Monthly Context Report - October 2023
Summary
Security & Access: The city of Avdiivka in Donetsk Oblast has become the focal point of Russian hostilities. Starting on October 9, Russian forces launched the largest assault on the city since the beginning of the full scale invasion.
Political & Legal: The consequences of the Israel-Hamas conflict are being felt around the globe. For Ukraine, it has affected media coverage, defense support from Western allies and humanitarian assistance. At the same time, reports indicated that North Korea is supplying Russia with weapons and ammunition on a large scale.
Economic & Development: Despite the ongoing conflict, the Ukrainian economy is showing signs of recovery, as Ukraine's consumer inflation fate continues to decline. The National Bank of Ukraine has shifted from a fixed exchange rate to managed exchange-rate flexibility. Over the past month and a half, Ukraine has experienced record-high fuel prices, surpassing the peaks seen in the initial days of the full-scale invasion. The grain dispute with Poland and the border blockade launched by Polish truckers are adversely affecting exports, shifting overland exports to Romania.
Humanitarian & Environmental: Escalated attacks along the frontline have prompted local and regional authorities to expand calls for mandatory evacuations.
Poland: In Poland’s October general election, the opposition secured enough seats in parliament to oust the ruling Law and Justice (PiS) party, which has governed since 2015.
Moldova: On November 5, voters went to the polls to elect mayors, city councilors and district and village councils across the country. The pro-European Action and Solidarity Party (PAS) won mayoral seats in 244 of 898 communities.
Slovakia: On September 30, the Smer-SSD party, which has been highly critical of Slovakia’s military aid to Ukraine, emerged victorious in Slovakia’s parliamentary elections with 24% of the vote.
Trends to Watch
Political & Legal: President Zelenskyi’s statement of full support for Israel following Hamas’s attack could jeopardize Ukraine’s efforts to secure support from the Global South, including certain Arab countries. A potential increase in oil prices should the conflict in the Middle East escalate will affect Ukraine’s economy. North Korea’s weapons deliveries could potentially give Russia an edge and enable it to step up its military assaults before the upcoming presidential elections.
Economic & Development: The resumption of sea exports is particularly important for Ukraine’s extraction industry, as the hostilities in the Black Sea has led to a drop in activity at mining and processing plants and to increased unemployment.
Humanitarian & Environmental: Weekly evacuation numbers remain fairly low, and this situation is unlikely to change as the winter comes on. Evacuees displaced earlier may start returning to their home communities, even if these are in the vicinity of the front line.
Poland: Despite winning the largest share of the vote, the Law and Justice party will be unable to form a government. As the opposition takes power, political tensions are to be expected, particularly concerning the anticipated rollback of Law and Justice’s bitterly contested judiciary reforms. The new government will continue providing support to Ukraine, and a détente is likely following the outgoing government’s U turn on grain imports, but trade issues will likely remain a bone of contention.
Moldova: Since the ruling party failed to field successful candidates in September’s local elections, the upcoming presidential and parliament elections in 2024 and 2025 could mean gains for the opposition. The major opposition parties do not openly express pro-Russian views, but are skeptical of Moldova’s EU candidacy.
Slovakia: Although the new government’s opposition to military assistance to Ukraine is likely to be minimal, of greater concern is the possibility that Slovakia’s stance will weaken European unity.
Security & Access
The city of Avdiivka (Donetsk Oblast) is now the focal point of Russian hostilities. Starting on October 9, Russian forces launched the largest assault2 on the city since the beginning of the full-scale invasion. Located north of the regional center of Donetsk, the city has been subjected to active hostilities since 2014. Due to this, over the past eight years, the city has been heavily fortified by Ukrainian forces. The first major attacks on Avdiivka took place following the full-scale invasion, and Russian forces have subsequently managed to half encircle the city. In October 2023, renewed Russian assaults yielded limited gains, but left open the possibility that the city could soon be completely surrounded. Prior to the full-scale invasion, Avdiivka had a population of around 30,000,5 a number that has now shrunk to about 1,000.6 Evacuations are proceeding slowly, with no more than ten people rescued each day. On October 18, the Avdiivka administration reported that delivery of humanitarian aid had been halted due to the escalation of hostilities.
