Russian missiles hit the entire economy of Ukraine. Will the business survive?

In general, as the head of the National Bank says, since October 2022, when Russia began carrying out massive missile attacks on Ukrainian energy infrastructure, a new macroeconomic factor has appeared - the number of missile attacks and the number of missiles fired at infrastructure targets in Ukraine.

This factor cost the Ukrainian economy at least a four percent decline from October to December 2022. As Pishnyi notes, the fall in Ukraine's GDP in the fourth quarter of last year reached 35 percent, despite the fact that the total annual figure slightly exceeded 30 percent.

During the shelling, business losses and expenses increased significantly, and the mood deteriorated sharply. At the same time, as at the front, there was an understanding that the war would continue and that "you still have to live for victory."

 

How is the Ukrainian economy and business at the beginning of 2023 and how can they survive?

 

What did shelling change?

 

According to surveys conducted monthly by the NBU, in January 2023 the business activity expectation index fell to 37.5 points. Back in December, it was 5 points higher. And both of these numbers are well below 50 points indicating that companies are optimistic about their future.

"The lack of electricity, the destruction of companies and infrastructure, the disruption of logistics, the reduction of the supply of goods/services, the increase in production costs, as well as the low solvency of the population continue to significantly affect the economic activity of companies and their expectations," the National Bank explains the reasons for the bad business mood.

At the same time, research participants expect that the reduction in the volume of production, as well as the volume of new orders and turnover, will continue in the future.

 

The respondents also talk about the increase in prices and tariffs for their own products and services due to the increase in purchase prices and the prices of contractors.

Trading companies have the most pessimistic attitudes, although they were among the most optimistic since the beginning of the war.

Companies that are part of the European Business Association (EBA), which are mostly large companies with foreign investments, have worse expectations.

According to the results of 2022, the majority of companies - 83 percent - recorded a drop in revenue in dollars. Only six percent of respondents said there was no change, and another 11 percent even had an increase.

"This result turned out to be the complete opposite of pre-war forecasts and business expectations: before the full invasion, 83 percent of the companies of the European Business Association expected positive dynamics of their business development in 2022. According to the results of the year, 83 have had a decline," they note in EVA.

They also point out that compared to October, when massive Russian missile attacks began, the number of companies that felt the impact of missile attacks on their activities almost doubled - from 47 to 89 percent. That is, if every other company felt Russian shelling in the fall, now it is nine out of ten.

"Russian shelling leads to the interruption of work processes, reduction of the number of productive hours, difficulties in planning, accumulation of fatigue of employees, increase of costs due to the use of generators", state the negative consequences of rocket attacks for business in EVA.

For example, as the head of Nestle Ukraine, Alessandro Zanelli, said, the company equipped its enterprises in Ukraine with special shelters where workers can be safe during shelling, and equipped the facilities with additional energy sources on solar panels, spending 25 million dollars.

The general director of investment company Dragon Capital, Tomas Fiala, said that only two million dollars were spent on generators for commercial facilities that are part of the company's interests.

Overall, according to EVA, power outages currently top the anti-rating list of current business challenges. In addition, companies complain about interruptions in communication and the Internet and have problems with employee reservations and going abroad, currently 88 percent of companies have mobilized employees.

However, despite all the difficulties, more than half of the companies that participated in the EVA survey - 54 percent - work at full capacity, while 46 percent work with restrictions (mainly geographical). At the same time, the company's losses are quite high: 32 percent report losses up to one million dollars, 36 percent report losses in the range of one to 10 million dollars, and 16 percent report losses greater than 10 million dollars.

 

Those who are better off than others

 

In the shadow of the enormous problems of the real economy of Ukraine during the war, a special "case" is the IT industry, which is currently the only one in the Ukrainian economy that increases exports and revenues at the end of the first year of the war.

According to the IT Ukraine association, by the end of 2022, the IT industry has provided 7.34 billion dollars in foreign currency, and the volume of exports of this industry has increased by 400 million dollars compared to the pre-war year 2021.

"For the export IT sector, such indicators were expected, because companies successfully implement measures to support business continuity and create conditions for the safe work of IT experts," says Kostjantin Vasyuk, executive director of IT Ukraine.

