Ukraine's Regional Economies 2024-2025: An Analytical Overview of War-Induced Restructuring and Recovery

Executive Summary

Ukraine’s regional economies in 2024-2025 continue a complex trajectory of adaptation to sustained military conflict and territorial fragmentation. While national GDP grew by 2.9% in 2024 (down from 5.5% in 2023), regional experiences diverge sharply across geopolitical lines. Eastern frontline regions—particularly Kharkiv, Donetsk, Zaporizhzhia, and Luhansk oblasts—bear approximately 72% of documented war destruction, while western and central regions have emerged as economic stabilization hubs. This article synthesizes available data on regional budgets, gross regional product, fiscal flows, and structural transformations to provide a comprehensive assessment of Ukraine’s wartime regional economic landscape.

1. National Economic Context and Macroeconomic Framework

1.1 Aggregate Economic Performance

Ukraine’s economy demonstrated resilience in 2024 despite mounting military pressures and infrastructure damage. Key macroeconomic indicators:

Real GDP Dynamics:

• 2024 real GDP growth: 2.9% (UAH 7.659 trillion nominal)​

• Q1 2024: +6.8% growth

• Q2 2024: +4.0% growth

• Q3 2024: +2.2% growth

• Q4 2024: -0.1% contraction​

The sequential deceleration reflects intensifying Russian attacks on energy infrastructure, poor agricultural harvests, and acute labor shortages from military mobilization and emigration.​

Nominal GDP and Budget Aggregates (2024):

• Nominal GDP: UAH 7.614 trillion (plan), actual: UAH 7.659 trillion

• State Budget revenues: UAH 3.12 trillion (including UAH 473.9 billion in grants)​

• State Budget expenditures: UAH 4.377 trillion (plan)

• Budget deficit: UAH 1.783-1.846 trillion (41-43% of revenues)

• Military and defense spending: UAH 2.207-2.672 billion (51-61% of expenditures)​

2025 Fiscal Framework:

• Budgeted nominal GDP growth: 3.3-3.6% (depending on source)

• State Budget 2025 revenues: UAH 2.239 billion (general fund), down 9% from 2024 plan

• State Budget 2025 expenditures: UAH 3.929 billion, down 10% from 2024​

• Tax revenue increase planned: +19% (to UAH 1.995 trillion)​

1.2 Sectoral Composition

Ukraine’s economy remains fundamentally service-based:

• Services sector: 61.4% of economic activity

• Industry: 18.8%

• Agriculture: 7.4%

Within industrial activity, manufacturing represents the largest share, followed by agriculture and resource extraction. The war has compressed industrial activity through infrastructure destruction, supply chain disruption, and resource reallocation toward defense production.​

Contributing to GDP Growth (2024):

• Private consumption: Largest positive contributor (+6.8% household final consumption)

• Public consumption: Negative contribution (-4.5%)

• Gross fixed capital formation: +3.5%

• Net exports: Negative contribution​

2. Regional Gross Product and Economic Hierarchy

2.1 Regional GRP Rankings (2021 - Most Recent Available Data)

The most recent comprehensive GRP data available is from 2021. The ranking by Gross Regional Product in EUR values is:​

Total National GRP (2021): €205.7 billion​

The concentration of economic activity in the capital region (26.7% of national GRP) reflects decades-long centralization patterns. The top five regions account for approximately 57% of national economic output, while eastern industrial regions, despite historical significance, contribute substantially but face severe wartime challenges.

2.2 GRP Per Capita and Development Disparities

Pre-war GRP per capita rankings indicated significant regional inequalities:​

• Kharkiv Oblast: UAH 122,227 per capita (2021) - 6th place nationally

• Lviv Oblast: Position among upper-middle tier oblasts

• Dnipropetrovsk Oblast: High per capita output due to industrial concentration

These disparities have likely widened during 2022-2025 due to differential war impact and migration flows.​

2.3 Estimated Regional GRP Adjustments for 2024

While official 2024 regional GRP data remains unpublished, several indicators suggest significant shifts:

Eastern/Southern Regions (High War Impact):
Regions with >40% enterprise damage rates experienced estimated GRP contractions of 15-35% from pre-war levels:

• Kharkiv Oblast: Estimated 20-30% contraction (from ~€17 billion to ~€12-14 billion equivalent)

• Donetsk Oblast (Ukrainian-controlled portions): Estimated 40-50% contraction

• Zaporizhzhia Oblast: Estimated 30-40% contraction

• Luhansk Oblast: Severe contraction due to limited territory under Ukrainian control

Western Regions (Receiving Relocations):
Estimated GRP growth or stabilization:

• Lviv Oblast: Estimated +8-15% growth (to ~€9.5-10.2 billion equivalent)

• Ivano-Frankivsk Oblast: Estimated +10-20% growth

• Ternopil Oblast: Estimated +5-10% growth

Central Regions (Kyiv-Centric Growth):

• Kyiv city: Estimated +5-10% growth (to ~€57.5-60 billion equivalent)

• Kyiv Oblast: Estimated +10-15% growth

National Total GRP (2024 Estimated): €190-200 billion (approximately 92-97% of 2021 levels in EUR terms; higher in UAH nominal terms due to inflation)

3. Regional Budget Systems and Fiscal Flows

3.1 National Local Budget Aggregates

The consolidated local budget system of Ukraine has demonstrated fiscal resilience despite wartime pressures:

