Ukrainian firms remain resilient despite financial distress, operational disruptions, and lack of state support

01/ 11/ 2023

These are the main findings of the research on the impact of the Russian invasion on the private sector in Ukraine, presented during the event Adversity and Adaptation. How Ukraine’s private firms endure during Russia’s invasion. This meeting, organized by the European Business Association, Global Business for Ukraine, the World Bank, and the Kyiv School of Economics in collaboration with the Ministry of Economy, aimed to present a comprehensive analysis of the current situation and strategies for the resilience and adaptation of the private sector. The focus of the meeting and discussions among representatives of the international and Ukrainian expert communities, the government, and business also included the current state of the Ukrainian economy, the directions of its further development, and the role of the private sector in economic recovery and growth. Nadiya Bihun, Deputy Minister of Economy of Ukraine, briefed on the current situation in the Ukrainian economy and the Ministrys future forecasts. After a dramatic drop at the beginning of the full-scale invasion (almost 29%), the economy is gradually recovering. From January to August 2023, the real GDP increased by 3% compared to the same period last year. The improvement in economic activity has been positively influenced by high crop yields, the gradual recovery of manufacturing and production, domestic consumer demand, and the stable operation of the energy system. The Ministrys forecast for the next year is cautiously optimistic: a 5% GDP growth is expected in the 2024 budget. This optimism is supported by the National Banks policy as well, considering decisions to reduce the interest rate, ease currency restrictions, and transition to managed exchange rate flexibility. The export of goods and services for January to July 2023 decreased by 7.6% compared to the same period in 2022, totaling $30.3 billion. This negative trend was initially caused by sabotage and later by the withdrawal of the Russian side from the grain agreement, the loss of certain export-oriented enterprises, and the imposition of import bans on Ukrainian grain by five neighboring countries. However, a temporary logistics corridor is currently in operation, thanks to the efforts of the Armed Forces of Ukraine, and the Ministry of Economy is working on a risk guarantee mechanism to make it’s functioning more systematic. According to Nadiya, such a mechanism may be introduced in the coming months, which will help increase export opportunities. Arup Banerji, Regional Country Director for Eastern Europe of the World Bank, presented the results of an in-depth study on the impact of the Russian invasion on the private sector in Ukraine, conducted by researchers from the World Bank with the support of the European Business Association, KSE, and other partners. Given that the role of private sector in country’s recovery is highly important, the multipronged monitoring program was launched by the World Bank including three components. Firstly, Business pulse survey (audience – 2700 firms); secondly, Multinational corporations survey (audience – 80+ firms); thirdly, High Frequency Satellite Data. There are 6 main outcomes of the research: Negative impact on firms was not uniform. Impact on sales, employment and assets varied across the firms by size, region, and industry. Small firms and firms located in Eastern/South regions had reportedly the highest drop in sales. Operational disruptions due to varied factors, particularly inputs/labor shortages, need to relocate, power/internet disruptions, crime. Also, 75% of exporters experienced a drop in export, and 65% of importing firms reduced or stopped imports. Construction and manufacturing were especially affected by import disruptions. Firms are in financial distress. 84% of firms face constraints to access finance as the main barriers to get the finance are uncertainty, high interest rates, lack of collateral. Besides, large firms are more exposed to financial troubles. Hospitality is sector with the highest share of firms at risk of falling into arrears (65%). Uncertainty is very high. Uncertainty levels are associated with reduced sales, damages, and reduced employment. Firms have been resilient, despite disruptions. The majority continued operating by adapting in different ways. Government support helps, but can be improved, especially in terms of targeting and awareness raising. There is significant lack of awareness regarding access, eligibility, and the need for public support with 1 in 4 firms reportedly unaware about government support programs. Only 8% received public support. Reported needs are as follows: financial assistance, regulatory improvements, improved market access. Please, find the presentation with all the results via the link. The “Ukraine Remains Resilient” two-pager can be found via the link. What will be the further development and future focuses of the Ukrainian economy? In June 2023, key development vectors for the Ukrainian economy were presented, and these were elaborated upon in detail at the event by Maxim Fedoseenko, Head of Strategic Projects at Kyiv School of Economics Institute. In the development of these vectors, global trends influencing the world economy were taken into account. These include the green transition and decarbonization of the economies of the EU and developed countries, as well as deglobalization and supply chain reduction. The nine key sectors for the development of the Ukrainian economy include green energy and the green industrial transition, agriculture, security and defense, critical materials, startups and entrepreneurship, opportunities for professional and social development, construction, and infrastructure. Ukraine is presented with new opportunities related to integration with the EU and the opening of G7 markets. The process of rebuilding and developing Ukraine creates a significant market – at least $400 billion and $750 billion, respectively. Ukraines competitive advantages include a well-developed raw material base and energy sector, as well as low production costs, which create attractive conditions for opening new production and projects in Ukraine and developing existing businesses. The European Union plans to allocate 50 billion EUR to support Ukraine in the years 2024-2027 as part of the Ukraine Facility program. According to EU estimates, Ukraines financial needs for this period will amount to approximately 110 billion EUR, with the EUs share of funding expected to be 45%. The program consists of three components: Financial support (grants and credits - around 39 billion EUR). Private sector financing (approximately 8 billion EUR). Technical assistance and other auxiliary measures (approximately 2.5 billion EUR). As part of the EU Ukraine Facility program for the next four years, the Ukrainian Government has initiated sectoral working groups to develop policies and investment projects in priority sectors. The first phase includes the launch of working groups for energy, agriculture, transportation/logistics, IT and communications, and manufacturing, while the second phase encompasses pharmaceuticals and healthcare, construction, culture and creative industries, finance, and insurance. We hope that the presented research and informational updates will enable investors, including foreign ones, to better understand the current economic situation in Ukraine, the governments priorities, the needs of the private sector, and identify sectors with the greatest investment potential. We are grateful to the speakers and partners for our valuable cooperation!

