By FocusEconomics
Over three years after Russia launched a full-scale invasion of Ukraine, the economic landscape in both countries has transformed. With an end to the conflict finally in sight, we examine the potential outcomes of peace negotiations and their implications for Russia’s and Ukraine’s economic outlook.
The Ukraine War three years in
Recent economic data for Russia and Ukraine
After shrinking just 1.4 percent in 2022, the Russian economy has since rebounded sharply, expanding around 4 percent in 2023 and 2024. This better-than-expected performance has been spearheaded by war-related investment and government spending, and the country’s ability to skirt Western sanctions by rerouting exports through unaffected countries, particularly in Asia. Less positively, inflation has climbed steadily since 2023 owing to labor shortages, currency weakness and government stimulus, prompting the Central Bank of Russia to hike its policy rate to an all-time high in Q4 2024.
Conversely, the economic panorama in Ukraine has yet to brighten: The economy shrank nearly 30 percent in 2022, and has since faced a wave of headwinds that have kept it far smaller than its pre-invasion size. Repeated Russian attacks on critical infrastructure, waning Western aid, plus troop mobilization and mass migration—the population is down more than six million from pre-invasion levels—have capped Ukraine’s economic recovery. Moreover, the fiscal deficit as a percentage of GDP is running well into the double digits, driving up the public debt-to-GDP ratio, and war-induced spikes in food and energy costs have fanned inflation, leading the National Bank of Ukraine to maintain a tight monetary policy stance.
Setting the stage for peace talks
The Trump conundrum
In his reelection campaign in 2024, Donald Trump promised to bring the Russia-Ukraine war to a swift close. Shortly after his inauguration, President Trump initiated a first round of talks with Russia and Ukraine in February 2025, and floated the idea of imposing further sanctions on Russian energy exports should peace negotiations stall. That said, before these early talks could take place, the US had already seemingly made major concessions to Russia, rejecting Ukraine’s ambition to join NATO and reclaim Russian-occupied territories, as well as dismissing the possibility of US troops policing any armistice in Ukraine.
Berenberg’s Holger Schmieding commented:
“Trump has conceded upfront and ahead of any talks with Ukraine what could have been part of a more balanced deal in the end. For all that is publicly known, Russia has not made any concessions in return. This can only embolden Russia to push for more. […] The dismal start to Trump’s attempt to end the war need not be the end of the story. Cooler heads may still prevail in Washington. Not all Republicans subscribe to Trump’s narrative. And even Trump can change tack if the other side overplays its hand.”
EIU analysts said:
“Those upfront concessions combined with Russia’s recent battlefield momentum will embolden the Russian president, Vladimir Putin, who has not yet shown any willingness to compromise on his objectives of reversing NATO’s expansion and subduing Ukraine. […] We believe that Russia could ultimately accept some European security guarantees for Ukraine and could make minor territorial and military concessions if some major sanctions are removed.”
In late February, Trump clashed with Ukraine’s President Volodymyr Zelensky in a heated public exchange, which led the USto freeze military aid and intelligence sharing with Ukraine in early March, in turn prompting a renewed Russian onslaught on energy infrastructure. Like a number of Trump’s other decisions in his first 100 days in office, this was short-lived and some aid has reportedly been restored since. Still, the spat highlights the risk that U.S. support for Ukraine could wane.
Failed first ceasefire
In March, Ukraine accepted in principle a US proposal for a 30-day complete ceasefire. Russian President Vladimir Putin did not reject the proposal outright, probably to sustain the appearance of being aligned with Trump; in a later call with Trump, Putin agreed to a 30-day pause on attacks on energy infrastructure. Still, Putin made fresh demands before Russia would accept a comprehensive ceasefire, including a military aid freeze to Ukraine. Most importantly, in delaying a ceasefire, Russia ensured it could continue to make advances to recoup its Ukrainian-occupied territory; Ukraine launched a campaign last summer to seize and occupy territory in the Russian Kursk region—seeking to improve its negotiating position ahead of peace talks—most of which Russian forces have reportedly since retaken.
