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Ukraine’s War Economy

Almost three and a half years of war have transformed the battle-hardened country into a weapons factory. 

Compared with almost anywhere in the world, new equipment is being developed and deployed at a fraction of the cost and on a massively compressed timescale. 

As Russia’s full-scale invasion grinds on, Ukraine is producing some 40% of its weaponry at home. It’s a crucial development for a country that remains dependent on US intelligence and deliveries of air-defense systems to intercept Russian drone and missile attacks. 

The importance was driven home this week with the abrupt decision by President Donald Trump’s administration to halt supplies. It can also offer a model for NATO members now looking to ratchet up military spending to respond to a more volatile strategic environment, Kyiv argues. 

“My country is becoming the arsenal of the free world,” said Oleksandr Kamyshin, President Volodymyr Zelenskiy’s advisor for strategic affairs. 

Innovation has long been visible with the military’s use of low-cost drones to attack Russian positions and take out battle tanks, altering the nature of the battlefield. Last month’s brazen strike on strategic bombers in synchronized attacks on Russian air bases in Siberia and the far north were the clearest demonstrations of the new reality. 

Kyiv hopes the burst of production will be a pillar of the country’s postwar recovery. Its procurement budget is around $12 billion, though the country can now produce battle-tested hardware worth three times that amount. European governments looking to re-arm should pay attention, Ukrainian government officials have said. 

For now though, weapons exports are subject to a ban — a source of tension for those in the industry. The focus is on converting innovation into production. Roman Sulzhyk, a former JP Morgan and Deutsche Bank executive who runs a venture fund for military technology startups, said he’s backing “mind-boggling” military-technology ventures. 

“The Ukrainian mil-tech scene is extremely hot right now,” he said. 

Around the Region

Poland: The central bank unexpectedly cut interest rates after a one-month pause and said inflation is likely to slow within its target in the coming months, raising expectations that monetary easing is set to continue. A day later, Governor Adam Glapinski said it wasn’t the beginning of a rate-cutting cycle. 

Romania: The country’s premier unveiled a package of tax hikes and wage freezes that aims to cut the budget deficit to below 6% of GDP next year and avoid a credit rating downgrade to junk.

Serbia: The government received assurances from China that it would support speeding up exports of materials critical for electric-vehicle production, benefiting companies like Stellantis NV, which operates a factory in the Balkan country.

Ukraine: Citigroup Inc.’s retiring top banker to governments will keep an appointment in September with the bank’s Ukrainian unit, underscoring the war-battered nation’s importance to the bank. “There is business there that has continued to grow,” Julie Monaco told us. 

Poland: California startup Lyten is buying a Polish energy-storage factory from Northvolt AB in a bid to become a global leader with its sulfur-based batteries.

Chart of the Week

The Czech koruna is benefiting from a more hawkish tilt in the central bank's rhetoric as policymakers focus on taming sticky inflation in services and soaring property prices. The currency hit its strongest level against the euro in more than a year after fresh signals of improving outlook for the key manufacturing industries. In contrast, central bankers in neighboring Poland surprised with a rate cut, sending the zloty weaker. 

By the Numbers

• Poland should continue to look at green bonds as a means of financing over the longer term after the Finance Ministry sold €1.2 billion in 12-year securities this week, the country’s first such securities in more than six years. 
• Investors in Romanian sovereign bonds are welcoming long-awaited measures to curb the budget deficit, with the reduced risk of a credit-rating cut pushing the yield on dollar-denominated securities to the lowest levels in about eight months.
• Czech manufacturing PMI rose to 50.2 in June, advancing more than expected and exceeding the threshold marking expansion in industrial activity for the first time in three years. 

Things to Watch

• Ukraine's reconstruction conference in Rome, July 10-11
• Bulgaria awaits final decision on euro adoption by Euro Group, EU Parliament, July 7-8

Final Thought

A day after hundreds of thousands of protesters flouted restrictions to march in Budapest’s Pride parade, Prime Minister Viktor Orban turned to outer space for political solace. The premier phoned Tibor Kapu, one of Axiom Space Inc.’s crew of astronauts from four nations who reached the International Space Station last week. Gazing up at a wall lined with monitors detailing the ISS mission, Orban listened as Kapu described growing paprika – Hungary’s culinary staple – on the station. With the long-ruling premier trailing badly against the opposition in polls, the ground-control politics offered a respite of sorts. The mission will at least keep the country’s HUNOR astronaut program on the map of global powers in space. 

Orban speaks with Hungarian astronaut Tibor Kapu on June 29. Source: Prime Minister of Hungary

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