The Ukrainian Economy Just Keeps On Going

Benjamin Bidder and Michael Kröger

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Whenever the power goes out yet again in western Ukraine, Maxim Ivanov’s business starts humming – from the roar of the diesel generator in front of his company’s offices in Ivano-Frankivsk, a town southeast of Lviv.

The name of the colossal machine from Turkey is "Teksan Jeneratör," and it churns out 80 kilowatts of electricity – plenty to keep the 350-employee company going. It’s also enough to thwart the plans of Russian President Vladimir Putin. That, at least, is how Ivanov sees it.

His IT company, called Aimprosoft, employs programmers, web designers and project managers. Their customers tend to be companies in Western Europe that are reluctant to hire their own tech workers or can no longer find the expertise they need in their domestic labor markets. Despite the war, Ivanov’s customers don’t need to worry about undue delays. Regardless whether Russia targets a major powerplant or a nearby transfer station, Aimprosoft just keeps on going, thanks to the generator and a stockpile of diesel sufficient for a 10-day blackout.

When Putin launched his invasion one year ago, his initial aim was the rapid takeover of Kyiv. But when that proved overly ambitious, and his other war aims likewise began fading as the progress of his military ground to a halt, he began targeting Ukraine’s infrastructure. Starting last fall, hundreds of Russian missiles and kamikaze drones began pounding the Ukrainian power grid, destroying powerplants and substations. At the end of December, 90 percent of the 700,000 residents of Lviv, to name one example, no longer had power. District heating was frequently disrupted in cities around Ukraine, and even in the capital Kyiv, running water was often unavailable. The consequences of the Russian onslaught could be seen from outer space: Nighttime photos showed that the lights in Ukraine were slowly going out.

Equivalent to a Nuclear Reactor

But the country didn’t grind to a halt in cold and darkness this winter. The apocalypse never arrived. And one reason for that is the generators. Loud roars in front of larger companies like Ivanov’s firm Aimprosoft, soft humming in front of hair salons and cafés. In just the last three months of 2022, the country bought around half a million emergency power generators from abroad, along with solar-powered blocks of batteries from companies like EcoFlow and Bluetti. Taken together, the power generating devices produce an amount of energy equivalent to a nuclear reactor. And strategically, they are even more valuable, since Russia cannot destroy them in a single strike or conquer them in a ground attack.

The rapid spread of the generators is more than just a symbol for the iron will of the Ukrainians. The perseverance of business leaders like Ivanov is an absolute necessity if the country wants to continue standing up to the Russian invaders on the battlefield. Ukraine, after all, must scrape together the revenues on its own for its rapidly growing defense budget. Kyiv continues to receive billions in funding every month from the United States and its partners in Europe, of course, but they are watching closely to ensure that such funding is used exclusively for non-military budgetary expenditures. Ukraine’s own tax revenues are now almost exclusively flowing into the military. And that flow must not be interrupted.

But it’s not easy. Ukraine’s economic output plunged dramatically last year. In addition to millions of people leaving the country, the most important steel factories in eastern Ukraine have either been destroyed or are now under Russian occupation. Only the IT sector continues to grow, even during 2022, with export revenues climbing to $7.3 billion, an increase of 6 percent. When calculated in dollars, tax payments from tech companies to the Ukrainian state rose by 16 percent.

"The couriers even keep going under fire."

Head of Aimprosoft Maxim Ivanov

The war has completely changed the industry, says Ivanov, and his priorities have also shifted. He says he and his partners used to be primarily focused on growth, but this year, their goal is simply "that we all survive." Meanwhile, many of his employees are donating up to 20 percent of their salaries to the military. Every person in Ukraine has friends, relatives or both fighting in the war, and they are constantly in touch through instant messaging services like Telegram or thanks to Elon Musk’s Starlink system, which continues to provide internet to much of the country.

The donations go directly to the army or to volunteer organizations. Sometimes, people send night-vision goggles or winter clothing. The private courier service Nova Poshta delivers packages to the front free of charge. "The couriers," says Ivanov, "even keep going under fire."

