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Ukraine: what’s the global economic impact of Russia’s invasion?

Russia’s brutal invasion has driven millions into poverty and debilitated – but not quite destroyed – Ukraine’s economy. Meanwhile, sanctions are straining the Russian economy, but they are yet to end a war that has sown financial turmoil and personal hardship in the region and across the globe.

It was clear from the start that Putin’s war in Ukraine would be a global economic disaster. Its economic impacts may be insignificant next to the suffering and loss of life on the battlefields. But they do present critical challenges that leaders must resolve to limit yet more suffering through poverty, food shortages and the cost of living crisis.

To illuminate these challenges, Economics Observatory has been publishing expert insights on the war’s economic implications ever since Russia fired that first set of missiles at Ukraine in February 2022.

Here, we round up analyses from these articles and elsewhere to help answer some big questions about how the conflict has affected the economies of Ukraine and Russia, magnified hardship, and harmed households and businesses across the globe.

How has Ukraine’s economy been affected by the war?

Ukraine was once one of the poorest Soviet republics. The war is undoing the significant – if bumpy – progress made by the developing country since its independence in 1991, adding catastrophically to its economic woes.

Ukraine’s economic output is now at a fraction of its pre-war levels. In the first year of the conflict, the country lost 30-35% of GDP. This led to the largest recession in Ukraine’s history (see Figure 1). Its GDP is projected to grow in 2023, if only by 0.5%.

Figure 1: Ukrainian GDP growth, 1992 to 2023

Source: International Monetary Fund (IMF)

Poverty and food insecurity

For the people of Ukraine, incomes have plummeted. Poverty in the country soared from 5.5% of the population to 24.2% in 2022, according to the World Bank. The war has thus pushed 7.1 million more people into poverty, undoing 15 years of progress.

Further, Ukraine is now one of the most food-insecure countries in the world, despite being one of the world’s biggest exporters of crops, such as maize, barley and wheat, before the war. The United Nations (UN) World Food Programme estimates that one in three Ukrainian households is food-insecure, rising to one in two in some areas of the east and south.

Ukraine’s rising deprivation is, in part, due to job losses following Russia’s destruction of infrastructure such as ports and manufacturing plants. It is also a result of a slow-down, or cessation, of economic activity including agriculture (see below).

Deaths among household earners also add to the deprivation. In August 2023, the UN Office of the High Commissioner for Human Rights (OHCHR) recorded 26,717 civilian casualties in the country: 9,511 killed and 17,206 injured since the conflict started.

This is almost certainly a major underestimate given the challenges of gathering accurate figures from areas blighted by intense hostilities. Separate figures from US officials are far higher: they report nearly half a million casualties across Ukraine and Russia as of August 2023, with around 60% (300,000) of these Russian.


War destroys farms, erodes soil and displaces farmers. This is particularly damaging in a part of the world known as the ‘breadbasket of Europe’.

Indeed, the decline in Ukraine’s agricultural sector has been especially harmful. Ukraine and Russia were the biggest producers in agriculture and food globally. Before the war, 55% of Ukraine’s land area was used for arable farming. In this highly fertile country, agriculture employed 14% of the population and accounted for 45% – or $22.2 billion – of its export revenue (International Trade Administration, ITA, 2022).

While the war has hampered agricultural production, exports were given the chance to bounce back a little in July 2022 when Russian and Ukrainian officials signed the Black Sea Grain Initiative. The Russian invasion has prevented commercial operations in Ukraine’s ports, blocking exports. But this welcome agreement eased the safe passage of Ukraine’s grain exports from three ports in the Black Sea.

Although grain exports remained below pre-war levels, they did go up – boosting global food security (see below) as well as Ukraine’s economy. As of July 2023, Ukraine had exported almost 33 million tonnes of grain and other foodstuffs via routes granted by the Black Sea Grain Initiative.

But the agreement was not long-term. Russia dealt Ukraine – and the countries it supplies – a major blow in July 2023 by withdrawing from it.