Analysis & Forecasting
Avdiivka is under the control of Ukrainian armed forces, and its proximity to the city of Donetsk poses a challenge for Russian troops. Taking Avdiivka, however, could result in Russia securing the entire Donetsk conurbation. The critical railway junction at Yasynuvata is close to Avdiivka, and Donetsk Airport is just five kilometers away.
Political & Legal Updates
The Escalation in the Middle East
The consequences of the armed conflict between Israel and Hamas are being felt around the globe. For Ukraine, it has affected media coverage, defense support from Western allies and humanitarian assistance.8 Should the conflict escalate further, the United States – a key ally of Ukraine and Israel – may be hard pressed to supply both countries, as arms manufacturers struggle to keep up with demand. Certain munitions, including 155 mm artillery shells, small-diameter bombs and Stinger missiles are key in both conflicts.9 A similar problem may arise in the humanitarian sector if international donors, under public pressure, redirect resources to the Middle East. After the EU and other donors initially suspended aid to Gaza in the aftermath of the Hamas attack, commitments from the West are again on the rise. On October 18, President Biden announced a $100 million aid package for the Palestinian people in Gaza and the West Bank.10 Israel has not taken a clear stance regarding the Russia-Ukraine war and has maintained close ties with both countries. However, strong anti-Israel rhetoric on Russian TV, antisemitic riots and the October meetings in Moscow with Hamas and Iranian delegations could push Israel toward Ukraine. On the other hand, Zelenskyi’s statement of full support for Israel following Hamas’s attack could jeopardize Ukraine’s efforts to secure support from the Global South, including certain Arab states. A peace summit in Jeddah in August of this year drew representatives from dozens of countries and was considered a major diplomatic success for Ukraine.
Analysis & Forecasting
The extent of the Israel–Hamas conflict could serve as a bellwether for potential economic upheavals, particularly regarding fluctuations in oil and food prices. The World Bank11 has issued a stark warning that, if the Israel-Hamas conflict escalates and oil is used as a bargaining chip by Middle Eastern nations – similar to the 1973 oil embargo during the Yom Kippur War – oil prices could surge to unprecedented levels, exceeding $150 per barrel. Such a scenario could trigger a worldwide energy shock and exacerbate the repercussions of the Russia-Ukraine war. As the world faces simultaneous crises, balancing how these issues are addressed will be a challenge for international policymakers.
Scramble for Ammunition in the Korean Peninsula
Throughout October, various Western and South Korean intelligence sources published assessments that North Korea, a Russian ally that has amassed one of the world's biggest stockpiles of artillery shells and missiles, was likely supplying Russia with weapons and ammunition on a large scale. In their estimation, since early August Pyongyang has provided up to 1,000 containers of ammunition and other war materials – compatible with the Soviet-era weapons used by Russia in Ukraine – and over a million artillery shells and other weapons. This is a violation of multiple UN Security Council resolutions.
Analysis & Forecasting
As the war shifts into a phase of attritional fighting and stalemate, with both sides affected by a severe shortage of artillery shells, Pyongyang’s weapons deliveries could well be a decisive factor on the battlefield. This may also result in pressure for South Korea,16 which also possesses huge munition stockpiles, to similarly supply Ukraine with shells. This compe11on for supplies has become critical for the future of the conflict. Kyiv has es1mated that it needs 250,00017 to 300,00018 shells monthly. Initially, the EU pledged to provide Ukraine with about a million shells by March, but it has reportedly fallen behind schedule19, delivering just 30% of the promised quan11es. Russian munitions plants may be able to produce two million rounds next year. This, together with North Korea’s contributions, could potentially give Russia an advantage and enable it to step up its military assaults before its upcoming presidential elections, slated for March 2024.
