The third front: How the Ukraine conflict became an economic war of attrition

How the war in Ukraine goes into its second year will be decided by dollars and cents (or rubles and hryvnias) as much as by bombs and bullets, say experts who warn that the economic battlefield in Eastern Europe has become critical in the conflict.

Ukrainian President Volodymyr Zelenskyy’s repeated calls for arms donations continue to make headlines as the Russian Army launches an offensive in the eastern Donbas region.

“Ukrainians, when I talk to them, they say there are three fronts for the war,” said Matthew Schmidt, an expert at the University of New Haven Connecticut, who also teaches at the US Command General Staff College. “There is the east front, there is the south front, and then there is the economic front.”

On Monday, US Treasury Secretary Janet Yellen visited Kyiv to reaffirm the importance of American economic aid to keep Ukraine’s government afloat and continue the war effort.

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CBC News has been on the ground about Russia’s invasion of Ukraine since its inception. Do you want to know about his experience there? Send an email to ask@cbc.ca. Our reporter will answer your questions.

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“I know people talk about war about battlefields, right?” said Schmidt, who wrapped up his own visit to Kyiv last weekend. “They talk about tanks and planes and troop movements. I teach military theory [at the command college] and I can say that what we are talking about is politics and economics.”

Ukraine’s economy “cratered” after Russia’s full-scale invasion last year, Schmidt said — a contraction of about 30 percent driven by the displacement of people and businesses and attacks on infrastructure.

Russia’s military reputation has been affected by its failure to conquer Ukraine. But when you consider the drive to exhaust the economy of Ukraine, said Schmidt – an aspect of the Russian war effort that is rarely talked about – the results look much different.

“If you look at the purpose of the Russian kinetic force, it is true that it has achieved a lot because the purpose is not only to kill Ukraine but to crater the economy, and then create an economy to change the political situation,” he said.

Ukrainians themselves realize that they are fighting an economic war for survival, Schmidt said – that’s why the Zelenskyy government recently removed half of the regulations required to open new businesses in Ukraine.

In a real sense, says Schmidt, the war has been reduced to a question of which economy will collapse first – Ukraine or Russia.

Howard Shatz, a senior economist at the US non-profit think-tank RAND Corporation, said the Russian economy had fared better than expected during the war, despite the impact of western sanctions.

Before the full invasion, the Bank of Russia had estimated that the country’s 2022 gross domestic product would increase by two or three percent. After the army crossed the border, the bank estimated that Russia’s GDP would drop by eight or 10 percent.

For Russia, ‘slow degradation’

The World Bank and the International Monetary Fund issued similar forecasts.

In October, the Bank of Russia said that the country’s GDP in 2022 “will only decrease by three or three and a half percent, which is close to what will happen.” [with] COVID,” Shatz said.

Anticipated higher world oil prices have helped slow Moscow’s economic slide. He has played down the effects of western sanctions – which many world leaders, including Prime Minister Justin Trudeau and US President Joe Biden, predicted would bring the Kremlin to its knees.

Shatz said he believed the sanctions would be more severe in 2023 than last year, but would not be the economic “smart bomb” the West wanted.

“I don’t think there will be, you know, a switch [in the Russian economy]where it suddenly falls off a cliff,” he said. “I think what we’re seeing is a slow degradation.

“We are looking at the downward slope in the Russian economy. Because bit by bit, it will only fall behind the West more and more in terms of technology.”

For Ukraine, it could be worse

In Kyiv, stocktaking among economists has been mixed. On the one hand, there is an understanding that the 30 percent plunge in GDP could be worse, given the situation.

Due to the mass exodus of Ukrainians to other countries, an estimated 5.3 million people displaced in Ukraine and extensive damage to infrastructure, including the power grid, the 30 percent drop is “a very good result, really,” said economic analyst Yuliya Pavytska.

This helped Ukraine’s central bank move decisively early in the fight to keep the country’s financial institutions solvent, he added.

“We don’t have a bank,” said Pavytska, an analyst at the Kyiv School of Economics.

He said the economy is now in recession and can grow again. At the end of last autumn, the central bank of Ukraine has predicted GDP growth of four percent for 2022.

That changed when Russia started blowing up its power grid.

The attack caused much suffering as Ukrainians struggled to cope with blackouts in the middle of winter. But the destruction of up to half of the national grid also has dire economic consequences, forcing the central bank to revise its GDP projection for 2022 to about 0.3 percent.

“Obviously, the pressure on the economy is huge,” Pavytska said.

“And of course Ukraine now relies on the West, in terms of financial aid, to cover its expenditures. But this does not mean that the Ukrainian economy will not survive in these conditions.”