Power cuts tip war-torn Ukraine’s economy into crisis
As the war enters its fifth year, the Ukrainian economy is experiencing its toughest period since the first months of the Russian occupation, after constant air strikes shattered the power system, forcing companies to cut production and shrink state revenues.
Ukrainian industry, from steel mills to miners to cement producers and food producers, has been forced to cut production and absorb rising costs as it scrambles to change work schedules and save equipment from emergency shutdowns, executives at eight companies said.
Sergii Pylypenko, CEO of Kovalska Group, Ukraine’s largest concrete and construction materials producer, said that “the diesel generators it purchased cannot power the entire production of its large factories”:
“For more than two months we have been operating under emergency power outages without a predictable schedule,” Pylypenko said.
“The lack of a stable power supply during certain periods can reduce production volumes by up to 50 percent.”
Ukraine’s economy shrank by almost a third in the first year of the war, and despite modest growth in subsequent years, it remains much smaller than before the invasion and relies heavily on government spending.
Nearly six million people left Ukraine and more than three million people, more than a fifth of the pre-war population, were displaced within its borders.
In February, the Kiev Economic Research Institute’s monthly business activity recovery index (which compares the number of companies reporting that their business is worse or better than last year) turned negative for the first time since 2023.
Ukraine’s economy is vital not only to finance the war and generate tax revenue and produce weapons to finance the debt, but also to provide jobs and economic prospects for soldiers and returning refugees when peace finally returns.
Oleksandr Myronenko, chief operating officer of Metinvest, a mining and metals group with about US$7 billion ($9.9 billion) in annual revenue, said long power outages made it difficult to restart production after Russia’s attacks.
Metinvest, controlled by Rinat Akhmetov, one of Ukraine’s richest men, became an important source of tax revenue and steel producer for the war effort.
Myronenko said that the company predicted growth in Ukraine this year, but could not achieve this in the first two months due to the effect of Russian bombing.
“This included damage to production capacities, which affected not only steel producers, but also all producers in Ukraine: they have to reduce volumes,” he said.
Kiev Center for Economic Research economist Nataliia Kolesnichenko estimates that energy demand exceeded supply by 30 percent in January and February.
“The energy situation has deteriorated dramatically in recent months,” he said.
Energy Minister Denys Shmyhal said that even as temperatures rose, peak demand at 16.4 gigawatts was well above the 12.3 gigawatts Ukraine was able to produce, importing almost two gigawatts at peak times.
Businesses are having to contend with lower production, rising costs, disruption of supply chains and longer delivery times. All of these affect competitiveness and will increase inflation, which currently hovers around 7 percent, three economists said.
The electricity crisis led the Ukrainian central bank to reduce its economic growth forecast for this year from 2.0 percent to 1.8 percent, in line with the 1.8 percent growth expected to be announced last year.
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