The third front: How the Ukraine conflict became an economic war of attrition

How the war in Ukraine unfolds in its second year will be decided as much by dollars and cents (or rubles and hryvnia)as by bombs and bullets, say experts who warnthe economic battlefield in Eastern Europe has becomea critical front in the conflict.

Ukrainian President Volodymyr Zelenskyy'srepeated calls for donations of weapons continue to dominateheadlines as the Russian Army carries ona grinding offensive in the eastern Donbas region.

"Ukrainians, when I talk to them, they say there are three fronts to the war," said Matthew Schmidt, an expert at the University of New Haven Connecticut, who also taught at the U.S. Command General Staff College. "There's the eastern front, there's the southern front, then there's the economic front."

On Monday, U.S. Treasury Secretary Janet Yellen visited Kyiv to reaffirm the American economic aid crucial to keeping the Ukrainian government afloat and continuing the war effort.

CBC News has been on the ground covering Russia's invasion of Ukraine from the start. What do you want to know about their experience there? Send an email toask@cbc.ca. Our reporters will be taking your questions.

"I know people talk about war in terms of the battlefield, right?" said Schmidt, who wrapped up his own visit to Kyiv last weekend. "They talked about tanks and planes and troop movements. I taught military theory [at the command college] and I can tell you what we talked about was politics and economics."

The Ukrainian economy "cratered" after Russia's full-on invasion last year, said Schmidt aroughly 30 per cent contraction driven by the displacement of people and businesses and the attacks on infrastructure.

The Russian military's reputationhas taken a massive hit due to its failureto conquer Ukraine. But when you consider the drive to exhaust Ukraine's economy, said Schmidt an aspect of Russia's war efforts that rarely gets talked about the results lookmuch different.

"If you look at the purpose of the Russian kinetic force, it's actually achieved a lot because its purpose is not just to kill Ukrainiansbut to crater the economy, and then create an economy to change the political situation," he said.

The Ukrainians themselves realize they're fightingan economic war for survival, Schmidt said which iswhy Zelenskyy's government recently wiped out half the regulations requiredto open a new business in Ukraine.

In a very real sense, Schmidt said, the war has been reduced to a question of which economy will collapse first Ukraine's or Russia's.

Howard Shatz, a senior economist at the U.S non-profit think-tank RAND Corporation, said Russia's economy has performed better than expected during the war, despite the effect of western sanctions.

Right before the full invasion, the Bank of Russia had been projectingthat the country's 2022 gross domestic product would rise by two or three per cent. Right after troops crossed the border, the bank projected Russian GDP would fall by eight or 10 per cent.

For Russia, a 'slow degradation'

The World Bank and the International Monetary Fund issued similar forecasts.

By October, the Bank of Russia was saying the country'sGDP in 2022 would "only fall by three or three-and-a-half per cent, something close to what happened [with]COVID," said Shatz.

Higher-that-anticipated world oil prices have helped to cushion Moscow's economic slide. They'vemitigatedthe effects of western sanctions the onesmany world leaders, including Prime Minister Justin Trudeau and U.S. President Joe Biden, predictedwould bring the Kremlin to its knees.

Shatz said he believes the sanctions will bite more in 2023 than they did last yearbut stillwon't be the economic "smart bomb"the West was hoping for.

"I don't think there's going to be, you know, a switch [in the Russian economy], where all of a sudden it's falling off a cliff," he said. "I think what we're looking at is a slow degradation.

"We're looking at a downward slope in the Russian economy. Because bit by bit, it's just going to fall behind the West more and more in the level of technology."

For Ukraine, it could have been much worse

In Kyiv, the stocktaking among economic experts is mixed. On the one hand, there's a sense that the 30 per cent plunge in GDP could have been worse, given the circumstances.

Given the mass exodus of Ukrainiansto other countries, the roughly5.3 million people displaced within Ukraine and themassive damage to infrastructure, including the electricity grid,a 30 percent drop is a "very good result, actually," said economic analyst Yuliya Pavytska.

It helped that Ukraine's central bank moved decisively early in the war to keep the country's financial institutions solvent, she added.

"We didn't have any bank runs," said Pavytska, an analyst at the Kyiv School of Economics.

She said she hopes the economy hashit bottom now and can begin to grow again. As late as last fall, Ukraine's central bank had been predicting four per cent GDP growth for 2022.

That changed when Russia began blowing up the electricity grid.

Those attacks led to a lot of suffering as Ukrainians struggled to cope withmid-winterblackouts. But the destruction ofup to half of the national grid also had dire economic consequences, forcing the central bank to revise its GDP projection for 2022 to roughly 0.3 per cent.

"Definitely, the pressure on the economy is huge," said Pavytska.

"And definitely Ukraine is now relying on the West, in terms of financial aid, to cover the expenditures. But this doesn't mean the Ukrainian economy will not survive in these circumstances."

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