The founder and director of SoftServe, Taras Kitsmej, says that one of the secrets of success is a correct risk assessment and the creation of business continuity plans.

His company ensured the relocation of 1,600 working families abroad, and another 2,500 families to the west of Ukraine.

Among other reasons, the representative of the IT industry cites the fact that it works for global markets, which became an advantage during the war in Ukraine.

In addition, the industry is, in fact, virtual - all processes - from recruitment to project management, order fulfillment and compensation payments take place on the Internet.

 

Even during the war, the industry grew by six percent and paid 32 billion Ukrainian hryvnias in taxes to the budget - 16 percent more than in pre-war 2021.

No one expected a "war with transformers", says the general director of energy supplier YASNO Sergey Kovalenko. However, a few months before the end of 2022, 75 percent of Ukraine's thermal power plants were destroyed or damaged by Russian missile attacks, and in addition to production problems, the electricity transmission system suffered significant losses.

"I personally believed that sometime between the end of March and the beginning of April (2023), when winter ends and consumption decreases, we will reach a balance (in the energy system - author's note). At the moment, I am not sure about that, because the renovation of production facilities - it's not months, it can be years", says the representative of the energy business.

Sergej Kovalenko advises companies to build their energy autonomy system at the same time as improving energy efficiency and not to wait for the national system to be renewed. Especially, since it is unlikely that it will be restored to its pre-war form.

 

He also advises companies and enterprises to consider the possibility of importing electricity from the EU. Yes, he says, it is indeed more than twice as expensive as the one produced in Ukraine (which is currently lacking for all consumers). But it is also about twice as cheap as the one produced on aggregates.

As calculated by the National Bank, in addition to electricity shortages leading to a reduction and increase in production costs, the "generator economy" also stimulates imports,primarily of oil derivatives, thus putting pressure on the hryvnia exchange rate.

 

Losses from this can be two to four billion dollars. And in general, in 2023, the shortage of electricity may cost Ukraine's GDP from two to 3.6 percentage points. At the same time, as predicted by the National Bank of Ukraine, "the electricity deficit will be felt even in 2024". This is a slight hint that the problem is unlikely to disappear in 2023.

 

Marathon-2023.

 

In general, according to the recently published forecast of the National Bank, the Ukrainian economy has a chance to grow in 2023, but "marginally" - by 0.3 percent (after falling by more than 30 percent in 2022). At the same time, inflation should also slow down to 18.7 percent (from 26 percent in the first year of the war).

The main thing that the National Bank is counting on is the endurance of the population and the economy.

"Business and the population showed a high level of adaptability in 2022. This factor will support the economy in the future.

 

However, high security risks will continue to limit economic activity in 2023, and the lack of electricity will also be felt in 2024," the NBU predicts.

The CEO of Dragon Capital, Tomas Fiala, also says that Ukrainian endurance is one of the decisive factors that led to the fact that in the first year of the war, the Ukrainian economy fell "only" by 30 percent, because the forecasts immediately after the Russian invasion were much worse . However, the analysts of that investment company believe that there will be no growth in 2023 and predict a drop in GDP by five percent.

"We expect that the hot phase of the war will continue until the fall of this year, and only in the fourth quarter will the enemy slow down. This forecast also assumes that the problems with electricity will last almost the whole year," said the head of the investment company.

Considering that there will be no rapid positive changes in the situation on the front and in energy, what, apart from endurance, will help the Ukrainians to endure until victory?

 

The National Bank says that the key factor that will allow Ukraine's economy to stay afloat until the end of the war is international support.

In the 2023 budget, the government predicted that international support would amount to 38 billion dollars.

"Is this figure big? It's fantastic," says the head of the NBU. "But if you compare it to the fact that in 2022 the amount of international support was actually $32 billion, it doesn't seem out of reach."

Is Ukraine ready for a long marathon?

 

With international help - yes, says Rostislav Šurma, deputy head of OP, who oversees economic developments.

"If adequate financial assistance is provided, then technically from the point of view of the budget, the balance of payments, the exchange rate, we will probably be able to endure with the support of donors. But we must understand that every month of war initiates certain irreversible processes, which primarily leads to connection with human capital. When the war take longer, it will be much more difficult for us to start later."