Economy & Development Updates
Inflation Falls, But New Concerns Emerge
In September, according to Ukraine’s State Statistics Service, the country’s consumer inflation rate fell from 8.6% to 7.1%. This was principally due to increased food supplies, such as newly harvested fruits, vegetables, grains and oilseeds. This surplus, coupled with limited export options, had an impact on prices for both raw and processed food items. Vegetable prices are generally lowest in the summer and early autumn, but tend to rise later in the fall as specialized storage facilities become necessary. The chairman of the Committee on Agrarian and Land Policy expects fruit and vegetable prices to increase by 5 to 10% per month, and those for dairy products to rise by 3 to 5%. The Ukrainian economy is showing signs of recovery despite the ongoing conflict. Based on preliminary data, the Ministry of the Economy is predicting a 9.1% (margin of error: 2%) year-on-year increase in GDP for September 2023. In October, the National Bank of Ukraine (NBU) adjusted its macroeconomic outlook for 2023 and now expects the economy to grow by 4.9% by year’s end, with a concomitant decline in inflation to 5.8%.25 Also in October, the NBU’s Board reduced its key policy rate to 16%,26 a move that suggests an effort to stimulate economic activity. Despite official figures indicating that inflation is slowing, the reality on the ground is more complex. Over the past month and a half, Ukraine has witnessed record-high fuel prices, surpassing the peaks seen in the initial days of the full-scale war, when gasoline and diesel shortages were rampant. Average gas prices in October topped ₴55 per liter,27 a 25% increase following the reintroduction of the normal tax regime on July 1. This is attributable to several factors, including higher global oil prices due to the conflict in the Middle East, depletion of fuel stocks purchased before the excise tax increase, and stepped-up efforts by the government to prevent cheaper Russian fuel imports from entering Ukraine through third countries. Supplementary checks have resulted in customs delays and have raised concerns about potential fuel shortages.
Exchange-Rate Flexibility
The NBU has moved from a fixed exchange rate to managed exchange-rate flexibility, which enables the interbank market to influence the exchange rate but provides enough control to offset currency deficits. This shift, driven by factors such as slowing inflation and macro-financial stability, is expected to result in a gradual devaluation of the hryvnia, which could be potentially beneficial for the state budget. To safeguard citizens' incomes, however, the NBU is unlikely to allow a dramatic devaluation to take place, although the state budget for 2024 estimates that the exchange rate will be ₴41.1 to the dollar. In October and throughout the year, the exchange rate was relatively stable at ₴36.53 to the dollar. According to the IMF, this rate transition aligns with a broader strategy to boost Ukraine’s economic resilience and prepare for potential reductions in international assistance.
Analysis & Forecasting
While lower inflation figures are encouraging, they may be only temporary, and Ukraine should brace for the possibility of rising prices. The exchange rate stability observed in October is a positive sign, but closely monitoring economic developments will be essential. Maintaining citizens’ purchasing power in the face of a devalued hryvnia may be a challenge, as market forces could exert pressure on the currency and drive up consumer prices. The humanitarian community may need to consider adjusting its cash assistance programs accordingly.
Ukraine’s economic recovery shows promise, but Russia’s ongoing attacks are a reminder of enduring challenges. Any surge in the cost of fuel and electricity31 will directly affect consumers, leading to higher prices for a wide array of goods and services, including essential food items. Renewed Russian attacks on Ukraine’s energy facilities could also result in civilians being unable to procure enough generator fuel.
Exports
New challenges, new routes
Exports of goods in 2022 totaled $44.2 billion, a year-on-year drop of 35%. There is some hope that the situation will improve in 2023: exports between March and August showed a modest 2% increase over the same period in 2022.
The top three countries for Ukrainian exports in the first eight months of 2023 were:
Poland: $3.4 billion (a year-on-year falloff of 25.2%)
Romania: $2.6 billion (a 20.6% increase)
China: $1.8 billion (an 8.4% increase)
The grain dispute with Poland is adversely impacting Ukraine’s ability to export there, and this affects far more than grain products. Stalkanat, an Odesa-based wire rope manufacturer, was forced to cut back its deliveries to the EU due to border restrictions. A blockade by Polish truckers at three key border crossing points in early November has only exacerbated the situation. This loss in revenue is partially mitigated by an increase in exports to Romania. Ukraine's neighbor to the southwest has provided Ukraine with logistical opportunities through its ports and land transport corridors. According to the Ukrainian Prime Minister, up to 60% of exported grain currently transits through Romanian territory.
Changing export categories
Ukraine’s top exports in the first eight months of 2023 were:
Food: ($14.6 billion)
Metals and metal products ($2.7 billion)
Machinery, equipment and transportation services: ($2.1 billion)
For decades, agricultural and metallurgical products contributed in equal measure to Ukraine's foreign exchange earnings. The situation has now shifted, with agricultural exports outstripping metallurgical exports fivefold.
