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If millions of Ukrainians leave the country definitively, this will have a significant impact on the economy. How can Ukraine avoid the worst possible scenario?

Monday, 11 September 2023, 08:59

The number of Ukrainian refugees abroad could reach 6.7 million. The longer the war lasts, the more the refugees will think about starting a new life in a host country. Ukraine risks losing millions of citizens.

On 5 September, Ukraine’s Centre for Economic Strategy (CES) presented a report analysing the attitudes of Ukrainian refugees and estimating how many of them will not return home after the war ends.

The CES calculated that Ukraine may lose up to 3.3 million citizens. Moreover, some families will be reunited abroad after the war ends: men will leave the country to join their wives and children after the restrictions are lifted.

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How many of us are there

Even in peacetime, it is not easy to count the population of Ukrainians. A full-fledged census was conducted in the country only once: in 2001. The census showed that 48.5 million people lived in Ukraine at that time.

Since then, no one has counted the population, and over time, inaccuracies in demographic indicators have only increased. Hence, the data from the State Statistics Service has become less and less relevant.

After the Russian invasion in 2014, Ukraine was unable to calculate how the population in the temporarily occupied territories was changing, which only added to the uncertainty. According to the latest estimates by the service, on 1 February 2022, 41.13 million people lived in the then-unoccupied territory of the state.

 

After 24 February 2022, it became impossible to count the exact number of Ukrainians. This is primarily because the state has no information on the number of people who fled the war abroad.

The State Border Guard Service noted that the number of people leaving the country is 1.6 million more than the number of border crossings towards Ukraine. However, these data are incomplete, as they do not take into account people who left the country not through official checkpoints, but, for example, through the temporarily occupied territories or via Russian Federation.

In addition, the data provided by Ukrainian border guards is strikingly different from that of border guards of the EU countries with which Ukraine borders. The latter figures are cited by the United Nations High Commissioner for Refugees (UNHCR), which estimates that the number of people who crossed Ukraine's western border after 24 February 2022 is 3.8 million.

The UNHCR also provides estimates of the number of people crossing Ukraine's border with Russia and Belarus, citing information from these countries. The UNCHR stated that 2.9 million Ukrainians could have travelled to those two countries. However, only 1.3 million remained there. That is, most Ukrainians could have used the territories of Russia and Belarus to reach other countries.

The number of migrants can also be calculated from the number of people with temporary protection status. In June, there were 6.3 million such Ukrainians, mostly in Central and Eastern Europe.

Thus, based on various calculations, it can be argued that 5.6-6.7 million Ukrainian citizens are outside Ukraine.

As expected, the majority of refugees are women and children. The largest group of Ukrainians in the EU are women aged 35-49. The majority of them – about 70% – have higher education and lived in cities before the full-scale war.

 

As indicated in a survey commissioned by the CES of some Ukrainian refugees in the EU and the USA, 63% of citizens plan to return home. However, this figure consists of diverse categories. Students and people who are actively looking for work are less likely to return. People with high incomes and older people are more likely.

Extrapolating the survey data to all Ukrainian refugees, the CES concludes that even after the war ends, 1.3-3.3 million people may not return home.

Moreover, some Ukrainian families divided by the war may be reunited outside Ukraine. As a result, 100-745,000 more citizens, mostly men, may leave Ukraine after the war ends. This trend can already be observed to some extent.

The CES survey was conducted in November-December 2022 and in April-May 2023. Between those two periods, the number of Ukrainian refugees increased by 300-500,000 people. The share of adult men among them increased to 29%, from 2è% in November.

How the absence of refugees will affect the economy

The migration of millions of Ukrainians is taking a heavy toll on the domestic economy. If a significant number of refugees do not return home, the impact will only grow over time.

In 2022, Ukraine's GDP fell by a record 30.4%. However, it is impossible to say how much of the decline was caused by six million Ukrainians living abroad. Another factor to take into account is that Ukraine lost much of its production capacity and access to maritime exports and electricity in 2022. So it is difficult to point to a single factor.

What is certain is that household spending has always been a driver of economic growth. In pre-war 2021, household spending accounted for almost 70% of GDP (if we calculate this indicator using the consumer method). In the first year of the full-scale war, household spending decreased somewhat, and much more money in the country was being redistributed through the state.

 

The CES, the Centre for Economic Recovery and the Institute of Demography estimated that by 2032, the country will be short 3.1-4.5 million workers as a result of out-migration. As a consequence, economic losses over this period could reach US$113 billion.

"Due to the low birth rate, these losses will not be compensated for by natural population growth. Therefore, a well-thought-out policy on the return of migrants is extremely important in order to minimise such losses," the CES concludes.

