Ukraine seeks to rebuild economy with defiant small businesses

LVIV, Ukraine, Oct 8 (Reuters) – Victoriia Maslova left her herbal cosmetics factory in the Ukrainian city of Bucha on the first day of Russia’s invasion of the country, fleeing to Poland with her mother and three younger brothers when rockets fell near the airport.

A month later they were back in Ukraine, determined to continue making Maslova’s herbal cosmetics brand Vesna.

“We love Ukraine. We wanted to return to our country and work here,” says Maslova, 24, who founded the company seven years ago with her mother Inna Skarzhynska, 44.

To reverse the economic shock caused by the worst war in Europe since World War II, the Ukrainian government is relying on the entrepreneurial will of people like Maslova, the return of millions of refugees – and extensive international financial aid.

Maslova’s mother waited until after Russia’s chaotic withdrawal in April from Bucha, a town near Kyiv now notorious for an occupation that left the bodies of civilians strewn in the streets, to return to the factory. The workshop was ransacked and in disarray, but she salvaged some equipment and loaded it onto a truck. They set up a new operation in relatively quiet Lemberg, some 450 km (280 miles) west near the Polish border.

Five months later, Vesna products are being sold in more countries than ever before, including Poland and Lithuania, and Maslova recently signed a deal to manufacture goods for a private label in the United States, she said. Meanwhile, the company is donating “You Are Our Hero” skin and hair care products to women and men serving on the front lines.

The war, which Moscow calls a “military special operation,” is now in its eighth month. Despite recent victories for Ukraine on the battlefield, experts believe it could drag on for a long time, with millions of Ukrainians displaced within the country and nearly 8 million outside its borders.

As Ukrainian forces struggle to retake territory captured by Russia since the February 24 invasion, the government in Kyiv is scrambling to stabilize the economy and find employment opportunities for those who have fled their homes, jobs and businesses east and south.

The economy is expected to contract by more than a third this year, but as businesses reopen, Economy Minister Yulia Svyrydenko expects output to stabilize and grow by up to 15% through 2023, albeit from a low base. And in a decade, she dreams of it more than doubling from pre-war levels to $500 billion, helped by foreign investment and joining the European Union.

“We always say that we have two fronts: one is the military front and the other is the economic front,” Svyrydenko told Reuters in an interview in the basement of Ukraine’s imposing Soviet-era Cabinet of Ministers building, where the corridors and windows are cluttered with sandbags. “The economic is no less important than the military.”

Small and medium-sized businesses like Maslova’s are at the center of the government’s efforts.

After the war began, economic activity collapsed across the country, but restaurants, retail outlets and even nightclubs are now visibly open again in Kyiv, Lviv and other unoccupied cities, even in Zaporizhzhia, near a besieged nuclear power plant.

The Economy Ministry has helped 700 companies relocate from the frontline areas, 480 of which have already resumed operations, Svyrydenko said. These companies are benefiting from the return of an estimated 3 million refugees, which supports demand while money flows back into the economy through renewed exports, including from three Black Sea ports.

To give displaced companies a fresh start, the Ukraine Investment and Trade Facilitation Center in Lviv offers companies rent-free access to office and manufacturing space, a valuable lifeline.

The task facing the country and entrepreneurs like Maslova is daunting given a recent estimate by the World Bank and the European Union of total war damage totaling nearly $100 billion and ongoing Russian attacks on civilian infrastructure.

Ukraine is also facing mounting budgetary problems, despite a debt payment freeze agreed this month by Western government creditors and private creditors in August. It seeks foreign aid but also needs private capital to rebuild.

Given what the German Marshall Fund called Ukraine’s “corruption history” in a report last month, all investments require security safeguards and strong accountability.

High-level economic experts from Ukraine, the World Bank, the International Monetary Fund and other donors will discuss some of these issues at a Germany-hosted reconstruction conference in Berlin on October 25.

The International Monetary Fund on Friday approved $1.3 billion in additional emergency financing for Ukraine, which could catalyze support from other donors ahead of a larger, more comprehensive program in the future.

“BRAVIVE COMPANIES, BRAVE PEOPLE”

Iryna Tytarchuk, who runs the Lviv Investment Center, is helping displaced business owners find resources like government microcredit and loans of up to $68,000, as well as funding from the US Agency for International Development for women-owned businesses that Maslova has helped restore to get up their feet.

“These are brave companies and brave people who didn’t give up everything and go abroad, but decided to start over again,” she said. Tytarchuk recalled that many companies experienced a jump in sales in 2014 as they turned away from Russian markets following the annexation of Crimea.

“Now even more markets are opening up for them,” she said, noting that a number of companies in the UK had approached her specifically looking for “Made in Ukraine” products.

Mykolayiv, 800 kilometers (500 miles) south-east of Lviv, is regularly hit by artillery fire near the front line. Here Julia Konovalova is biding her time, eager to restart Fresh U & detox, her once thriving healthy food delivery business, when the fighting stops.

Konovalova stayed when more than half of Mykolayiv’s population fled. She donated her supplies to the army when the war began and has coordinated food aid for the World Central Kitchen aid group in recent months.

“I still have all my equipment. Now I’ll wait until the war is over and then I’ll start again,” said the former hotel manager. “We just have to survive.”

Near the Russian border, bitter fighting has emptied Ukraine’s second city, Kharkiv, of three-quarters of its 2 million people, although recent Ukrainian advances have reclaimed nearby territory.

Rockets damaged Evgeniy Safonov’s wine bar in Kharkiv, but he is already looking for new places in safer cities and would like to return to Kharkiv someday.

“Our investors are already interested,” he says. “Call me brave or stupid, I know. But our planning horizon is a matter of days. You never know what tomorrow will bring.”

SEARCH FOR INVESTMENTS

Svyrydenko acknowledges that Ukraine faces major challenges but says she and other officials are looking for investment wherever they can, citing estimates that every $10 billion invested translates into a 5 percentage point increase in national production becomes.

Her ministry is reviewing 50 applications from the United States, Germany, Britain and Poland that were filed after the launch of a new investment portal, Advantage Ukraine, on the New York Stock Exchange last month, highlighting $400 billion in investment opportunities, but said it was too early to give details.

The World Bank’s private financing arm, the International Finance Corporation, and the European Bank for Reconstruction and Development also said last month they would put $70 million into a private equity fund that will invest in technology and export-oriented companies in both Ukraine as well as in neighboring Moldova. The goal is to raise up to $250 million over the next 12 months.

Andy Hunder, head of the American Chamber of Commerce in Ukraine, said Ukraine’s economy is showing “phenomenal resilience,” with internet and banking services performing better during the Kiev war than in some parts of Europe during peacetime.

The group’s latest poll, released this week, found that 77% of its 600 member companies believe the war will end in 2023, and all but 2% plan to continue doing business here.

Yulia Zavalniuk, whose small flower farm Villa Verde some 40 km west of Kyiv was severely damaged by Russian forces four days after the start of the war, initially considered moving to Slovakia but then decided to temporarily move to Lviv while she sold plants, to continue paying salaries and cover basic operating expenses.

“Now is the time for us — small business owners,” she told Reuters. “We have to be the most creative, service and quality oriented to make goods, sell them and pay taxes,” she said.

Reporting by Andrea Shaal; Edited by Frank Jack Daniel and Jane Merriman

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