Outlook
Scenario I: Peace deal
Though ceasefire talks could drag on, Russia and Ukraine alike have incentives to end the war. Both countries are facing rising economic headwinds plus increasing difficulty in maintaining their military efforts and mobilizing additional troops. That said, Ukraine is in a far more precarious position than Russia—the latter has the upper hand on the battlefield, significant financial reserves and a steadily growing economy.
A peace deal for Russia would likely lift at least some sanctions, ease labor shortages and provide relief to the currency—in turn alleviating inflationary pressures and prompting the Central Bank to cut rates. Moreover, it would allow Russia to return to the global stage geopolitically, if only to a limited extent.
JPMorgan’s Anatoliy Shal and Nicolaie Alexandru said:
“Lifting some sanctions and restoration of gas flows through Ukraine could be an economic argument to lure Russia into a deal. […] Yet, the net impact on growth appears ambiguous. A significant portion of sanctions has worked as an active industrial policy for Russia, with higher barriers for imports and exits of western companies opening up space for local producers – a prospect of potential reversal may weigh on investment and hiring plans of businesses. Besides, business and consumer confidence are close to historic highs and demand is unlikely to get much of an additional boost from stronger animal spirits.”
For Ukraine, a peace deal would likely involve a significant loss of land. Still, large-scale economic assistance from the West for reconstruction projects would buttress fixed investment and government spending. Troop demobilization, a stronger hryvnia and looser monetary policy would further aid domestic demand.
Goldman Sachs’ Andrew Matheny and Johan Allen commented:
“[The nature of any peace deal] matters insofar as a) it is likely to influence migration trends (i.e., the willingness of refugees abroad to return home); and b) a deal that is perceived as being more durable is likely to catalyse stronger foreign-financed reconstruction activity, in particular from the private sector. […] The historical drag on investment from concerns over the rule of law will likely diminish, thanks to greater willingness to fight corruption and a stronger reform anchor from abroad.”
However, the strength of the peace treaty hinges crucially on the security guarantees for Ukraine. Though NATO membership is seemingly off the table, the country is unlikely to sign a deal that does not provide protection against potential future Russian incursions.
EIU analysts said:
“The US and Europe will be keen to make a peace deal as strong as possible, both to deter future Russian incursions, but also to send a firm sign to other countries that may be considering aggressive military action against their neighbours. Our baseline forecast envisages that these efforts flounder to some extent, resulting in a weaker deal. [But] the West may succeed in carving out a solution that involves sufficiently firm security guarantees for Ukraine to result in a long-lasting agreement that would keep Russia at bay and prompt a more rapid recovery for Ukraine.”
Scenario II: Fragile ceasefire, frozen conflict
Russia is yet to control the entirety of the Donetsk, Kherson and Zaporizhian provinces, but likely wishes to do so. This and the issue of security guarantees are likely to be the two main points of contention that could scupper future peace talks. A fragile ceasefire could, therefore, be put in place and remain for a prolonged period if Ukraine and Russia fail to find a middle ground and agree on a comprehensive peace treaty; though sporadic border spats could break out, renewed high-intensity conflict could be avoided if both sides fear potential reprisals. Economically, this would allow Ukraine to recover only tepidly—dissuading private-sector investors from funding reconstruction—while limiting sanction relief for Russia.
Scenario III: Ceasefire talks fail
If the two sides fail to reach a ceasefire, Western sanctions would likely mount for Russia, potentially knocking the external sector and the ruble; further trade restrictions could also hit key investment projects. Moreover, sustained currency weakness and labor shortages would continue to fan inflation and drive the central bank to maintain a tight monetary policy stance, buffeting domestic demand. That said, elevated military spending would continue to cushion economic activity, and Russia would probably find ways around future sanctions just as it has with previous ones.
