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August 18, 2014

Ukrainian Businesses Look for Alternatives to Russia

by Gabe Joselow

With tensions continuing to rise with Russia, Ukrainian businesses are looking for opportunities elsewhere. 

In the eastern Ukrainian city of Kharkiv, near the Russian border, economic change is underway.  On a warm summer's day riding the cable cars at an amusement park in Kharkiv, you would never guess there is a war going on next door.

Just a few hundred kilometers from here the Ukrainian military is battling pro-Russian separatists in a months-long conflict that has divided the country.

Kharkiv has remained relatively peaceful despite the conflict in neighboring Donetsk province, but the economy has taken a hit because of tensions with Russia.

So, business owners are looking for opportunities elsewhere.

Industries in places like Kharkiv were built around serving the needs of the former Soviet Union.  Ukraine still exports about 25 percent of its products to Russia.

These include agricultural goods like sunflower seed oil, as well as other food and heavy machinery.

But new Russian trade restrictions on Ukrainian products have started to affect local businesses.

Dmytro Kutovyi runs a successful construction business in Kharkiv, his wife owns a popular upscale cafe, and they are active with a leading civil society forum.

“Probably in the short perspective, the Ukrainian economy will suffer losses because cooperation with Russia has lessened and in some fields has stopped," Kutovyi said. "But nothing extremely awful has happened during these months.”

Russia has already put restrictions on food imports from Ukraine and exporters have complained about new, prohibitive customs requirements to access Russian markets.

Kutovy says the increased pressure from Moscow has encouraged businesses in Kharkiv to start looking increasingly inward to Ukraine for opportunities.

“No economy can be dependent on one, even a really large, customer," he said. "Even now, companies are slowly starting to work on the domestic market, which is traditionally important for such fields as the defense industry.”

One of Kharkiv's biggest industries is the production of military vehicles bought by Russia.  Ironically, the rebels fighting against the Ukrainian military are accused of using Russian-supplied equipment.

A new regional administration is focusing on shifting the defense industry to support the local economy, as well as the country's armed forces.

The head of the Kharkiv state authority, Igor Baluta, says the industry was long neglected under the previous government.

“Things for many years have been falling into pieces, say, sabotaged, by the leaders of the Ministry of Defense.  We are trying to restore it now,” he said.

The new government of President Petro Poroshenko has agreed to trade deals with the European Union to encourage more economic cooperation with the West.

But Russia remains the economic powerhouse in the region, its greatest leverage stemming largely from the supply of natural gas.

In the meantime, as war rages, Kharkiv is optimistic the most promising business horizon is at home.