With more than ten thousand casualties, the ongoing hybrid war between Russian-backed separatists and the government in the Donbass region, Ukraine’s industrial production centre, has taken a severe toll on the country. In our recent study we are the first to quantify the actual cost of the Donbass war on Ukraine’s economy. Our statistical analysis shows that, due to the war, Ukraine’s per capita GDP declined by 15.1% on average over the years 2013-2017 and, in its absence, would have instead followed a rather stable, slowly increasing trend. As the war is ongoing, we expect higher costs in the future. This knowledge is crucial to mitigate the damaging consequences of the conflict, target aid and investment effectively, and finally ensure the reconstruction of a badly wounded economy.
Hybrid conflicts: A modern warfare
The Donbass war is an armed conflict between anti-government groups of Russian-backed separatists and the Ukrainian government, taking place in the aftermath of the 2013 Euromaidan protests and the 2014 Ukrainian revolution. As a hybrid form of warfare, the Donbass war is an especially interesting case study as neither Ukraine nor any other entity declared war status. Many modern conflicts are likely to arise as a consequence of regional struggles with governments facing non-governmental actors who operate in concert with external players. Specifically, hybrid wars especially threaten the government’s sovereignty due to lack of soil governance, unclear front lines, casus belli (an act or political occurrence which brings about a declaration of war) and politico-strategic goals, and new tactics that focus on the weakening of governments rather than on direct combat. This complexity makes it difficult to assess the overall costs of hybrid conflicts.
Constructing “synthetic” Ukraine
The major challenge for estimation of the costs of conflict is disentangling the direct effects of the war from other events that would have happened in the absence of the conflict and which could influence the country’s economic growth.
We consider per capita GDP foregone as the main measure of welfare loss caused by the Donbass war. We construct Ukraine’s counterfactual GDP in absence of the war by using the synthetic control method. We build a “synthetic Ukraine” which is a weighted outcome combination of countries similar to Ukraine, but not affected by the Donbass war. The graph below compares Ukraine’s GDP path (the “treated” outcome, solid line) after the war with its counterfactual estimate had the war not happened (the “synthetic” outcome, dashed line). We estimate causal effects of the conflict from 2013, when the high political instability caused by the violent Euromaidan protests may have already impacted Ukraine’s economy.
Causal effects are estimated by computing the yearly difference in GDP per capita between Ukraine and its synthetic counterpart after the eruption of the war. Results indicate that Ukraine’s foregone GDP per capita due to the Donbass war amounts to 15.1% on average in years 2013-2017.
We also break down the impact of the war by regions. Results from the regional analysis confirm the devastating effect of the war for the Donbass area, with GDP losses of 42% and 52% for the regions of Donetsk and Luhansk, respectively.
Mechanisms underlying the GDP decline caused by the war
The Donbass is of considerable importance for Ukraine’s production. Before the 2014 Ukrainian Revolution, the region accounted for about a quarter of the country’s exports and more than 15% of capital investment. For instance, the Donbass used to provide raw materials such as coal, steel and other industrial goods to international manufacturing industries. As of August 2014, industrial production dropped by 60% and 85% in the Donbass regions of Donetsk and Luhansk, respectively, due to power cuts and the destruction of transport infrastructures. These losses were even higher than early estimates of the Ukrainian government (31.5% and 42%, respectively). Overall, major reasons for the decline of Ukraine’s economic activity are high costs of trade, exacerbated by the blockade operated first by activists and then by the Ukrainian government, together with employment, agricultural and financial losses, compressed government spending, and the partial military mobilisation coupled with growing political instability.
Yet, important questions remain open, namely, whether the negative effects of the Donbass war on Ukraine’s economy have been reinforced by the government’s mismanagement of the conflict and a weak external environment during the war.
A badly wounded economy
In light of all the above, we can expect that not only the Donbass but also other Ukrainian regions were damaged by the conflict, in which case our estimated GDP losses would represent a lower bound for the true costs of the Donbass war on Ukraine’s economy. Moreover, we should assess how these costs evolve over time, in particular, whether the estimated destructive effects increase in scope as more workforce and investment flee the state. Starting from 2016, the Ukrainian economy showed signs of recovery, a growth that slowly continues driven by external and internal factors, such as world raw material prices, the implementation of macroeconomic and structural reforms, and the improved political situation.
Note: This article gives the views of the authors, and not the position of the Social Policy Blog, nor of the London School of Economics.