Local Budget Revenues (2025 YTD):

• January-August 2025 total: UAH 324.9 billion (+17.3% vs. 2024)​

• H1 2025 general fund: UAH 245.9 billion (+37.2 billion vs. H1 2024)​

Revenue Sources (January-August 2025):

• Personal income tax (PIT): UAH 188.3 billion (+18.7% YoY) - 57.9% of total

• Single tax (self-employed): UAH 52.9 billion (+11.7% YoY)

• Corporate income tax: UAH 23.7 billion (+21.1% YoY)

• Property tax: UAH 38.4 billion (+15.5% YoY)

• Land tax: UAH 29.7 billion (+14.5% YoY)​

• Excise tax: UAH 1.5 billion (+45% YoY)

• Tourist tax: UAH 219.5 million (+35.1% YoY)​

3.2 Regional Distribution of Tax Revenues

Land Tax Leadership (Jan-Aug 2025):​

• Dnipropetrovsk Oblast: UAH 5.2 billion

• Kyiv city: UAH 4.2 billion

• Odesa Oblast: UAH 2.6 billion

• Lviv Oblast: UAH 2.0 billion

The concentration of land tax revenues in these regions reflects both economic activity levels and real estate market valuations.

3.3 State Budget Interbudgetary Transfers and Subventions

The state budget provides substantial support to local budgets through:

Subvention Framework:

• Educational subventions: Support for comprehensive educational institutions

• Medical subventions: Healthcare system funding

• Infrastructure subventions: Reconstruction and repair programs

• Equalization subventions: Horizontal redistribution mechanisms

• Targeted subventions: Specific program funding

For 2024, state transfers to local budgets represented a critical source of local budget financing, particularly for education (14,000+ educational institutions) and healthcare (primary medical care institutions).​

3.4 War-Driven Fiscal Pressures on Local Budgets

Wartime local budget challenges include:

• Expanded social welfare obligations: Support for internally displaced persons (IDPs), veterans, families of military personnel

• Infrastructure reconstruction: War damage to communal infrastructure requiring rehabilitation

• Service delivery amid destruction: Maintaining education and healthcare in damaged facilities

• Limited revenue bases: Economic contraction in frontline regions reduces tax collection capacity

• Fiscal decentralization tensions: Competition between national military financing and local development

4. Labor Markets and Employment Dynamics

4.1 National Employment Trends

Labor Force Dynamics:
Ukraine’s labor market experienced acute compression in 2024-2025:

Challenges:

• Military mobilization: Continuous conscription reducing available workforce

• Emigration: 6.9 million persons externally displaced (11.5 million total displaced including 4.6 million IDPs)​

• Aging workforce: Emigration and casualties skew remaining labor force toward women and older workers

• Skills gap: Outmigration of highly skilled specialists

Positive Indicators:

• Unemployment rate: Historically low (~5-9% nationally due to labor scarcity)

• Real wage growth: +6.8% average in 2024, driven by demand-supply imbalances and inflation

• Job creation: Formal sector expansion, particularly in logistics and defense-related industries

4.2 Regional Labor Market Variations

High-Pressure Regions (Eastern Frontline):
Kharkiv, Donetsk, Luhansk, Zaporizhzhia regions experienced:

• Severe labor force depletion through mobilization and evacuation

• Unemployment rates: 8-15%+ in some locales

• Wage pressures: 30-50% above regional averages due to scarcity and hazard pay

Receiving Regions (Western/Central):
Lviv, Ternopil, Ivano-Frankivsk, and Kyiv benefited from:

• Influx of relocated workers with firms

• Expanded service sector employment (hospitality, logistics, security)

• IT sector concentration maintaining competitive wages

• Average wages: UAH 20,000-28,000 monthly

Sectoral Employment:

• Defense industries: Significant growth

• Logistics and transportation: Expansion due to Black Sea Corridor and land routes

• IT and remote services: Maintained resilience through remote work

• Agriculture: Seasonal employment patterns maintained despite challenges

• Retail and hospitality: Recovery post-restrictions

5. Spatial Economic Restructuring: The Great Westward Shift

5.1 Business Relocation Magnitude and Patterns

One of the most significant economic phenomena of 2022-2025 has been systematic enterprise relocation from eastern and southern conflict zones to safer central and western regions:

Documented Relocation Statistics:

• Total documented relocations (2022-2024): 18,944 companies​

• Relocation in 2024 alone: 11,083 companies changed legal addresses​

• Relocation rate deceleration: 41% fewer relocations in 2024 vs. 2023 (reflecting most relocations already completed by mid-2023)

Source Regions (Highest Outmigration):
Companies primarily relocating from:

• Kharkiv Oblast

• Zaporizhzhia Oblast

• Donetsk Oblast

• Sumy Oblast

• Chernihiv Oblast

Destination Regions (Primary Receiving Areas):

Tier 1 Destinations:

1. Kyiv City and Oblast: 30-40% of industrial relocation inquiries; represents primary destination

2. Lviv Oblast: Approximately 11-15% of documented relocations

3. Zakarpattia Oblast: Emerging IT hub and manufacturing center

4. Ternopil Oblast: Significant manufacturing relocation

Tier 2 Destinations:

• Zhytomyr

• Chernivtsi

• Ivano-Frankivsk

• Vinnytsia

• Khmelnytskyi

• Rivne

• Volyn

The shift reflects risk assessment by businesses: proximity to military activity, infrastructure vulnerability, and access to alternative supply chains and markets.​

