War in Europe

Ukraine's food industry: a lifeline under pressure

The Ukrainian economy is suffering heavily under Russia’s war of aggression. So far, one can only make assumptions about the full extent of the economic damages. The same goes for the material losses of Ukrainian businesses. However, an initial assessment has now been made possible via a survey conducted by the European Business Association. Overall, forty-one per cent of the surveyed Ukrainian companies suffered revenue losses of up to US$1 million in the first five months of Russian aggression. Thirty-two percent of those surveyed estimated their economic losses at between US$1 million and US$10 million. The remaining companies had already incurred more than US$10 million in losses at this point.

The fighting devastates large areas of land, destroys important infrastructure and thus leads to material losses, as well. Well over a third of the companies operating in Ukraine have been directly affected by damage to their facilities. Half of those companies, whose assets were destroyed or damaged, are still in the process of documenting the losses. Only twenty-eight per cent have contacted law enforcement agencies. Thus far, only a small proportion of companies have already initiated legal action before a national court. The extent to which recompense and reparation payments can be expected is certainly questionable - and yet these measures make it possible to take the first, important steps toward taking stock.

Destruction of civilian industries

Russia's war is severely affecting the Ukrainian food industry, among other sectors. Along the entire value chain, the Russian incursion is causing supply scarcities and shortages. It is already well established that the war is putting enormous strain on Ukraine's agricultural capacities. Nevertheless, downstream processing and refining operations are also being hampered. In some regions, Ukraine's manufacturing sector has been almost completely shut down as a result of the destruction by Russian attacks. Meanwhile, Russian missile strikes are spreading fear and terror throughout the country. These are also concentrated in particular on industrial sites. Employees can therefore only go about their work in constant anxiety. In addition, the attacks also destroy complex manufacturing facilities as well as the needed infrastructure. The situation is particularly precarious in the temporarily occupied regions. Numerous Ukrainian and international companies were located in these areas and used to produce goods for daily use.

A confectionery factory in the town of Trostyanets can be taken as a suitable example. Before the outbreak of the war, a wide variety of chocolate products were produced there. The company was considered one of the most modern in the industry and employed more than a thousand people. The goods were in demand not only in Ukraine but were exported to about 50 countries all over the world. However, the city was occupied by Russian troops right at the beginning of the war and was heavily destroyed in the process. The confectionery factory was also shelled and subsequently caught fire. The occupation troops then hindered the fire-fighting efforts, which is why the fire raged for more than a day. The result is obvious: no more confectionery will be delivered from Trostyanets for the foreseeable future. Unfortunately, such fates are becoming more frequent, as are reports of looting and misappropriation in the occupied territories. For example, office buildings and the premises of some companies are seized by the Russian occupiers as headquarters or deployment areas - logically, it is not possible to continue business activities during such an occupation.

However, the war also leads to a shortage of personnel, which further restricts the already strained production capacities. A substantial part of the Ukrainian workforce has fled - both within the country and across its borders. In addition, there are those workers who avoid their jobs for fear of attacks. Moreover, these same attacks cost civilian lives every day. While it will certainly be a long time before reliable casualty statistics are available, Russian missile terror is driving up the civilian casualty figures. Another important factor is the Ukrainian general mobilization – a significant proportion of Ukrainian men are either in military training or on the front lines, thus unable to continue their peacetime jobs in the meantime.

The collapse of logistics chains

However, other factors beyond the destruction of production facilities and the shortage of labour, also hamper economic activity in the country. With the onset of the war, retailers had to reorganize their logistics processes. During the first days, the focus was on the supply of basic food products, i.e. bread and drinks, as well as some dairy and meat products. At that point, uncertainty about the war's continued developments, the general shortage of fuel, and the public chaos that ensued prevented the supply of more complex goods.

Much has happened since then. The initial shock has been overcome, but the effects of the war are still clearly felt. Even outside the occupied territories, logistics capacities remain limited. On the one hand, this is due to the destruction of warehouses and production facilities described above, and on the other hand, it is also due to new demand situations. A macabre example follows: refrigerated trucks originally intended for transporting perishable foodstuffs are now needed elsewhere – for the return transport of the fallen as well as for the recovery of civilian casualties. The same goes for other trucks, that are currently also needed elsewhere, more urgently. An already terrible situation that threatens to exceed the capacities of retail and logistics companies, thus further jeopardizing the supply to the civilian population.

But that's not all: heavy Russian strikes against essential central warehouses destroyed a significant part of the stocks of Ukrainian food producers and large retail chains, especially in the early days. Since the destruction of some such logistic centres, the companies have tried a new approach. Now, products are stored in a variety of decentralized warehouses – spreading the risk and avoiding the loss of entire supply chains. However, this also entails significantly higher costs – and the already strained situation within the logistic chains becomes even more complicated.

Necessity is the mother of invention

However, Ukrainian food producers and supermarkets have increasingly adapted to the new conditions. For example, direct marketing of locally produced goods has increased significantly. However, retail chains in various Ukrainian cities are still looking for local producers and suppliers who can supply supermarkets independently. Therefore, new supply routes have also been developed. For example, the share of goods shipped via the rail network has increased significantly. In addition, with the help of digital platforms, the demand for goods and the available supply in the individual regions are now tracked and optimized in real-time. This in turn makes it possible to open up new supply chains and allows to link different market participants, public institutions and international humanitarian commitments, even under wartime conditions. Therefore, the platform simplifies coordination processes between different actors and facilitates the return to a secure supply for the Ukrainian people. Against this backdrop, imported goods are increasingly filling the supply gaps.

The initiatives are already bearing fruit. According to the above-mentioned survey by the European Business Association, a large proportion of Ukrainian companies have already resumed their work, at least in part. The most impressive aspect is that around half of the companies surveyed have returned to regular operations. The growing importance of digital sales channels is also striking. Almost 20 per cent of the companies have increased their focus on online business since the start of the war.

Agricultural exports

Ukrainian farmers and food producers are doing their best to maintain supplies. However, it is not only about the needs of their own people. Ukraine has been and continues to be a major food exporter - especially to some countries in Africa and Asia. According to United Nations forecasts, the number of people at the edge of starvation will increase by 47 million during the course of this year. Ukraine, therefore, needs not only to supply the domestic market but at the same time to close supply bottlenecks on world markets - not least to maintain important international sources of income.

According to the Ukrainian Ministry of Agrarian Policy and Food, Ukraine still has reserves of essential grains. Just to name a few: There is enough wheat left in warehouses for two years, oil for five years, and corn for a year and a half - in addition, despite the war, much of this year's crops could be harvested. Faced with full accounts, farmers, food producers and exporters are trying to revive foreign trade. For example, in July 2022, the Ukrainian economy managed to export three million tons of agricultural products via alternative routes despite the Russian harbour blockade. Since the beginning of August, the sea route has been open again and Ukrainian agricultural trade is flourishing once more.

Food industry representatives are working tirelessly, along the entire value chain. From farmers to butchers to truck drivers - they all ensure the supply of the Ukrainian population, even under the most adverse conditions. They also continue to put in their weight, in order to feed the rest of the world. And yet, nothing short of a swift Ukrainian victory and an end to the war can sustainably ensure supplies. The current state of emergency must not be allowed to become the norm.

Maximilian Luz Reinhardt is a consultant for business and sustainability at the Liberal Institute of the Friedrich Naumann Foundation for Freedom.
Tetiana Schyrochenko is Committees Manager of the European Business Association.