How Ukrainians are learning to adapt to their wartime economy

Published by The i paper (6th August, 2024)

Life seemed good for Vadym Liski before the arrival of war. His cardboard factory, recycling mountains of waste and employing 1,000 people on the site of a former Soviet paper plant, had built up sales across Europe over the previous decade.

Then came the savage onslaught by Russian troops and tanks in early 2022, which came within 30 miles of the factory in Zhytomyr as the Kremlin tried to encircle Kyiv. After bombs fell on their city, a school was destroyed and a hospital devastated.

About 200 staff fled Ukraine. Another 150 joined the army – with firms having to pay all their wages for the first six months of combat. Others helped to build barricades. Lorries blocked the airport runway and rushed ammunition to the front line.

After two weeks’ shutdown, the factory sought to restart operations to ensure egg and other food suppliers could restock shops. “It was very scary with aircraft flying over the city and fighting nearby, so I asked people if they wanted to work,” said Liski.

About 600 workers came back. But their waste paper came from Kyiv, cut off by the fighting and no longer collecting rubbish, while foreign lorry drivers refused to go to Ukraine to deliver replacement waste supplies from Poland.

“The price of logistics tripled with the huge problems of finding trucks, the longer distances, higher diesel prices,” said Liski, 42, the firm’s first deputy general director. “This is not only a war about troops but about the economy and logistics.”

He is right – the nation’s survival after Russia’s attack depends not just on soldiers at the front line but also the engineers repairing shattered infrastructure, the drivers delivering supplies, the factories and shops powering a wounded economy.

“Strong armies must be underpinned by strong economies to win wars,” stated Ukraine’s finance minister, Sergii Marchenko in July.

Yet their economy has shrunk by about a quarter since Vladimir Putin’s  full-scale invasion with debts soaring to support a fight for survival and waves of missile attacks on energy infrastructure setting back growth forecasts.

So I went to Zhytomyr – a transport hub about 90 miles west of Kyiv that is home to 264,000 people – to test the economic temperature for businesses, retailers and citizens.

The scale of challenges facing Ukraine’s firms was demonstrated at that cardboard factory as clattering machines and green-clad workers turned waste such as food packaging and old books into boxes and egg cartons inside the sweltering plant.

Their key struggle is human resources. Thirty staff have been killed – and the firm is routinely losing people to the military, although half of its now 700-strong workforce is protected until October since the factory is deemed essential to the war effort.

“We work with the military enlistment office to decide who is crucial for us,” said Liski. “We are losing people every month to enlistment. They were asking us to choose guys for the military but I said no.”

Two men wounded in fighting returned to work only to quit since they could not handle the noise of machinery – something I heard echoed by other factory owners, which bodes badly for the future since it indicates the depth of psychological scars.

Staff shortages are made worse with so many men in hiding to avoid military call-up. Zhytomyr’s mayor estimated this might account for 20 per cent of the male population; certainly, few men of military age are seen on the streets not in uniform.

Salaries at the factory have risen by almost one-third as a result. The business has hired engineers from Moldova, is scanning the world for power generation systems to keep energy running and is training women  for jobs traditionally done by men, such as driving.

“The war has driven changes and efficiencies,” said Liski. “Business people are the most creative in any country. They adjust to situations and find solutions to solve problems. I think our economy will survive – I believe in our people and our country.”

The city has not been hit by a missile since March last year. But it is suffering rolling power cuts like the rest of the country following the Kremlin’s renewed targeting of energy infrastructure that has destroyed about half of Ukraine’s generating capacity.

“The situation is much better in Zhytomyr since we’ve created a huge solar power station,” said mayor Serhiy Sukhomlyn. “But we’re still having power cuts for several hours a day. This has huge impact on the economy, production and businesses.”

He thinks those suffering most severely include pensioners – faced with rising costs for food, medicines and energy – and smaller firms hit by the power cuts, manpower shortages and martial law restrictions such as curfews.

He accepts this might eventually weaken public backing for the war, currently still rock solid. “People cannot live in fear and stress all the time. They crave a return to normality and that is when economic hardship might influence support for the state.”

Yet Sukhomlyn points out some citizens earn higher war-time salaries – such as workers paid more in the military than in their old jobs and skilled trades such as engineering, plumbing and welding, where salaries have soared due to shortages.

In the city’s shops and cafes, staff spoke of their struggles. “War has a tremendous impact on people,” said Yana, 23, in a fashion outlet bearing the slogan Dress & Shine. “In the last couple of months, the situation has become really bad.”

She estimated sales of their women’s clothing had fallen by about a quarter. “We’re not an expensive store but people are searching for cheap T-shirts or jeans. We end up selling less and having less revenue. It is very difficult.”

