Executive summary

Russia’s war of aggression against Ukraine is a human tragedy on a scale not seen in decades in Europe, with tens of thousands dying and millions of refugees escaping Ukraine or being internally displaced. At the same time, the war has also sparked a series of economic shocks around the global economy, and Eastern Partner (EaP) countries, as a result of their geographic and economic proximity to both Russia and Ukraine, are strongly affected.

Supply chains are being disrupted as a result of export bans, Russia’s threat to Ukrainian shipping in the Black Sea, and international sanctions, all of which make it harder to get goods in and/or out of Russia and Ukraine. The two countries’ key role in the global supply of food and energy have caused huge volatility in commodity markets, with prices of key grains, energy and metals increasing dramatically. This has exacerbated inflationary pressure across the EaP region and pushed governments to consider strategies to preserve their countries’ food and energy security, for instance by reducing dependence on imports of fossil fuel and invest in domestic renewable energy sources.

Following the macro-economic contraction in 2020 and the rebound in 2021 across the EaP region, the recovery in 2022 was expected to continue at a steady pace on the back of growth in private consumption, investment and exports. Russia’s war against Ukraine, however, challenges established human, financial and commercial links between EaP countries and some of their major economic partners and affects the trajectory of the post-COVID-19 recovery that was underway.

Growth projections for all EaP countries have thus been revised several times in the wake of the war. With Russia’s economy experiencing recession and the devastation of Ukraine hard to quantify, the economic outlook for EaP countries had to be adjusted downward in the initial phases of the war. The only exception was Azerbaijan, whose energy industry has been bolstered by soaring oil and gas prices. For Armenia and Georgia, the downward revisions that followed the outbreak of the war have been reconsidered in light of the positive macroeconomic development observed in the first nine months of the year, but these short-term effects may fade away, leaving the two countries exposed to the long-term, structural challenges described in this paper.

This report outlines the main economic shocks triggered by the war, such as supply chain disruptions, soaring commodity prices and exchange rate volatility, and discusses in detail EaP countries’ exposure to key transmission channels, such as inflation, migration, remittances, investment, and trade. A section with a specific focus on small and medium-sized enterprises (SMEs) follows. Finally, the report suggests policy responses to ease the impact of the shocks in the EaP region, provide targeted support to the most vulnerable, support the refugee crisis, maintain open markets, diversify trade partners, and strengthen energy policies.