Russia’s invasion of Ukraine will not only have a terrible cost in human lives, it will also reverberate economically across Eastern Europe and Central Asia. In this context, it is vital to understand the strengths and weaknesses of businesses across the region, the challenges they face and their ability to adapt to a dramatic shock to their operations.
The war comes just as firms in the region were recovering from the COVID-19 shock. Business resilience in the pandemic and beyond examines how firms in the region weathered the sharp downturn caused by the pandemic, how prepared they are to face future challenges, such as shifting global value chains and global warming, and whether gaps in access to finance are likely to impair their short-term resilience and long-term prospects.
Some key takeaways from Business resilience in the pandemic and beyond:
Trade with developed economies, information and knowhow gained through global value chains, access to foreign technology and improved management practices helped boost innovation and competitiveness in the region.
Unprecedented government intervention prevented large-scale bankruptcies, business closures and job losses. In the region, good policy support was particularly needed for firms that didn’t have easy access to other forms of finance, such as credit lines from banks or from a larger corporate group.
Investment in digital infrastructure and improvements in workers’ skills are driving innovation, reducing development gaps and building resilience in the region.
The transition to a net zero carbon economy presents significant risks for the region, and firms are lagging behind developments in others parts of the world.
Companies will need to improve their green management and address transition challenges. Access to finance continues to constrain firms’ growth in the region. The number of firms without access to credit or even a banking relationship is still relatively high.
The report uses a unique firm-level dataset, the latest wave of the EBRD-EIB-World Bank Group Enterprise Survey (Enterprise Survey 2019), which collected data on more than 28 000 registered firms from 2018 to 2020. The survey was conducted just before the outbreak of the pandemic, providing a structural snapshot of firms in the region. The report also uses the first round of the COVID-19 Follow-up Enterprise surveys, which queried more than 16 000 firms. The World Bank used the follow up survey to examine how firms adapted to the crisis.
The pandemic’s impact on business
During the first wave of the pandemic, firms on average lost 25% of revenue and shed 11% of their workers. Strong government intervention such as job retention programmes, grants, debt moratoriums, guarantees, tax breaks and interest rate subsidies softened the pandemic’s blow. Only 4% of firms filed for bankruptcy or closed permanently.
Firms that were integrated into global value chains, with high levels of productivity, innovation and digitalisation – as well as those run or owned by women – adapted faster to the pandemic.
Financial lifelines helped firms weather the crisis. Firms with access to credit lines or other financial facilities, and those that were part of larger corporate groups, were less likely to go bankrupt.
Government programmes reduced the stress of the pandemic on vulnerable companies, such as small businesses, independent firms and those without easy access to credit.
Trade and innovation
Most firms in Eastern Europe and Central Asia are actively involved in trade. This increases productivity, innovation and growth. Trade varies across the different regions, however, with a higher number of firms exporting goods in Central and Eastern Europe and the Western Balkans than in lower- and upper-middle-income countries. Central Asia and Russia are not doing as well in trade.
Innovative firms account for about a third of the non-exporting firms, while about 40% of firms that import are considered to be innovative. Innovation is also key for firms that contribute to global value chains (more than 50% of firms).
Firms in the region invest more in innovation than firms in similar economies in other regions, even if innovation is mainly driven by new technologies developed elsewhere.
To boost trade with developed economies, firms need to have access to information and knowhow, which can be gained by participating in global value chains. Access to foreign technology and modern management also spurs innovation.
The sub-regions of Eastern Europe and Central Asia are still lagging behind in green management practices, specifically in setting targets for energy use and emissions. The region is slowly shifting from a dependence on coal and oil to nuclear power and renewable energy.
However, until 2018, the region relied heavily on fossil fuels to generate three-quarters of its electricity. Several countries continue to provide generous subsidies that lower the price of gas and other fossil fuels for people, slowing down the motivation to cut emissions.
Measurable and realistic environmental objectives would help firms improve their environmental performance.
The report introduces a “Corporate ESG Responsibility” composite indicator for unlisted firms. Firms in the region lag their peers in Southern Europe on environmental, social, and governance practices. Firms with fewer than 20 employees, on average, perform the worst.
Customerpressure and energy taxes play an important role in determining the quality of green management practices as firm-level characteristics, such as size and age.
Providing a business environment conducive to green investment will nudge firms to improve their ESG standing.
The financial systems in Eastern Europe and the Western Balkans have held up so far. Firms continue to rely largely on bank credit for external finance. Capital markets are underdeveloped, and the availability of venture capital, private equity and leasing is very limited. About 55% of firms perceive access to finance as an obstacle.
24% of small and medium-sized enterprises (SMEs) and 27% of young firms say access to loans or other finance is a problem. Innovative firms are also more likely to be credit-constrained, particularly young, innovative SMEs.
About 50% of firms rely solely on their own finances for projects, particularly small businesses and young firms. Access to credit is associated with investment and growth. Strong connections to the banking sector yield economic gains.
Improvements in collateral frameworks can improve the allocation of credit, reduce lending risks and increase access to credit.
Financial literacy and improvements in audit and accounting standards, along with a genuine reform agenda geared to improving the quality of institutions, could increase firms’ ability and willingness to do business with banks.