Country of strategic importance
Ukraine is the second largest country in Europe, located at the crossroads of the European and Asian markets. Ukraine regained its independence in 1991 after the collapse of the Soviet Union. However, the first state structures were established as early as the Middle Ages. Due to its strategic location, Ukrainian lands have been a place of intermingling of various cultural influences and a subject of rivalry among the region’s countries. In the 1990s, a debate began in Ukrainian politics about Ukraine’s place in regional and international politics.
The 2013-2014 Revolution of Dignity led to a fundamental change in Ukrainian domestic and foreign policy. This period saw Russia’s illegal annexation of Crimea and the outbreak of war in the Donbas, where pro-Russian separatists, with Moscow’s backing, established “people’s republics” (Donetsk People’s Republic and Luhansk People’s Republic). In February 2022, Russia launched a full-scale war against Ukraine, resulting in more territories in the south and east coming under Russian occupation. The Ukrainian armed forces went on the counteroffensive, and the government in Kyiv stepped up efforts to achieve integration into the European Union and NATO.
Economically, the post-1991 period was a time for Ukraine to implement market reforms and build economic capacity. In 2022, the value of GDP was $160.5 billion ($4534 per capita). In the GDP structure, industry accounted for 19.2%, services for 60.8%, and agriculture for 8.2%. Yet Russia’s invasion in 2022 results in immense social and economic costs. Because of the war, the number of people living in Ukraine dropped from 38 million to 33.2 million people. The economy contracted by a third, inflation rose to 17.7%, and the unemployment rate increased to 19.4%.
At the same time, Ukraine has received political, economic, and military support from the international community, primarily the European Union and the United States. In its analysis, the International Monetary Fund stresses that, despite the war, Ukraine’s economy has shown resilience, and macroeconomic and financial stability were maintained. Under the current circumstances, maintaining support for Ukraine and continuing reforms related to the prospect of EU accession is critical.
Population of Ukraine
Ukraine is currently home to 33.2 million people. After the full-scale invasion by Russia, more than 5 million people left the country. In the first weeks of the war, the largest number of refugees came to Poland. Currently, the countries with the largest number of Ukrainian refugees are Germany (1.2 million), Poland (958,000), the Czech Republic (358,000), Spain (187,000), and Bulgaria (166,000). Across the European Union, 4.2 million Ukrainians rely on temporary protection, which provides residence permits, access to the labor market, housing, medical assistance, and education for children.
The largest ethnic groups are Ukrainians (77.8%), Russians (17.3%), Belarusians (0.6%), Moldovans (0.5%) and Crimean Tatars (0.5%). More than 70% of Ukrainians are Orthodox Christians, while other religious groups include Protestants, Catholics, Muslims, and followers of Judaism. Ukrainians are an aging society, with those aged 65 or older making up 18.1% of the population. The population has been declining since the 1990s, driven by labor migration, among other factors. According to estimates, some 4.6 million Ukrainians, or 25% of the working population, worked abroad in the past decade, mainly in Russia and Poland.
Economy of Ukraine
Before 2014, Ukraine was one of the world’s leading grain producers and had a significant industrial base. At the time, it was developing mining, energy, metallurgy, chemicals, machinery, defense, automotive, shipbuilding, telecommunications, finance, and tourism industries. Likewise was the case with agriculture, based on the cultivation of grains (corn, wheat, barley) and vegetables (sunflowers, potatoes, sugar beets) and farming of swine and cattle.
After 2014, the economy began to adjust to the new conditions. Changes became necessary due to the loss of control over gas fields in the Black Sea shelf and the tourism sector in Crimea, as well as portions of the mining, metallurgical, and chemical industries in the Donbas. There has been a breakdown in economic ties with Russia, leading to the loss of the largest export and import market, financial instability, and the destruction of the country’s established resource-based economy model.
As a result of Russia’s full-scale invasion in 2022, Ukraine’s economy shrank by 29.1%. The economic troubles were exacerbated by damage to infrastructure resulting from Russian attacks and difficulties in exporting Ukrainian goods, including grain. The problem was mitigated partially by the so-called Black Sea Grain Initiative, an agreement between the UN, Turkey, and Russia that lasted until July 2023. It has resulted in the export of 33 million tons of grain and other food products, mainly to developing countries.
In 2023, the wartime-operated economy began to overcome the effects of the crisis, enabled by economic aid from the West. So far, Ukraine has received $68.5 billion in budget support. Ukrainian authorities are negotiating additional assistance packages with countries such as the United States, the United Kingdom, Japan, and South Korea. The European Commission predicts Ukraine’s GDP will grow by 4.8% by the end of 2023, 3.7% in 2024, and 6.1% in 2025.
International trade
Before 2014, Russia was Ukraine’s most important trading partner, but a year later, the European Union replaced it. In 2015, due to the loss of control over the Donbas, the structure of Ukrainian exports also changed, with agricultural products becoming dominant.