Ukraine is already feeling the impact of migration on economic activity. Demand for goods is shrinking, decreasing companies’ incentive to expand. The only source of stimulus is working for export, although logistics are significantly hampered by war conditions.

Even if these problems can be solved and security risks kept to a minimum, it will be difficult to increase export-oriented production due to the lack of labour. Highly qualified workers will be more scarce, since the level of education of Ukrainian refugees abroad is higher than the average in Ukraine, This can become an obstacle to the development of more complex and technological production.

Depending on how many Ukrainians do not return home after the end of the war, economic losses due to the decline in production and consumption may range from 2.6 to 7.7% of GDP per year. However, these figures on the losses Ukraine is already experiencing are only "temporary". They are set to grow, as children of refugees who have gone abroad will not enter the Ukrainian labour market.

While the loss of refugees risks becoming a catastrophe for Ukraine’s economy, it is a real gift to the economies of the countries where Ukrainians are living. The governments of these countries are interested in Ukrainians developing their economies. Therefore, the future return of refugees will require dialogue with partner countries and the development of joint policies.

The refugee factor will also affect the country's balance of payments, and therefore the currency market. It is difficult to assess this impact because the balance of payments will in many ways depend on investments in reconstruction and the outcome of the war.

Until 2022, consumption had a significant impact on the balance of payments. Many goods that Ukrainians use in everyday life are imported. If the millions of refugees do not return, the consumption of these imports will decrease. The pressure of importers on the hryvnia exchange rate may be less than before the war.

On the other hand, many refugees abroad continue to spend money using the Ukrainian banking system. The scale of such expenses exceeded US$1.5 billion per month and US$5 billion per quarter in 2022.

 

The volume of payments made by refugees abroad using Ukrainian bank cards remained unchanged at the beginning of 2023. However, many refugees will find work in the host countries and therefore will no longer spend money using Ukrainian accounts. As a result, this flow of currency from Ukraine may decrease.

Refugees who find jobs can contribute to the inflow of foreign currency into the Ukrainian economy by sending money to relatives in Ukraine. However, no such effect has been observed. Moreover, the volume of remittances decreased after the beginning of the full-scale war.

 

Migrant workers sent US$1.1-1.2 billion dollars to Ukraine every month in 2021,whereas in 2023 it was less than US$1 billion. The sums risk falling further after the war if some of the men are reunited with their families abroad.

Despite the absence of millions of Ukrainian citizens, the National Bank is building up its international reserves, and the government is financing record defence spending. However, this has been possible only thanks to record amounts of international support. Most of the external financing that Ukraine receives comes from soft loans. Eventually, the debts will have to be repaid.

 

The Ministry of Finance of Ukraine states that the volume of the country’s state and state-guaranteed debt reached US$133 billion at the beginning of August. If millions of Ukrainian refugees do not return, servicing such a debt burden will become increasingly difficult. As a result, the government would have to cut back on social spending to allocate more money to paying off debts.

The pension system will suffer even more. If future generations of people in the labour market are reduced, the state will have nothing with which to pay pensions. In that case, the government would have to abandon numerous benefits or raise the retirement age.

What to do 

The end of the war ranks first among the factors refugees mention as the most important when it comes to returning home. This condition was mentioned by 51.2% of respondents. However, it is not only the war that stands in the way of Ukrainians returning. Economic factors and the intensity of post-war recovery are of great importance.

28.3% of the interviewed refugees mentioned the availability of decently paid work among the conditions for their return to their homeland. Another 20.7% expect an increase in the standard of living in Ukraine. There are even those who expect the state to pay them cash assistance after returning home.

Therefore, if the state wishes refugees to return, it will need to implement a comprehensive policy, to include reforms and the attractiveness of investment in the restoration of destroyed infrastructure.

It will be necessary for Ukraine to enlist the help of partner countries for citizens to return home.

"If Ukrainians remain abroad, then European countries will receive a direct economic benefit; however, if they return, there will be an indirect benefit for the EU. The return of refugees will strengthen Ukraine's economy and allow it to invest more in security and reconstruction, so it will need less European funding," the Centre for Economic Strategy believes.

Among other recommendations regarding the return of refugees, the Centre for Economic Strategy calls for rapid post-war reconstruction, providing assistance to people from regions affected by the war, simplifying the reintegration of children into the national education system, and opening the EU labour market for Ukrainians after the war.

Yaroslav Vinokurov – Ekonomichna Pravda 

Translation: Myroslava Zavadska and Sofiia Kohut

Editing: Monica Sandor

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