Ukraine’s Economy Stabilizes, a Boost Alongside Rapid Military Gains
By Marcus Walker, Sept. 13, 2022, WSJ
KYIV—At Nova Poshta, Ukraine’s equivalent of FedEx, deliveries are back to 90% of their prewar level of a million parcels a day.
After Russia launched its full-scale invasion of Ukraine in February, Nova Poshta’s revenues fell to 2% of the prewar level. “I thought our company could disappear,” said co-owner Vyacheslav Klimov. But as spring progressed, e-commerce and business
activity resumed in areas away from the front lines, and many factories switched to supplying the military. “It means we’re profitable and even have some money for future investments,” he said.
Ukraine’s economy, while hurting, is stabilizing after the deep crash set off by the war, thanks to a combination of quick policy actions, military resilience and the flexible response of Ukrainian businesses to the damage and dislocation. The uptick
is boosting morale in the country along with recent combat breakthroughs in the east after months on the defensive.
Early this year, as Russian forces threatened the capital Kyiv, it looked like Ukraine’s economy might collapse, with gross domestic product for the year projected to fall by as much as half. It is still expected to be down about 30%, but summer saw a
rebound from the depths of last spring.
“Things are bad but stable,” said Tymofiy Mylovanov, head of the Kyiv School of Economics. “It looks and feels like the economy is adapting.”
A major factor is military: Russia’s retreat from the area around Kyiv, the slow progress of its subsequent offensives and Ukraine’s recent counterattacks have created enough certainty for economic activity to resume in the unoccupied part of Ukraine.
The Ukrainian army’s success in recent days in driving Russian forces out of the eastern Kharkiv region has shown how Ukraine has seized the strategic initiative and put Russia on the back foot, raising hopes that more territory will be liberated
before winter and that Russia will struggle to resume the offensive.
“If you’re 50 or 100 kilometers from the front line, there are missiles but you don’t fear the Russians will be here tomorrow,” said Mr. Mylovanov.
Ukraine’s central bank and Finance Ministry also took swift steps, using a playbook drawn from earlier crises, that economists say helped to prevent a bigger disaster.
The National Bank of Ukraine imposed capital controls and pegged Ukraine’s currency, the hryvnia, to the dollar at a level that didn’t allow import costs and inflation to skyrocket. The bank had to devalue the hryvnia in July when it came under too
much pressure, but the new rate has held so far.
The central bank, despite misgivings, printed money to keep the government solvent at a time when international markets wouldn’t lend and tax revenues were evaporating. “At the beginning of the war we understood it is impossible to conduct our
monetary policy as before,” said Sergiy Nikolaychuk, deputy governor of the National Bank of Ukraine.
The government temporarily slashed business taxes and suspended sales taxes and import duties, providing a fiscal stimulus and easing imports of consumer goods during the darkest hour. Kyiv has gradually restored taxes as economic activity has stabilized.
Russian efforts against vital systems such as banks and the internet have been largely ineffective, and they have continued to function.
Russian bombs destroyed most of Igor Liski’s wood-processing factory west of Kyiv this spring. He decided to rebuild it to set an example of resistance. It will be operating at nearly full capacity by fall, he said.
“I believe victory will depend on the economy,” said the 43-year-old entrepreneur. “Ukraine needs companies to give work, pay taxes, export products. All companies who can, should produce.”
Despite the recent gains, the economic blow has been severe. Russian troops have seized some of the heartlands of Ukrainian industry and agriculture; blockaded the Black Sea ports that Ukrainian exports rely on; and bombed factories, oil refineries and
other infrastructure. Millions of Ukrainians have become refugees inside the country and across Europe, and unemployment is declining slowly from a peak of 35%.
Russian missiles continue to strike, and winter will bring new difficulties, including the sky-high cost of heating and fears of natural-gas shortages. In recent days, Russian strikes against power stations, which have caused temporary outages in several
cities, are a warning that Moscow will try to target Ukraine’s electricity and heating infrastructure.
Ukraine’s Western allies, especially the European Union, are lagging in sending promised financing for the government’s huge budget deficit, leaving Kyiv dangerously reliant on money-printing by the central bank. That has contributed to inflation of
over 20%.
