The following is the seventh edition of our new Ukraine Business Roundup weekly newsletter. To get the biggest news in business and tech from Ukraine directly in your inbox, subscribe here.
Search & Destroy
The business news world in Ukraine this week was abuzz with a battle far from the front lines.
In the afternoon of Oct. 17, armed employees of Ukraine’s Financial Investigations Service, known here by its Ukrainian acronym BEB, showed up at the doors of the !Fest restaurant group’s office in the western city of Lviv, refusing to let its employees in or out.
It claimed the group was massively evading taxes, largely by paying employees under the table. For those of you who don’t immediately recognize the !Fest name, the group owns dozens of popular bars and restaurants in Ukraine, including the bar Piana Vyshnia (Drunken Cherry) and Lviv Handmade Chocolate.
“Today at !FEST we have a classic mask show. (They showed up) in helmets with assault rifles, armor — everything is like being sent to the front :)),” Yurko Nazaruk, co-owner of the restaurant group, wrote on Facebook during the search.
Allow me to explain what Nazaruk means when he says “classic mask show.” Ukrainians refer to these types of raids and searches by Ukrainian state agencies as “mask shows” because of how they go down: armed men in balaclavas show up unannounced, demanding documents and confiscating property. Cases of these searches turning into extortion abound.
Here’s the thing. !Fest, like so many businesses in Ukraine, operates with a sole proprietorship model, referred to by its Ukrainian acronym FOP. It’s actually the most common way businesses are registered in Ukraine.
In short, instead of having all employees officially employed, they are registered as “sole proprietors,” or “individual entrepreneurs,” paid essentially like contractors with a lower tax rate than official employees. Doing business this way tends to simplify management, accounting, and a complicated tax structure in Ukraine.
Olha Nasonova, the founder of Restaurant Consulting, told Forbes Ukraine, that “McDonald’s is probably the only food establishment in Ukraine that pays its employees “white salaries,” or wages that are taxed fully as part of the business.
Nasonova also told Forbes that this type of search is unprecedented for the restaurant market, saying that this is the first search over a tax audit in many years.
As I’ve previously written, many businesses in Ukraine say that following Russia’s full-scale invasion, they have faced increased pressure from state agencies, particularly from the State Security Service of Ukraine (SBU) and the BEB. They say these searches and raids seriously hamper their ability to function properly and deter investment.
“As long as the state assaults entrepreneurs with weapons rather than protecting them, we are not a country for civilized investors,” Nazaruk wrote.
Taking stock
The UN recently released a Post Disaster Needs Assessment that evaluates the extent of the damage and losses incurred by Russia’s destruction of the Nova Kakhovka dam in June of this year.
As a result of the dam’s destruction, dozens of communities were flooded and thousands lost their homes. Up to a million people lost access to drinking water, and 140,000 were deprived of electricity, the UN says.
The report’s findings estimate that the dam breach caused around $2.79 billion in direct damage to infrastructure and assets, with the energy ($1.26 billion) and housing ($1.1 billion) sectors taking the brunt of the damage.
In total, losses exceed $11 billion, the report says, adding that the recovery and reconstruction needs are somewhere in the ballpark of $5.04 billion, with $1.82 billion of that needed in the short term.
The destruction of the dam caused revenue losses of $96 million alone to the state-owned company Ukrhydroenergo which operated the dam before Russia occupied the surrounding area, the report found, adding that the estimated income losses of the company due to the loss of electricity and ancillary services sales amounted to $138 million.
The return of a “significant proportion of displaced residents is necessary to give momentum to the reconstruction,” the UN writes. But with over 37,000 homes destroyed by the dam explosion, 15% of those beyond repair, and a total of $1.1 billion in damages to housing, it’s hard to imagine people will be in a rush to return.
That, and the affected areas’ proximity to the front lines where Russian assaults on civilian infrastructure are frequent.
Restoring energy supply to the area will also be key as will addressing the devastating environmental impact of the disaster, which as the UN says, “will take decades to remedy.”
Demographic disaster
The threat of a demographic crisis has been building in Ukraine for a while but Russia’s full-scale invasion has pushed it to the breaking point, Kyiv Independent reporter Dominic Culverwell writes in his latest article, “Demographic disaster: Ukraine’s biggest post-war threat.”
“The country had a population of 41 million in 2021, by the government’s reckoning. Now, it hovers around 35 million and experts warn that it could drop to under 29 million in the next 30 years, according to the EU’s Joint Coordination Center (JCC).
The UN has estimated that 6.2 million refugees left the country during the full-scale invasion and only one million have come back. That may not be enough for a full economic recovery, experts say.
“We are not ready to lose six million refugees (for good),” Economy Minister Yuliia Svyrydenko said at the Kyiv International Economic Forum (KIEF) on Oct. 12.
If the country can’t get enough people to come back, the future looks grim for its economy and population. And large numbers of people were leaving and not coming back, even before Russia’s total war, over unequal opportunities.
The government needs to guarantee that when the war is over, the country will be built back better.
But it could be a Herculean task to convince skilled refugees to repatriate if they have reached a comfortable living standard in the EU. Member states are also using these Ukrainians to plug their own workforce deficits.
Their benefit is Ukraine’s loss. The knock-on effects of a demographic crisis will be tremendous, stunting any recovery. The Center for Economic Strategy (CES) forecasts an annual GDP decline between 2.7%- 6.9% if the country loses between 1.3-3.3 million of its citizens.
Continue reading the story here.
On the move
There is no shortage of examples of how Ukrainian businesses have artfully adapted to war-time conditions. Technology has no doubt played a huge role in businesses’ ability to stay online and keep operations running smoothly.