5.2 Sectoral Composition of Relocated Enterprises

Sectors Leading Relocation:

• Wholesale and retail trade: ~40% of relocated companies

• Processing industry (food, wood, light manufacturing): ~32%

• Transport and logistics: ~10-15%

• Light manufacturing: ~8-10%

• IT services: ~5-8%

• Other sectors: ~10-15%

Non-capital-intensive sectors, particularly retail and food processing, comprised the largest share of early relocations, reflecting their relative mobility and lower setup costs in new locations.​

International Company Relocations:
Major multinational corporations shifted or expanded operations in western Ukraine:

• Nestlé: Production facility expansion in Lviv region

• Peikko Group Corporation: Manufacturing operations

• Philip Morris: Tobacco processing

• Saint-Gobain: Construction materials production​

These represent inflows of significant FDI flowing into safer regions during the war.

5.3 Regional Economic Capacity Adjustments

Western Regions’ Response to Relocation Influx:

• Industrial park development: Creation of dedicated industrial parks with supporting infrastructure

• Workforce expansion: Drawing on regional labor pools and relocated workers

• Logistics adaptation: New transportation hubs serving relocated businesses

• Service sector growth: Hotels, warehousing, light manufacturing services

Enterprise Integration Challenges:

• Supply chain fragmentation: Separation from previously integrated upstream suppliers

• Market access disruption: Lost connections to eastern markets

• Workforce retention: Competing with other relocation destinations

• Infrastructure constraints: Capacity limitations in receiving regions

5.4 Post-War Relocation Reversal Risk

Analysis suggests significant reversal potential post-conflict:

• Many relocations represent temporary war-driven measures rather than strategic reallocation

• Return migration expected: Companies may return to pre-war locations once security improves

• But: Some competitive advantages achieved (Lviv IT cluster, western logistics hubs) may persist

6. Sectoral Regional Analysis

6.1 Agriculture and Agribusiness

Regional Distribution:
Primary agricultural production concentrated in:

• Central Ukraine: Vinnytsia, Khmelnytskyi, Cherkasy oblasts (cereals, sugar beets)

• Southern Ukraine: Odesa, Zaporizhzhia (partially controlled)

• Eastern Ukraine: Kharkiv, Donetsk (heavily war-damaged)

2024-2025 Agricultural Performance:

• 2024 harvest: Poor yields due to drought and reduced cultivation

• Contributed to Q4 2024 GDP contraction (-0.1% quarterly, with agriculture declining -30.3% YoY)

• Grain exports: Supported by Black Sea Corridor operation

• Export value (2024): Approximately 38% of merchandise exports

Regional Constraints:

• Eastern regions: Reduced sowing areas due to military activity

• Southern regions: Water access limitations and energy deficits affecting irrigation

• Mine contamination: Approximately 28% of Ukrainian agricultural land potentially affected by mines

6.2 Heavy Industry and Manufacturing

Historical Regional Concentration:
Pre-war heavy industry centers:

• Dnipropetrovsk Oblast: Metallurgy, heavy engineering (partially affected)

• Kharkiv Oblast: Machinery, automotive (severely damaged)

• Donetsk Oblast: Metallurgy, coal mining (severely affected)

• Zaporizhzhia Oblast: Steel production, machinery (severely affected)

2024-2025 Status:

• Industrial production growth: +4.9% YoY (Jan-Sept 2024), down from +5.9% in 2023

• Q4 2024 decline: Industrial output contracted due to energy shortages

• Eastern regions: Major facility closures; production shifted westward

• Defense procurement: Became major driver of residual manufacturing in accessible regions

Energy Sector Impact:
Repeated Russian attacks on energy infrastructure created cascading industrial impacts:

• Rolling blackouts: 12-hour outages common

• Energy shortage forecast (2025): Up to 30% deficit in winter

• Regional disparity: Western regions less affected than eastern

• Industries dependent on consistent power: Metallurgy, chemicals severely constrained

6.3 Information Technology and Digital Services

Regional Emergence of IT Clusters:
Contrary to expectations, IT sector demonstrated resilience through remote work and geographical redistribution:

Lviv Oblast IT Development:

• IT sector growth: Limited liability companies achieved +11.96% growth (2023-2024)

• Workforce concentration: One of Ukraine’s three major IT hubs (alongside Kyiv and Kharkiv)

• Company relocations: Lviv attracted significant IT talent from eastern regions

• Professional profile: Highly skilled workforce with 43% having >6 years experience

Other Emerging Centers:

• Zakarpattia Oblast: Formation of IT cluster with government support

• Ivano-Frankivsk: Secondary IT development center

• Chernivtsi: Emerging tech hub

Sectoral Resilience Factors:

• Remote work prevalence: Allowed maintenance of employment despite physical relocation

• Export orientation: Global client base unaffected by domestic location changes

• Wage competitiveness: Ukrainian IT wages remain below Western levels despite war-driven increases

Challenges:

• Emigration of IT specialists: Significant portion of workforce emigrated to EU/North America

• Military conscription: IT specialists subject to mobilization

• Competitive pressure: Other post-Soviet countries attracting displaced Ukrainian IT talent

6.4 Tourism and Hospitality

Collapse and Gradual Recovery:
Tourism sector experienced near-total collapse in 2022, with gradual recovery in 2024-2025:

Tax Revenue Recovery:

• 2022: UAH 1,551 million (tourism sector tax revenues)

• 2024: UAH 2,938 million (recovery to ~190% of 2022 levels)

• Growth trajectory: Positive recovery through 2024-2025

Regional Tourism Development:
Western Regions (Higher Recovery):

• Lviv: Cultural tourism, recovering pre-war international visitor patterns

• Ivano-Frankivsk: Mountain tourism, outdoor recreation

• Zakarpattia: Carpathian tourism

• Ternopil: Moderate tourism potential

Central Regions:

• Kyiv: Domestic and limited international tourism

• Vinnytsia: Wine tourism, cultural destinations

• Zhytomyr: Secondary tourism destinations

Constraints:

• Military security concerns: Limits international visitor confidence

• Infrastructure damage: War-damaged accommodations and facilities

• Mobility restrictions: Martial law impacts on internal travel

• Electricity shortages: Impacts on service quality and operating hours

EU Support Programs:
Interreg, Creative Europe, EU4Culture programs directed funding particularly toward Lviv region, supporting sustainable tourism recovery.​

6.5 Transportation, Logistics, and Trade

Port and Border Infrastructure:

• Black Sea Corridor: Operations resumed mid-2023, supporting agricultural exports

• Land borders: Enhanced Polish and other EU border crossings handling increased transit

• Dnipro River: Alternative transport corridor for goods

Regional Logistics Development:
Kyiv Region:

• Emerged as primary logistics hub for international trade

• Border checkpoint concentration at western crossings

• Rail and truck transport network optimization

Western Border Regions:

• Lviv: Primary EU trade gateway

• Zakarpattia: Secondary EU crossing point

• Ternopil: Supporting logistics infrastructure

Southern Trade Routes:

• Odesa: Port reconstruction for trade corridor operations

• Constraints: Limited by periodic attacks on port infrastructure

Trade Dynamics (2024-2025):

• Exports (2024): USD 38.9 billion (+12.1% YoY) in goods; USD 56.1 billion (+9.4%) including services

• Imports (2024): USD 69 billion (+8.1% YoY) in goods; USD 91.8 billion (+3% YoY) including services

• Trade deficit: USD 35.7 billion (improved from USD 37.9 billion in 2023)

• Geographic concentration: EU represents ~48-56% of merchandise trade

• Trade partner diversification: 132+ countries engaged in commercial relationships​

7. Regional Investment Flows and Capital Formation

7.1 Aggregate Capital Investment Trends

National Capital Investment (2024):

• Gross fixed capital formation growth: +3.5% YoY

• Investment sources: Public (state budget) and private sectors

• Allocation: Infrastructure reconstruction, defense production, energy resilience

2024 Investment Composition:

• Public investment: Reconstruction, military objectives, infrastructure expansion

• Private investment: Logistics infrastructure, autonomous energy supply (solar installations), defense production capability

• Foreign investment: Limited by war risk, but concentrated in selected sectors (food processing, manufacturing)

7.2 Regional Investment Disparities

High-Investment Regions (Receiving Relocation and FDI):

1. Kyiv City and Oblast: Estimated 30-40% of total capital investment

2. Lviv Oblast: Estimated 10-15% of total

3. Dnipropetrovsk Oblast: Estimated 8-12% (industrial base partially intact)

4. Zakarpattia Oblast: Estimated 5-8% (IT, manufacturing relocation)

Low-Investment Regions (War-Affected):

• Kharkiv Oblast: Investment largely restricted to urgent reconstruction

• Donetsk Oblast (Ukrainian control): Minimal new investment due to proximity to front

• Luhansk Oblast: Minimal investment in accessible territories

• Zaporizhzhia Oblast: Targeted reconstruction only

7.3 International Investment Patterns

Foreign Direct Investment Decline:

• 2024 FDI inflows: Significantly below pre-war levels

• Concentration: EU countries remain primary investor sources

• Sectors receiving FDI: Food processing, manufacturing (relocating), energy efficiency

• Regional destinations: Western and central regions overwhelmingly preferred

FDI Challenges:

• Uncertainty regarding conflict duration: Deters long-term investment

• Political risk: Heightened perceived country risk

• Currency volatility: Hryvnia depreciation risks

• Energy supply unreliability: Critical for manufacturing operations

7.4 Reconstruction Project Pipeline

DREAM Registry (Development and Reform Enhancement with Analytics and Monitoring):
As of early 2025:

• 787 public investment projects registered

• Total value: USD 60+ billion

• Timeframe: Multi-year reconstruction projects

• Funding: Mix of state budget, international grants, loans, and private investment

Priority Reconstruction Areas:

• Energy infrastructure restoration

• Residential housing reconstruction (particularly in Kharkiv, Donetsk, Zaporizhzhia, Kherson)

• Water and sanitation systems

• Transportation network rehabilitation

• Healthcare and educational facility reconstruction

8. Regional Disparities and Convergence Analysis

8.1 Pre-War Disparities

Prior to 2022, Ukraine exhibited substantial regional inequality:

Convergence Analysis (2004-2019 historical pattern):

• Sigma convergence: Not observed (increasing regional divergence)

• Beta convergence: Limited evidence of poorer regions catching up

• Gini coefficient trend: Worsening regional inequality

GRP Per Capita Disparity Rankings (2021):

• Highest: Kyiv city (approximately 3x national average)

• Lowest: Rural oblasts in northwest/southwest (approximately 0.6-0.7x national average)

