Industrial manufacturing accounted for 13% of total value-added in Ukraine prior to the pandemic and the Russian war. According to our report, this was the second largest contribution after the wholesale and retail trades. The recent events, however, have shaken not only the Ukrainian industrial sector, but also global supply chains.
It is tough to keep business going throughout the war, yet it is critical since companies through their activities support the country’s economy. In the beginning of Russia’s full-scale invasion, the south, east and north of Ukraine came under attack the most. Due to the proximity of hostilities, some businesses in these areas have decided to relocate to Ukraine’s western regions.
Restarting the economy and assisting businesses in adapting to the new realities of war have become key priority for the Ukrainian government. Transferring companies to safer regions is one of the most effective ways to resume manufacturing. In early March 2022, the Ukrainian government began a corporate relocation initiative to assist enterprises in moving to safer areas, such as Zakarpattia, Lviv, Ivano-Frankivsk, Ternopil, Khmelnytsky, Chernivtsi, Vinnytsia, and the southern districts of Volyn and Rivne. Local governments in the regions are in contact with newcomer companies, looking for locations for manufacturing facilities, assisting with rent negotiations, and helping with staff and family relocation.
According to the Ministry of Economy of Ukraine, more than 400 businesses relocated by the end of April 2022, with 216 having already begun operations. Another 500 businesses are in various stages of relocation. The corporate relocation application can be submitted using the Prozorro.sales site or by contacting the local regional authority of the desired region.
The main challenges of the industrial manufacturing sector in Ukraine are:
- Logistics, particularly air and sea freight, came to a full stop at the beginning of the war, but slowly resumes its work. For the time being, auto cargo and trains are the prioritized forms of transportation, since the seaports are blocked, and the airports are destroyed. Many drivers have relocated either permanently or temporarily. Furthermore, expensive and limited fuel means higher tariffs for customers.
- Infrastructure, especially in the western part of the country was not prepared for the load when the war started. Warehouse rental rates have risen significantly because of the high demand, which is expected to continue. The west of Ukraine is overburdened, yet there are still areas in the central part of the country where warehouses are available.
- Labor force: as of the beginning of May 2022, almost a third of Ukrainians have left their homes in search of a safer place to live. This is 7 million internally displaced persons and another 5 million who have gone abroad. Nowadays many companies relocated their own staff to new production facilities, when possible, and some businesses report new employment of people from the new hosting regions. The issue of labor shortages in Ukraine will develop even further, and not just due to emigration. The list of necessary professions will be quite different from pre-war periods in order to rebuild the country.
- Raw materials: metals, wires, and foam, among other raw resources, have traditionally come from Ukraine’s eastern regions. Many enterprises are now forced to hunt for other sources for raw materials in western Ukraine and order production parts from elsewhere.
Building and construction, furniture manufacturing, machine production, and infrastructure development are among the sectors in Ukraine that have the biggest potential for future growth. Steel manufacturing will have to be restarted in order for Ukraine to repair bridges, residential areas, factories, and social infrastructure.