Why are Ukraine’s existing industrial capacities still not fully utilized amid a full-scale war? Could it be that our “economic model” is fitted for a “wrong system”? Let’s take a closer look.
Are there any clear indicators that determine the level of industrial momentum during wartime?
Yes, such indicators do exist.
First of all, it is the unemployment rate. Under a well-functioning model of military Keynesianism, it should not exceed 2–3 percent.
The 2–3 percent rate is what is known as structural unemployment because the employment rate never reaches 100 percent. In Ukraine, unemployment is currently at 15 percent—at least five times higher than the Keynesian optimum.
Incidentally, we note that the only alternative to military Keynesianism during wartime is the foreign aid model. The latter, however, is too volatile and turns us from an agent of economic policy into an object.
The second indicator is the level of industrial capacity utilization. During the war, it should reach 90–95 percent. In Ukraine, it is currently 70 percent of the pre-war level (based on indicators recorded in government-controlled territories).
This leads to a sobering conclusion: Ukraine is failing to fully utilize either its available human capital or its existing material and technical infrastructure.
There are particularly high unemployment levels among internally displaced persons, of whom there are currently around 4 million.
One of the key factors contributing to this situation is the lack of credit impulse for growth.
So, a few words about the inflexibility of the NBU in wartime. When writing about credit impulse in the context of the military Keynesian model, it is important to determine the parameters at issue.
The net credit impulse (new loans minus repayments) should be approximately 5 percent of GDP per year. In our case, this is UAH 400 billion annually ($10 billion). Over three years of war, this amounts to UAH 1 trillion, or $20–25 billion.
Had such a credit impulse taken place, our actual unemployment rate would be 2–3 percent rather than the current 15–20 percent. The utilization of core production capacities would stand at 90–95 percent of potential, not 70 percent. GDP growth would reach 7–8 percent, instead of the current 2 percent. And the trade deficit would amount to 5–10 percent of GDP, not the current 25 percent.
Yes, there are numerous structural constraints on growth—such as Russian attacks on Ukraine’s energy systems and infrastructure. However, these very challenges only amplify the economy’s need for a credit impulse.
Who should receive credit?
First and foremost, enterprises with government contracts—especially those in the defense industry.
Also, raw material processing enterprises, which would simultaneously ease the burden on port infrastructure and logistics networks currently overwhelmed by raw material exports.
Small and medium-sized businesses should also be prioritized.
In addition, enterprises operating in high-risk zones near the front line should be supported through state guarantees. The same applies to energy companies and entrepreneurs undergoing relocation to other regions.
There are many priority areas—the real issue lies in the credit interest rate.
The “5-7-9” preferential lending program is not designed for capital investment and cannot cover all economic actors.
But how can the discount rate be lowered if the National Bank of Ukraine (NBU) has not revised its inflation target during wartime? The target remains at 5 percent, even though annual price dynamics have already exceeded 15 percent.
This raises the issue of adjusting the inflation target—say, from 5 to 10 percent—since wartime inflation differs fundamentally from peacetime inflation. The former is largely driven by non-monetary factors. For instance, energy prices have surged due to the destruction of part of the country’s generation capacity. These increases are not influenced by the NBU’s high discount rate; if anything, the relationship is inverse. Yet energy prices are among the most critical drivers of the overall inflationary impulse. Despite this, throughout the war, the NBU has not revised its inflation target—the benchmark it is mandated to achieve and maintain.
To illustrate this, the gross credit impulse in the Russian economy—specifically in the area of corporate lending—amounted to approximately $800 billion, or about 40 percent of GDP, over the three years of the war. As a result, Russia’s unemployment rate has dropped below 3 percent, and its industrial capacity utilization exceeds 90 percent. At the same time, inflation remains high—around 10 percent annually.
However, in Russia this inflation is occurring against a backdrop of historically high employment, whereas in Ukraine it unfolds amid historically low employment.