“It’s crucial for the resilience of Ukraine that we get the funding that was committed from our international partners,” said Yuriy Vitrenko, chief executive of the national oil-and-gas company Naftogaz.
But determination not to go under is evident across the country, and many Ukrainian businesses are finding workarounds for missile threats, blocked logistics, shortages and scattered workforces. “Motivation and truth are on our side,” said Mr. Liski.
“If we survive also on the economic side, definitely we will win the war.”
Mr. Liski built his first businesses in Luhansk in eastern Ukraine. He lost them all in Russia’s covert invasion of the region in 2014. He moved to Kyiv and built up new ventures in industry and agriculture, ranging from wood-processing to honey-making.
His company, a private-equity fund called Effective Investments Group, uses foreign capital raised from Europe and North America.
He is pitching a proposal to the government for an insurance fund involving international insurers that protects investments against military risk to spur rebuilding now despite the continuing war.
Ukraine’s economy suffered a deep depression in the 1990s after the collapse of Communism. Later, a series of shocks set the country back, from the 2008 global financial crisis to Russia’s 2014 seizure of Crimea and part of Ukraine’s east.
Ukrainians watched while neighbors such as Poland and Romania joined the EU and grew rapidly. Ukraine’s aspirations for deeper economic ties with the West, and Moscow’s resistance, were among the causes of the conflict.
Ukraine’s economy was improving before Russia’s invasion this year. Many Ukrainians say the latest economic shock is still better than the one in the 1990s, when employers couldn’t pay wages and mass hardship swept the country. Many also say
experience has engendered a mentality of inventive self-reliance.
“We are well-trained in recovering from all types of crises,” said Mariya Masliy, a shoe designer from Kyiv. “Crisis management is the norm since we were born.”
Ms. Masliy has switched from designing high heels to army boots with Kevlar protection. The factory she works with in Kharkiv was bombed; it has restarted production in safer western Ukraine. Currently a refugee in Amsterdam, she has carved out a new
Dutch export market for her fashion brand, Marsala. “A Dutch friend told me, ‘You, Ukrainians, are all so active, you don’t sit around in depression,’” she said.
Energy crisis
==============
The invasion threatened to cut off Ukraine’s access to gasoline, diesel and crude oil, which came overland from Russia and from Belarus, a Russian ally, or from the blockaded Black Sea. Russian missiles also destroyed Ukraine’s main oil refineries
and major fuel depots.
Executives from Ukraine’s gas-station operators, led by major networks OKKO and WOG, traveled frantically around the EU, buying up new supplies of gasoline and diesel. They had to pay cash up front, sometimes a month in advance, to European suppliers
that didn’t like the risk of dealing with a country being invaded.
Importing fuel by train was difficult, because Ukrainian railroads have a wider gauge than the EU’s. At the Polish-Ukrainian border, fuel had to be siphoned out of EU-standard trains and pumped into Ukrainian wagons. “It isn’t easy or quick,”
said Vasyl Danylyak, CEO of OKKO.
In April, Ukraine imported about 200,000 metric tons of fuel, compared with a million tons a month before the war. Mile-long lines of cars were a common sight at Ukrainian gas stations. The government relaxed fuel-price controls to help importers cover
higher logistics costs. Gas-station networks bought fuel from all over the world, except Russia, bringing it in by road, rail and river. By July, imports were back up to 770,000 tons. It was enough to meet demand, and lines at gas stations disappeared.
The fuel companies operate without large depots because of missile attacks. WOG keeps less than $3 million of gasoline in any one place, to keep the target’s value below the cost of Russian missiles.
A deal brokered by Turkey to reopen the Black Sea for limited grain exports is giving partial relief to Ukrainian agriculture and world food markets—although Russia has threatened to curtail the shipments. But heavy industry is still struggling without
sea access.
Ukraine’s biggest steel plant, the ArcelorMittal steel mill in Kryviy Rih, is producing at about 20% of its prewar volume. The mill has switched to sending steel westward to the EU via road and rail. But without ports, it can’t import enough coking
coal to Kryviy Rih, limiting how much iron ore it can process.