If the war continues, Ukraine may be unable to return to its pre-war level of agricultural production. Unless production is reinforced, exports will eventually fall.


The war has forced over six million people to flee Ukraine to date. Representing around 15% of Ukraine’s pre-war population, they leave a large hole in its national workforce. Even after the war is over, this exodus is likely to cause a serious shortage of workers.

But forced migration can offer an economic lifeline to many affected by war. It not only provides essential shelter and safety, but also gives children the chance to resume education and invest in a brighter future. The same may be true for adults from Ukraine, who will probably want to learn the language of their new home country and train in new skills to make the most of their new environment.

How might Ukraine’s economy be rebuilt?

Ukraine’s economic outlook is uncertain and depends on how long the war lasts. But recovery is possible. What’s more, Ukraine has already proved its resilience. In March 2022, 79% of businesses in the country were idle or on the brink of shutdown. By the end of the year, this figure had fallen to just 32% – which is remarkable given the scale of the destruction.

Similarly, Ukraine has avoided bureaucratic failure with most public services remaining accessible. This is largely thanks to a high level of digitalisation since the Covid-19 pandemic.

But successful recovery will take unprecedented efforts and creativity from government. Going forward, Ukraine’s leaders must strive to achieve all of the structural changes that other European countries have been going through for years, but in much less time. These include implementing low-carbon production, improving the energy intensity of the economy and using advances in information technologies and fintech to improve government services.

Could European Union (EU) membership offer a distant glimmer of hope? Ukraine submitted an official request to join the EU in February 2022, just days after the Russian invasion began. We don’t yet know whether Ukraine will become an EU member state, but this would bring economic benefits for the country.

How have sanctions affected the Russian economy?

The world has stood strong with Ukraine. Countries across the globe have imposed punishing sanctions and defensive trade instruments on Russia, and on an unprecedented scale. Before the war, trade as a share of Russian GDP was close to 50%. The wide-ranging trade sanctions seemed sure to weaken Russia’s economy significantly and bring the aggression against Ukraine to a halt.

Have the sanctions worked?

The sanctions are certainly yet to stop Russian aggression. Nor have they brought Russia to the negotiating table. Some commentators believe that they have had, at most, a very limited impact on the Russian economy.

The question of whether sanctions work is critical. They cause so much disruption to the world economy and supply chains – in this case, especially in the energy and agriculture sectors. The willpower of sanctioning nations to keep them in place may dissolve.

But analysis suggests that the sanctions have, in fact, significantly affected the Russian economy, even if initial forecasts of its decline have proved over-dramatic.

It is true that at the end of 2022, the World Bank had to revise its economic forecast for Russia significantly. In March that year, it had predicted that the sanctions would cause Russia’s GDP to be 11% lower by the end of the year, with inflation at 22%. But by the end of 2022, it was estimating a fall in GDP of only 4.5% for 2022 and inflation of 13.9%. Similarly, the International Monetary Fund (IMF) estimated that the real GDP decline was lower than it had originally forecast.

To understand the sanctions’ economic impacts, instead of looking at current estimates of GDP growth, we should compare these estimates with what Russia’s GDP growth would have been in the absence of sanctions – what economists would describe as the ‘counterfactual’.

In late 2021, prior to the invasion, the World Bank had forecast that Russia’s real GDP growth in 2022 would be 4.3%. Given an actual fall ranging between 2.1% and 4.5% in 2021, the impact on growth constitutes a reduction in GDP of 7-10%.

The evidence suggests that sanctions and trade restrictions have been highly effective at damaging Russia’s economy since, perhaps, mid-2022. The country’s federal budget deficit reached 2,400 billion roubles in the first quarter of this year. This is more than half of the budgeted deficit for the whole year.

By the end of 2023, Russia is expected to be in serious financial difficulties. At this point, it may become clear whether the Russian regime in its current form will survive. The sanctions alone cannot end the war, but they do limit Russia’s ability to replace its destroyed military equipment and finance its campaign.

