Ukraine business resilience can inform reconstruction

Ukrainian companies are showing remarkable resilience by continuously adapting production processes and logistics to meet the dynamic challenges of the war.

Expert comment
3 minute READ

Dr Inna Melnykovska

OSUN Academy Fellow, Russia and Eurasia Programme

Despite the inevitable loss and damage inflicted on Ukraine’s economy by Russia’s war, there is some optimism from Ukrainian companies about their own commercial future and the country’s economy overall.

In those Ukrainian territories less affected by hostilities and occupation, companies began recovering their operations just a few weeks after the Russian invasion began and have continued despite ongoing attacks on Ukraine’s power grid causing massive disruptions to power supply.

Throughout the country, its corporate climate has been recovering in recent months, thanks in no small part to the military victories of the Ukrainian army and its upgraded ability to defend both its territory and people from shelling.

Now, according to a December 2022 business survey, only three per cent of Ukrainian companies report a complete hold on production, and only 15 per cent say they have been unable to resume exporting.

A resilience grown from many roots

The swiftness of Ukrainian companies in adapting to the context of war has several roots, perhaps most notably the lean management structures, emergency production plans, and logistical innovations developed during COVID-19 restrictions.

They have also benefited from training programmes on crisis management organized by international donors and a special programme of temporary relocation rapidly launched by the Ukrainian government in March 2022. Official statistics show 745 enterprises received government relocation assistance to move production facilities to western Ukraine.

While large enterprises, able to draw more heavily on available resources, have generally demonstrated better survival and adaptation capacities, small and micro-business are typically suffering the most or have taken longer to adapt

In addition, although the cost of direct damage to Ukraine’s industrial facilities is estimated at almost $13 billion, this is only 9.5 per cent of the total documented damages while, in comparison, the share for residential buildings is 38.6 per cent.

But Russia’s war has affected Ukraine’s economic sectors and regions unevenly. The textile and IT sectors have suffered little disruption thanks to the low energy-intensity and flexibility of their production processes. And Ukrainian agriculture was rescued by the United Nations (UN) Black Sea Grain Initiative which opened a safe maritime humanitarian corridor for grain and food exports.

In contrast, Ukraine’s energy and metal industries which are mainly located in south-eastern regions experienced major damage and losses to production output and exports. And while large enterprises, able to draw more heavily on available resources, have generally demonstrated better survival and adaptation capacities, small and micro-business are typically suffering the most or have taken longer to adapt their activities.

Adaptation strategies build long-term resilience

There are several commonalities in the adaptation strategies of Ukrainian companies of every size which can have a long-lasting impact on post-war business activity – and a reconstruction plan should build on these successes to strengthen the resilience of Ukraine’s corporate sector.

The country’s companies have a strong social component, prioritizing humans over profit. Despite making financial losses and having to use revenue from previous periods – as well as relying more on those hidden in the rather shadowy parts of the economy – Ukrainian companies continue to pay salaries and try to offer additional benefits and services to employees.

Although this has been largely successful in securing human capital, there has been an inevitable loss in Ukraine’s comparative advantage of a cheap labour force, which will be further reinforced by the refugee outflow. In response, Ukrainian companies have made efficiency gains, with many already upgrading their production or speeding up plans to implement technological innovations.

Many innovations rely on energy-saving and alternative energy-based technology, both of which are in high demand globally, but Ukrainian efforts are being supported primarily by grants from local budgets as they are easier to apply for than international grants and credits.

Reconstruction efforts of the international community should further promote this technology transfer to the sectors of the Ukrainian economy which need it the most. And international donors must seek effective forms and channels for technology transfer and upskilling which could be an integral part of Ukraine’s reconstruction.

Current adaptation strategies tend to be cost-intensive and a full recovery and reconstruction for Ukraine’s economy will be even more so. Over time, many Ukrainian companies will have depleted assets and equity resources and will be in urgent need of cash. Although international governments are providing a high level of public funds and support, it will not be enough – and security concerns as well as the old problem of corruption may become obstacles to foreign direct investment.

Using the international financial system

Global financial markets do offer alternative mechanisms of raising private investment, and Ukrainian companies should be supported in taking credit from international banks, issuing corporate bonds, and offering shares at international stock exchanges.

In addition, international donors and international governments have proven instruments of risk insurance, such as the Multilateral Investment Guarantee Agency (MIGA) guarantee of the World Bank or the national export credit and loan guarantees. Adapted to Ukraine’s context, these insurance provisions could make Ukrainian shares and bonds better risk-protected and more attractive for private investors.

International donors must seek effective forms and channels for technology transfer and upskilling which could be an integral part of Ukraine’s reconstruction

The legal jurisdiction of global inflows could also be moved outside Ukraine, essentially outsourcing a weak Ukrainian rule of law to the more secure European Union (EU) or US legal systems. Beyond an immediate role supporting Ukraine’s reconstruction and corporate modernization, these mechanisms could unleash the transformative powers of global financial markets and tackle the country’s pre-war association with illicit money flows and endemic corruption.

Ukrainian companies do see integration into the European and global value chains as the way to sustain resilience during the war and to develop business after the war. But they are limited by non-tariff barriers and the ‘wait-and-see’ strategies of international partners.

The EU accession process, potentially a key part of Ukraine’s reconstruction, would open many important doors but the conditions of entry, which aim to make the economies of prospective members more open, have harmed domestic business in newly admitted countries before.

Ukraine business resilience can inform reconstruction 2nd part

Compliance with EU standards is also costly, especially for small and medium-sized companies (SMEs), which could make it hard for Ukrainian business to compete with the EU’s existing companies. The accession conditions should be revised to avoid imposing one-size-fits-all compliance reforms on Ukraine, and to take into consideration what is needed to sustain and strengthen its domestic corporate resilience.

By helping rather than hindering Ukrainian businesses in getting the benefits of full integration to the European single market, Ukrainian companies – especially SMEs – will be protected from any negative consequences of the country’s eventual economic opening.

It is vital Ukraine’s reconstruction plans focus on learning from the war-time innovations of its corporate sector, ensuring technological advances are shared with businesses and encouraging their integration into global capital markets and to become compliant with EU regulations. In doing so, a post-war Ukraine can exemplify the possibilities of global finance as a force for good.