Oleksandr Nesteruk,
Corporate Finance Director at BDO in Ukraine
War. Russian war against Ukraine and related events - physical loss, damage or capture of property and cargo, injury, or death of workers, etc. are the main risks in Ukraine. Some businesses such as metallurgy and mining, agriculture, logistics cannot be relocated. The protection from war risks is the priority for entrepreneurs particularly nearby the front-line. Meanwhile the war continues, Ukraine may hardly expect for any significant private investments from abroad. Therefore, political (war) risk insurance is highly expected by both domestic and foreign entrepreneurs.
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Economics. Due to Russia’s invasion Ukraine lost 20% of territory on the east and the south, and 14.5 million people left the country in 2022 (according to ombudsman Dmytro Lubinets). Alongside with destroyed big industrial plants, blackouts, stopped small and medium business, partly closed seaports all that caused GDP decrease by 30% in 2022 (Government of Ukraine estimates) and 40% devaluation of national currency. Currently, the Ukrainian Eurobonds are trading at a yield of 35-50% (a Default level). To support economic stability and the continuation of essential government services the US, the UK, European countries, and Japan mobilized emergency financing for Ukraine. 60% of Ukraine state budget was covered by the help of Ukraine's partners in 2022 (according to Danylo Hetmantsev, Chairman of the Parliament Committee on Finance, Tax and Customs Policy). According to Prime Minister Denys Shmyhal, the deficit of the state budget will exceed 20% of GDP in 2023, and it is planned to cover it with the help of the partners. Without that help Ukrainian Government is not able to cover its expenses. Terminating the financial support from partners is a significant risk for the economic situation in Ukraine.
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Global Recession. The Russian war against Ukraine, the consequences of the COVID pandemic and record inflation make talks about the inevitability of a new global economic crisis. Such a scenario could have negative consequences for Ukraine. It would lead to a drop in prices for commodities, that hurt much Ukrainian exporters income. Investors would reduce the volume of loans to Ukraine to finance the budget deficit and maintain the balance of payments. The global recession may persuade European politicians to ease sanctions and find a compromise with Russia. Due to potential economic problems the financial support of Ukraine from Western leaders may be decreased. Over the past year, NATO allies have provided military and financial and economic support to Ukraine in the amount of about 150 billion euros, of which 65 billion are military aid (according to Jens Stoltenberg, Secretary General of NATO).
Corruption and pressure on business. Before the war, the Ukrainian leadership had many meetings with large foreign companies. Many loud statements have been declared about the protection and support of investors against the actions of officials. However, few projects were implemented. A lot of officials and Law enforcement have no respect for private property and entrepreneurs. That is the permanent local risk for both foreign and domestic entrepreneurs.
Corruption and unfair competition. There are always companies receiving preferences or operating under the cover of law enforcement under any government in Ukraine. For example, they do not pay enough taxes, rent, import customs duties. They can avoid expenses for labor safety, sanitary requirements, or mined land reclamation. Therefore, entrepreneurs need be prepared to compete with unfair companies that have a lower cost of products.
Natural monopolies and bureaucracy. There is a quasi-market economy of natural monopolies regulated by state bureaucracy in some industries in Ukraine. Therefore, some basic services - connection to the gas, water supply or electricity grid, supply, railway transportation - are not working well with customers. There is risk to be billed higher than promised, and unable to get service from other providers because they do not exist in that place. Local authorities can do a little to help, except of loud statements at the beginning and sad condolences at the end.
Workforce. For over last 30 years Ukraine wasted many of its cost advantages. The labor cost is the one that remains. But in recent years, many blue-collar workers have gone to work in European Union. Finding and retaining a good specialist became a problem. The annexation of 20% of territories, emigration around 5 million (as of end of 2022 according to Ptoukha Institute for Demography and Social Studies of the National Academy of Sciences of Ukraine), as well as mobilization into the army, may causes a workforce shortage.
Consumer market. Decline of Ukrainian population and its income in 2022 caused a drop in demand for some consumer markets. For example, the consumption of building materials and commercial concrete in November 2022 is 20-25% of the pre-war level (according to Serhii Pylypenko, Director of “Kovalska”). Medical service “Dobrobut” lost 70% of its revenue in 2022 (according to Ihor Mazepa, Direcror of “Concorde Capital”). Surely, some western regions prosper due to migration, but in general consumer market in Ukraine is shrinking.
Foreign specialists. It is necessary to involve highly qualified foreign technical experts, engineers, geologists, etc. in some industries for implementing new projects. Because of the war, foreign specialists do not visit Ukraine. Many of them who used to work in Ukraine left the country since the Russian invasion. The longer the war lasts, the longer new projects that require the participation of foreign professionals will not be implemented.
Export logistics. Export of commodities is a significant source of revenue for exporters, state budget, and hard currency inflow for the stability of the national currency. Export of agricultural products totaled $27.8 billion in 2021, accounting for 41 percent of Ukraine’s $68 billion in overall exports. Export of steel and ore totaled $20.9 billion in 2021, accounting for 31% of Ukraine’s overall exports (according to Ministry of Economic Development and Trade of Ukraine). The Black Sea was the main export route of commodities from Ukraine - steel, ore, grain, and sunflower oil. Due to the Russian blockade of Ukrainian seaports, only a limited export of grain remains. Alternative routes are more expensive, longer, and not guaranteed. That creates risks both for the exporters and for Ukrainian economy.
Despite the fact that this publication has been carefully prepared by the company's specialists, it can only be used to get a general idea of the subject discussed in it. It is not recommended to use the information presented in the publication as professional advice on a specific issue. Prior to making any decision or taking any action that may affect your finances or business, a qualified professional advisor should be consulted. Please, contact BDO in Ukraine for advice.