Russia’s shape-shifting economy

Deeper analysis also reveals an economic shift within Russia – in terms of what the country produces and spends its money on.

Russia’s overall manufacturing output has not changed much: it was down just 1.7% year-on-year in January-February 2023. But car production in Russia was less than 25% of pre-invasion levels, with all Western brands leaving the country.

Filling its place is a big rise in the manufacture of products used in the war, such as metals, textiles and medical goods. Even in the face of harsh trade restrictions, Russia has ample resources and capability to keep making relatively simple products.

GDP figures for Russia are also likely to mask the cost of the war facing ordinary people. As with Ukraine, the human cost of the war has been devastating with up to 120,000 Russian troops killed, according to US government estimates.

Away from the frontlines, public services may suffer as the government redirects its spending towards military demands. In Russia’s 2022 budget, a third of funds were allocated to the military and ‘internal security’. Increasingly, this seems to be the main effect of Western policies on the Russian economy.

Analysis of Russia’s 2023 public budget suggests that relative to 2022, the government will spend 50% more on ‘security’ (which includes military activity). This comes with cuts of 9% in health spending, 2% in education spending, 24% in infrastructure spending and 19% in industrial spending.

A tough economic future for Russia

Looking ahead, the Russian economy may suffer from the collapse of technical, scientific and cultural ties with the West. This could lead to a ‘brain drain’ of younger and more outward-looking Russians who do not wish to stay in a country that has become a pariah on the world stage.

Further, Russia’s currency, the rouble, has tumbled in value. As in 1998, when the rouble was also in crisis, social and political stability is likely to suffer and a deep recession appears certain. Without a move towards peace, this financial crisis for Russia may be longer lasting and more severe than that of the 1990s.

Figure 2: The GDP cost of the war for the global economy

Source: National Institute Global Econometric Model (NiGEM) simulations

Figure 3: The inflation cost of war

Source: NiGEM simulations

What is the impact of the war on countries around the world?

The sharp cost of living

Clearly, many would argue that there is never a good time for war. But the timing of Russia’s first full-scale attack on Ukraine in February 2022 felt particularly brutal.

It came at a point when societies around the world were attempting to resume ‘business as usual’ after two gruelling years of the pandemic. Businesses faced chaotic supply chains as they tried to meet resurging demand for goods and services, and started passing on rising production costs to their customers.

Russia’s attack on Ukraine placed a further squeeze on critical commodities – food and energy. This was the result of reduced output from both countries and sanctions on Russia. Costs climbed even further, triggering inflation rates that far outpace wage growth. This cost of living crisis has diminished the health and wellbeing of people around the world, especially for the poorest, and increased the risk of famine (see Figures 2 and 3).

Growing global food insecurity

The conflict has hit food security around the world. Before the war, Ukraine and Russia were together the world’s largest exporter of wheat – responsible for over a third (36%) of wheat exports. They also exported more than half of the world’s sunflower oil.

Early predictions, including those in Economics Observatory, that the conflict would exacerbate global food insecurity have, sadly, proved to be correct. It has hit developing and emerging economies the hardest, as they rely more on Ukraine and Russia for fuel and grain imports.

The Food Security Information Network highlights the war as a key force – alongside the pandemic, other conflicts and extreme weather – behind a staggering rise in the number of people who are food-insecure.

Nearly 258 million people in 58 countries/territories were in food crisis or moderate-to-severe acute food insecurity in 2022 – up from 193 million in 53 countries/territories in 2021. This is the highest figure on record since the organisation began reporting these data in 2017.

And while the – currently defunct – Black Sea Grain Initiative (see above) helped to get more grain out of Ukraine, figures show that it mainly went to wealthier countries. Despite their larger populations, low-income and lower-middle-income countries received less than 20% of grain exports from Ukraine as of January 2023. A possible explanation, suggested by a commentator on the Economics Observatory, is that Ukraine provided ‘food-for-funds’.

