CEE Special Report | Rebuild Ukraine
CEE Economies Special Report , 24. Feb.
Three years ago Russia invaded Ukraine. The following analysis builds upon previous versions of the reports on rebuilding Ukraine. As the possibility of a peace deal between Ukraine and Russia recently made headlines, we would like offer a more detailed look at macroeconomic development in the region (the impact of the war and economic potential). We believe that the sustainability of the peace deal would be crucial for the stability of Ukraine, the region, as well as economic prospects. Strong guarantees will be needed to see the full economic benefits.
Although the region expanded since the outbreak of the war, the Kiel Institute estimates that, in the CEE8 region, the GDP loss stands at USD 7.9bn over 5 years after the onset of the war (cumulative loss estimated to occur in 2026). In relative terms, GDP is anticipated to be up to -0.2% lower than it would have been without the war's impact – peanuts against the cumulative GDP loss in Ukraine estimated at USD 120.2bn or GDP 31 percent lower than it would have been without the war's impact. The inflation shock following the Russian invasion of Ukraine was unprecedented, however, and the region is still bearing the consequences of a high inflation and interest rates environment. Further, the war forced Europe to diversify its energy sources as well as to alter trade flows (sancitons on Russia). Finally, the region has experienced a massive inflow of Ukrainian refugees since the outbreak of the war. While in absolute terms, Germany and Poland welcomed the highest number of refugees, as a percentage of population, Czechia stands out, with Ukrainians amounting to 3.7% of the Czech population. In our view, CEE economies benefited from the inflow of Ukrainian workers who became mostly well-integrated into the job market.
Europe has not been spending enough on defense when looking at the cumulative gap in military spending in 2014-24 against the 2 percent benchmark. Within that period, only Poland, Greece, and Estonia consistently met the benchmark. Europe needs to increase defense spending. In general, the flow of aid to Ukraine has been surprisingly steady, in aggregate, with annual allocations of about EUR 80bn in each of the years 2022, 2023 and 2024. Europe has been and remains the main source of aid to Ukraine, with Scandinavian and Eastern European donors making the largest contribution by far, when scaled by donor country GDP. Last but not least, we see the deepening of integration (NATO enlargment, granting of candidate status for EU membership to Ukraine.
EU accession has a long way to go, however. Ukraine’s path to EU membership will demand substantial political, economic and structural adjustments from both Ukraine and the EU. Ukraine lags behind in governance indicators and control of corruption seems to be the biggest drag at this point.
The Hungarian forint and the Polish zloty have been continuously strengthening since news about the peace deal between Ukraine and Russia has been building momentum. The end of the war would be economically beneficial for the region and provide investment opportunities in Ukraine if the guarantees are strong enough. The optimism reflected on the FX market may be stretched at this point, however.
The outlook on peace talks is another driver for European stock markets, but it comes with a high realization risk. Any euphoria based on current initiatives might prove to be early/overdone. An initiative kickstarted by the US might not yet provide the basis to benefit from rebuilding the country in peace. Current share price corrections after initial strong gains should be seen as just a proof of concept here. To engage in rebuilding Ukraine, corporates still require a reliable peace situation, transparency issues in UA being addressed, and a rebuilding scenario under the guidance (financing) of international organizations.
Although the region expanded since the outbreak of the war, the Kiel Institute estimates that, in the CEE8 region, the GDP loss stands at USD 7.9bn over 5 years after the onset of the war (cumulative loss estimated to occur in 2026). In relative terms, GDP is anticipated to be up to -0.2% lower than it would have been without the war's impact – peanuts against the cumulative GDP loss in Ukraine estimated at USD 120.2bn or GDP 31 percent lower than it would have been without the war's impact. The inflation shock following the Russian invasion of Ukraine was unprecedented, however, and the region is still bearing the consequences of a high inflation and interest rates environment. Further, the war forced Europe to diversify its energy sources as well as to alter trade flows (sancitons on Russia). Finally, the region has experienced a massive inflow of Ukrainian refugees since the outbreak of the war. While in absolute terms, Germany and Poland welcomed the highest number of refugees, as a percentage of population, Czechia stands out, with Ukrainians amounting to 3.7% of the Czech population. In our view, CEE economies benefited from the inflow of Ukrainian workers who became mostly well-integrated into the job market.
Europe has not been spending enough on defense when looking at the cumulative gap in military spending in 2014-24 against the 2 percent benchmark. Within that period, only Poland, Greece, and Estonia consistently met the benchmark. Europe needs to increase defense spending. In general, the flow of aid to Ukraine has been surprisingly steady, in aggregate, with annual allocations of about EUR 80bn in each of the years 2022, 2023 and 2024. Europe has been and remains the main source of aid to Ukraine, with Scandinavian and Eastern European donors making the largest contribution by far, when scaled by donor country GDP. Last but not least, we see the deepening of integration (NATO enlargment, granting of candidate status for EU membership to Ukraine.
EU accession has a long way to go, however. Ukraine’s path to EU membership will demand substantial political, economic and structural adjustments from both Ukraine and the EU. Ukraine lags behind in governance indicators and control of corruption seems to be the biggest drag at this point.
The Hungarian forint and the Polish zloty have been continuously strengthening since news about the peace deal between Ukraine and Russia has been building momentum. The end of the war would be economically beneficial for the region and provide investment opportunities in Ukraine if the guarantees are strong enough. The optimism reflected on the FX market may be stretched at this point, however.
The outlook on peace talks is another driver for European stock markets, but it comes with a high realization risk. Any euphoria based on current initiatives might prove to be early/overdone. An initiative kickstarted by the US might not yet provide the basis to benefit from rebuilding the country in peace. Current share price corrections after initial strong gains should be seen as just a proof of concept here. To engage in rebuilding Ukraine, corporates still require a reliable peace situation, transparency issues in UA being addressed, and a rebuilding scenario under the guidance (financing) of international organizations.