The temporary sea corridor established by the Ukrainian Navy for the export of Ukrainian products could play a role in helping the country's steelmakers to resume operations and thus contribute to economic recovery. According to the Ministry of Infrastructure, the ports of Odesa, Chornomorsk and Pivdennyi are currently harboring 23 vessels, and a total of 51 ships have used the new corridor.
Analysis & Forecasting
The resumption of sea exports is particularly important for Ukraine’s extraction industry, as the conflict in the Black Sea has led to a drop in activity at mining and processing plants. Prior to the full-scale invasion, most iron ore exports bound for China left from Greater Odesa’s ports. Currently, any intact mining and processing plants are operating at 35-40% capacity.36 Restoring sea exports would help to restart the country's metallurgy industry and get Ukraine’s economy back on track.
Between March 2022 and July 2023, Europe imported €13.7 billion worth of raw materials from Russia, including nickel, aluminum and copper.
Humanitarian & Environmental Trends
Ongoing Evacuations
Although shifts in the war’s front line have slowed, security incidents, particularly in areas in the Donetsk, Kharkiv, Kherson and Zaporizhzhia oblasts remained high throughout October. This has prompted local and regional authorities to expand their calls for mandatory evacuations. Despite the fact that Russian forces are attempting to encircle the city of Avdiivka and are likely preparing a three-pronged assault, some 1,500 people refuse to leave, in spite of mandatory evacuation orders. On October 23, due to escalating hostilities, authorities in Kherson Oblast announced the mandatory evacuation of 23 frontline settlements in the Kherson and Beryslav districts (excluding Kherson city). Some 800 children were identified for urgent evacuation, accompanied by a caregiver. As of the end of October, more than 1,300 children had been successfully relocated at a rate of 20 to 50 children per day. The evacuees have been taken to oblasts far from the front lines, with many being housed in summer camps in the Khmelnytskyi, Mykolaiv, Odesa, Lviv and Ivano-Frankivsk oblasts. On November 2, Ukraine’s Ministry for Reintegration of the Temporarily Occupied Territories also issued a mandatory evacuation order for approximately 275 children from 66 frontline settlements in Kharkiv Oblast. These include Kindrashivka, Kupiansk, Kurylivka, Petropavlivka, Dvorichna, and Vilkhuvata, all of which are located in the Kupiansk district. The evacuation is expected to take 45 days.
Analysis & Forecasting
Security trends suggest that the authorities will continue to issue evacuation orders, following recent deadly incidents. Mandatory evacuations may be expanded to frontline communities in Kharkiv Oblast’s Chuhuiv district, and to others in Donetsk Oblast’s Kramatorsk and Pokrovsk districts.
Regardless of the urgency expressed by local authorities, law enforcement, the military and volunteers from Ukrainian initiatives, weekly evacuation numbers remain fairly low and this situation is unlikely to change as the winter comes on. Rather, a stalemate at the front might trigger a trend that was observed this spring: populations displaced earlier may start returning to their home communities, even if these are located near front lines, accepting the security risk in order to be able to stay in their homes.
Neighboring Countries
Poland
Poland held its parliamentary elections on October 15. According to the final tally by the National Electoral Commission, a range of opposition parties secured enough seats to oust the ruling Law and Justice (PiS) party, which has governed since 2015. Despite PiS capturing 35.4% of the vote, it fell short of winning a majority in the Sejm, Poland’s 460-seat lower house of parliament. Three separate coalitions – the centrist Civic Coalition, led by former Prime Minister Donald Tusk, the center-right The Third Way, and The Left – won 30.7%, 14.4%, and 8.6% of the vote, respectively. Together, they hold a total of 248 seats, compared with PiS’s 194. This victory signals a major political shift for Poland. The opposition also strengthened its position in the Senate, winning 66 seats against PiS’s 34.
Turnout for the elections was historic: 74.4% of Poland’s registered voters cast ballots, and in Warsaw this figure rose to 85.4%. A referendum, which coincided with the elections, included the topics of privatization, Poland’s retirement age, the EU’s relocation mechanism for immigrants, and the Belarus border barrier. The referendum was unpopular with voters, and support for it fell below the 50% threshold necessary for it to be binding.