“You solve one bottleneck and you find another,” said Mauro Longobardo, an Italian who heads the Ukraine operations of the Luxembourg-based multinational. Low volume and expensive logistics mean the plant is losing money. It has cut wages and will
need to cut jobs if the situation doesn’t improve. “If we reduce people, this city hurts like hell,” he said.
The gritty steel town of Kryviy Rih, about 40 miles from the front-line fighting in south Ukraine, holds symbolic importance for both sides: It is the hometown of Ukrainian President Volodymyr Zelensky. The steel mill helped defend it early in the
invasion when a Russian armored column came within less than 10 miles by giving the Ukrainian army several giant mining trucks to block the road into town. The Russian armored vehicles couldn’t use the soggy ground around the obstacle, came under fire
and retreated, a strategic setback for Russia’s campaign in the south.
Parcel delivery
===============
Service sectors are faring better, despite challenges. Nova Poshta, the parcel-delivery company, struggled through the springtime gasoline shortages. In Kharkiv, Russian shelling killed people queuing at a branch for humanitarian packages. Sorting
centers in Kharkiv, Chernihiv and Mykolaiv were also bombed.
“We began rebuilding the sorting centers within hours. Now you can’t see the damage,” said Mr. Klimov. Out of 30,000 prewar employees, about 2,700 have joined the military. The company laid off about 1,500 people, mainly in Russian-held areas where
it can’t operate.
Signs of recovery in Ukraine’s job market began soon after Russian forces retreated from Kyiv. Vacancies on Work dot ua, Ukraine’s biggest employment website, reached more than 40,000 on a given day in August, compared with 6,000 in March. That
compares with more than 100,000 vacancies in February, before the invasion.
Vacancies show the geographical shift taking place in Ukraine’s economy, said Artur Mikhno, Work dot ua’s CEO. Jobs are being created disproportionately in Lviv and other cities in Ukraine’s safer west, and he said far fewer employers are hiring in
eastern cities such as Kharkiv, which Russia continues to target from afar.
Work dot ua is part of the burgeoning tech scene in Dnipro, an industrial city in central Ukraine. Other IT clusters have emerged in Kyiv and Lviv. Exports of IT services were up 23% in the first half of 2022 compared with a year earlier.
“We’re at war with a country with nuclear weapons and companies are still able to grow their business,” said Alexander Kholodov, founder of Dnipro-based software company Yalantis.
Many people are supporting the national defense and economy however they can.
Before the war, Petro Hryhoriev’s main business was an 84-acre asparagus farm in the southern Kherson region. Russian troops now occupy it. Some of Mr. Hryhoriev’s workers are now refugees in Europe, and others are in Kherson but uncontactable. He is
still wiring them their salaries, using the farm’s financial reserves and the profits from two cafes he opened this year in Dnipro. He has donated body armor, helmets, medicine and two cars to the army. He said he firmly believes Kherson will be
liberated and he will see his farm again.
On a summer evening in Dnipro, Mr. Hryhoriev’s cafes were lively, and young people drank and talked on the waterfront until the midnight wartime curfew. The city of over a million on the banks of the wide Dnipro River has suffered less bombing than
cities nearer the front line and has become a haven for many displaced people.
“We’re trying to live a full life,” Mr. Hryhoriev said. “Everyone wants their life back.”
Among the Soviet-era high-rise blocks of eastern Kyiv, Maksym Pustakov is starting to rebuild the food-kiosk business he lost in Mariupol, the port city destroyed in one of the most brutal episodes of Russia’s invasion.
After fleeing Mariupol with his wife and son and reaching Kyiv, Mr. Pustakov said he shut his eyes and tapped on his mobile phone’s banking app. Opening his eyes, he was relieved to see his bank was still working and his money was all there. He decided
to open up a new shawarma kiosk in Troieshchyna, a tough working-class suburb of the capital. All their employees are fellow refugees from Mariupol.
“We didn’t want to wait for something to happen. We are not that sort of people. We decided to act,” he said. The outlet took off, and Mr. Pustakov is already expanding it and planning a second. His ambition, he said, is to build a chain across
Ukraine.
https://www.wsj.com/articles/ukraine-economy-stabilizes-military-gains-11663078436
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