In a nearby coffee shop, two women serving me a flat white admitted they were earning less money since their salaries were part-based on sales and they saw fewer than half the customers than before the full-scale war. “A lot of people left the city, many went to war, many more just disappeared,” said Maria, 18.

Her boss Anna, 33, said they had obtained a generator to keep the lights on and coffee machines running but the extra cost of fuel would drive up prices, depressing sales further. “So yes, my personal financial situation has been deteriorating.”

Everyone seemed to have similar stories of financial woes. A bar manager said the combination of a curfew, prohibition on selling alcohol after 10pm and lack of men going out had sent profits tumbling.

“I worked in different bars in Kyiv, Lviv and now here in Zhytomyr so I can say that across the country bars have lost some 40 per cent of their revenues due to the war,” said Maksym.

A student working in a cheese shop, studying to become an engineer, said his family’s business growing grain and soybeans was suffering since wholesale prices had almost halved and it was hard to export crops. 

Even a pawnbroker – a profession seen as a reliable economic barometer – said they were seeing fewer customers. “It seems like people are running out of things they can exchange for money,” he said.

He has seen a recent surge in women coming to his store. “They are having very difficult times, bringing in something just to buy food because they don’t have enough money to live until their next salary.”

No wonder a pharmacist said the financial situation was becoming critical. “People are trying to spend less – especially pensioners,” said Alina. “They choose not to buy medicines or food because it is above their budget. They are basically surviving.”

Yet despite their difficulties, she added that people were donating cash to the army. “These are not big amounts of money but when we all do this, it makes a difference – some soldier somewhere will be better equipped and that might save his life.”

This underlines the resolve of Ukrainians to resist Russia’s devastating onslaught. The World Bank estimated earlier this year that the damages exceed $486bn (£380bn) – and that is thought to be a conservative figure.

At another factory, the boss of a household goods manufacturer pointed from his window to where a bomb had fallen, setting ablaze a fuel facility, and said 130 of the 1,100 people they employed before the war were now serving in the military.

Mikhailo Shepetko, chief executive of Eurogold, explained that the company had been churning out more than one million ironing boards a year along with step ladders, dustbins and drying racks – but output and staffing had since fallen by about 40 per cent.

His problems included having to find a fresh source for their steel since it mostly came from a plant in Mariupol taken by the Russians and customers refusing to pay after stores or warehouses were destroyed in attacks.

One major chain has lost ten stores – including a Kharkiv hypermarket blown apart in May, killing at least six people and wounding dozens more. “It is everyday crisis management,” said Shepetko, whose wife runs the firm’s finances. 

Listening to such people outline their stressful experiences over these past couple of years underlines how this country’s commercial leaders confront difficulties that dwarf the usual concerns of business executives. 

At one point in our conversation, this tough man blinked back tears as he told me how his firm’s Austrian partners had provided sanctuary for his two-year-old son, along with other family members, in their Vienna home for the first year of the war.

Back in Kyiv, a top economist said it was tough for companies to survive and that some had gone into “the shadows” to avoid mobilisation and taxes – but pointing out that the economy grew slightly last year aided by government spending while tax revenues rose by a quarter.

Anatoliy Amelin, co-founder of the Ukrainian Institute for the Future think-tank, said the war was driving rapid change and the creation of many new firms, especially in defence and technology. “Our economy is changing: it is becoming more flexible, developing new businesses and relationships,” he said.

Last year, more businesses were registered in Ukraine than in the year before the war despite a huge fall in population. More than half were formed by women – who comprise 25 per cent of the workforce in its expanding technology sector, a higher rate than seen in the European Union.

Amelin, who also heads the Defence Alliance of Ukraine, said his members were working with Western firms to develop and test the latest military equipment, such as their new drones that can fly three times further than any made by Russia.

He believes that for all their problems, Ukraine is a land of opportunity with one million refugees expected to return whenever the war ends and so many homes, hospitals, schools, factories, power stations and roads needing to be rebuilt.

Such a view was underlined on Wednesday by Penny Pritzker, the US Special Representative for Ukraine’s Economic Recovery, as she outlined plans to boost private-sector investment in “Europe’s largest, most complex reconstruction and economic recovery since World War Two”.

Amelin argues that his country offers unique opportunities. “There is not much space for rapid growth in the European economy so in that sense it is a unique situation, a Klondike, that can grow fast and deliver strong profits for investors.”

He believes his nation could see growth exceeding ten per cent a year. “There will be need for new infrastructure, new industries, both military and traditional, even cultural developments,” said Amelin. “Our nation has become stronger and bolder – the challenge is to create a new Ukraine.”

Categorised in: Business & economics, Europe, home feature, Russia, Ukraine