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With Ukraine’s Aid in Doubt, Companies Say They’re the Plan B

The economy is headed back to its prewar level as manufacturers have pivoted to new markets and products while consumers have kept spending.
Shoppers at a market in Kyiv on Dec. 19.Photographer: Andrew Kravchenko/Bloomberg
Shoppers at a market in Kyiv on Dec. 19.
Photographer: Andrew Kravchenko/Bloomberg
 

From its base in the city of Dnipro in central Ukraine, Biosphere Corp. supplied countries across the former Soviet Union with household and cleaning products. Demand was buoyant. Orders were good.

Then, like for the rest of the country, life turned upside down in February last year when Russia invaded. Sales collapsed 30%. Biosphere needed to fill the void as Ukrainians went to war. The result: a wet wipe in a khaki-green envelope that’s suitable for soldiers in the trenches.

The product is just one of the many innovations for the war effort that have demonstrated Ukraine’s resilience over the past 22 months. Yet Biosphere is also now an example of how companies have adapted to a reality that politicians have been more reluctant to accept: the conflict isn’t going to end any time soon, and Ukraine needs a Plan B.

The country faces dwindling resources after a counteroffensive that failed to make any significant gains. Fresh assistance from the US and European Union, meanwhile, is mired in their internal politics. President Volodymyr Zelenskiy was in Washington last week to try to corral support, though was told to wait. The EU then failed to agree on a new €50 billion ($54 billion) aid package.
 

President Biden Hosts Ukrainian President Zelenskiy
Zelenskiy in Washington on Dec. 12.Photographer: Al Drago/Bloomberg


What is moving is the economy. Companies have pivoted to new markets and products — many in the defense industry — and consumers are spending money while they have it.

Gross domestic product jumped 9% in the third quarter from a year earlier after almost 20% growth in the second, defying all expectations. GDP might even reach its prewar level of $200 billion next year, investment bank Dragon Capital said on Dec. 4. That’s despite a currency devaluation in July 2022 and an exodus of people.

“The war is long and the state and quality of the economy will determine its outcome,” said Andriy Zdesenko, Biosphere’s chief executive officer. “Debate in the US and Europe over future aid should make the president and the government look inward — at Ukrainian business. We understand the responsibility we carry.”


Ukraine’s Economy Is Recovering

The government is spending money on the military, and consumers are spending money while they have it

Companies making products ranging from food to trash bags to security alarm technology — many of which have lost factories, trading partners and staff — are ensuring their survival while contributing to the war effort.

Currently, budget revenue is equal to about 60% of total government spending, with foreign money helping fund public sector salaries and healthcare. With aid in doubt, executives say they are building a source of sustainable income in a country with a history of corruption and tax evasion.

The Finance Ministry said on Dec. 13 that military spending next year will be largely covered by tax paid by companies and individuals. The money coming in will total 1.58 trillion hryvnia ($42.7 billion), equivalent to 93% of planned defense spending.

For Aleksandr Konotopskyi, founder and chairman of security alarms company Ajax Systems, it’s a case of getting on with it. The mantra is either the firm stops working or adjusts to the new circumstances, he told a business event held in the Ukrainian capital in October.
 

DO NOT USE
Ajax Systems’s new factory in Istanbul, Turkey.Source: Ajax Systems


In the month after Russia’s invasion, the company used 160 trucks to relocate its plant from Kyiv to the region bordering with Hungary and Slovakia. It resumed production the following month and by the summer opened a new plant in Turkey. It also started a new app alerting Ukrainians to air raids and has about 24 million installs so far.

“My current strategy is that the war will never end,” said Konotopskyi, who was ranked among the 20 richest Ukrainians in 2022 by Forbes Ukraine. “We should build upon what we have here and now.”

In Dnipro, about 400 kilometers (250 miles) southeast of Kyiv, Biosphere halted all sales to Russia and Belarus the day Vladimir Putin’s troops invaded on Feb. 24, 2022. Since then, about 6 million people — mostly women and children — are estimated to have left Ukraine, meaning there’s less of a market for things like nappies and cleaning products.

But the company kept its four sites open, moved some production west and has an additional warehouse in case its main one in Dnipro comes under bombardment. It also set to work on altering its product mix. Its new wet wipes, for example, are designed not to rustle and alert the enemy. The disposable cloth is able to clean the whole body.
 

Biosphere's khaki-green wet wipes.Source: Biosphere Corp.
Biosphere's khaki-green wet wipes.Source: Biosphere Corp.


Next up is tea, a market previously controlled by Russian companies. Biosphere has bought Italian equipment to start production by the end of the year. CEO Zdesenko just hopes the impasse over foreign aid won’t hit the currency.

“A weakening caused by these deliberations would be very negative for my business because I import things like machinery,” Zdesenko said. He’s also concerned Zelenskiy and his officials are too preoccupied with securing aid. “The government doesn’t fully understand the need for self-reliance,” he said.

McKinsey & Co. found that a fifth of Ukrainian companies lost 50% of their revenue or more since the war began. The biggest threats continue to be attacks on facilities, disruption to supply chains or energy, and low employee morale.

But companies have become more nimble and resilient while rallying workers behind the cause, said Olga Gordusenko, partner at the consultancy firm. That was reinforced by the American Chamber of Commerce, one of the biggest business lobbies in Ukraine. It said on Dec. 14 that 74% of companies had managed to achieve their predicted financial results in 2023.

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Author: Dasha Afanasieva, Volodymyr Verbianyi, and Olesia Safronova

Source: Bloomberg

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