Business in wartime: Ukrainian companies in 2022 and beyond
Dmitry Pikalov, Senior Specialist at iA Group, digests the impact of war on business in Ukraine.
It is now just over a year since Russia invaded Ukraine and, while the price paid by the Ukrainian people became evident very quickly, it is only now that the toll on the country’s economy is becoming clear. And the impact has been big. According to the Ukrainian Minister of Finance,[1] Ukraine’s economy contracted by 30% in 2022 and inflation leapt to 26%. The Ukrainian currency also fell sharply in value, with the Hryvnia falling from UAH29 to UAH40 to the US dollar. The bald figures, however, don’t tell the whole story.
Blow after blow for business
Ukrainian businesses began to suffer as soon as the war began. A shrinking economy, plummeting demand, supply disruption, loss of assets, lack of funds – all these factors added up to a massive challenge for the country’s entrepreneurs. According to surveys by the Ukrainian Entrepreneurship and Export Promotion Office[2], around 46% of companies surveyed have ceased their operations since February 2022. The rest have had to adapt to survive. Consumer demand, meanwhile, has decreased in many sectors of the economy. According to the Ukrainian Business Association[3], 83% of Ukrainian companies saw their business decline in 2022.
On February 24, 2022, the Ukrainian government, and the National Bank of Ukraine restricted payments in foreign currency (starting with the US dollar and euro), except where they were for goods on a so-called ‘critical import’ list approved by the Cabinet of Ministers of Ukraine. While this was done to protect the financial sector, it had the effect of disrupting payment flows from Ukrainian importers to their foreign partners. The limits were lifted only in July 2022.
Business also faced having to cope with the total disruption of their logistics chains. Road and rail shipments through Russia and Belarus stopped. Ukrainian airspace was closed, and all flights suspended. Ports closed, with ships having to be rerouted to ports in the EU (for example, via Hungary, the Netherlands, Lithuania) and then delivered to Ukraine by road. Customs posts at the Ukraine-EU border quickly struggled to cope with people fleeing the country, leading to substantial waiting times and delays at the beginning. Meanwhile, companies tried to increase their stocks and exporters and importers negotiated with their foreign partners to extend payment terms and share the additional delivery costs.
Staffing, too, was another problem for Ukrainian companies, either because of people being drafted or volunteering to join the Ukrainian army, or leaving the country as refugees. Properties and assets were destroyed, especially in areas where the fighting was worst. Businesses located in or close to the conflict zones had to relocate their assets and operations to western Ukraine or the EU. The majority of personnel were switched to remote working where this was possible.
Since September 2022, many businesses have also been affected by power shortages and disruptions to internet access resulting from the attacks on power plants, the grid and other critical infrastructure. Companies have responded by switching to alternative power supplies and means of communication, such as diesel generators and satellite internet access.
Down, yes, but far from out
First, Ukrainian business adapted by quickly shifting from simple survival mode to focusing on and scaling up in new markets. Many Ukrainian companies, for example, began exporting to the EU and other countries around the world, and in particular large businesses, started expanding into Europe. In Poland[4] alone, Ukrainians have registered over 10,000 companies since March 2022.
Ukrainian express parcel company Nova Post (‘Nova Poshta’ in Ukrainian) is a great example of this kind of business expansion. Founded in 2001, it quickly became a pioneer in express deliveries in Ukraine. Since February 2022, the company has made tremendous efforts to keep its Ukrainian logistics routes operational. However, it has started to look for new markets outside Ukraine, too. In October last year, Nova Post opened offices in Poland, and it plans to do the same in Germany and Romania in Q2 2023.
And despite the current risks, there are also remarkable examples of foreign businesses setting up in Ukraine. Home Essentials, an international furniture supplier, has acquired a mattress production factory[5] in Kremenets in the Ternopil region of Ukraine. The plan? To expand manufacturing there to provide its own brand of quality mattresses to refugees displaced by the war. Home Essentials' founder Christopher Exline, a US national, relocated to Ukraine from Hong Kong to run the operations in Ukraine, along with establishing the ‘Rest Assured’ charity program.
We cannot know what the future will hold for Ukraine. What we can say is that Ukrainian businesses and entrepreneurs are learning to adapt both within Ukraine and through the wider Ukrainian diaspora.
As for the future, it will depend on the course of the war. And yet, Ukraine has already started its way to recovery. According to the Export Credit Agency of Ukraine[6], economic activity shows signs of recovery in all sectors except construction. The National Bank of Ukraine[7] released results of their survey which shows that the business activity expectations index is on the rise. Ukrainian businesses are gradually adapting to new conditions and again look optimistically to the future.
