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Ukraine counts cost of war but starts to look to future

Russia’s invasion of Ukraine has taken a terrible toll in terms of human suffering and has had a devasting impact on Ukraine’s economy, causing destruction and disruption on a massive scale. It has cast a dark cloud over what was one of emerging Europe’s rising stars and its impact has been felt far beyond Ukraine’s borders. Yet, despite the fighting, Ukraine and its people have shown they are not just brave and resourceful, but also highly adaptable. Business too has proved to be agile and the wheels of commerce have continued to turn, reacting to the huge challenges of the conflict and paving the way for future reconstruction.

When Russian troops invaded Ukraine in February 2022, it sent shockwaves around the world and what was intended as a short and swift military operation has turned into a long-running war that has shone a spotlight on the courage and resilience of Ukrainians. The war may have resulted in a slowdown in activity, but people have adjusted to the new circumstances and Ukraine and its allies have already begun laying the foundations for reconstruction.

In October, the World Bank forecast that Ukraine’s economy would contract by 35% in 2022, as economic activity was “scarred by the destruction of productive capacity, damage to agricultural land, and reduced labour supply”. It was no surprise that M&A activity fell sharply in 2022, although it came down from an exceptionally strong performance in 2021. In such extraordinary circumstances, deal-making turned out to be resilient and both transaction volumes and values compared favourably with those during the pandemic and the middle of the last decade. There were 84 deals recorded in 2022, down from 143 in 2021, but not far behind 2020 and well ahead of 2016. At EUR 570m, deal values were also down, from EUR 1.72bn in 2021, but higher than the EUR 490m recorded in 2017. Telecoms and IT was the star sector with a bumper crop of deals.

A war economy

Maria Orlyk, CMS partner in Ukraine, looked back at events of 2022 and observed: “The damage that has been caused to Ukraine by the Russian war is difficult to describe in a single sentence. It is just beyond comprehension. It has affected all sectors of the Ukrainian economy; all spheres of human life. The consequences of this war have gone far beyond the borders of Ukraine.” The direct effects have been most severe on towns and cities in the east of the country, where infrastructure and industry has been damaged by bombing, while high fuel prices have affected all sectors, most notably those with high gas consumption such as manufacturing.

Agriculture, the country’s leading industry, has seen disruption to exports of crops and products including wheat, corn and sunflower oil. The second largest industry, iron and steel, has seen production affected directly by the destruction of plants such as those in Mariupol and difficulties in getting shipments out of the country through the Black Sea ports blocked by Russia. “There was a devastating impact on production capacity across the country, with those in the east suffering the most. Some mid-size and small size businesses have been able to relocate to western Ukraine, but it is most difficult for heavy industry,” said Vitaliy Radchenko, partner, CMS Ukraine.

Even in western areas, Ukraine’s economy is on a war footing with missile attacks hitting critical infrastructure and disrupting power supplies to homes, factories, offices and shops. As Tetyana Dovgan, CMS partner in Ukraine, explained: “Daily life comes with dangers and frustrations, from the threat of missile attacks to power cuts, and while we can’t say it’s business as usual, we are all learning to adapt.”

Europe also affected

The effects of the war have been felt across Europe through soaring energy prices as EU nations have cut back or pledged to reduce oil and gas imports from Russia. More directly, sanctions against Russia have forced companies to cease trading with former suppliers and customers. Werner Oliver, CMS managing partner Slovakia, explained: “The EU has—for the first time in its history—reacted swiftly and brought in tough sanctions against the Russian attacker as well as oligarchs and business people financing the war. We expect that EU sanctions, and those from the USA and UK, will have a lasting impact on the economic relationship between Russia and the Western world.”

Complying with sanction has, according to Marija Zrno Prosic, CMS partner Croatia, become a part of commercial life with “all parties in transactions now put even greater emphasis on sanctions’ checks and ensuring that contractual mechanisms support the proper way of doing business in this environment.” On another level, she said companies that dealt with Ukraine faced challenges: “This does not concern just those companies that export to Ukraine, but also companies which relied on supplies from Ukraine, which were either interrupted or terminated and which required alternatives to the existing supply chains to be found.”

In Warsaw, CMS partner Blazej Zagorski said: “Sanctions have to some extent impacted Polish companies that have business ties with Russia or Belarus. This applies mostly to automotive, machinery and food industries. In reaction to the sanctions, those businesses need to adapt to the new situation and look for additional outlet markets.” There was a danger though, Horea Popescu, CMS partner Romania, pointed out, that international observers with little understanding of emerging Europe could believe the whole region was affected equally. He said: “If you are an investor from Europe, you may be educated enough to know the difference between countries which are NATO members and where investment is protected in the long run, and those outside NATO where the future is less clear.”

Marija Zrno Prosic said of sanctions: “The impact is most significant on businesses which are related to sanctioned persons as they faced different measures, mostly concerning the freezing of their assets, which means the inability to dispose with them. This situation has led to further difficulties, such as issues with financing business operations.”

Ukraine’s European ambitions

Before the war, Ukraine’s axis was already shifting away from Russia and towards Europe. This accelerated in 2022 when the country was awarded EU candidate status. With a pre-war population of 44 million, a longstanding role as an international breadbasket, and a well-educated and tech-savvy young workforce, it was increasingly seen as an attractive place to invest in and well-placed to deal with markets in western Europe, central Asia and the Middle East. Maria Orlyk said: “The country’s economy has been deeply woven into the European and global economy in many industry sectors. Ukraine has always been open for business and has been working hard on improving its investment climate. It has been developing its investment attractiveness and climbing up the Ease of Doing Business ranking.”