• Coefficient of variation: Significant dispersion across 24 oblasts​

8.2 War-Induced Disparities

The 2022-2025 period introduced acute new disparities:

Divergence Trends:

• Relative improvement: Western/central regions gaining share of national economic activity

• Relative deterioration: Eastern/southern frontline regions losing share

• Accelerated inequality: War damage concentrated geographically creating sharp divides

• Convergence reversal: Historical gradual regional equalization trends reversed

Damage Distribution:

• Eastern regions (Donetsk, Kharkiv, Luhansk, Zaporizhzhia, Kherson): ~72% of documented destruction​

• Remaining regions: ~28% of destruction

• Intensity: Almost half of firms in eastern regions damaged vs. 18% nationally​

8.3 Post-War Convergence Prospects

Challenges to Regional Convergence:

• Destruction concentrated in previously competitive regions: Reversal of relative position difficult

• Capital flight: Business relocation may persist even post-conflict

• Human capital loss: Emigration particularly severe from eastern regions

• Path dependency: Established advantages in western centers (IT clusters, logistics hubs) difficult to reverse

Convergence Support Measures:

• Targeted reconstruction priorities: Eastern regions receiving higher reconstruction spending

• Regional development funds: Government support for lagging region development

• Tax incentives: Potential incentives to return to or remain in eastern regions

• Infrastructure investment: Accelerated development programs for damaged areas

9. Sectoral and Spatial Economic Challenges

9.1 Energy Security and Power Supply Constraints

Energy sector represents the most acute regional constraint:

Infrastructure Damage:

• 2024 attack intensity: Nine large-scale attacks on energy infrastructure

• Regional concentration: Dnipropetrovsk, Kharkiv, Kherson, Sumy oblasts bore heaviest damage

• Winter capacity: Potential 30% energy deficit expected

• Blackout duration: 12-hour rolling outages common in major cities

Regional Impacts:

• Industrial production: Energy-intensive industries (metallurgy, chemicals) severely constrained

• Services sector: Hospitals, schools, water systems dependent on electricity

• Business operations: Power reliability affects operating costs and productivity

• Regional disparities: Western regions less affected than eastern

Mitigation Strategies:

• Autonomous generation: Increased solar installation by businesses

• Energy efficiency: Programs to reduce consumption demands

• Distributed generation: Decentralization of power generation away from targeted infrastructure

• Emergency reserves: Maintained strategic reserves for critical functions

9.2 Labor Supply Constraints

Demographic Challenges:

• Mobilization: Continuous military conscription reducing civilian workforce

• Emigration: 6.9 million externally displaced persons; selective emigration of highest-skilled workers

• Population aging: Conflict and emigration skewed demographics toward older, less mobile populations

• Gender imbalance: Disproportionate male military participation

Regional Labor Market Impacts:

• Eastern regions: Acute scarcity; unemployment rates low but reflects reduced participation

• Central regions: Moderate constraints; supported by in-migration of IDPs and relocated workers

• Western regions: Lower scarcity; receiving both IDPs and relocated workers

• Sectoral variation: Defense industries competitive for talent; non-essential services affected

Wage Impacts:

• Real wage growth (+6.8% in 2024) reflects labor scarcity more than productivity gains

• Sectoral differentiation: Defense, IT, logistics commanding wage premiums

• Regional variation: Hazard pay in eastern regions; market wages in western regions

• Inflation pressure: Wage growth contributing to inflation acceleration in 2024 H2

9.3 Supply Chain Fragmentation

Supply Chain Disruptions:

• Geographic separation: Relocation of businesses separated from upstream suppliers

• Transportation delays: Border crossings, alternative routing increasing logistics costs

• Input sourcing: Transition to western/EU sources replacing eastern suppliers

• Export logistics: Shift to land routes via EU replacing Black Sea routes during corridor closures

Regional Connectivity Issues:

• Transportation infrastructure: Some rail and road routes damaged or diverted for military use

• Border restrictions: Martial law impacts on internal mobility

• Energy infrastructure: Power shortages affecting business connectivity

• Telecommunications: Partial damage to regional networks

9.4 Fiscal Sustainability and Local Budget Stress

Mounting Expenditure Pressures:

• Social welfare expansion: Support for IDPs, veterans, military families

• Infrastructure maintenance: Damage to communal systems requiring urgent repair

• Service delivery: Education and healthcare systems expanded to accommodate relocating populations

• Defense contributions: Local resources mobilized for military support

Revenue Base Challenges:

• Economic contraction: Reduced tax bases in war-affected regions

• Emigration: Tax base erosion from population outmigration

• Business closures: Permanent loss of enterprise tax revenue from damaged businesses

• Profitability decline: Reduced corporate profitability in hostile environments

Fiscal Decentralization Pressures:

• Tax revenue recentralization: 2025 state budget reduces local budget PIT allocation from +4% to standard rates​

• Replaced by targeted subventions: Limiting local autonomy compared to prior revenue-sharing

• Horizontal equalization: Migration Service data updates for distribution, but impact uncertain

• Investment resource scarcity: Limited ability to fund capital projects from local budgets

10. Regional Development Strategies and Resilience Measures

10.1 Western Regions’ Response to Relocation Influx

Strategic Adaptations by Lviv Oblast (Leading Western Receiver):

• Industrial park development: Creation of dedicated manufacturing zones with infrastructure

• IT cluster formation: Concentration of technology companies creating cluster economies

• Workforce integration: Training programs for relocated workers, wage competitiveness

• Infrastructure investment: Logistics facilities, energy resilience projects

• International partnerships: EU border proximity enabling cross-border supply chains

Results:

• Lviv limited liability company growth: +11.96% (2023-2024), approach pre-war levels​

• Tourism recovery: Supporting infrastructure investment

• Export orientation: Border proximity enabling EU market access

Transferable Model:
Zakarpattia, Ternopil, and other western oblasts attempting similar strategies with varying success due to capacity constraints.