It is worth noting that the Central Bank of Russia did not revise its inflation target. Its key interest rate has now been reduced to 20 percent, which has already caused a sharp deceleration in the credit impulse and brought the Russian economy to a plateau—with GDP growth slowing from 4 percent to just 1.5–2 percent.
That said, Russia did experience a structural credit impulse from summer 2022 to summer 2023, when the key rate was held at 7.5 percent. During this period, a wartime restructuring of the Russian economy took place on a systemic scale.
In Ukraine, the monetary impulse was extremely short-term, lasting only from March to June 2022, when the NBU’s discount rate was fixed at 10 percent.
However, three months is too short a period.
The National Bank of Ukraine (NBU) now has a unique opportunity to “break from orthodoxy”—that is, to generate a credit impulse in the economy by revising its inflation target and lowering interest rates. Ukraine’s foreign exchange reserves provide the necessary macro-financial buffer to support such a move.
This would allow for the transformation of approximately one trillion hryvnias in financial resources held by the banking system from a passive liquidity cushion into active capital for economic development. In essence, the aim is to redirect idle liquidity into productive credit, rather than allowing it to remain in marginal-yield instruments, such as NBU deposit certificates held by commercial banks.
Such a policy shift could enable the Ukrainian economy—and industrial production in particular—to accelerate its growth trajectory during the war’s endgame phase.
This dynamic is also driven by a shift in the “inflationary scissors.” Previously, industrial inflation—as measured by the Producer Price Index (PPI)—exceeded consumer inflation, primarily due to rising energy costs. In other words, the rate of increase in prices of factors of production outpaced that of finished goods prices, thereby compressing profit margins for industrial enterprises. However, the situation has dramatically reversed: industrial inflation has plunged sharply into deflationary territory, while consumer inflation remains relatively elevated. Consequently, the sale of finished goods now generates more revenue than the costs incurred for purchasing production inputs (see Figure 1).
Simultaneously, this past price trend has already eroded production margins: for the first time in a year, the rate of growth in losses has surpassed the rate of growth in profits among private companies (see Figure 2).
Key industrial production indices are also decelerating, with the monthly index showing a sharper decline than the cumulative index for the same period last year (see Figures 3–4). This indicates that the trend of industrial slowdown is only beginning after a brief recovery during 2023–2024 (noting that in 2022, industrial production experienced a steep decline of 36.7 percent, so part of the recent growth reflects a low base effect of the statistical comparison).
Moreover, we can assess trends in weapons production thanks to data provided by the State Statistics Service (see Figure 5).
As can be seen, the decline in arms production predates the full-scale war, occurring in 2020 with a 25.1 percent drop due to the pandemic. In 2019, production was stagnant, growing only by 0.3 percent. During the war in 2022, arms production contracted by 7.2 percent—a smaller decline compared to the overall industrial downturn.
In 2023, there was a significant rebound of 70.3 percent, followed by a deceleration in growth to +41.4 percent in 2024. Although these figures for 2023–2024 appear high, wartime conditions imply they should be substantially higher—at least a doubling in volume.
As an example, let’s consider several sectors that have experienced both growth and decline (see Table 1).
Table 1. Industrial production indices by type of activity, 2024, year-on-year percentage change
Source: State Statistics Service of Ukraine.
As we can see, there are objectively determined cases of decline, particularly in coal mining. Conversely, all sectors tied to defense orders are experiencing growth—and at a good pace. However, these growth rates are more characteristic of peacetime conditions. Targeted budgetary financing and procurement, if effectively implemented, have the potential to deliver substantially higher growth rates.
The data speaks for itself. By product group, we observe growth in the production of consumer goods and semi-finished products, while production of investment goods and energy is contracting (see Table 2).
Table 2. Industrial production indices by major industrial groups, year-on-year percentage change
Source: State Statistics Service of Ukraine.
This indicates low rates of gross fixed capital formation and a decline in the energy intensity of the economy. Without energy, industrial production will slide to the level of “screwdriver” and “garage-based” industries.
Unfortunately, if the situation does not change, this is what will happen. This is not the best-case scenario, especially considering the reconstruction and revival that we are all so eagerly awaiting.