LDN - Business

Companies in Ukraine see problems pile up, but most tough it out

[February 29, 2024] By Marc Jones and Olena Harmash

KYIV/LONDON (Reuters) - German supermarket chain Metro and its 3,400 employees in Ukraine have worked hard to get their business back to where it was before Russia's full-scale invasion two years ago.

After a sales slump of 10.4% in 2022 - when the overall economy collapsed by almost a third as war caused havoc - revenue rebounded by almost the same amount last year as domestic consumption recovered. Now Metro faces a new test, as protests by Polish farmers blockading the borders with Ukraine disrupt supplies coming in - one of several challenges foreign and domestic firms face as they navigate doing business in a country at war. "The war has taught us to respond flexibly," Olena Vdowychenko, head of the supermarket giant's Ukraine business, told Reuters.

According to Vdowychenko, around 18 of her company's trucks have been stuck each week at the Polish border in recent months, sometimes for three to four days. "This is a big problem for Ukrainian businesses," she said, explaining it was pushing up costs everywhere.

Capital controls restricting the movement of profits out of the country, difficulties in getting insurance and wavering U.S. financial and military support have been issues for corporate Ukraine for months, if not longer. To make matters worse, border disruptions in 2023 by Polish truckers have been replaced by similar actions by farmers upset at cheap Ukrainian grain taking their market share. Russia's military also has the upper hand in the battlefield in the east and south, putting key mining operations out of action or at risk, and a new mobilization bill aimed at recruiting up to 500,000 more Ukrainians threatens staff levels.

POINT OF NO RETURN? Some smaller companies say an accumulation of problems has brought operations in Ukraine to the brink of collapse. The owner of one UK-based clothing manufacturer, who did not want to be named because of commercial sensitivities, said the business had been impacted by border protests, customer confidence and insurance issues to the point where operations in Ukraine were at risk. "Now we are at the point where we don't think we can continue," said the owner, adding that the company had been active in Ukraine for 25 years. "We are still trying though." Others, mainly larger firms and foreign operators, are not sounding the alarm bells yet, although some have relocated away from the frontlines and there are major Ukrainian corporations who have defaulted on debt. A recent American Chamber of Commerce in Ukraine study estimated that only 2% of firms had closed and another 10% had been severely affected since 2022, based on a survey of 125 members who are mostly larger multinationals and bigger Ukrainian companies.

"Multinationals are not leaving," said Alfonso Garcia Mora, a regional vice president at the International Finance Corporation, which is part of the World Bank group, whose recent surveys tell a similar story. "They have really held in there as much as they can." He added that one reason was war-time capital controls effectively prevented firms from selling up or sending money made by subsidiaries in Ukraine back home, meaning many were taking the view that it would be better to stay for a hoped-for eventual post-war recovery.

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Customers shop at a Metro cash and carry store in Kiev, Ukraine, August 17, 2016. REUTERS/Valentyn Ogirenko/File Photo

The risk of missile strikes and collateral damage means firms and organizations need special war risk insurance although barely any have been able to secure it.

The clothes manufacturer said it had been unable to insure goods during transport, while Leverkusen-based Bayer, which is building a 60 million euros ($65 million) corn seed facility near Kyiv, is only finding cover now. "We have a number of offers for war insurance and are looking at which one we take," said Oliver Gierlichs, the company's Managing Director of Ukraine, adding that it would be costly however. Some development bankers grumble that there is no sign of a global or Europe-wide insurance backstop, although some governments are starting to step up.

Philipp Grushko a board member at the large TIS port near Odessa expects "small and brave" exporters to restart container shipping in the next few months, while private equity fund Horizon Capital says it is even starting to look at possible stock market floats for some of its firms next year.

"It is less of a crazy thought these days," Horizon's Vasile Tofan said.

SHIFTING FRONTLINES

Yuriy Ryzhenkov, chief executive of Ukrainian metals giant Metinvest, is watching the shifting frontlines carefully. Russia's seizure of Avdiivka in mid-February meant the loss of control over his company's coke plant there, nearly two years after Metinvest's sprawling Azovstal iron and steel works in Mariupol fell to Moscow's forces after being badly damaged. Battles are now raging within 40 km (25 miles) of two other big operations - Pokrovsk, where it runs Ukraine's largest coal mine, and Zaporizhzhia to the south where its biggest steel plant is located. Ukraine's iron and steel sector employed some 600,000 people and contributed around 10% of Ukraine's GDP before the war. It still represents a huge share of the economy and contributes large amounts of tax. But Ryzhenkov and others are also worried about the government's plans to mobilize up to 500,000 more people to replenish an exhausted and stretched army.

"We are hiring people, we are training them and then they are getting drafted before they even start working," Ryzhenkov said, estimating that Metinvest was already 9,000-10,000 under-staffed.

"That is a big problem we are trying to convey to both the military guys and the politicians in Ukraine. Hopefully they will be able to find a way around it because otherwise the economy will not be able to function."

(Additional reporting by Helen Reid in London and Michael Kahn in Prague, Editing by Alexandra Hudson)

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