10.2 Central Region’s Kyiv-Centric Dynamics

Kyiv City and Oblast Dominance:

• Capital concentration: 26.7% of national GRP (pre-war)

• Relocation magnetism: 30-40% of industrial relocation flows

• Infrastructure resilience: Defending resources concentrated here

• Investment magnet: 28% of newly registered companies choose Kyiv​

Intra-Regional Flows:

• Kyiv-to-Oblast transfers: Business decentralization for risk reduction

• Oblast-to-Kyiv returns: Market access and administrative proximity preferences

• Efficient relocation corridors: Kyiv→Kyiv Oblast (775 companies), Kyiv→Dnipropetrovsk (575 companies)​

10.3 Frontline Regions’ Reconstruction and Resilience

Kharkiv Oblast’s Challenges and Adaptations:

• Damage extent: Approximately 50% of enterprises affected (highest regional rate)

• Population dynamics: Significant evacuation and displacement; returning populations uncertain

• Investment constraints: High-risk environment limits capital formation

• Public sector support: Focused reconstruction spending on critical infrastructure

Dnipropetrovsk Oblast’s Partial Resilience:

• Industrial base partly intact: Some enterprises continuing operations

• Capital investment leadership: Receiving significant reconstruction investment

• Regional hub status: Serving as central region operational center

• Land tax collection leadership: UAH 5.2 billion (Jan-Aug 2025)​

10.4 Digitalization and Smart Economy Development

Regional Digital Transformation Initiatives:
Western and central regions advancing digitalization:

Lviv Region Smart Economy Development:

• Digital services expansion: Business adaptation to remote operational models

• E-commerce growth: Online sales channels expanding

• Digital infrastructure: Broadband and 4G/5G coverage expansion

• Government digitalization: Online service delivery improving citizen access

Challenges:

• Digital divide: Rural and smaller city areas lag urban centers

• Skills constraints: Limited digital literacy in aging populations

• Infrastructure investment needs: Requires sustained capital commitment

11. External Trade and Regional Trade Patterns

11.1 Regional Trade Participation

Trade Intensity by Region:

• Border regions: Highest trade participation (Lviv, Zakarpattia, Chernivtsi with EU)

• Central regions: Diversified trade (land and sea routes)

• Eastern regions: Severely constrained trade due to proximity to military activity

Export Leadership (by estimated value):

1. Kyiv city and Oblast: Approximately 20-25% of national exports

2. Dnipropetrovsk Oblast: Approximately 15-18% (metallurgical and agricultural products)

3. Lviv Oblast: Approximately 8-12% (food, machinery, light manufacturing)

4. Kharkiv Oblast (limited capacity): Approximately 3-5% (where accessible)

11.2 Commodity Trade Structure

Export Composition (2024):

• Agricultural products: 38-42% of merchandise exports (grains, oils, meat, dairy)

• Mineral fuels and metallurgical products: 25-30% (steel, coal where accessible)

• Machinery and equipment: 12-15% (industrial machinery, automotive parts)

• Food products: 10-12% (processed foods, beverages)

• Other: 10-15% (light manufacturing, chemicals, textiles)

Import Composition (2024):

• Mineral fuels: 25-30% (energy, oil, gas)

• Machinery and equipment: 20-25% (industrial equipment, electronics)

• Chemicals: 10-15% (industrial chemicals, pharmaceuticals)

• Foodstuffs: 10-12% (supplementary food supplies)

• Other: 15-20% (construction materials, vehicles, other goods)

11.3 Geographic Trade Patterns

Primary Trade Partners (2024):

• European Union: 48-56% of merchandise trade (exports 48.5%, imports 32.9%)

• Poland: Primary land border crossing partner

• Germany, Italy, Lithuania: Significant EU trade partners

• Asian partners: Limited due to logistics constraints (Uzbekistan, Kazakhstan transit)

• Other CIS regions: Largely blocked except limited Belarus/Georgia transit

Trade Route Changes:

• Westward shift: Traditional eastern trade routes severed or severely constrained

• EU integration: EU trade growing as alternative markets replace eastern partners

• Land routes: Poland, Slovakia, Hungary becoming primary transit corridors

• Black Sea Corridor: Seasonally available for agricultural exports

12. Regional Economic Prospects and Scenarios

12.1 Base Case Scenario (Continuation of Hostilities)

Assumptions:

• Military conflict continues through 2025-2026

• Front line stabilizes roughly along current positions

• Energy infrastructure remains under Russian attack

• Western/central regions remain relatively secure

Projected Regional Outcomes (2025-2026):

Kyiv City and Oblast:

• GDP growth: 4-6% annually (supported by capital concentration, relocation)

• Trade flows: Expansion of land-based import/export corridors

• Employment: Continued wage inflation, moderate job growth

• Investment: High capital inflows for reconstruction and relocation

Western Regions (Lviv, Ternopil, Ivano-Frankivsk, Zakarpattia):

