Business New Europe: Industry takes heavy hit across Ukraine

(Business New Europe – bne.eu – October 2, 2014) Ukrainian manufacturing is taking a heavy hit across the country and not just in the war-torn Donbass, as the economic collapse and loss of Russian markets take their toll.

Vehicle producers are worst hit, with a number of companies closing their doors and laying off workers. Lviv bus plant announced on September 15 announced that the plant had completely stopped production. “if Ukraine signs the economic part of the association agreement with the EU, no Ukrainian industrial producers will survive. Ukrainian companies cannot realistically compete in European tenders,” owner Igor Churkin said in a media interview on September 21. The mayor of Lviv, Andriy Sadoviy, an outspokenly pro-European politician, slammed Churkin, but confirmed the catastrophic state of the plant. “Lviv bus plant is no longer running. The Churkins have buried it,” Sadoviy said.

Zaporozhe automotive concern (ZAZ), Ukraine’s largest assembler of cars, has also stopped work, according to the press service. “We are not talking about the plant being closed as such but the need to stop production until conditions improve,” the company said. In August the plant, with a workforce of thousands, turned out only 33 cars, according to media reports.

Eurocar, which assembles Skoda cars in West Ukraine, has also halted production. Bogdan concern, founded and previously owned by President Petro Poroshenko, has all but stopped its conveyor belt and may be facing bankruptcy because of its debt burden, say analysts. Kremenchug car plant has also stopped production. “The plant is ready to start producing vehicles as soon as the situation on the automobile market and in the economy of the country will normalise,” said CEO Andrei Chernysh.

The Central Ukraine town of Kremenchug is already struggling over the loss of the key Russian export market for Ukraine’s producers of railway cars and wagons. Statistics show that Ukrainian exports of locomotive and rolling stock to Russia dropped by nearly $750m in the first six months of 2014, from an already low level in 2013. Kremenchuk’s Kryukov Car-Building works has had a 68% collapse in production on the year for the first seven months of the year, following a 50% collapse in 2013, when Russia first closed its market. Kremenchuk steel plant,which supplies railcar castings, announced it would be closing its doors on September 29, with 1,500-2,000 layoffs expected.

Ukraine’s famous engineering giants are also in difficulties as their key export market in Russia disappear. Sumy Frunze, a producer of turbines for the gas and power industries, normally sells 70 per cent of its orders to Russia, but half of the Russian orders drop by more than half alone in the first half of the year. The company says around $350m worth of potential orders to Russia and Central Asia have not been brought to signing, because customers have balked at the political situation in Ukraine.

Ukraine’s defence sector is hit by a double whammy – Russian firms are reluctant for political reasons to place orders, while Ukraine’s government in July prohibited all defence exports to Russia.

Some famous suppliers have tried to find wiggle room. Zaporozhe’s Motor Sich, which traditionally is Russia’s main supplier of helicopter engines, will persevere on the Russian market, according to owner and chairman, Vyacheslav Boguslaev. But it is not clear what the position of the Ukrainian government is on this issue. In 2011, Motor Sich signed a 5-year contract with Russia’s state-owned helicopter producers worth in total $1.2bn. Russia meanwhile has launched domestic production of helicopter engines at a Petersburg plant but not yet on the volume required for Russia to meet its international order book.

Ship turbine builders Zorya Mashproekt in Mykolaiv is the main supplier of naval engine turbines to Russia’s state-owned shipbuilder United Shipbuilding Corporation (USC), and also falls under the government ban on defence sales to Russia. USC will not source turbines domestically before 2017, CEO Alexei Rakhmanov told reporters on September 24, according to newswires.

A whole list of other defence producers have lost their main customers, although Ukraine’s government is saying it intends to boost defence spending to compensate. Around a score of crucial major Ukrainian companies are crucial to Russia’s massive defence industry, including intercontinental ballistic missiles, and the Ukrainian export prohibition will hit Russia’s defence industry arguably hard – but also wreak havoc on the most technologically intensive sector of Ukraine’s domestic economy.

In a crisis, companies’ individual weak points are exposed. Thus Ukraine’s aviation national champion Antonov is riven by a management conflict, after Ukraine’s new government removed longserving Dmitry Kiva from running the ailing plane design and production shop. Under Kiva, Antonov had become heavily dependent on a partnership with Russia to build a regional jet, plans that now seem pie-in-the-sky. Kiva is fighting a rearguard battle, with company employees trying to barricade out the new government-appointed management, and court cases are in the offing.

The economic hit is not just affecting industry but consumer goods and services, say analysts. Alcholol producers are under extra pressure as the state desperately seeks new revenue by hiking excise tax. In late September, two of the country’s major beer brewers, SUN InBev Ukraine and Carlsberg, said they might close one brewery each. Ukraine’s national airline Ukraine International Airways has appealed to the government for a $100m stabilisation loan over 10 years as passenger numbers are set to fall by one fifth in 2014, as hryvnia prices soar because of devaluation. “The role of UIA in the Ukrainian transport system is very important, and we’re the skeleton of the aviation transport system, and if one assumes that UIA, heaven forbid, stops flying, the whole air transport system of the country will collapse,” President of UIA Yuriy Miroshnykov told journalists on September 26.

On a bright note: the Kremenchug truck builder, KrAZ, owned by mining oligarch Konstantin Zhevago, is doing well out of the war, having supplied 733 trucks to the state for Ukraine’s war effort in the east, according to sales head Vladislav Lisittsa, 30% more than in 2013.