In the line of fire: How war destroys the economy of front-line regions

The Russo-Ukrainian war has caused unprecedented damage to Ukraine's national economy. In 2022, GDP fell by almost 30%, and more than 7 million Ukrainians are below the poverty line.

80% of heat generation and a third of hydro generation infrastructure has been destroyed. Nuclear power generation decreased by 45% following the Zaporizhzhia Nuclear Power Plant's capture by Russian forces. According to the forecasts of the World Bank, recovery will cost USD 486 billion, and each shelling increases this amount.

Despite large-scale destruction, loss of sales markets, and budget deficit, Ukraine still maintains macro-financial stability. However, it becomes even more difficult to keep economic potential in the regions close to the frontline.

The destruction of transport, energy, and manufacturing infrastructure, complicated logistics, and the loss of human capital is significantly undermining the financial stability of liberated, currently occupied, and front-line communities.

In 2023, 75% of communities in Zaporizhzhia Oblast declared a critical or low level of financial capacity, almost 90% in Kherson Oblast, and 30% in Kharkiv Oblast. About 70% of the territory of the Zaporizhzhia and Kherson oblasts are still under Russian control. This has resulted in Ukraine losing a significant share of its cultivated lands, enterprises, ports, alternative power plants, and recreational areas.

The following industrialized communities are still under Russian occupation: Enerhodar, Berdiansk, Melitopol, Tokmak, and Dniprorudne.

According to the State Statistics Service, the profits of Mykolaiv Oblast regional enterprises have decreased by two and a half times compared to pre-war indicators, and those of Kharkiv Oblast by three times. The level of industrial production in Zaporizhzhia Oblast has decreased by more than 50%. The ports of Mykolaiv Oblast, which generated 30–40% of the regional economy before the 2022 invasion, are still blocked to this day.

Another problem is that areas near the front and liberated communities have been heavily mined by the invaders. About 288,000 hectares of land in Mykolaiv Oblast alone require priority inspection. This is more than the combined area of ​​Luxembourg and Malta.

Despite the high level of uncertainty and security risks, 2023 became a year of social and economic recovery in these liberated regions. More than 95% of the industrial enterprises of Chernihiv Oblast have partially or fully resumed their operational activities.

193 relocated companies have already returned to Sumy Oblast. In addition, more than 90% of the projected areas for crops were cultivated, allowing the food requirements of the region to be satisfied. Several grant programs for business support were launched in the Kharkiv and Kherson oblasts.

In 2023, many communities reported surplus budgets. This was the result of an increased payment of personal income tax and an additional resource generated due to military units deployed in certain communities. These communities received resources for infrastructure development, capital investments, or recovery.

In 2024, the security situation worsened. Russia intensified hostilities in the Kharkiv, Kherson, Donetsk, and Zaporizhzhia oblasts. The Main Directorate of Intelligence (HUR) expects a repeat of offensive operations in the Chernihiv and Sumy oblasts. Due to increased shelling and frequency of enemy sabotage and reconnaissance groups in the front-line communities, the population is being evacuated. The expansion of the combat zone will make it impossible for businesses to function.

The current year is also difficult given the halt of external financing inflow and the increase in the labor resources deficit. The war has added to structural imbalances in regional economic development. The extremely difficult situation requires combined efforts of the central authorities and territorial communities.

Ukraine must transform the regional economies, improve the partnership of the public and private sectors, and review the mechanisms of tax and budget policy, in particular the instrument of horizontal budget equalization. Inter-budgetary transfers should support front-line communities, while rear communities should be encouraged to increase their revenue contributions to the budget.