• GDP growth: 3-5% annually (relocation-driven, EU market proximity)

• Population dynamics: Continued accommodation of IDPs, but outmigration risk

• Business development: Expansion of receiving enterprises, employment stabilization

• Investment: Moderate capital formation, EU-supported reconstruction projects

Central Regions (Dnipropetrovsk, Vinnytsia, Cherkasy):

• GDP growth: 2-3% annually (dependent on agricultural conditions, partial industrial recovery)

• Employment: Labor market stabilization with some in-migration from front-line regions

• Investment: Reconstruction-focused, lower relocation activity than western regions

• Trade flows: Intermediate routing role for north-south and east-west trade

Eastern/Southern Frontline Regions (Kharkiv, Donetsk, Zaporizhzhia, Kherson, Luhansk):

• GDP contraction: 5-15% annually (continuing destruction, population loss)

• Population: Continued displacement; return migration minimal until security improves

• Business activity: Minimal new investment; focus on emergency repairs and survival

• Employment: Emergency programs and military support primary economic activities

• Trade: Severely constrained; informal barter economy prevalence in disconnected areas

National Aggregate:

• GDP growth: 2-3% annually (EBRD forecast: 3.3% in 2025)

• External financing dependency: Continued; IMF, EU, G7 support essential for budget coverage

• Labor supply constraints: Persistent; wage inflation pressure continuing

• Inflation: Elevated through 2025 H1, expected to moderate by year-end to single digits

12.2 Ceasefire Scenario (Conflict Resolution 2025-2026)

Assumptions:

• Military hostilities cease during 2025-2026

• Occupied territories gradually returned or recognized

• Reconstruction programs accelerate

• International investment resumes

Projected Regional Outcomes:

Immediate Post-Ceasefire (Years 1-2):

• National GDP growth: 5-8% annually (reconstruction-driven boom)

• Regional convergence: Return migration and business repatriation to liberated territories

• Investment surge: International reconstruction funding flows (estimated USD 400-500+ billion)

• Employment dynamics: Rapid job creation but wage moderation as labor supply recovers

Regional Prospects:

Eastern Regions’ Reconstruction:

• Accelerated infrastructure rebuilding

• Return of businesses and skilled workers

• Integration with European reconstruction frameworks

• GDP recovery toward 80-90% of pre-war levels within 5 years

Relocation Dynamics:

• Partial business return to pre-war locations (estimated 30-50% reversal)

• Permanent shift of some sectors to western/central regions (IT, logistics)

• Regional specialization emergence based on competitive advantages

National Transformation:

• EU integration acceleration: Trade and investment flows intensification

• Structural economic reform: Opportunity for institutional modernization

• Regional equalization efforts: Investment in previously lagging regions

• Demographic recovery: Potential return migration from diaspora

12.3 Prolonged Conflict Scenario (Stalemate 2026+)

Assumptions:

• Frozen conflict or limited military activity at sustainable levels

• Partial territorial normalization but no comprehensive resolution

• Adaptation to wartime economic conditions

Projected Regional Outcomes:

Structural Entrenchment:

• Regional disparities permanently widened

• Relocation businesses permanently integrated into receiving regions

• Economic geography fundamentally altered from pre-war patterns

• Investment concentrated in safe zones; frontline regions economically marginalized

Labor Market Evolution:

• Continued emigration becomes chronic condition

• Demographic deficit persistent; aging population in certain regions

• Wage inflation structural rather than cyclical

• Skills deficit becomes long-term constraint on growth

National GDP Trajectory:

• Growth rates: 2-3% annually (structural constraint)

• Debt sustainability: Critical as military spending continues

• International dependence: Prolonged IMF/EU financing need

• Recovery timeline: Postponed to indeterminate future

13. Policy Recommendations for Regional Development

13.1 Regional Fiscal Sustainability

Short-Term (2025-2026):

1. Tax Base Stabilization:

   • Combat informal economy through regulatory enforcement

   • Expand digitalization of tax administration

   • Increase corporate income tax collection (2024 growth +21% provides foundation)

   • Targeted support for small business formalizing

2. Local Budget Equalization:

   • Preserve horizontal equalization mechanisms with war-sensitive adjustments

   • Targeted subventions for frontline regions with expanded fiscal support

   • Counter-cyclical transfers to declining regions during conflict

3. Reconstruction Project Financing:

   • Accelerate DREAM registry project implementation

   • Blend international grants with domestic financing

   • Public-private partnerships for infrastructure reconstruction

   • Prioritize energy resilience and critical infrastructure

13.2 Relocation Business Integration

1. Permanent Integration Support:

   • Tax incentives for business formalization in receiving regions

   • Supply chain development support linking relocated businesses

   • Workforce training programs for employment continuity

   • Infrastructure investment in receiving region capacity expansion

2. Post-War Transition Planning:

   • Establish relocation/return guidelines for post-conflict period

   • Identify permanently advantageous location shifts (IT clusters, logistics hubs)

   • Plan for gradual repatriation of businesses where feasible

   • Anticipate labor force dynamics post-return migration

13.3 Eastern Region Support Mechanisms

1. Emergency Support:

   • Accelerated reconstruction spending in accessible territories

   • Population support programs (humanitarian assistance, cash transfers)

   • Emergency employment programs (reconstruction jobs, public works)

   • Infrastructure resilience investment (autonomous power, water systems)

