15% of Ukraine’s GDP: the economic cost of Russia’s hybrid war

Julia Bluszcz from Humboldt University and Marica Valente from the Berlin School of Economics study the impact of the Donbas war on Ukraine’s economy in their research paper published on the VoxUkraine website. They explain the hybrid origins of the Donbas war and the threat these conflicts pose to the government’s sovereignty, as well as the importance of the region to Ukraine’s production — before 2014, it accounted for about a quarter of the country’s exports and more than 15% of capital investment. When the war began, the industrial production in the Donbas regions of Donetsk and Luhansk dropped by 60% and 85%, respectively. In their study authors build a “synthetic Ukraine” — a weighted outcome combination of countries similar to Ukraine, but not affected by the Donbas war, to study the impact of the war on the country's GDP. Causal effects are estimated by computing the yearly difference in GDP per capita between Ukraine and its synthetic counterpart after the eruption of the war. Synthetic Ukraine is estimated with countries that resemble Ukraine’s economy as accurately as possible before the war’s outbreak. Researchers match countries not only on pre-war values of GDP per capita but also on its determinants such as inflation, investment, trade dependence, and other socio-economic measures. Finally, as shown in the graph below, researchers compare Ukraine’s GDP path (the “treated” outcome, solid line) after the war with its counterfactual estimate had the war not happened (the “synthetic” outcome, dashed line).

The Donbas war had such a devastating effect on Ukraine’s economy because of disruption to production, trade and employment, agricultural and financial losses, compression of public expenditures, and a partial military mobilization coupled with growing political instability. Authors state that not only the Donbas but also other Ukrainian regions were damaged by the conflict, so their estimated GDP losses would represent a lower bound for the true costs of the Donbas war on Ukraine’s economy. Statistical analysis shows that, [highlight]due to the war, Ukraine’s per capita GDP declined by 15.1% on average over the years 2013-2017[/highlight] and, in its absence, would have instead followed a rather stable, slowly increasing trend. It should be assessed how the costs evolve over time, and whether the estimated destructive effects increase in scope as more workforce and investment flee the state. This knowledge is crucial to mitigate the damaging consequences of the conflict, target aid, and investment more effectively, and finally ensure a healthy reconstruction of the badly wounded economy.

Read also:

• Reintegration Costs of Donbas: $22 Billion or More?
• Ukraine’s economic losses due to Russian occupation of Donbas
• The price of Russia’s war is too heavy for Ukraine to lift alone – report
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