The effect of company seizures and trade suspension in Donbas

German Advisory Group Ukraine

In March, a further escalation of the economic component of the conflict in Donbas occurred. Ukrainian-owned businesses in the non-controlled area (NCA) were seized by the de-facto authorities. In reaction, the Ukrainian government suspended all trade-related goods transports across the contact line. In this report, we assess the economic impact of these two events on the government-controlled area (GCA), but not on NCA.

The effect of the company seizures is estimated to take 0.7% off Ukraine’s GDP in 2017, as the seized companies no longer are a part of Ukraine’s GDP. The trade suspension is likely to result in a negative effect of 0.6% on GDP in 2017, as several value chains are disrupted. However, reorganisation of production processes and substitution of inputs through imports and of sales through exports are possible. The magnitude of the effect in 2017 hence depends much on the speed of adjustment and is likely to be temporary. Grave disruptions such as electricity shortages due to a lack of anthracite coal or strong decreases of steel production do not appear realistic. However, Ukraine’s trade deficit in 2017 will probably increase by USD 1.8 bn, corresponding to 1.9% of GDP.

To sum up, the negative impact on GCA is significant, but much smaller than the economic disturbances in previous years related to the Donbas conflict.