The war has mobilized the entirety of Ukrainian civil society, including the economy. According to a survey conducted by the international consulting giant Deloitte, more than half of Ukrainians are donating to the military. Furthermore, 56 percent of companies in Ukraine send money to the troops, while 40 percent provide in-kind donations, according to the European Business Association (EBA). Putin had been hoping to decimate the economy of his neighboring country with targeted strikes on its most vulnerable spots, but it looks as though he may have underestimated the Ukrainian people.

People like Yuri Yakovlev, for example. Right at the beginning of the invasion, the Russians devastated the 61-year-old’s lifework, advancing on the small airfield near Kyiv that Yakovlev’s company used. Called Aeroprakt, the firm builds ultralight aircraft, producing nine of them per month for customers around the world – before the war. The hangar was fired on by the Russians and the roof collapsed. It was only with a bit of luck and derring-do that he was he able to salvage important tools and blueprints. A short time later, the Russians finished the job, essentially pulverizing what was left, says Yakovlev. He initially brought the material he had salvaged to his company’s Polish branch so that he could at least continue maintaining and repairing the aircraft of his Western customers.

Going Nowhere

The Ukrainian is a legend in aviation circles. Over the past decades, he has sold over 1,000 aircraft around the world, having learned the trade at the Soviet airplane manufacturer Antonov. Despondency and fear are not characteristics that anyone would associate with him. In Poland, he first reestablished the production of replacement parts before then contacting his distributors and promising that he would soon resume aircraft production. In April, he returned to the aviation tradeshow AERO in Friedrichshafen. The message was clear: Yakovlev and Aeroprakt aren’t going anywhere.

Now, twelve months after the beginning of the war, he has cleaned up much of the detritus left behind by the Russian shelling of the airstrip near Kyiv. His company’s workforce is unfortunately quite a bit smaller than it used to be, he says, with a number of his younger workers now fighting at the front. Still, Aeroprakt is again churning out planes. "Nine per month," says Yakovlev, the same output as before the war.

There are a lot of similar stories in Ukraine of companies carrying on in the face of hardship. At the very top of the pecking order, there are the board members of the National Bank of Ukraine, who rush down into their underground shelter when the air-raid sirens go off. From their four-square-meter bunker, they then continue discussions with the International Monetary Fund over billions in aid for the country.

But there are plenty of tales of heroism at the opposite end of the pecking order as well – such as the repair crews working for the state energy supplier Ukrenergo. After months of constant work, they have amassed so much experience that they are now able to repair damaged facilities "four times quicker than last fall," as the head of Ukrenergo says. Indeed, he adds, they are now as fast at repairing as the Russians are at destroying, "and sometimes even faster."

The Ukrainians have managed to put the brakes on their country’s economic freefall. Last summer, the World Bank forecast that Ukraine's gross domestic product would collapse by 45.1 percent in 2022. In actuality, the drop is likely to have been around 30 percent by the end of last year – which is still catastrophic. But experts with the German Economic Team, which has provided consulting services to Ukraine on behalf of the government in Berlin for many years, believe that 2023 may see slight economic growth of 1.8 percent.

Will that be enough? Steel production in Ukraine, which used to be one of the backbones of the country’s economy, has plunged by 85 percent. Because Russian troops have occupied steel factories in eastern Ukraine, in addition to destroying the vast Azovstal steel plant in Mariupol, nationwide production fell from 60,000 tons per day to just 10,000 tons. Unemployment has tripled to an estimated 30 percent, despite the fact that hundreds of thousands of men have been drafted into the military since the beginning of the war.