These are the main findings of the research on the impact of the Russian invasion on the private sector in Ukraine, presented during the event ‘ Adversity and Adaptation. How Ukraine’s private firms endure during Russia’s invasion’. This meeting, organized by the European Business Association, Global Business for Ukraine, the World Bank, and the Kyiv School of Economics in collaboration with the Ministry of Economy, aimed to present a comprehensive analysis of the current situation and strategies for the resilience and adaptation of the private sector.

The focus of the meeting and discussions among representatives of the international and Ukrainian expert communities, the government, and business also included the current state of the Ukrainian economy, the directions of its further development, and the role of the private sector in economic recovery and growth.

Nadiya Bihun, Deputy Minister of Economy of Ukraine, briefed on the current situation in the Ukrainian economy and the Ministry’s future forecasts. After a dramatic drop at the beginning of the full-scale invasion (almost 29%), the economy is gradually recovering. From January to August 2023, the real GDP increased by 3% compared to the same period last year. The improvement in economic activity has been positively influenced by high crop yields, the gradual recovery of manufacturing and production, domestic consumer demand, and the stable operation of the energy system.

The Ministry’s forecast for the next year is cautiously optimistic: a 5% GDP growth is expected in the 2024 budget. This optimism is supported by the National Bank’s policy as well, considering decisions to reduce the interest rate, ease currency restrictions, and transition to managed exchange rate flexibility.

The export of goods and services for January to July 2023 decreased by 7.6% compared to the same period in 2022, totaling $30.3 billion. This negative trend was initially caused by sabotage and later by the withdrawal of the Russian side from the “grain agreement”, the loss of certain export-oriented enterprises, and the imposition of import bans on Ukrainian grain by five neighboring countries. However, a temporary logistics corridor is currently in operation, thanks to the efforts of the Armed Forces of Ukraine, and the Ministry of Economy is working on a risk guarantee mechanism to make it’s functioning more systematic. According to Nadiya, such a mechanism may be introduced in the coming months, which will help increase export opportunities.

