragging the local economy to its knees.
Mayor Oleksandr Vilkul said the sprawling industrial city — which stretches along the banks of the Inhulets River — was doing everything possible to ensure its hospitals remain open, the lights remain on in kindergartens and schools, and buses keep running.
"In Kryvyi Rih, the situation is actually worse than anywhere else, apart from the front line itself," Vilkul, 52, a former mining executive, said in a video address.
The financial squeeze on the city of about 600,000 people underlines the challenges facing Ukraine as the government navigates its biggest budget crisis since Russia's full-scale invasion in 2022.
Last month, the city's largest employer — ArcelorMittal's hulking mining and steelmaking complex — suspended its operations following a series of Russian ballistic missile strikes that darkened its furnaces.
The prospects for next year, Vilkul said, are bleak.
"It's about survival. Right now, we need to survive," he said.
It's a scene played out across Ukraine's once-mighty steel industry, which accounted for a tenth of economic output before the war. Giant mills in Zaporizhzhia in the southeast and other industrial cities stand silent and exports have stopped.
Infrastructure and Business Disruption Across the Country
An escalation in Russia's drone and missile strikes this summer destroyed factories and warehouses across Ukraine, damaged ports and railways, and forced shops and businesses to close, slowing the growth of the economy and tax revenue.
Meanwhile, the technology-driven war is becoming ever more expensive for Ukraine to fight.
Budget Crisis and International Financial Support
Billions of euros in foreign loans have been delayed by failure to pass bills including unpopular tax reforms and anti-corruption legislation demanded by Ukraine's Western allies, leaving a gaping hole in state coffers.
Ukraine needs $56 billion to fund that gap this year —equivalent to about a quarter of its economic output. Of that, $27 billion is military spending.
Efforts to Bridge the Funding Gap
To bridge the shortfall, Ukrainian officials met European partners in Brussels last week to discuss bringing forward disbursements due next year under a €90-billion ($101-billion) EU loan. The European Commission and Ukraine said they had identified funds to close the gap this year.
But three sources familiar with the talks said accelerating these payments risked increasing budget pressure next year - at a time when looming election campaigns in European allies including France and Poland could erode support for Kyiv.
Government Spending Priorities
Prime Minister Sergii Koretskyi acknowledges the situation is "challenging". The government has been forced to freeze non-essential spending — including reconstruction of damaged buildings and infrastructure — to prioritise military spending, public sector wages and pensions.
"All resources should be channelled into critically important areas," Koretskyi told reporters.
War Costs Soar, Domestic Revenues Fall
Rising Military Expenditure
WAR COSTS SOAR, DOMESTIC REVENUES FALL
Two years ago, a single day of fighting cost Ukraine $140 million, but that figure has jumped to $190 million, according to Roksolana Pidlasa, the head of parliament's budget committee. And that does not include direct military support to Kyiv from its Western allies.
Rising costs are driven partly by the need for expensive medium- and long-range weapons capable of striking Russia's oil refineries and military factories to reduce Moscow's ability to continue its war.
Plus, the wage bill for an expanded army is higher than ever before, and the state must support a growing number of military families of disabled or deceased soldiers.
"Expenditure will continue to rise," Pidlasa told a conference in Kyiv. "This is one more pragmatic reason why the US and Europe need to act faster to force (Russia) to end this war."
In the first nine months of this year, Ukraine spent more than $44 billion on defence alone, data showed. That does not include in-kind military support from allies.
Declining Tax Revenues and Economic Slowdown
In the same period, the government was able to raise only about $42 billion in tax revenue as the economy slowed.
Pidlasa said that in the first nine months of this year Ukraine's budget lost over 49.5 billion hryvnias ($1.1 billion) in tax revenue because of Russian attacks that not only damaged property and goods, but disrupted logistics and shut shops and businesses for hours at a time.
By the end of the year, the cumulative losses could rise to 70 billion hryvnias, the government estimates.
"We have not a temporary but a structural problem with the revenues at the very time when spending really requires resources," said Oleksandra Myronenko, an economist at the Centre for Economic Strategies, a Kyiv-based think tank.
Business Sentiment and Sector Impacts
Industrial and Business Retrenchment
Some Ukrainian businesses have started to scale back operations. Others have put capital expenditure on hold as the country braces for a difficult winter. Business sentiment and economic expectations are darkening.
Vasyl Khmelnytskyi, founder of an industrial park in the city of Bila Tserkva near Kyiv, said he had scrapped plans to build three new factories.
"The risks are simply too great right now — both for the business and for the people," he said in a Facebook post.
Agricultural Sector Under Pressure
Ukraine's agricultural sector — its largest source of export revenues — has been particularly hard hit. Russian attacks on Ukraine's Black Sea ports led to a 36.6% fall in grain exports year-on-year in September.
About $40 billion in export revenue is at risk this year as a result of the blockade, Economy Minister Oleksandr Kravchenko said.
Future Outlook
Even with tens of billions of euros in foreign support, Ukraine's economy is expected to