Ukraine in Times of War: Still Time for Greening Industrial Production

In times of war, military operations and short-term economic concerns are justifiably prioritized. Nevertheless, the sooner the longer-term reconstruction plans can be agreed and implemented, the better the chances of a successful socioeconomic recovery. Post-crisis reconstruction can also offer an opportunity to upgrade productive infrastructure.

With this in mind, we consider the opportunities for Ukraine to make a green industrial recovery. A firm-level survey of Ukrainian manufacturing and service firms from October to December 2023 (UNIDO Ukraine Industrial Diagnostics 20231) suggests that policy incentives can drive a green recovery, restoring key industrial and energy infrastructure along a more sustainable trajectory, and most regions of Ukraine can still diversify their industrial production and exports towards new sectors, despite the current situation.2

The survey coverage is representative of the country’s manufacturing sectoral structure and covered 501 respondents across six macro-regions: the north (8%), south (8%), centre (12%), east (23%), west (12%), and the Kyiv region and capital city (27%). Ten per cent of respondents indicated their location as “All of Ukraine”.

The first section of the survey gathered general information, such as firm size and age, type of ownership, location, sector of activity, and percentage of exports and imports. The second section explored the impact of the war on Ukrainian business. It included questions about war-related disruptions to regular operations, relocation and factors influencing the decision to relocate, and current operating capacity. In close alignment with the World Bank Enterprise Survey (WBES), this section also uncovers the main bottlenecks affecting business before the war, those that have arisen during the war, and those that have deteriorated during the war. Further questions explore the impact of the war on other aspects of firm activity including sales, employment, liquidity and profits. The third section look sat Ukrainian firms’ responses to war including changes in day-to-day activity, investment, international operations and integration with the European market. Finally, a fourth section explores current and desired government support at both national and local levels.

Some questions were explicitly designed to explore the introduction of environmentally friendly practices in Ukraine during the war. For example, one question specifically addresses the introduction of circular economy practices: any change that promotes resource efficiency by reducing the consumption of material while increasing output and value added. These can include repair, remanufacturing, recycling or the re-design of final goods. The survey also considered the use of renewable energy as a circular economy practice.

Results

Survey results, aggregated by circular economy measure, show that 20–50% of firms introduced some kind of circular economy activity before and/or during the war (Figure 1). Of these, 9–18% introduced the measure during the war. Circular economy activities are often associated with higher costs, and the final products are sometimes seen as luxury goods, even during peacetime. This survey suggests – on the contrary – that these investments can promote dynamism, adaptability and resilience during a crisis.

It is important to underline that for a significant share of Ukrainian firms, the adoption of circular activities was not immediately possible. Questioned on the main obstacles they encountered, responses included a lack of government support, lack of access, the high price of technology and a lack of skilled labour (Figure 2). This indicates a lower level of dynamism in these areas, and the need for technology transfers and government support.

Turning our attention to energy efficiency, a significant share of Ukrainian firms indicated that they have implemented changes in energy infrastructure (25%), in the behaviours of all categories of the labour force (including managers) (43%), production process modalities (20%), firm organization (29.5%) and/or technology (17.8%) as a response to the war (Figure 3). The most important obstacles to further energy efficiency measures, as cited in the survey responses, were technology transfers and government supports.

Overall, the survey results paint a picture of surprising vitality and dynamism in Ukrainian firms. This is particularly clear in the very high percentage of firms striving to improve production processes and practices to cope with the war. The main changes in day-to-day business activities include new pricing strategies (43%), efficient use of resources (41%), increased remote working arrangements (38%), the release of new products to meet changing market demands (34%), a search for grant funding (34%), upgrading current products and services (28%), and an increase in online business activity (26%). All of this points to the fact that extreme events – such as war – do not necessarily impede firms’ pursuit of innovation, sustainability and resilience.

Conclusions

While circular measures and green infrastructure come with implementation costs, they also imply increased competitiveness, longer-term cost efficiency and a better use of resources overall. Considering the upfront investment required, many see environmental sustainability as a luxury, only to be pursued in “good times”. This survey of Ukrainian manufacturing and service firms shows that, on the contrary, circular economy and energy efficiency investments have increased in response to the challenges imposed by war. This shows that sustainability and economic performance can be a winning partnership, even in a crisis.

In other words, shocks can sometimes reveal opportunities to promote synergies between economic efficiency and environmental protection. Industrial policy has a crucial role to play in realizing these benefits by facilitating the transfer of skills and technology, and by directly supporting firms in the adoption of virtuous production practices.