Life goes on in the Ukrainian capital. Foto: Sergey Dolzhenko / epa

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Ukrainians charge their devices in a tent set up for the purpose in Kyiv. Foto: Oleksii Chumachenko / SOPA Images / ddp

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Ukraine has managed to keep its supermarkets full across the country despite the ongoing war. Foto: Andrew Kravchenko / Bloomberg / Getty Images

The country appears to be facing the beginnings of a demographic crisis. In the period following the collapse of the Soviet Union, Ukraine already lost around 8 million residents through emigration and a low birthrate. Prior to the outbreak of war, there were still 44 million people living in the country, but 8 million have fled the violence since then. The result is a population lower than it has been in eight decades, since before the outbreak of World War II. Most of those who have left the country say that they want to return once the war has come to an end, but some governments in the European Union are trying to hang on to them. Three-quarters of those who have left Ukraine have university degrees.

Without the billions in aid from Ukraine’s partners, the state would likely have collapsed by now. And yet, members of the international community haven’t been particularly assiduous when it comes to coughing up the money they have pledged. In 2022, 64 billion euros were promised to Ukraine, but thus far, only 31 billion euros of that have actually been paid out, according to the Kiel Institute for the World Economy.

A "De Facto a Member of the EU"

Ukraine is still in a position of having to scrape together up to 5 billion euros every month from other countries so it can pay its teachers and civil servants. The International Monetary Fund (IMF) isn’t actually authorized to pay out money to countries involved in a military conflict, but it has indicated it is willing to continue making an exception for Ukraine. To professionalize the process, donor countries have agreed to set up administrative offices in Kyiv and Brussels.

The EU is Ukraine’s largest trading partner. In the first months following the Russian invasion, the EU’s share of Ukrainian exports rose from 40 percent to a temporary high of 80 percent. Furthermore, shortly before the beginning of the war, the long-planned synchronization of the EU and Ukrainian power grids was completed. It proved to be a blessing for Kyiv: During the initial months of violence, Ukraine was able to export nuclear power to the West, thus earning badly needed hard currency. Now, with Russia targeting Ukrainian power plants, Kyiv is able to buy significant quantities of power from the EU. Indeed, ties have become so tight that some observers say that Ukraine is a "de facto member of the EU."

“Reconstruction will never work without private capital."

Economist Robert Kirchner

But things haven’t quite progressed that far yet. "There are initiatives to integrate Ukraine into EU supply chains," says Michael Harms, director of the German Eastern Business Association. But doing so is frequently more challenging than many might think, he says, since some products may not adhere to EU standards or aren’t yet competitive for other reasons. Sometimes, it just comes down to bureaucracy. There are, for example, agricultural operations in Ukraine that produce and liquify biofuel – and they have potential customers in the EU lined up to buy it. But they lack the necessary certification.

Economists at the Kyiv School of Economics have calculated that war damage now amounts to $138 billion – and rising every day. "Reconstruction will never work without private capital," says economist Robert Kirchner, the deputy head of the German Economic Team. But what kind of investor would willingly send money into a country that is being threated with annihilation by its neighbor Russia? Still, German chemicals and pharmaceuticals multinational Bayer recently announced that it was sticking to plans to invest 30 million euros in a seed plant. Factories belonging to Western automobile parts suppliers have also started up again. To attract new investments, the European Bank for Reconstruction and Development and the World Bank subsidiary Multilateral Investment Guarantee Agency (MIGA) have announced plans aimed at mitigating the risks of investing in Ukraine.

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Grain being loaded into a ship on the Black Sea near Odessa. Foto: Igor Tkachenko / epa

Ukrainian foodstuffs are in particular demand. A British logistics giant has thus invested in a transshipment center in Moldova to secure access to Ukrainian agricultural products. From there, according to the plan, fruit and vegetables from Ukraine will soon start making their way to Britain. And it might actually work: The Ukrainians have managed to maintain food supplies even in regions extremely close to the front – in contrast to the situation in British supermarkets.

For Ukrainian traders, ensuring that their stores are continuously stocked has become a patriotic duty. Many also offer passersby the opportunity to come inside to warm up or charge their mobile phones and laptops. Some shops have even set up office space, available to anybody who needs it. "The supermarkets," says the head of the country’s retail association, "are now centers of our invincibility."