Inertial Scenario For Ukraine. What If Everything Ends Badly?

What if, at the end of the spring of 2024, the Western partners will force Ukraine to agree to negotiations and the war will “freeze”? Financial support for the Western coalition will decrease, and fatigue from our problems and refugees will increase. There will be no significant changes in economic policy, there will not be enough funds for incentives, and the recovery will slip. What will happen to Ukraine under such a so-called inertial scenario?

We have tried to predict the future based on these gloomy preconditions, because the main problem with any inertial scenario is that it does not require any change to be implemented, it is enough to simply continue existing policies. When reading this forecast, it is worth remembering that nothing motivates change as much as the awareness of a possible disaster.

Indeed, in 2023, we still have the illusion of growth, but the only factor supporting GDP growth is external financing from the countries of the Western bloc. But as soon as foreign aid stops or is significantly reduced, devaluation of the hryvnia becomes inevitable. After all, investment activity will remain extremely low, incentives for capital accumulation will continue to be absent, and the foreign trade deficit will soon reach its record value.

What to expect in 2024

Most of the industrial sectors are stagnating. This does not mean that production volumes are falling, but there is no development. Small and medium-sized enterprises are also stagnating. The creation of jobs in the economy is low but considering the large number of those who left, unemployment is gradually decreasing.

Access to capital in the country is extremely limited, there are no sources of financing, there are practically no investments, as well as business confidence in the future, any support from the state and incentives.

External financing that supports the economy continues to flow in, but its volume is gradually decreasing.

Those investments that are in the economy are concentrated in large state projects. Beneficiaries of these projects are a small “circle” close to the current elites.

The war continues, but at the end of spring 2024, the active phase of hostilities ends, military restrictions (martial law, travel restrictions) are lifted. Presidential and parliamentary elections are announced, in which the current political elite wins.

Hundreds of thousands of people are returning from the front. They have no income, and their financial cushion is enough for 3-4 months. A large number of people with disabilities and PTSD are joining the ranks of those unable to work, accordingly, the social and financial burden on the weakened state is increasing.

The opening of borders in a stagnant economy leads to the departure of some men, and the simmering danger deters a significant part of Ukrainian migrants from returning. The population is reduced by another 1.5–2 million in addition to those already abroad.

People returning to Ukraine are mainly those who did not manage to get a job in Europe and other countries, and those who lost European aid due to the end of hostilities in Ukraine. They also need social support and jobs.

There is a crisis in the labor market, the shortage of qualified labor resources is worsening. The existing problem of professional degradation and lack of skilled labor force, considering migration, only increases.

Regional imbalances are accumulating in some regions, the labor market is “boiling”, and in others, closer to the front line, it is “dying”. People are increasingly concentrated in large, quiet cities. A new factor of social tension is emerging as there are very rich and impoverished regions. This affects reconstruction because it makes no sense to restore infrastructure in the so-called dead regions.

The influence of global factors on Ukraine is increasing. The occasional entry of developed economies into recession and the growing problems in China affect world demand and prices for raw materials. Global economies are gradually immersed in their own problems, the focus on Ukraine is decreasing, and so is the amount of aid.

The trade deficit at the beginning of 2024, even if it does not grow, remains at a fairly high level. The National Bank of Ukraine “holds” the rate until the elections, but later launches a floating exchange rate of the hryvnia, which is expected to lead to devaluation.

The devaluation of the national currency somewhat improves the situation of Ukrainian exporters, the export of goods begins to grow faster than the import, which makes it possible to reduce the negative trade balance in the second half of 2024.

On the one hand, devaluation starts a new cycle of inflation. This forces the NBU to implement a tight monetary policy, and credit resources remain expensive. Tight currency restrictions are maintained to prevent money from fleeing the country, which also depresses the real sector. On the other hand, the real solvency of Ukrainians is sharply reduced, which leads to further impoverishment of people.

There are difficulties with financing the budget deficit. Foreign aid, which used to balance budget imbalances in 2023, is no longer so easily given. The adoption of the National Revenue Strategy and the increase in the fiscal burden do not lead to a significant increase in tax revenues, as the economy traditionally goes into the “shadow”. Meanwhile, the corruption rent for turning a blind eye to this is growing. According to the results of the year, the budget is mainly saved by devaluation and inflation.

The demand for justice is inevitably increasing in society, and the country’s high level of corruption, weak economic growth and limited budgetary resources are further increasing social tension and protest sentiments, including from combatants and veterans.

Meanwhile, decisions in the country continue to be made reflexively, without in-depth analysis and assessment of economic consequences, since the key reference point remains the reaction of the population “here and now”, and not qualitative changes that require time.

Would we like to find ourselves in such 2025

We are entering 2025 as a weak, ruined country that everyone is tired of.

For the West, Ukraine is a buffer zone with Russia. Of course, the bases of Western countries are located here to protect against a possible attack by the Russian Federation, but there is no discussion of our joining the EU or NATO. The lack of a strategic framework makes us a resource in the hands of external partners. Besides, our budget is deeply dependent on their help.

The inflow of Western funding is seriously decreasing. With the money they give us, we partially restore the old infrastructure instead of creating a new economy.

There is a possibility that Western countries will not completely stop funding. It will be reduced to a model where Ukraine receives zero-interest loans with a grace period of 25-30 years, and under these loans, reconstruction projects are implemented, on which foreign companies are working and local resources are only partially involved.

Such projects are accompanied by major corruption scandals, affiliated to the government people take part in them, and corruption schemes flourish. But society still does not have effective tools to influence the corrupt government.

Ukrainian business is adapting, trying to survive, but the best entities are actively “taken away” by Poland, Türkiye, and the UAE. They give grants to Ukrainian manufacturers and help relocate production together with the workforce.

The sea corridors are partially unblocked, but the volume of supplies is lower than before the war due to the destroyed infrastructure, expensive insurance, and slow demining of the territories. This, in turn, limits the development of agriculture, which remains the main driver of growth.

Ukraine encapsulates its rawness. There are no prerequisites for the development of technology – neither investments in physical capital, nor the development of human capital, education, or science. Business exists in an old technological paradigm. Foreign investors do not go to Ukraine, which for us are not only a source of financing, but also a supplier of technologies, knowledge, and experience. The technological gap between Ukraine and developed countries is growing.

Migration continues. Together with declining birth rates, this leads to a demographic catastrophe. And in the absence of people, it is futile to hope for economic miracles.

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Undoubtedly, this is a very bleak future, but it is not so incredible. We are only a few steps away from it. Considering that this is an inertial scenario, we are talking, rather, about steps that simply no one will take. After all, this scenario is the most likely if we move forward without changing anything in the current policy. One has to admit, we all would like to avoid it.