People help clean up debris at a bus station damaged after shelling, amid Russia’s attack on Ukraine, in Kherson, Ukraine on February 21, 2023.

Lisi Niesner | Reuters

A year since the start of Russia’s full-scale invasion, Ukraine’s economy and infrastructure are in shambles, and the government and its allies are planning the biggest reconstruction effort since World War II.

The World Bank estimates that Ukraine’s GDP shrank by 35% in 2022, and expected in October that the share of the population with incomes below the national poverty line would rise to almost 60% by the end of last year – up from 18% in 2021.

The World Bank has so far mobilized $13 billion in emergency funding for Ukraine since the war began, including grants, guarantees and linked parallel funding from the US, UK, Europe and Japan.

The International Monetary Fund estimates that the Ukrainian economy shrank by 30%, a less severe decline than previously estimated. Inflation has also started to moderate, but ended 2022 at 26.6% on an annual basis, according to the Central Bank of Ukraine.

IMF Managing Director Kristalina Georgieva visited Ukraine this week and met, among others, President Volodymyr Zelenskyy and NBU Governor Andriy Pyshnyy.

Ukraine needs much more money from public and private sources for reconstruction: Open Society

In a statement on Tuesday, Georgieva said she saw “an economy that works, despite the huge challenges”, and praised the government’s vision to move from recovery to a “transformative period of reconstruction and EU accession”.

“Shops are open, services are delivered and people will work. This is a remarkable proof of the spirit of the Ukrainian people,” Georgieva said, also noting that government agencies, economic institutions and the banking system are fully functional.

“Despite the attacks on critical infrastructure, the economy is adjusting, and a gradual economic recovery is expected over the course of this year,” she added.

This handout photo taken and released by the Ukrainian presidential press service in Kiev on May 16, 2022 shows Ukrainian President Volodymyr Zelensky (R) and International Monetary Fund (IMF) Managing Director Kristalina Georgieva (on screen) holding a video conference.

STR | AFP | Getty Images

Georgieva reiterated the IMF’s commitment to support Ukraine, and the Washington-based institution has provided $2.7 billion in emergency loans over the past year. However, it is also working with Ukraine under an economic policy monitoring program, a precursor to the establishment of a full-fledged IMF loan program, as Kiev seeks a $15 billion multi-year aid package.

“The international community will continue to have an important role in supporting Ukraine, including helping to address the major financing needs in 2023 and beyond,” Georgieva concluded.

“The war in Ukraine has had far-reaching consequences for the local, regional and global economy. Only if we work together as a global community will we be able to build a better future.”

Massive rebuilding of infrastructure

At a G-20 meeting on Thursday, US Treasury Secretary Janet Yellen urged the IMF to “move quickly” toward the fully funded loan program, with Washington preparing $10 billion worth of financial aid in the coming weeks.

The United States has provided a total of $76.8 billion in bilateral military, economic and humanitarian aid to Ukraine between January 24, 2022 and January 15, 2023, according to Germany’s Kiel Institute for the World Economy.

This includes $46.6 billion in military grants and loans, weapons and security assistance, far exceeding the rest of the world. Britain has been the second largest military contributor at $5.1 billion, followed by the EU at $3.3 billion.

As the conflict enters its second year and shows no sign of abating, with Russia increasingly attacking critical infrastructure and power outages persisting, the Ukrainian economy is expected to shrink again this year, albeit at a low single-digit rate.

A recent estimate from the Kyiv School of Economics puts the total damage to Ukrainian infrastructure at $138 billion, while Zelenskyy has estimated that the reconstruction of the country could end up costing more than $1 trillion.

Destruction seen through a broken car window in Lyman, Ukraine, on February 20, 2023.

Anadolu Agency | Anadolu Agency | Getty Images

“Since the beginning of Russia’s war against Ukraine, at least 64 large and medium-sized enterprises, 84.3 thousand units of agricultural machinery, 44 social centers, almost 3 thousand shops, 593 pharmacies, almost 195 thousand private cars, 14.4 thousand public transport, 330 hospitals, 595 administrative buildings for state and local administrations have been damaged, destroyed or seized,” the KSE report highlights.

Meanwhile, Ukraine’s budget deficit has risen to a record $38 billion and is expected to remain high, although strong external support from Western governments and the IMF is likely, according to Razan Nasser, senior emerging markets analyst at T. Rowe Price.

“This should help close the financing gap, which in turn should help reduce reliance on monetary financing this year,” Nasser said.

At its policy meeting in January, NBU officials discussed a number of measures aims to avoid a return to monetary financing of the budget deficit.

External creditors agreed in August to a two-year moratorium on government debt, acknowledging the enormous pressure the war was putting on the country’s public finances.

“This is likely to be the first step in the restructuring, with a deep cut of the debt likely. It is difficult to predict the size of this debt reduction as it depends on the state of the Ukrainian economy at the time the restructuring is agreed,” Nasser said.

He added that a “political decision” will be needed on how much private creditors should contribute to reconstruction costs in light of the colossal damage to infrastructure so far.

A worker inspects the damage near a rail yard at the freight railway station in Kharkiv, which was partially destroyed by a missile attack, amid the Russian invasion of Ukraine on September 28, 2022.

Yasuyoshi Chiba | AFP | Getty Images

“When this war eventually ends, the scale of the reconstruction and recovery efforts will likely eclipse anything Europe has seen since World War II,” he said.

This sentiment was echoed on Wednesday by Deputy Prime Minister Yulia Svyrydenko, who told Politico during an interview in Brussels that reconstruction should start this year, even though there is no immediate end to the conflict in sight.

“It will be the biggest reconstruction (since) World War II,” she said. “We have to start now.”

While starting to rebuild while the war is still ongoing and Russia continues to target civilian infrastructure may seem counterintuitive, Daniela Schwarzer, executive director of Open Society, told CNBC on Thursday that it was important.

Short-term reconstruction of Ukraine immediate priority for Germany, says state secretary to BMZ

“Ukrainians argue very clearly that the reconstruction must actually start in some parts of the country while the war is still going on, because for the country the destruction of infrastructure – which really happens every day – must be dealt with, otherwise people can” If we don’t live, the economy can’t take speed, and it is therefore a big task, she says.

“We will see in the next few months how international financial institutions, including the European ones like the International Bank of Reconstruction and the European Investment Bank together with governments and the EU, plus the United States, but the next important question is how private investment is eventually brought back to Ukraine because governments alone cannot rebuild the country.”