Without equitable food distribution, achieving global food security (one of the UN’s Sustainable Development Goals) by 2030 could become elusive, even with a surge in food exports and supply. Food prices are still snowballing in many developing countries. For example, in March 2023, food inflation climbed to over 24% year-on-year in Nigeria. This was at the same time as some European countries were cautiously celebrating a fall in global food prices.

Soaring energy prices

The severe economic sanctions on Russia have triggered further increases in energy prices in the international market (see Figure 4). The ultimate picture is one of further inflation, as energy adds costs to each stage – production, storage and transport – in the supply chains of goods and services.

During the first two weeks of the war, Brent prices – the European oil benchmark – increased by more than 25%. By the end of March, European gas prices were around 580% higher than a year earlier, although they have fallen back since then.

Figure 4: Energy prices, December 2020 to October 2022

Source: Office for National Statistics (ONS) consumer price inflation, November 2022
Note: December 2020 = 1

European countries, including the UK, sought to cut their use of Russian oil and natural gas quickly, and the newly completed Nord Stream 2 pipeline was never activated. Indeed, both Nord Stream 1 and 2 were sabotaged in September 2021.

But efforts to replace Russian energy have proved challenging. They often mean using more expensive alternatives, such as liquified natural gas (LNG) from the United States.

While the UK does not directly consume much gas from Russia, it is linked very closely to the European wholesale market. Supply problems in continental Europe therefore feed directly into UK prices. The EU was the largest collective buyer of Russian oil – buying 42% of Russia’s oil output in 2021.

If it is possible to draw another positive from the conflict, one would be that the rise in fossil fuel costs should accelerate the development of cleaner energy supplies, including renewables, further reducing use of fossil fuels, and faster.

The decline in economic growth caused by rising energy prices should also limit fossil fuel consumption in countries including the UK and EU member states. In the face of the looming climate crisis, this is an unintended but encouraging side effect.

Impacts on global financial markets

The conflict has clearly affected global businesses, as well as consumers. Evidence from the stock market reveals that firms with strong ties to Russia, through trade or ownership, experienced a substantial fall in share prices following the invasion.

On average, trade links with Russia caused a 1.53% drop in the value of each country’s aggregate stock market index, the London School of Economics study shows (see Figure 5). Pre-war, firms had an average dependence on Russia of 0.25%. This meant, for example, that a firm with an output of $1 billion will have exports and imports to and from Russia worth $2.5 million in total.

But some countries depend far more on Russia than others. European countries have suffered the biggest losses. East European countries are among the most affected through trade links, while West European countries are the most affected through ownership linkages. In contrast, countries that are less closely linked to Russia, such as the United States and China, have suffered less. This suggests that Europe will feel the long-term, international financial impact of the war most keenly.

Figure 5: Average cumulative returns of firms, by level of exposure to Russia

Source: Leromain and Biermann, 2023

The longer the war, the greater the economic strife

The economic impact of the war in Ukraine may be less urgent than the immediate suffering and death in the warzone. It has, nonetheless, proved to be immense – and especially for Ukraine and Russia. The impacts themselves cause further harm by driving food insecurity and poverty to perilous levels. The longer the war goes on, the deeper the economic crisis goes.

Much is still unfolding on the exact scale of the war’s impacts. But through the insights presented here, we can start to build a quantitative picture of its economic hazards. While a clear end to the war remains out of view, these insights also hint at where governments should focus their efforts to undo the war’s damage and pave the way for a brighter future.

Where can I find out more?

Who are experts on this question?

  • Vladyslav Davydov
  • Richard Disney
  • Lotanna Emediegwu
  • Yuriy Gorodnichenko
  • Dmytro Natalukha
  • Sascha Becker
  • Mark Harrison
  • Tymofiy Mylovanov
Author: Michelle Kilfoyle
Photo by Max Kukurudziak for Unsplash

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