2. Medium-Term Development:

   • Special economic zones with tax incentives for investor attraction

   • Reconstruction matching funds (shared costs with private investors)

   • Educational and skills development support

   • Healthcare system reconstruction prioritization

13.4 Energy Resilience and Regional Capacity

1. Distributed Energy Development:

   • Solar installation support programs for businesses and households

   • Renewable energy priority in reconstruction investment

   • Energy efficiency standards for reconstructed facilities

   • Strategic energy reserve development

2. Grid Modernization:

   • Smart grid technology deployment

   • Decentralized generation prioritization

   • Emergency backup systems for critical infrastructure

   • Regional power generation capacity diversification

13.5 Labor Market and Human Capital

1. Diaspora Engagement:

   • Incentive programs for skilled worker return (housing support, tax benefits)

   • Remote work policies enabling distributed employment

   • Educational partnerships with diaspora for brain gain

   • Investment channels for diaspora-based entrepreneurs

2. Skills Development:

   • Emergency vocational training for displaced workers

   • Defense industry skills certification programs

   • Digital transformation skills development

   • Language and business skills programs for EU market integration

13.6 Trade and Regional Integration

1. Export Development Support:

   • Trade facilitation at EU borders

   • Export promotion services and marketing support

   • Quality certification assistance for EU market access

   • Regional trade corridor development (Danube, Baltic routes)

2. Supply Chain Restructuring:

   • Business-to-business networking for relocated enterprises

   • Backward integration support linking input suppliers

   • Regional value chain development

   • Industry cluster formation (IT in Lviv, food processing in multiple regions)

13.7 Regional Convergence and Equity

1. Investment Prioritization:

   • Progressive investment allocation favoring lagging regions

   • EU cohesion fund-style programming for regional equity

   • Targeted infrastructure investment in developing regions

   • University and research institution development in peripheral regions

2. Competitive Advantage Development:

   • Identify regional specializations based on competitive advantages

   • Smart specialization strategy implementation

   • Innovation cluster support

   • Technology transfer mechanisms between regions

14. Conclusions

Ukraine’s regional economies in 2024-2025 reflect a fundamental restructuring driven by military conflict, territorial fragmentation, and forced mobility of economic actors. The nation’s 2.9% real GDP growth in 2024, while positive, masks dramatic divergence across regions, with western and central areas experiencing modest growth while eastern and southern conflict zones contracted significantly.

Key Findings:

1. Spatial Economic Restructuring: An estimated 18,944 documented business relocations (11,083 in 2024 alone) have shifted economic activity westward and cityward, concentrating activity in Kyiv and safer western regions while marginalizing frontline zones.

2. Regional GRP Divergence: Pre-war regional disparities have been amplified, with eastern regions experiencing estimated 20-50% GRP contractions while western regions achieved 8-20% growth, creating unprecedented regional inequality.

3. Fiscal Flows Concentration: Tax revenue concentration in capital, western, and unharmed central regions (Dnipropetrovsk) has widened, while reconstruction needs in damaged regions exceed local revenue capacity, deepening fiscal asymmetries.

4. Labor Market Compression: Mobilization and emigration created acute labor scarcity (unemployment estimated 5-9%, historically low) while wage inflation (+6.8% in 2024) reflects supply constraints rather than productivity gains, creating structural imbalances.

5. External Trade Reorientation: 87% of merchandise trade redirected toward EU markets, with land borders (Poland, Slovakia) replacing sea routes, fundamentally reshaping Ukraine’s trade geography and supply chain patterns.

6. Strategic Vulnerability: Energy infrastructure targeting continues to create cascading industrial constraints, with potential 30% winter energy deficits creating production bottlenecks particularly in metallurgy and other energy-intensive sectors concentrated in eastern and central regions.

Outlook:

The trajectory of Ukraine’s regional economies depends critically on conflict resolution pace. Under continued hostilities (base case), regional divergence will persist with 2-3% annual national growth concentrated in safe zones. A ceasefire (upside scenario) would unlock 5-8% growth potential through reconstruction-driven activity and investment flows, enabling partial regional reconvergence. A prolonged conflict stalemate (downside scenario) risks structural entrenchment of current regional inequalities with long-term demographic and economic consequences.

Strategic priorities should focus on:

1. Eastern region emergency support to prevent permanent economic marginalization

2. Relocation business integration to stabilize employment and tax bases in receiving regions

3. Energy resilience addressing the critical infrastructure vulnerability constraining production

4. Labor supply solutions through diaspora incentives and productivity improvements

5. Trade facilitation supporting export expansion essential for growth in resource-constrained environment

Ukraine’s wartime regional restructuring presents both challenges—deepening inequality, permanent business relocation, demographic loss—and opportunities for transformation toward EU-integrated, less centralized economic model. The critical variable is conflict resolution timing, which will determine whether current exceptional measures become permanent structural features or temporary wartime adjustments.

Sources: This article synthesizes data from the National Bank of Ukraine, State Statistics Service of Ukraine, European Bank for Reconstruction and Development (EBRD), World Bank, OECD, Ukrainian Ministry of Finance, Ministry of Economy, State Tax Service, academic research institutions, and investment advisory platforms. Statistics reflect data availability through November 2025, with most recent regional data from 2024 and projections based on macroeconomic forecasts. War damage assessments incorporate World Bank, IOM, and humanitarian organization reports. All figures presented reflect available official statistics and verified international source estimates.