Ukraine's economy "wobbles" due to lack of human resources

Attrition has weakened Ukraine’s military in stopping Russia’s onslaught on the battlefield, while also sapping productivity at factories, construction sites, mines and the broader economy of the conflict-torn country, Bloomberg reported.

Labor issues have become a top concern for businesses struggling to recruit. Mobilization laws that came into effect last month are designed to add hundreds of thousands of troops to the Ukrainian military. But the lack of young, healthy workers is straining the large and small businesses that form the backbone of Ukraine’s wartime economy.

It is a conundrum for Ukrainian President Volodymyr Zelensky, who wants to replenish the front lines while ensuring that this does not damage the economy Kiev needs to sustain the fight.

“We are now in a war of attrition. It is difficult to choose between butter and guns,” Deputy Governor of the Central Bank of Ukraine Sergiy Nikolaychuk said in an interview in Kiev.

The problem will only get worse as the conflict with Russia drags on and Ukraine is forced to fill the void left by the millions who have fled the country, joined the army or died. As the Ukrainian army struggles to fend off renewed Russian attacks, the Ukrainian economy – which has lost a quarter of its output since the conflict began – risks being further weakened by a shrinking workforce.

Nikolaychuk said the drop in economic output compared to 2021 was linked to a decline in the workforce of about 27% compared to pre-conflict levels. That’s a policy challenge that can’t be solved even with aid from Western allies, who are mobilizing ammunition and air defense systems for Ukraine. Meanwhile, manpower is a problem that gives Russia and its vast resources an advantage.

Ukrainian steelmaker and mining unit Metinvest BV, which employs nearly 60,000 people and is looking to fill 4,000 vacancies, has struggled to find workers to operate an open-pit steel furnace at a plant in the city of Zaporizhzhia.

The search for about 90 workers turned into a grueling and stressful recruitment exercise that took three months, longer than the usual one month in peacetime, said Tetiana Petruk, Metinvest’s sustainability director. “It wasn’t about raw materials, it wasn’t about equipment or machinery – the priority was who would do the work and whether we could deliver,” Ms. Petruk said.

The recruitment process was also cumbersome, as male employees were reluctant to work at the large companies targeted by military recruiters. “Recruitment officers posted conscription notices at the entrance gates – even for our applicants,” said Ms. Petruk. About 15% of Metinvest’s workers were drafted, Ms. Petruk said.

This problem ranks second to rising costs among Ukrainian companies, according to a survey conducted earlier this year by the Kiev-based Institute for Economic Research and Policy Consulting. About half of the companies surveyed said they were struggling with labor shortages.

The result of the labor shortage is skyrocketing wages as employers look to retain workers. Although inflation has fallen to nearly 3% from its post-conflict peak of 27%, the Bank of Ukraine cited this phenomenon in an inflation report, predicting that adjusted wages will surpass pre-conflict levels next year.

Volodymyr Landa, a senior economist at the Kiev-based Center for Economic Strategy, said the government must keep an eye on business needs even as it beefs up its military capabilities. “The reason is simple: Ukraine does not have the budget to significantly increase its military capabilities,” Landa said.

For her part, Ms Petruk at Metinvest warned that the shortage could cause a domino effect, with the tax base being eroded and ultimately harming military targets. Businesses could be forced to cut production.

“If the conscription continues at this rate, we will be forced to stop some processes or production areas because there will not be enough workers,” Petruk concluded.