The BNR has just calculated how much Russia's invasion cost us in Ukraine. How much I lost from GDP and how inflation is due to war

The study published these days by the National Bank analyzes the impact of Russia's invasion in Ukraine in February 2022 on economies in the region, in particular Bulgaria, Czech Republic, Hungary, Poland and Romania. The document is signed by Daniel Dăianu (Fiscal Council), Tudor Grosu.

The results of the simulations indicate that, by the end of 2022, the conflict caused an increase in the inflation rate by approximately 1.1 percentage points and a decrease of the GDP by up to 1.4 percentage points, compared to a hypothetical scenario that the war would not have taken place.

The Ukraine war has caused huge human losses and materials in this country, stresses the authors of the document. In fact, a report developed by the World Bank, the European Union and the United Nations estimate the death of tens of thousands of Ukrainians, including numerous civilians. The gross domestic product (GDP) of Ukraine in 2023 reached 74% of the level registered in 2021, in real terms.

Russia's attacks targeted both military objectives and critical elements of civil infrastructure, such as energy systems, port facilities and river dams of Ukraine, exacerbating the poverty level and causing a massive exodus of the population.

The Russian Federation was also confronted with severe repercussions as a result of conflict, including substantial military losses and major economic dysfunctions, say the authors of the document.

The high inflation rates have significantly eroded the purchasing power of the households, leading to a deterioration of the standard of living. In addition, the Russian Federation was subjected to international sanctions that disrupted commercial flows, restricted access to global financial markets and exerted negative pressure on economic growth.

The withdrawal of Western companies from the Russian market has caused a reorientation of Russia's trade to China

As a reaction to sanctions, in May 2022, Russia stopped the deliveries of natural gas and oil to the European Union. This action caused a severe energy shock at the beginning of the war, causing significant disturbances on the European market, before the Member States succeed in diversifying energy supply sources, including by imports of liquefied natural gas (GNL) from other countries. However, energy prices remained at high levels, exerting persistent economic pressure, say the study authors.

The Ukraine war has generated a number of economic challenges, mainly by increasing energy prices, which led to increase in production costs and reduce the power of buying the population. This dynamic has affected the competitiveness of companies and has led to a contraction of the consumption expenses.

As Western Europe, the main commercial partner of ECE countries, has also suffered economic disturbances, export opportunities have decreased.

In this context, national governments have implemented support schemes for the population and the business environment, exerting additional pressures on public finances. At the same time, central banks have operated increases in interest rates to counteract inflationary outbreak. This combination of expansionary fiscal measures and restrictive monetary policies has highlighted the significant economic tensions that the region faces in the context of superimposed crises.

Following a pattern observed at the level of the whole European continent, the Ukraine war affected the dynamics of inflation in the ECE countries during 2022, while the effects on GDP became more pronounced in 2023, when there was a significant slowdown in economic growth.

The Czech Republic and Hungary were less directly affected by the refugee influx and the military activity

This work aims to provide a quantitative evaluation of the short-term macroeconomic effects of the Ukraine on several ECE countries, focusing on economic growth and inflation. The analysis concerns Bulgaria, Poland and Romania, states that have faced common challenges, such as refugee influx, disturbance of supply chains and an increased aversion of investors, determined by the uncertainty generated by the geographical proximity to the conflict area.

As a control group, the Czech Republic and Hungary were included in the analysis. These countries, although they also felt the impact of increasing energy prices, were less directly affected by the refugee influx and military activity, due to a greater geographical distance from Ukraine. All the analyzed states are both NATO members, notes the 4 authors.

In response to this shock, the prices of raw materials registered significant increases: the price of oil increased by 18.3%, and the price of natural gas by 34.2%. As expected, the reaction of natural gas prices is broader, reflecting the more pronounced impact of the Ukraine on natural gas markets compared to oil markets. According to the sign restrictions imposed, the GDP decreases in both the US and in Romania, the contraction being more severe in the case of Romania. Thus, Romania's GDP decreases by about 4 percentage points, while the US records a lower decrease of about 2 percentage points.

Of the unrestricted variables, the most significant decrease is observed in the trusted indicator – ESI, with almost 10 points, reflecting an increase in the aversion of investors determined by the increased geopolitical risks. The triggering of the war also exerts a direct impact on the evolution of inflation, mainly through the channel of prices of raw materials.

The results for Hungary are generally similar to those for the Czech Republic, except for the insignificant response of the inflation rate. In contrast, the results of Poland are closer to those of Romania, except for the response of GDP, where the extent of the impact is smaller.

Read here the full study