That progress has been partly derailed by the conflict, which had the most immediate and serious impact on industry in the east of the country, particularly heavy industries such as steel, which suffered direct damage to plant and machinery and were not able to move to safety. But, according to Tetyana Dovgan, there is no doubt that Russia’s aggression has “made Ukraine more determined than ever to embrace Europe”.

Open for business

As Ukrainian businesses recalibrate to operate in a war economy, some have moved from the east to safer areas, while those that suffered direct damage, such as logistics companies around Kyiv, have rebuilt and reorganised. “Quite a few businesses have regrouped and relocated, and the country remains open for investments. In summer, we started receiving inquiries from new potential investors planning to launch operations in Ukraine, for example in the food sector. This was a very good sign and we expect this interest to increase,” said Maria Orlyk.

One consequence of power cuts in Kyiv is that at certain times, the city now hums to the sound of portable generators that have become an essential tool along with power storage packs, while Space X’s Starlink satellite internet service has expanded rapidly to provide critical communications. Tetyana Dovgan added: “Business has to go on not only meeting people’s daily needs, but also to keep the economy functioning. The same goes for professional service providers such as lawyers, accountants and corporate advisers. We’re working hard to provide as normal a service as possible to our clients.”

Technology is M&A star

In terms of M&A, deal numbers and size may have been down, but technology remains on the up. Like the rest of Europe, telecoms and IT was the hot sector, accounting for seven of the top ten deals and seeing a sharp increase in the number of deals, up from 25 in the previous year to 38. The sector accounted for 45% of deals in the country in 2022, as most other sectors saw a slowdown in transaction activity. Food and beverage (nine) and real estate and construction (six) were the next busiest, followed by energy and utilities, mining, and manufacturing. Agriculture saw four deals, down from 17 previously. Of the top ten deals in 2022, only the EUR 196m purchase of the farming assets of Kernel Holding by its founder Andriy Verevskyi was above EUR 50m. Four of the top ten involved Ukrainian buyers and four US buyers, with one each from Spain and the UK.

While some deals had been cancelled completely or put on long-term hold, said Tetyana Dovgan, others were going ahead even if they took longer to complete. Vitaliy Radchenko said that as well as growth in technology deals, “IT industry, software development and outsourcing, start-ups are still alive and kicking”.

Horea Popescu predicted: “I expect there to be an increase in M&A activity once the war ends and then, of course, attention will turn to plans to rebuild Ukraine.” While some Ukrainian investors were considering moving their money abroad until the situation became clearer, he said that could trigger M&A activity elsewhere in the region.

Road to reconstruction

Europe and the international community have pledged more than USD 1trn investment and aid. In December, the EU agreed a EUR 18bn aid package for Ukraine in 2023, including fixing energy infrastructure, transport, health, water and food supplies. Power will be a big focus as Ukraine seeks to pull back from its reliance on old Soviet era technology nuclear power stations and looks to build a network of smaller capacity power generation that will not leave it as vulnerable if a plant goes down. The cost of nuclear, securing funding and the construction timescale were major hurdles for nuclear said Vitaliy Radchenko, but he added: “I think we have learned the lesson that we need distributed generation, with more flexible generation, gas-fired power plants and CHPs in the mix, moving away from coal and using more renewables.”

From the de-mining of land, nurturing the agricultural sector, restoring roads and bridges, to rebuilding commercial real estate and residential homes and repairing energy infrastructure, reconstruction will be a joint effort by publicly funded bodies and private investment.

CMS’s Ukraine partners are all optimistic about Ukraine’s prospects when the war is over, with Vitaliy Radchenko saying: “I believe Ukraine can again be a rising star of Europe. Look at the fundamentals. It is one of the largest territories in Europe. Look at the sheer acreage of arable and high-quality land and our resilient, talented, inventive, creative and very well-educated people.” Maria Orlyk added: “Naturally, restoration and rebuilding of Ukrainian industries will play a crucial role in regaining stability of the regional and global economy. Rebuilding Ukraine will inevitably require substantial financing from various sources. And the private sector will likely be one of the key contributors.”

Tetyana Dovgan said: “The war has interrupted Ukraine’s growth plans, but it has not derailed them completely. We are already planning for reconstruction, from our staple industries such as agriculture and steel to the new industries such as IT which more than ever will be central to the country’s future.”

The international community is standing by to support Ukraine’s efforts, noted Horea Popescu, who added: “First, you have to rebuild infrastructure because without it you cannot manufacture and ship goods, so I think in the main, first wave of investment will be public money, but then the second wave will come from the private sector. It is a very large nation, with a young, educated population that will be willing to try to rebuild their country with Europe’s and the rest of the world’s help.”

Key contacts

Horea Popescu
Managing Partner
Head of CEE Corporate M&A
T +40 21 407 3824
Vitaliy Radchenko
Managing Partner
Head of Energy & Climate Change, CMS Cameron McKenna Nabarro Olswang
T +380 44 391 33 77
Maria Orlyk
Managing Partner
Kyiv (CMS RRH)
T +43 1 40443 0
Tetyana Dovgan
CMS Cameron McKenna Nabarro Olswang
T +380 44 391 3377
Marija Zrno Prošić
T +385 1 4825 600
Błażej Zagórski
T +48 22 520 8401