Analysis-War upends Ukraine's economy in a shift that may be permanent

Oleh Drozdov, an architect from Kharkiv, and his business partner talk in their reopened office, amid Russia’s attack on Ukraine, in Lviv, Ukraine, March 11, 2024. REUTERS/Alina Smutko

By Olena Harmash

KYIV (Reuters) – Within days of Russian forces invading Ukraine in early 2022, architect Oleh Drozdov made up his mind: he would move his home and business from the besieged eastern city of Kharkiv more than 1,000 km to the west, far from the fighting.

Oleh Drozdov, an architect from Kharkiv, poses for a photo in his reopened office, amid Russia’s attack on Ukraine, in Lviv, Ukraine, March 11, 2024. REUTERS/Alina Smutko

Now, with the war in its third year, his practice may finally be returning to growth, as businesses like his adapt to the conflict and search out opportunities alongside the formidable challenges.

“The storm is over. There are many holes in our boat but we are moving forward,” Drozdov said from his offices in a historic building in the centre of Lviv, a city of some 700,000 people close to the Polish border.

An employee works in the reopened office of Oleh Drozdov, an architect from Kharkiv, amid Russia’s attack on Ukraine, in Lviv, Ukraine, March 11, 2024. REUTERS/Alina Smutko

On the city’s outskirts, cranes dot the skyline and industrial parks and other projects are being built.

In some ways Drozdov & Partners is well placed to adapt to the shock of war. It is small and footloose, and, in a country where millions of people and thousands of companies are displaced, demand for buildings and renovations is high.

“Some new opportunities have started to open up slowly,” said Drozdov. “There are investments in this part of the country as businesses and people are relocating.”

His practice is among 19,000 companies that have registered in new locations within Ukraine since the invasion, according to Opendatabot, which provides data from official registries, in a mass migration of businesses from east to west that may never be reversed.

“Thanks to the adaptability of businesses, support from partners and government programmes, Ukraine is increasingly taking on the characteristics of a wartime economy,” First Deputy Prime Minister Yulia Svyrydenko told Reuters.

“If we compare the economy’s structure in 2023 with that of pre-war 2021, we clearly see this transformation. The Ukrainian economy is showing resilience and adaptability … proving its ability to navigate through difficult times.”

FILE PHOTO: Men fish in the Dnipro river in Kyiv, amid Russia’s attack on Ukraine, May 2, 2024. REUTERS/Max Muzichenko-Kishka/File Photo

WEST WINS FOR NOW

In the east of Ukraine, where fighting has raged during offensives and counteroffensives, towns and villages lie in ruins. Kharkiv is being heavily bombed.

A study by the World Bank, United Nations, European Commission and the Ukrainian government published in February estimated the total cost of rebuilding the economy at $486 billion, a figure that continues to rise as more damage is incurred.

Far to the west, urban centres are faring better.

Viktor Mykyta, regional governor in Zakarpattia which borders Poland, Slovakia, Hungary and Romania, described a rush of new businesses ranging from salt production to furniture and textiles.

Before the war, the mountainous region’s economy relied heavily on tourism and remittances sent home by Ukrainians working abroad.

“When the war broke out, a lot of businesses moved, jobs were created, the budget began to be filled,” Mykyta said.

Officials in Lviv region report a similar trend, with logistics, energy, construction and IT firms among those setting up operations there.

Of the few wartime foreign investments announced, most are in central and western regions – in part because they stand to benefit most should Ukraine succeed in its aim of joining the European Union one day, analysts said.

Projects include Turkish Onur Group’s plans to invest $50 million in graphite mining in western Khmelnytskyi region and a further $150 million in renewables in Zakarpattia.

Germany’s Bayer said it would invest 60 million euros in its corn seed production facility in central Zhytomyr region, while Ireland’s Kingspan Group has announced a $280 million investment in a facility in Lviv region.

Back in Kharkiv, Ukraine’s second city, the reality is very different. Oleh Synehubov, the region’s governor, said 70% of large enterprises have been destroyed or relocated or suspended their operations.

“Our regional and city budgets have fallen by 40%,” he told Reuters.

World Bank data shows that businesses in eastern Ukraine experienced a 70% slump in sales between the invasion and the end of 2023, and those in the south a drop of 63%. In comparison, companies’ sales in the west decreased 39%.

NEED FOR WORKERS

Official data on the impact of the war on different sectors is patchy, and recent trends could change if there are dramatic shifts on the battlefield. Russian attacks on energy infrastructure is also a major challenge for many firms.

After the economy collapsed by a third in 2022, it rebounded by 5.3% in 2023 and the government forecasts growth of 4.6% this year. The steel industry, once Ukraine’s key exporter, contracted by about 80% in 2022 and grew only 8% in 2023.

The economy ministry said that so far in 2024, the fastest pace of growth has been in construction, processing, transport and retail.

The defence industry has also expanded significantly. According to Ukraine’s strategic industries ministry, the number of defence manufacturers has more than doubled since February, 2022.

As some sectors have expanded, job vacancies have grown fastest in the west of the country, according to Work.ua, an employment portal which reported a record number of wartime vacancies in April.

Vacancies were up 55% in Zakarpattia at the end of February compared with pre-war levels while Lviv region had about 8,500 vacancies open at the start of March, up 23% from before the invasion.

A recent survey from the European Business Association, one of Ukraine’s leading business groups, showed that about 74% of companies have suffered staff shortages – the result of millions of people fleeing overseas and hundreds of thousands of men serving in the military.

Drozdov has struggled to hire enough staff at his practice and to fill vacancies at an architectural school that he also runs.

Mindful of the long term task of rebuilding the country, Drozdov is launching a masters programme for young architects with a focus on rebuilding the shattered east. He hopes to return one day to Kharkiv.

“When there is an opportunity we will return there physically. It will be a gradual process.”

(Editing by Mike Collett-White and Christina Fincher)