KSE Institute has published the October edition of its Ukraine Monthly Economic Update. The effects of the blockade of Greater Odesa ports and the destruction of production capacity are now visible in Ukraine’s export and industrial output data. In August, goods exports fell by 19% year-on-year to $2.4 billion, the lowest monthly level since July 2023. The goods trade deficit widened by 49.4% to $41.6 billion in January-August, while the current account deficit reached $4.8 billion in August, the largest monthly gap since at least 2010.
Metallurgy suffered particularly heavy losses. In August, metal exports fell by 48.1%, while metallurgical output declined by 48.6% year-on-year. Overall industrial production contracted by 6.1%. Steel output dropped a further 53% month-on-month in September following the shutdown of the country’s three largest steel plants. According to KSE Institute, even reopening the ports would not restore previous metal export volumes without rebuilding production capacity and reducing the risk of further Russian attacks. Analysts expect total goods exports to remain at $2-3 billion per month over the coming months.
Defense-related manufacturing continues to grow but can no longer offset losses in other industries. Russian strikes are putting further pressure on the labor market. Companies are trying to retain skilled workers by reducing working hours and pay. According to the September survey by the Institute for Economic Research and Policy Consulting, only 1.7% of firms plan to increase employment over the next three to four months, compared with 8.4% planning cuts. KSE Institute expects firms to begin laying off workers in the first quarter of 2027.
Inflation accelerated to 10% year-on-year in September from 8.1% in August, returning to double digits for the first time since October 2025. Core inflation rose to 8.8%, while consumer prices increased by 2.1% month-on-month, the largest monthly rise since June 2024. Despite weaker demand, companies are passing higher costs on to consumers. KSE Institute’s baseline forecast puts inflation at 13.2% by the end of 2026. If elevated inflation expectations persist, they could influence future wage and price setting.
The National Bank of Ukraine raised its key policy rate twice, in July and September, bringing it to 16%. Accelerating inflation, however, has weakened the impact of these decisions. The ex post real policy rate fell to around 5.7% from 7.3% before the tightening cycle began. KSE Institute expects two further increases of 0.5 percentage points, in October and December, bringing the rate to 17%. Easing is expected to begin only in the fourth quarter of 2027.
The hryvnia continued to weaken against the dollar after four months of relative stability. Since October 19, the interbank exchange rate has closed above UAH 45 per dollar on every trading day. The NBU reduced foreign exchange sales in late October, while the client-market FX deficit remained broadly unchanged. KSE Institute sees this as a decision to allow further hryvnia depreciation. It helps preserve international reserves but may add to inflationary pressure. In September, the NBU sold a record $5.5 billion in foreign currency, while international reserves declined to $47.1 billion as of October 1. KSE Institute expects the exchange rate to approach UAH 46 per dollar by December.
In September, state budget general fund revenues reached UAH 196 billion, or 44.3% of the monthly plan. Most of the shortfall was linked to EU assistance under the Ukraine Support Loan. Some funds were credited to the special fund, while part of the scheduled assistance did not arrive during the month. Excluding planned receipts under this program, revenues would have reached approximately 92% of the target. Most major taxes underperformed as well, and the general fund recorded a deficit of around UAH 104 billion. Faced with limited resources, the government introduced temporary spending restrictions in October, prioritizing defense, debt service, pensions, wages and social assistance. A EUR 3.7 billion EU macro-financial assistance tranche remains an important source of financing for the fourth quarter, with Ukraine having met the legislative conditions for its disbursement in October.
Corporate lending slowed. Net hryvnia loans to businesses grew by just 0.7% in September, following monthly growth of around 4% in June-August. The entire increase came from the government-subsidized 5-7-9% lending program. Foreign-currency loans accounted for almost three quarters of the overall increase in corporate lending, making credit risks more sensitive to exchange-rate movements. Banks tightened lending standards for businesses while easing them for households.
Ukraine’s economy is moving closer to recession as inflation accelerates. In its Q4 2026 Ukraine Macroeconomic Handbook, KSE Institute forecasts economic contractions of 0.3% in 2026 and a further 0.6% in 2027. Continued Russian strikes on energy infrastructure increase the risk of a deeper downturn. KSE Institute sees effective air defense as one of the defining factors for Ukraine’s economic outlook. The adverse scenario assumes further logistics downturn, including closure of the Danube ports, unopened metallurgy plants, daily 12-hour power outages in January-February 2027, and other negative factors. Restoring and protecting industrial and energy capacity remains essential to limiting the economic contraction without adding further inflationary pressure.