In the absence of a ceasefire, the conflict would likely go one of two ways: An eventual collapse of Ukrainian manpower and morale and thus victory for Russia, or a long-term stalemate under which the war’s frontline varies little over time. The latter would keep Ukraine’s GDP below pre-conflict levels and preclude EU membership or large inflows of reconstruction investment. The former, in contrast, would allow the Ukrainian economy to rebuild—but under Russian leadership.
Foreign aid will be critical if Ukraine is to sustain itself in the absence of a peace deal. Should the US pull the plug on further military aid to Ukraine, the burden to assist Ukraine’s war efforts would fall on Europe; the continent is currently ramping up defense spending, but it is unclear whether European countries are able or willing to provide enough aid quickly enough and long enough to stop a Ukrainian defeat.
Our economic outlook
Our panel of expert analysts differs regarding the most likely direction for the conflict to take ahead. Our Consensus Forecasts—the mean average of individual analysts’ predictions—are a synthesis of these different viewpoints.
For Russia, the Consensus among our 34 panelists is for economic growth to wane to below its pre-pandemic 10-year average of 1.9 percent in 2025. Sky-high interest rates, ruble weakness fanning inflation and population decline should dent domestic demand. In addition, a recovery in exports should be limited as Russia exhausts its capacity to circumvent mounting Western sanctions.
For Ukraine, our Consensus is for GDP growth to remain modest in 2025 and for the economy to remain around 20 percent below its pre-invasion size. The recovery will be maimed by infrastructure damage and dwindling foreign aid. Moreover, hryvnia is forecast to depreciate to a new all-time low by December, and interest rates and inflation should remain elevated, hitting household budgets. Meanwhile, there is a growing public desire for the conflict to end. Still, Ukraine’s outlook hinges on the security guarantees the US and Europe can offer.
Burden Sharing: All eyes on security guarantees
Europe steps up
At the close of last year, the US and the EU were contributing roughly equal shares of the cost to support Ukraine’s effort against the Russian invasion. At the outset of 2025, Trump made it clear he intends Europe to bear much more of this protection burden going forward, and NATO urged members to raise defense expenditures. Several countries have since headed these calls: Denmark, Germany, Sweden and the UK have all recently approved plans to scale up military spending significantly, and Spain announced an additional aid package for Ukraine.
A united European effort to assist Ukraine could incentivize Russia to accept a peace deal, which might fear reprisals from prolonging the conflict. Moreover, a larger and more long-lasting troop presence along the border could ensure a more durable peace deal for Ukraine. Still, Russia has stated that it opposes European troops acting as peacekeepers in Ukraine, a likely significant sticking point in future talks.
Analysts at Berenberg commented:
“If European countries want to be taken seriously on the world stage and have a seat at the table when the fate of Ukraine is decided, they need to raise their defence capabilities significantly. In aggregate, the European members of NATO finally met the agreed minimum defence spending of 2 percent of GDP in 2024. However, a number of countries still fell short, including Italy, Spain, Belgium and Portugal. NATO may raise its spending target at its June summit, possibly to 3 percent.”
Minerals critical for safety
A minerals deal is still on the table, which would see the US acquiring a 50 percent stake in Ukraine’s rare earth minerals plus oil and gas reserves in exchange for the military and financial aid it has provided since 2022. For Ukraine, this agreement should assist in developing the country’s critical mineral resources and funding its reconstruction efforts, boding well for investment and public spending in the short term as well as trade in the long term.
More importantly, though, it could provide Ukraine with some security guarantees from the US Trump has made it clear that he does not wish to pour more US taxpayer money into the conflict, comments which have so far emboldened Russia, which knows Europe will take time to offset any drop in US assistance. That said, a Ukraine-US economic partnership would likely dissuade Russia from ramping up incursions for fear that the US would intervene to safeguard its assets—even if Trump fails to provide military assurances.
The post The Art of Peace: The economics of Russia-Ukraine ceasefire talks appeared first on Caribbean News Global.
