Instead of conquering territory, Russia and Ukraine are increasingly engaged in a war of attrition that now also focuses on damaging each other's economies. With attacks on oil refineries and distribution centers, Ukraine managed to deliver heavy blows to the Russian economy this summer. Now Russia's response is hitting at least as hard.
Last week, data centers and internet providers were targeted; over the weekend, a grain storage facility in Odesa went up in flames, and yesterday there were fatalities in attacks on an office building, a pharmaceutical company, and gas stations. Distribution centers are also increasingly targeted. The United Nations counted 32 attacks on commercial companies in Ukraine in August, nearly three times as many as the previous month.
"More than one million square meters of logistics facilities have been destroyed," says Ukrainian Prime Minister Serhij Koretsky. "Russia wants to destroy our companies." A Kremlin spokesperson said yesterday that Ukraine is "paying the price" for the attacks on Russia in recent months.
"I think they want to break us, that they want to destroy our country and people," says Viktor Nahorskyi. He is communications director of Epicentr, Ukraine's largest hardware store and retail chain. He has already lost eighteen properties of his company. "But they will not succeed."
The impact on the Ukrainian economy is enormous, says political economy professor Oleksandra Moskalenko, affiliated with Kyiv National Economic University. Besides direct damage, such as destroyed factories, retail warehouses, and ports, the indirect damage is also large, she says. "If electricity and internet keep failing and people have to flee to shelters multiple times a day, that costs many working hours."
The Ukrainian Ministry of Economic Affairs estimates that the economic damage from the Russian attacks will have risen to 10 billion euros by the end of the year. This also causes tax revenues for the state to drop dramatically.
Gap in defense budget
The attacks on the Ukrainian economy come at a time when Ukraine is already struggling with a 23 billion euro gap in the defense budget. Ukrainian President Volodymyr Zelensky urged his European colleagues last week to accelerate the release of the second part of an EU loan of 90 billion. If that does not happen, "then this autumn we will not be able to buy new drones and rockets and in January and February we will face serious problems," Zelensky said.
European Commission President Ursula von der Leyen says Ukraine must first speed up reforms. However, EU member states approved 6.6 billion euros in military aid on Friday. That amount was still blocked earlier this year by the previous Hungarian government.
EU funds often become available more slowly than Ukraine would like. That makes it all the more important that the domestic economy keeps running, says Moskalenko. "The defense industry cannot rely solely on uncertain external sources of income, such as EU money."
To somewhat offset the deficits, Ukrainian Prime Minister Serhij Koretsky announced yesterday that for now only strictly necessary government expenditures will be approved. These include defense spending, pensions, and social benefits. New construction projects and repairs to non-critical infrastructure will be postponed.
"Until now, attempts were made to quickly repair damage to non-critical roads, parks, and squares to maintain normal life in Ukraine as much as possible," says Moskalenko. "From an economic standpoint, this decision is understandable, but it makes the war even more tangible for Ukrainians. That demands a lot psychologically from them."
Russian assets
Because of the precarious situation, the discussion has flared up again about whether Europe should use the frozen Russian assets for reparations. At the end of last month, a handful of EU member states, including the Netherlands, asked the European Commission in a letter to resume plans for this. European Commission officials told the Ukrainian newspaper The Kyiv Independent that the Commission will not do so "as long as there is no clear mandate from the member states" about what exactly they want.
Professor Moskalenko does not expect a European agreement soon on using the Russian money. "But I think the increasing economic pressure on Ukraine will ensure that this issue rises high again on the European agenda."