Re-Imagining the Economic Front of the Russia-Ukrainian Conflict

Photo via the Brookings Institution


The Russian Central Bank Board of Directors announced on December 18, 2023, that it would increase its Key Rate to 16% to attempt to curb inflation. Its announcement on December 15 also included provisions to increase interest rates by 100 basis points (1 percent) for all of its liquidity absorption and liquidity provision operations from their earlier October 30, 2023 rates. The Key Rate has doubled since earlier this January and nearly quadrupled since the beginning of the war in February of 2022, where it rested at a steady 4.25 percent. 

This announcement came only a day after the Ukrainian Central Bank announced that it would slash interest rates to 15 percent, with December 18 marking the first time since 2022 that Ukrainian interest rates dipped below Russia’s. This all came with the central bank forecasting that Russian inflation would reach 7.5 percent by the end of the year, with officials targeting an inflationary rate of 4 to 4.5 percent for the following year. 

Many journalists tout this change as a signal towards Ukraine’s economic recovery and as evidence of Russia’s ongoing struggles, often failing to account for the fact that Ukrainian inflation remains at 13.5 percent, a far more significant figure than Russia’s. However, a more holistic understanding of Ukraine’s economy requires reporting on economic data beyond GDP growth, inflation, and Central Bank interest rates to understand how the economies of both states have reacted and adapted as a consequence of the conflict.

Critically examining the factors that have led to rapid inflation in both countries allows economists to better understand the measures and steps policymakers could implement to improve the economic conditions in both states. Inflation must, therefore, be seen as an effect instead of just being examined as a cause, and unraveling the factors leading to its rise in both states is integral to examining alternatives to simply increasing and decreasing interest rates. 

Economists have long correlated the link between Russia’s tightening labor market and its resulting low unemployment rate as fueling Russia’s rampant inflation. With a tighter labor market, employers compete through increased wages to appeal to the limited supply of workers. In the context of Russia’s war with Ukraine, the mass exodus at the beginning of the war, and the mass mobilization of Ukraine’s population, unemployment has dropped to a record 2.9 percent. This trend follows the 3.3 percent unemployment rate reported earlier this spring.

Ukraine, however, appears to have the opposite phenomenon, where the mass displacement of around 8 million workers has led to a record-high unemployment rate, with the International Monetary Fund (IMF) reporting an unemployment rate of 19.4 percent. Therefore, the rapid inflation rate can be presumed to be caused by other factors.

After almost two years of conflict, the Ukrainian economy finally appears to have begun to recover, though caution should be exercised to avoid conflating this with the notion that Ukraine’s economy has returned to its pre-war conditions. The aforementioned unemployment rate is preceded by a previous high of 24.5 percent, according to the IMF, signaling a slow recovery. During the peak of the conflict, the Ukrainian economy shrunk by nearly a third; however, it appears to have begun to recover following a rise in consumer spending. Specifically, the World Bank has reported a 5 percent rise in consumer spending, which has recently fueled its economic growth. However, it is essential to note the intricacies of the adapting economy, as farmland from Ukraine has decreased grain exports by 30 percent, according to a report from the United Nations Office for the Coordination of Humanitarian Affairs. As the report indicates, direct action, such as the destruction of the Kakhovka Dam and the displacement of individuals off agrarian land in the East, has dramatically reduced its agricultural exports. Still, farmers recently have experienced greater yields, indicating that they may soon rise again. Ultimately, the war in Ukraine and Russia has introduced a wide array of new problems for both the Russian people and Ukrainian citizens. Accurate reporting on the conflict’s economic effect must utilize a variety of economic factors beyond basic metrics, such as GDP, Interest Rates, and Inflation, to provide a holistic examination of the economic changes that occurred due to the conflict.