Before the full-scale Russian invasion in 2022, Ukraine was the 46th largest exporter and 47th largest importer, with imports ($69.9 billion) outweighing exports ($65.9 billion). Ukraine’s main trading partners were Poland, China, Germany, Turkey, Romania, Bulgaria, Italy, Hungary, the United States and the Czech Republic.
The group of most imported goods in 2022 was oil and mineral fuels (23%), motor vehicles and parts (9.5%), electrical machinery (9%), industrial machinery (7.6%), plastics (4.5%), pharmaceuticals (3.4%), chemical products (2.4%), precision instruments (2.1%), iron and steel (1.7%), fertilizers (1.4%), and rubber (1.4%).
The most exported goods in 2022 were cereals (21%), fats and oils (13%), iron and steel (10%), oilseeds (8.5%), ores (6.9%), electrical machinery (5.8%), wood and wood products (4.3%), industrial machinery (2.7%), iron and steel articles (2.4%), oil and mineral fuels (2.4%), meat (2.1%), and furniture (1.8%).
In 2023, the monthly value of imports fluctuated between $4.6-6 billion and exports between $2.4-3.8 billion, depending on the intensity of military operations and access to transportation infrastructure, among other factors.
Trade agreements
Ukraine, to date, has concluded 78 bilateral investment treaties (BITs). Currently, 66 of these are in force. Ukraine also signed a Trade and Investment Cooperation Agreement (TICA) with the United States in 2008, which established a joint Trade and Investment Council.
In 1991, Ukraine was one of the three founding countries of the Commonwealth of Independent States (CIS). However, Ukraine failed to ratify the organization’s statute and eventually withdrew from its work in 2018.
Ukraine has concluded preferential trade agreements with Armenia, Azerbaijan, Belarus, Canada, Georgia, Iceland, Kazakhstan, Kyrgyzstan, Liechtenstein, Macedonia, Moldova, Montenegro, Norway, Russia, Switzerland, Turkmenistan, Tajikistan, and Uzbekistan.
In 2014, an Association Agreement was signed between the European Union and Ukraine, which came into force in September 2017. The economic part of the agreement was the Deep and Comprehensive Free Trade Area (DCFTA), which went into effect as early as January 2016.
Ukraine signed free trade agreements with the following countries:
Israel
Canada
United Kingdom
Agreements with associations of countries:
European Union (EU)
European Free Trade Association (EFTA)
Ukraine-European Union relations
Relations between Ukraine and the European Communities were established in December 1991. They were gradually deepened in the following years, but a factor that slowed down the process was Russia’s stance. Ukraine’s participation in the Eastern Partnership since 2009 brought some change. However, the breakthrough came after the signing of the Association Agreement in 2014.
The agreement went into effect in September 2017. The economic part of the deal was the Deep and Comprehensive Free Trade Area (DCFTA), which came into effect in January 2016. Following Russia’s invasion of Ukraine in 2022, President Volodymyr Zelenski applied for Ukrainian membership in the EU. In June 2022, the European Council granted Ukraine candidate status, and in December 2023 decided to start accession negotiations.
The European Union introduced full trade liberalization twice, in 2022 and 2023, to support Ukraine. Furthermore, the Priority Action Plan was deployed in 2021-2022 to speed up the DCFTA implementation process. The next period of the Plan’s operation covers 2023-2024. The European Union supports Ukraine with economic assistance and military equipment acquisitions under the European Peace Facility.
The European Union is Ukraine’s largest trading partner, while Ukraine is the EU’s 17th partner. The value of trade in 2022 was 57.7 billion euros. The EU exported €30.1 billion worth of goods to Ukraine, such as oil and mineral fuels, motor vehicles, electrical machinery, and industrial machinery. In turn, Ukraine exported goods worth 27.6 billion euros, such as grains, oilseeds, fats and oils, iron, steel, and ores.
Opportunities and challenges
The regulatory harmonization resulting from DCFTA after 2016 and the removal of tariffs and technical barriers have substantially facilitated economic relations with Ukraine. Another pivotal step is the ongoing harmonization of Ukrainian legislation with European Union law. Among the most critical issues are judiciary reform and stepping up the fight against corruption, as Ukraine was ranked 116th by Transparency International in 2022. In turn, Ukrainian companies must prepare to compete effectively in the EU market.
After the end of military operations, the Ukrainian government will face many challenges in rebuilding cities and a possible labor shortage. Ukraine already needs investment in repairing energy and transportation infrastructure, housing, schools, and hospitals. According to preliminary estimates by the World Bank, reconstruction costs will amount to at least $411 billion over the next ten years. However, the more the war is prolonged, the higher these costs will be.
The reconstruction of Ukraine implies the need to modernize industry, which has become uncompetitive due to war damage, outdated technology, and lack of funds for development. Such investments are also necessary in the agriculture and service sectors. It indicates that Ukraine will cooperate on a long-term basis with foreign actors in the development of all sectors of the economy. Nevertheless, significant economic support from the international community, primarily from the European Union and the G7, will be necessary to achieve the desired goal.