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The cost to Ukraine of the conflict with Russia

Lost output between 2014 and 2020 amounts to US$280bn, nearly 20% of Ukraine’s pre-conflict GDP, writes Douglas McWilliams.

My colleagues at the Centre for Economics and Business Research (Cebr) have been tasked by the Ukrainian Government with preparing an independent estimate of the cost of the conflict with Russia to the Ukraine. We have come up with the figure of US$280 billion or US$40 billion a year over the 7 years since the conflict started in 2014 to 2020. This is just under 20% of Ukrainian GDP. This is quite a price to have been paid by Ukrainian people.

There are a range of different ways in which a figure like this can be calculated. Since the impact of the conflict has been wide ranging, with trade actions, annexation of some regions and disruption of activity elsewhere as well as knock on impacts on investor sentiment, we felt that of the available techniques, the foregone output approach was probably most appropriate in this case.

What this implies is that a GDP forecast made pre-crisis is compared with what actually happened. The estimated loss is the difference between the two. We have compared the forecast in Cebr’s World Economic League Table (WELT) released on 26 December 2013 with what in fact has happened to the end of 2020. For this report we actually adjusted the December 2013 forecast downwards (i.e to reduce the estimated difference) to allow for the Covid pandemic. We have measured the difference in real terms and valued at up-to-date dollar exchange rates. The WELT forecasts are widely recognised internationally and, other than the unexpected impact of the pandemic which in this case we have adjusted for, have stood the test of time reasonably well.

How is this cost made up? Some of the cost is the output lost when regions have been annexed. Pre-annexation Crimea and Sebastopol was a relatively small part, 3.7%, of Ukraine’s GDP. Dombas is more important as a centre for heavy industries and pre-conflict accounted for 15.7% of Ukraine GDP. The cost of the loss of the two regions that have been annexed or occupied amount to US$160 billion of GDP.

On top of this has been lost trade and lost investment. We estimate that the biggest loss has been through reduced trade which has cost US$160 billion (though since a significant proportion has been from Dombas, Sebastopol and Crimea, it is not appropriate to add this together with the regional loss) and investment has also been reduced by US$72 billion.

In addition, taxes have been higher to pay for military spending. Although military spending is included in GDP, it represents resources that could be spent on other more useful items in the absence of conflict and its share has risen by 2% of Ukrainian GDP.

Of course, the regions lost by Ukraine have not stopped producing. Indeed, growth in Crimea and Sebastopol has been dramatic since the regions were annexed by Russia as heavy investment in infrastructure has boosted GDP. Our calculations show that conflict has not only a military and human cost but also an economic cost. It is to be hoped that the present conflict can be ended soon and more benign conditions can return.

Douglas McWilliams is Deputy Chairman of Cebr, a leading economics consultancy