Analysis & Forecasting
The election surprised many observers with its record-breaking turnout, as well the lack of voter support for both the Left (which lost almost half of its seats in the Sejm) and the far-right Confederation (which some polls had suggested could become the country’s third-largest political force). The alliance of Civic Coalition, The Third Way and The Left is projected to assume power, led by Tusk as prime minister. Under Tusk’s leadership, we are likely to witness a reorientation of Poland’s foreign policy back towards the EU.
The new government will continue to provide support to Ukraine, and a détente is likely following the outgoing government’s U-turn on grain imports, but trade issues will likely remain a bone of contention. Political tensions are to be expected, particularly concerning the anticipated rollback of Law and Justice’s bitterly contested judiciary reforms. President Andrzej Duda, a PiS appointee, is expected to drag out the transition process and, as a result, Poland may not have a new government until the end of the year. In addition, the opposition alliance will have to bridge significant ideological differences between its various members (particularly between The Left and the center-right The Third Way).
Moldova
On November 5, voters went to the polls to elect mayors, city councilors and district and village councils across the country, with 12,000 positions available. Initial results indicated that the ruling pro-European Action and Solidarity Party (PAS) had won mayoral seats in 244 of 898 villages, towns and cities.39 These victories were principally in rural areas; PAS candidates failed to win control of the larger cities, including Balti and Chişinău. The Chişinău mayoral race was won by the incumbent Ion Ceban, a former member of the Socialist Party who, since the start of the war in Ukraine, has attempted to reinvent himself as a pro-Western figure in favor of EU integration.
Overall voter participation was 41%. Although low, this is in line with past local election turnouts.40
In its assessment of the electoral process, the Organization for Security and Co-operation in Europe (OSCE) stated that “Interference from abroad and restrictive measures – imposed due to national security concerns on freedom of speech, association, and the right to compete – had a negative impact on the process.”41 The OSCE also cited “credible, persistent and widespread allegations of the use of illegal funds for vote buying”42 which are attributed to Ilan Shor. These included Shor’s announced intention to use his personal funds to implement certain local infrastructure projects, as well as the distribution of cash (provided by a Shor-affiliated charity) to teachers in the Gagauz region.
Analysis & Forecasting
Despite its failure to capture mayoral races in any of Moldova’s largest cities, PAS performed better than its competitors nationwide, though not decisively so. Furthermore, the candidates focused primarily on local issues, rather than on the broader geopolitical concerns that are part of Moldova’s presidential and parliamentary politics. Given these factors, along with low voter turnout, it is difficult to draw any definite conclusions concerning next year’s presidential election and 2025’s parliamentary elections.
Slovakia
On September 30, the Smer-SSD party, which has been highly critical of Slovakia’s military aid to Ukraine, emerged victorious in Slovakia’s parliamentary elections with 24% of the vote. The party, led by former Prime Minster Robert Fico, subsequently formed a coalition with the far-right Slovak National Party (SNS) and the center-left Hlas party. The coalition will control 79 out of 150 seats in the National Council. Fico campaigned on a pledge to halt military aid to Ukraine, although he has stated that no steps will be taken to halt private companies from shipping arms to Ukraine. Further, it is not yet clear whether he will impede the transit of weaponry across Slovakian territory to Ukraine.
Analysis & Forecasting
While the election of a leader who has expressed open hostility to sending military aid to Ukraine does not bode well for Ukraine’s military efforts, in reality the impact may be negligible. Although Slovakia was one of the earliest and most enthusiastic supporters of military support to Ukraine, the total volume offered was low relative to other donors. Of greater concern is the possibility that Slovakia’s stance will weaken European unity. That said, Fico’s coalition has only a slender parliamentary majority. The Smer-SSD and SNS parties will not be in a strong position to change Slovakia’s pro-Western orientation, as doing so would almost certainly alienate their coalition partner Hlas. Regarding the possibility of any reorientation of Slovakia’s pro-EU and pro-NATO stance, Hlas leader Peter Pellegrini has said, “If the government tries to change that, Hlas will leave.”