(Bloomberg) -- Ukraine is taking an economic hit from Russian attacks on its energy infrastructure, forcing it to rely on more expensive imports as it builds alternative sources, according to the European Bank for Reconstruction and Development.
The EBRD lowered its forecast for Ukraine’s economic growth to 4.7% next year from 6% in May due to the attacks, the lender said in its bi-annual report on the region on Thursday. The country’s economy is expected to expand 3% this year.
“More than half of electricity generation capacity was destroyed,” Beata Javorcik, chief economist at the London-based development bank, said in an interview. “Now, some of the gap is being filled by imports of electricity from Europe, but this electricity comes at a higher cost. So that puts energy intensive industries at the disadvantage.”
Russia has targeted Ukraine’s civilian infrastructure, including power, heating and water supplies, ahead of the winter season. In late August, Russia launched its biggest aerial attack to date, with a combined strike of more than 230 drones and missiles against power substations, causing blackouts.
Earlier this month, Ukraine’s top energy official warned that further Russian air strikes against the country’s energy grid could trigger an emergency at one of the three operating nuclear power plants still under Kyiv’s control.
“Our priority as an institution is to help Ukraine make it through the winter,” Javorcik said. “So it’s both through state-owned companies for repairs but also financing for purchases of distributed generation capacity,” she said.
The bank is providing up to €700 million ($782.7 million) in financing to secure Ukraine’s energy infrastructure, supporting decentralized energy production, energy storage and efficiency that would be harder for Russia to disrupt. State-owned banks Ukrgasbank and PrivatBank got the first loans for €250 million and €150 million, respectively.
Other Forecasts
EBRD regions’ economies are expected to grow 2.8% in 2024, picking up to 3.5% in the following year.
In Turkey, the EBRD sees growth moderating amid a tighter monetary policy to fight inflation at around 50%. The bank expects the economy to grow 2.7% in 2024 and 3% in 2025, according to the bi-annual report. With real wages measured in US dollars increasing since early 2022, Javorcik said that salary increases will be “much more muted in the future.” In July, Turkey already ruled out a mid-year hike in the minimum wage.
Average inflation in the EBRD regions declined from 17.5% in October 2022 to 5.8% in July 2024, though still remains 1.6 percentage points above the pre-pandemic average. “The remaining catch-up potential thus appears to be limited and real wage growth can be expected to moderate going forward,” the bank said.
The decline in inflation in the EBRD’s regions, which covers some 40 economies stretching from Kazakhstan to Turkey and Tunisia, allowed a recovery in real wages after several quarters of declines, “boosting household consumption,” according to the report.
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