The situation on the Ukrainian market after two years of full-scale war
Russia's aggression against Ukraine has had a number of political, military and social consequences that have affected the lives of millions of people. With the ongoing war, entrepreneurs and investors are also facing a number of challenges related to this difficult situation.
Do new investments start to appear 2 years after the start of the war?
As long as there is a war going on, it is difficult to talk about large foreign investments, such as those related to the construction of a plant, i.e. investments in real estate with large CAPEX (capital expenditures). We are still dealing with a constant threat, because at any moment the property or the plant can be bombed. Unfortunately, it is difficult to predict where and when Russian missiles will strike.
Last year, I visited a manufacturing company in Ukraine, part of an international group, which was shelled two months ago. As a result of this shelling, several employees were killed, production lines and structural parts of the production hall were damaged. In such a situation, the following algorithm is most often encountered: manufacturing companies are forced to stop the production process, which entails high costs; in extreme cases, the company is no longer able to recover from such an event. Then they begin to have a completely different attitude to the war, because it has affected them. Managers introduce much stricter security procedures than before and strictly adhere to them, which, in turn, severely disrupts the production process and automatically increases business costs. Due to the losses that have occurred, these companies are usually forced to cut production and, accordingly, reduce the number of employees by, for example, 50%. This, in turn, affects the situation in the micro-region, especially when companies employing more than 500 people are affected.
New potential investors are paying close attention to the - let's call it - randomness of the explosions and drawing conclusions.
It is true that in the middle of last year, the first insurance products and guarantees began to appear that allow for investment and export security and already include the war in Ukraine as an insurance risk. However, in my opinion, we should not expect massive investments. Previously, every investment was made by entrepreneurs at their own risk, and as you know, business is not humanitarian aid. Investors expect a return on their investments in the short or long term, so they are currently being very cautious.
Who is investing during the war in Ukraine? What are the strategies of investors in this market?
I would divide the activities of foreign companies in the Ukrainian market into three types. The first is the companies that were present here before the war started. The vast majority of them stayed, deciding to continue their activities after a temporary suspension at the very beginning of the full-scale Russian invasion. In part, these companies did so to demonstrate their solidarity with Ukraine and to provide a source of income for their Ukrainian employees in the difficult conditions of war. They also stayed for business reasons, as it is not easy to exit projects in which they have previously invested heavily, but it is also difficult to move production lines or existing infrastructure to another country.
The second group includes companies that trade, export, and import products that the Ukrainian economy needs here and now, and for which Ukraine is willing to pay. These are more suppliers from abroad than investors. This part of the economy is very active and is regulated by the rules of market supply and demand, so you can see how the demand for goods or services changes depending on the circumstances. An example of this is the boom in generator purchases when energy infrastructure was regularly shelled in the last quarter of 2022 and entire cities were cut off from power.
The third group is new investors, such as funds or companies, who are willing to risk a certain amount of money because, on the one hand, they want to show their support for Ukraine, and on the other hand, they hope to gain an advantage over competitors who are waiting for the conflict to end. However, in my experience, their behaviour is quite cautious. They declare large, even billion-dollar investments, but their investment plans are remote in time and stretch for many years. At the start, these companies are willing to risk a much smaller amount, and wait until the war is over for the rest. In other words, companies start project activities that make up a relatively small part of the overall investment budget. If there is no prospect of a short war, the planning phase itself is extended in time.
What risks do investors face, apart from the obvious - the constant threat of bombings?
For entrepreneurs who produce goods for export, it is a huge problem if they cannot export their products and fulfil their obligations. This is a very big business risk that is virtually impossible to diversify, because in wartime you never know when a shutdown will occur.
With the outbreak of a full-scale war, companies that used to export by sea, such as metallurgy and the agricultural sector, faced a huge challenge. When Ukraine lost access to maritime exports, entire sectors of the economy suffered losses running into millions of dollars. Reorienting all of the country's exports to rail or road logistics was, firstly, unrealistic in terms of volumes, and secondly, much more expensive, resulting in losses for companies. An additional negative effect is that these companies could not fulfil their obligations on time, losing customers who needed the contracted goods here and now. The delays carried the risks of contractual penalties and currency exchange rate risks.
Another serious problem is the lack of human resources, especially specialists. It is said that during the war, up to 10 million people left Ukraine, which is almost ¼ of the total population. This step was most often taken by those who had education and money, often active professionals. Among those who stayed, a significant percentage are elderly people and children, meaning that there are relatively few people left in the Ukrainian market who can work. This, in turn, has a significant impact on wage growth. In addition, labourers such as bricklayers, roofers, tilers and welders have left the market, as they are drafted into the army and sent to the front more often than other professional categories. Workers in metallurgy, energy or banking are considered privileged professions that are strategically important for the country's economy, and men employed in these sectors are not affected by further conscription.
What does the FM market in Ukraine look like now?
With the outbreak of the great war, the FM market shrank significantly, although even before the invasion it was much smaller than in Poland. According to my estimates, the FM market in Ukraine has shrunk by 50% during the war. This is mainly due to the fact that the main region for FM was the east of Ukraine. Industrial holdings were located there and managed their business in a more modern way, outsourcing a number of services. Now that the main concentration of fighting is in the east, the largest steel mills or mines have reduced production and mining, and sometimes, as in the case of one of the largest steel mills, Azovstal in Mariupol, they have simply ceased to exist. This fact, as well as the previously mentioned problems with exports by sea, led to the maximum reduction of indirect costs, so that the budgets allocated to FM services were drastically reduced, often by 50-60% of the pre-war cost of services. The entire FM market has shifted to the west of Ukraine and is looking for customers there - among banks, manufacturing companies, and retail chains.
In our experience, as a company that has been operating in the Ukrainian market for many years, it is possible to maintain business parameters at a good level even now. However, this requires a rethinking of the business model, constant attention to business liquidity and very rapid adaptation to changing market conditions, including keeping up with customer expectations.
Source: impel.pl