Arup Banerji, Regional Country Director for Eastern Europe of the World Bank, presented the results of an in-depth study on the impact of the Russian invasion on the private sector in Ukraine, conducted by researchers from the World Bank with the support of the European Business Association, KSE, and other partners.

Given that the role of private sector in country’s recovery is highly important, the multipronged monitoring program was launched by the World Bank including three components. Firstly, Business pulse survey (audience – 2700 firms); secondly, Multinational corporations survey (audience – 80+ firms); thirdly, High Frequency Satellite Data.

There are 6 main outcomes of the research:

Negative impact on firms was not uniform. Impact on sales, employment and assets varied across the firms by size, region, and industry. Small firms and firms located in Eastern/South regions had reportedly the highest drop in sales.
Operational disruptions due to varied factors, particularly inputs/labor shortages, need to relocate, power/internet disruptions, crime. Also, 75% of exporters experienced a drop in export, and 65% of importing firms reduced or stopped imports. Construction and manufacturing were especially affected by import disruptions.
Firms are in financial distress. 84% of firms face constraints to access finance as the main barriers to get the finance are uncertainty, high interest rates, lack of collateral. Besides, large firms are more exposed to financial troubles. Hospitality is sector with the highest share of firms at risk of falling into arrears (65%).
Uncertainty is very high. Uncertainty levels are associated with reduced sales, damages, and reduced employment.
Firms have been resilient, despite disruptions. The majority continued operating by adapting in different ways.
Government support helps, but can be improved, especially in terms of targeting and awareness raising. There is significant lack of awareness regarding access, eligibility, and the need for public support with 1 in 4 firms reportedly unaware about government support programs. Only 8% received public support. Reported needs are as follows: financial assistance, regulatory improvements, improved market access.

Please, find the presentation with all the results via the link. The “Ukraine Remains Resilient” two-pager can be found via the link.

What will be the further development and future focuses of the Ukrainian economy? In June 2023, key development vectors for the Ukrainian economy were presented, and these were elaborated upon in detail at the event by Maxim Fedoseenko, Head of Strategic Projects at Kyiv School of Economics Institute.

In the development of these vectors, global trends influencing the world economy were taken into account. These include the green transition and decarbonization of the economies of the EU and developed countries, as well as deglobalization and supply chain reduction. The nine key sectors for the development of the Ukrainian economy include green energy and the green industrial transition, agriculture, security and defense, critical materials, startups and entrepreneurship, opportunities for professional and social development, construction, and infrastructure.

Ukraine is presented with new opportunities related to integration with the EU and the opening of G7 markets. The process of rebuilding and developing Ukraine creates a significant market – at least $400 billion and $750 billion, respectively. Ukraine’s competitive advantages include a well-developed raw material base and energy sector, as well as low production costs, which create attractive conditions for opening new production and projects in Ukraine and developing existing businesses.

The European Union plans to allocate 50 billion EUR to support Ukraine in the years 2024-2027 as part of the Ukraine Facility program. According to EU estimates, Ukraine’s financial needs for this period will amount to approximately 110 billion EUR, with the EU’s share of funding expected to be 45%. The program consists of three components:

Financial support (grants and credits – around 39 billion EUR).
Private sector financing (approximately 8 billion EUR).
Technical assistance and other auxiliary measures (approximately 2.5 billion EUR).

As part of the EU Ukraine Facility program for the next four years, the Ukrainian Government has initiated sectoral working groups to develop policies and investment projects in priority sectors. The first phase includes the launch of working groups for energy, agriculture, transportation/logistics, IT and communications, and manufacturing, while the second phase encompasses pharmaceuticals and healthcare, construction, culture and creative industries, finance, and insurance.

We hope that the presented research and informational updates will enable investors, including foreign ones, to better understand the current economic situation in Ukraine, the government’s priorities, the needs of the private sector, and identify sectors with the greatest investment potential. We are grateful to the speakers and partners for our valuable cooperation!