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Economies of Belarus, Russia and Ukraine in 2023 – the devil is in the details

The ongoing Russian aggression in Ukraine has influenced the economies of the three countries engaged in the conflict. While the similarities in the institutional setups of these economies have resulted in some resemblances regarding the results of this impact, there are also notable differences in what has happened in them.

February 26, 2024 - Kacper Wańczyk - Analysis

Trading floor of the Sperbank stock exchange in Moscow. Photo: drserg / Shutterstock

Belarus – more of the same

Even though this is the second year when Belarus has almost completely cut off trade relations with the non-Russian market, its GDP growth for 2023 reached 3.9 per cent. The growth was ensured by positive dynamics in almost all production sectors, transport aside. This part of the Belarusian economy has been significantly declining for a second year in a row, given the sharp decline in transit and the growing competition from Russian logistic companies. Belarusian exports, an important part of this economy, also remained at high levels.

These positive trajectories are mostly ensured by tools traditionally used by Belarusian authorities in economic difficulties. Regarding the internal market, Minsk is supporting consumption through relaxed monetary policies and widely accessible consumer credit, as well as attempts to limit the functioning of the private sector. Moreover, it continues to subsidize production and export activities. In addition to that, Belarus – as always – relies on the support of Russia. In 2023, 60 per cent of imports were coming from that country, and 65 per cent of Belarusian exports were transported to Russia. This tendency is also a consequence of the fact that Russia became in 2022 a transit state for Belarusian goods.

Inflation in Belarus remained at a low level and reached the level of 5.8 percent for the whole year, which was mostly an effect of the state control of prices. However, state policies concerning the stimulation of the economy led to an increase in inflation pressure closer to the end of the year.

According to the October edition of the regular survey conducted by the independent analytical centre BEROC, around 45 per cent of households did not observe significant change in their material situation during the passing year, while 35 per cent saw either some or a significant worsening of the situation. At the same time, around one third of respondents reported a decline in their income.

Given the ongoing repressions, and the pressure put on the private sector, Belarusians continued to leave the country in 2023. Existing data is overall insufficient to assess the scale of this movement, but reports of worker shortages, particularly with regards to highly educated experts, seem to confirm that trend. However, the level of migration was probably lower than in previous years.

Russia – short-term policies undermine economic fundamentals

According to official data, the Russian economy grew in 2023 by 3.5 per cent, while World Bank estimates suggested that the dynamic was a bit lower – 2.6 per cent. Still, growth was slightly better than earlier projections that suggested a contraction of the economy by two per cent or stagnation at the level of one per cent. The Kremlin owes these dynamics mainly to its partial success in circumventing the sanctions and substituting former export markets with  China, Turkey or India. Regarding the internal market, Moscow focused on programmes of financial support for the largest companies to maintain production and introducing measures militarizing the economy.

However, in the institutional reality of the Russian economy, that is waging a war against another country, these reactive policies coupled with sanctions resulted in important changes in the structure of internal production. On one hand, the sectors depending on the import of high-tech components (like the automotive sector) rapidly declined. Instead, the growth was recorded in production based on low-tech, local raw materials (e.g., food or concrete production), as well as all subsectors related to the military invasion. This means a growth in the importance of the state-financed and state-controlled security sector. This has led to a peculiar division of labour between the private and state sectors – the first being gradually restricted to the consumer market and the second slowly taking over most of the economy.

The Central Bank of Russia’s interest rate policies were a direct result of the Kremlin’s decisions. The CBR was forced to keep them at a relatively low level, mainly to avoid raising the costs of loans for companies. The result of this was a rise in inflation pressure that the CBR has been trying to mitigate with delayed policies of increasing interest rates. In the end, the inflation for 2023 was registered at 7.4 per cent, higher than the inflation target (four per cent).

At first glance, the situation in the social sphere looks positive. The rate of unemployment in November 2023 was at record low levels for Russia – 2.9 per cent – and real wages started to rise in the second part of the year. However, the rise in wages was countered by the rise in prices. Moreover, household income is increasingly dependent on the militarization of the society. In addition to that, in search of financial resources, the Kremlin was cutting, in real terms, all social spending.

Ukraine – signs of stabilization and the concentration of power

The Ukrainian economy showed signs of stabilization. GDP growth for all of 2023 is expected to be between five and 5.5 per cent. This was mainly the effect of the recovery of production and exports in two crucial sectors of the Ukrainian economy – metallurgy and agriculture. However, given the fact that the main production capabilities in metallurgy were permanently destroyed in the Russian invasion, and that both sectors still suffer from logistical problems, their production remains below pre-war levels.

Regular business opinion surveys, conducted by the National Bank of Ukraine (NBU), showed that throughout the last three quarters of the year Ukrainian entrepreneurs remained positive about general perspectives on the growth of business activities. They are also constantly expecting growth in the levels of production. The respondents mentioned security risks and logistical issues as the main challenges.

Despite being widely advertised by government actions aimed at transparency – particularly regarding the introduction of different IT platforms and systems – the clarity of the relationship between business and the authorities remains questionable. The equally popular issue of decentralization seems to have resulted in widespread tensions between local and central authorities particularly in access to financing. A series of changes in the higher echelons of power, which took place at the beginning of the year, suggests that the Presidential Office aims to consolidate control over the economy and also at the local level. This will be done in anticipation of the foreign-financed post-conflict reconstruction of the country.

Contrary to Russia, Ukraine was able to tackle the inflation problem. This was the combined effect of the temporary freezing of the exchange rate of the hryvnia and the high interest rates policy of the NBU. Base inflation for the whole year was at the level of 5.1 per cent. However, the dynamics of inflation still influence household income – the growth of real salaries lagged behind the change of prices.

While there were no significant changes in the migration flows from Ukraine in 2023, the number of Internally Displaced Persons (IDPs) dropped significantly to 3.6 million in November 2023, according to the International Organization for Migration (IOM). However, IDPs still face significant difficulties. Of those IDPs questioned in the November IOM survey, 74 per cent were not receiving any financial help. Similar problems were reported by 58 per cent of those that ultimately returned home.

The government will feed itself  

The second year of war saw the temporary general adaptation of the economies of the three countries to the effects of Moscow’s aggression in Ukraine. This adaptation is probably superficial, because, as usual, the devil is in the details.

The population of the three countries suffers most of the outcomes of these changes, facing forced migration (Belarus and Ukraine), lowering of living standards (Russia and Ukraine), unemployment and the physical effects of military aggression (Ukraine). Other issues include the general diminishing of the levels of social protection or support.

Moreover, economic functioning in the circumstances of war is changing the structures of these economies, strengthening the presence of the central state in them and, in the Russian case, subordinating the economy to the military sector. This may make these economies less flexible and more prone to the influence of crises in the future. These processes manifest themselves in the “quiet war” between Russia’s important economic actors over assets and the attempt to diminish the role of oligarchs in Ukraine.

Kacper Wańczyk is an analyst focusing on Belarus, Russia and Ukraine and a PhD student at Koźmiński University in Warsaw. He is a former diplomat who has served in Belarus and Afghanistan, among other places.

“We suport the Belarusian Awakening’24” is a project co-financed by Solidarity Fund PL within the framework of Polish development cooperation of the Ministry of Foreign Affairs of the Republic of Poland in the amount of PLN 230,000.

This publication expresses the views of the author only and cannot be identified with the official position of the Ministry of Foreign Affairs of the Republic of Poland.


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