But for some companies, access to stable internet isn’t enough, and under the constant threat of Russian attacks, one of the only options may be to physically pick up and move.
Under a government-supported relocation program, over 800 Ukrainian businesses have done just that. Since the start of the full-scale invasion, 840 Ukrainian businesses have moved away from regions most affected by the war, analytics website Opendatabot reported on Oct. 23.
As part of the program, any Ukrainian business located in Chernihiv, Sumy, Kharkiv, Luhansk, Donetsk, Zaporizhzhia, Kherson, or Mykolaiv oblasts can apply to receive support to select a new location, resettle employees, and transport equipment elsewhere in Ukraine.
So far, Lviv Oblast, located on Ukraine’s far western border with Poland, is the most popular destination for relocation, with 199 companies reportedly having moved to the region.
Some 300,000 tons of grain have also been destroyed by Russian attacks, according to the minister.
Relocating to western Zakarpattia Oblast is also popular, as 120 enterprises have done so, followed by Chernivtsi Oblast with 78. The fourth-most popular oblast is Ivano-Frankivsk, with 70 businesses moving to the region.
Speaking to people in the business community, I’ve been hearing how companies are successfully managing to move entire factories from war-torn parts of the country to the west.
One couple moved their plant from the city of Dnipro all the way to Ivano-Frankivsk, taking 70 employees and their families with them. The company, SheMax, which manufactures manicure vacuum hoods to protect manicurists from hazardous manicure dust, is now exporting its products to more than 35 countries in Europe and the U.S.
Front-line operations
More than a year and a half into Russia’s war against Ukraine, the country's largest retailers are returning to front-line and liberated areas, despite the risks, freelancer Nina Mishchenko writes in a soon-to-be published story for the Kyiv Independent.
Among those risks are enormous losses to their personnel and businesses due to continued Russian attacks, labor scarcity, and a shortage of goods.
However, according to Mishchenko’s reporting, these businesses want to be in these areas, viewing their return as a sort of humanitarian mission to bring normalcy back to places that have been devastated by Russia’s war.
"Despite constant danger, shelling, and fear, people in these front-line cities continue to live their lives. We wanted to support them and be there for them,” co-owner of Ukraine’s e-commerce giant Rozetka, Vladyslav Chechotkin, said on Facebook.
Both the financial risk and the danger are very real. Ukraine’s largest privately-owned postal service Nova Poshta estimates its losses at nearly $45 million due to the war, not including a recent Russian attack on one of its postal depots in Kharkiv Oblast on Oct. 21 that killed six people and injured 17 more.
As of Sept. 1, the total losses of companies surveyed by Mishchenko — which includes the large retailers Okko, Eva, Comfy, Dnipro-M, and the Fozzy Group — exceeded $150 million. The number of lost stores in each chain is in the dozens.
The upcoming story is also a feel-good one, full of examples of heroic employees doing their part, both during occupation and after, to reopen stores to make sure that people could still meet their needs.
I particularly liked one — as Russian troops were entering Kherson in the early days of the war, employees of one Nova Poshta branch welded shut the doors of the branch, preserving 4,000 packages that had been sent to the location for delivery before Feb. 24, 2022. After the city was liberated, eight months later, the packages were delivered.
Keep an eye out for the story on our website and social media.
What else is happening
Energy giant DTEK imports almost 40,000 metric tons of coal from Poland. DTEK, Ukraine's largest private energy company, has imported over 38,000 metric tons of coal from Poland, Ildar Saleev, the company's general director, said on Oct. 20. The company plans to import 210,000 metric tons of coal for the winter to ensure the stable operation of its thermal power plants. While "Ukrainian coal is priority no. 1," Saleev said that the company is importing coal from Poland in case of Russian attacks.
Ukrainians can now officially open stores on Etsy online marketplace. Ukrainians can now officially open stores on the Etsy online marketplace following the launch of the Etsy payment system in Ukraine, Digital Transformation Minister Mykhailo Fedorov announced on Oct. 18. “The launch of Etsy payments in Ukraine is an important part of the systematic work of the Digital Transformation Ministry to scale up the participation of Ukrainians in the international e-commerce ecosystem,” Fedorov wrote on his Telegram channel.
Media: New EU sanctions package to include Russian diamonds ban. The next package of European Union sanctions against Russia is set to include a long-awaited ban on Russian diamonds, Brussels-based media outlet EUobserver reported on Oct. 20, citing an unnamed European diplomat. The EU is now awaiting a Group of 7 (G7) statement on the diamond ban before announcing its 12th round of sanctions against Russia. The G7 countries of Canada, France, Germany, Italy, Japan, the U.K., and U.S. "account for 70 percent of world diamond end-user demand," EUobserver reported. Make sure to read our investigation on Russian diamonds if you missed it.
Boryspil airport plans to resume operations within a month of war's end. Ukraine's largest airport, Kyiv's Boryspil International, is prepared to resume flights within one month after the end of the war, the airport's director general Oleksiy Dubrevskyy said in an interview with Politico on Oct. 18. "We're doing all the necessary activities to get flights as soon as possible," Dubrevskyy said. "We’re ready to start operations at short notice."
Turkish ambassador: Black Sea grain deal possible to restore. Turkey believes that the Black Sea Grain Initiative can be restored, and Anakara is working with all relevant players to achieve that result, Turkish Ambassador to Ukraine Yagmur Ahmet Guldere told Ukrinform on Oct. 19. "We believe that the grain deal can be revived... As you know, the initiative became a reality thanks to Turkey's cooperation with the UN, Ukraine, and Russia," the ambassador said in the interview.
