Economic Front. Digest.
Geopolitics and macroeconomics, Government decisions
Military and geopolitical situation
After the start of large-scale offensive operations in eastern Ukraine on April 18 aimed at capturing the entire Donetsk and Luhansk regions as well as southern Ukraine, Russian troops concentrated reinforcements and conducted large-scale assaults in Rubizhne, Popasna, and Maryinka. Heavy artillery and air shelling is taking place. At the moment, Russian armed forces have also advanced to Lyman.
Heavy fighting continues in the Kharkiv direction, where Russian troops are being sent as a result of counterattacks by the Ukrainian Armed Forces, distracting the aggressor from intensifying the offensive in Donbas.
In the southern direction the fighting continued west of Kherson without significant changes in the front line. Positions in the Mykolayiv direction are kept, the city of Mykolayiv is on the verge of humanitarian catastrophe, from where there is a mass outflow of business.
Map of hostilities as of May 2
The US Congress has finally adopted the lend-lease law. This document provides for an accelerated procedure of granting to Ukraine weapons, uniforms, raw materials, fuel, medicines and food worth $ 33 billion. The unprecedented rapid and powerful assistance of the United States to Ukraine has significantly changed the situation on the battlefield. At the international forum at the US military base in Germany, Ramstein an international contact group on Ukraine's defense was established with the participation of more than forty countries.
According to Victor Andrusiv, executive director of the S. Nizhny Kyiv School of Public Administration, the Russian army is exhausted and demoralized and experiencing a shortage of ammunition. In two weeks, Ukraine will receive all the promised artillery, tanks, armored vehicles, aircrafts and, accordingly, will begin to displace and surround Russian units. According to the analyst, the Armed Forces will be able to bring their counterattack to a victorious end. Analysts at the Institute for the Study of War (USA) believe that neither side still has an advantage, so the process of confrontation will be longer.
According to a study by Frank Duwell, a senior researcher at the University of Osnabrück (Germany), there are also more pessimistic scenarios, including keeping the southern regions of Ukraine under occupation for several months and even developing an offensive west of Donetsk and Luhansk oblasts which may cause an additional increase in both emigration to European countries and the number of internally displaced persons by several million. This continues to create conditions of uncertainty for Ukrainian business.
The state of economy and Government
Discussions continued in the expert and governmental environment of Ukraine regarding the possible nature of post-war assistance. It became known that the best option was finally chosen: on May 5, the European Union will announce the launch of the Solidarity Trust Fund to finance most of the costs of rebuilding the war-caused destruction in Ukraine.
The Fund will structurally replicate the recovery mechanism after COVID-19 for EU member states. It will finance investments and reforms in agreement with the Government of Ukraine. This financial institution will be managed by the European Commission and will receive EU budget guarantees. But it will be complemented by donations from the EU and other donors: G7 members, as well as Australia and South Korea. The G7 has already announced that Ukraine will receive more than $ 24 billion in the form of grants. The fund will also include the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and the World Bank (WB).
The purpose of the trust fund is to collect all the money in one pot and then direct it, in agreement with the Ukrainian government, to where it is most needed. Several options are currently being considered: by placing Ukrainian government bonds on a zero coupon or redistributing SDR (special drawing rights) quotas to the IMF in favor of Ukraine. Other potential sources of assistance, as we have already reported, include: private sources; confiscated Russian assets; Russia's current revenues from oil and gas. Ukraine will use aid most effectively if its aid programs are in line with the country's long-term goals (for example, bridging the GDP per capita gap with EU candidate countries and introducing a carbon-free economy). The World Bank Group (WBG) roadmap includes initial measures to respond to the effects of the war over a period of 15 months, starting in April 2022. Ukraine will be the focus of assistance. The WBG should allocate about $ 50 billion to support both Ukraine and countries hosting refugees from Ukraine, as well as developing countries (to overcome the effects of the crisis among vulnerable groups, provide market access and protect the population from food shortages).
The Government of Ukraine presented the principles of the economic recovery plan of Ukraine, according to which the aid will be used. First Deputy Prime Minister and Minister of Economy of Ukraine Yulia Svyridenko presented them at an international conference:
- Full access to EU and G7 markets.
- Obtaining candidate status and then full membership in the EU.
- Building economy on the principles of deregulation and liberalization.
- Establishment of logistics routes in the western direction.
- Transition from raw materials export to processing in those industries that provide the largest export revenue.
- Development of the domestic military-industrial complex, which will be a driver of development for civil sectors of the economy.
- Self-sufficiency in energy during 3-5 years, increase in own gas production and nuclear energy development.
- Creation of new facilities in various industries must take into account the “green” economy principles.
- Localization – not less than 60%.
At the International Conference "After the War: Rethinking the Future of Civil Society"
The Ukrainian Parliament supported the Government's actions. Also “The Strategic Foresight of Ukraine” inter-factional deputies' association has been established to coordinate work on developing scenarios for Ukraine's post-war future. Together with international and Ukrainian government officials, experts, and think tanks key trends, risks, uncertainties and security factors that need to be considered when developing Ukraine's postwar development strategies will be identified.
The analytical products we developed will be handed over to the National Council for the Recovery of Ukraine from the Consequences of the War, which has begun developing its programs in 23 areas. Earlier, the Foundation for Reconstruction of Ukraine was established as an advisory body to the President, whose coordination functions are similar to those of the National Council. However, there is uncertainty about distribution of funds by this fund and the EU Solidarity Trust Fund with the Post-War Reconstruction and Development Strategy of Ukraine, the Recovery Plan and targeted assistance programs to Ukraine.
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Industry news and reviews, the state of clusters
Furniture industry – yesterday, today and tomorrow
In the pre-war period, the furniture industry of Ukraine was represented by more than ten thousand enterprises with one hundred thousand employees. A special impetus for development was 2015, when a moratorium on the export of raw wood was introduced. As a result, in 6 years of operation, despite the global crisis related to COVID-19, when both commercial purchases and consumer demand fell sharply, primarily due to foreign investment, a very effective export-oriented industry rose to replace the import-dependent and resource-oriented one that faced a high level of corruption at customs.
Exports of Ukrainian furniture in 2021 amounted to $ 1.05 billion, 40% more than in 2020. The whole period after the moratorium we witnessed more than 17% increase in the industry. There was a reorientation from markets of Russia and Belarus to European market (the share increased to almost 90%). Poland, the main supplier of furniture, bought $ 360 million worth of furniture in Ukraine last year.
High inflows of investment from the EU and the US ($ 500 million in 2021) have also led to increased exports of pressed panels, boards, veneer, construction timber and other processed wood with a value added 4 times higher than untreated wood, up to $ 2 billion USD per year, and exports of wooden furniture – up to $ 213 million.
To increase value added and increase sales (similar to Turkey, which in 15 years has created a furniture industry from scratch, bringing exports in 2019 to $ 3.5 billion, in 2020 – to $ 4.3 billion, and in 2021 – up to $ 6 billion) furniture makers in Ukraine have been active in creating full-fledged clusters, starting to invest in their own design and serial production (which brings up to 20% of added value in developed clusters), as well as in marketing and logistics (up to 50% of added value).
National plan for forestry development, woodworking and furniture industries was approved, planning to attract 5 billion euros of investment in the sector and create more than 200,000 jobs, to enter the top ten exporters in the world. The draft law # 4197-D “On the Wood Market” was prepared and submitted to the Verkhovna Rada for the second reading, a number of stimulating actions were taken to strengthen the industry, in particular, it was included in the Export Strategy of Ukraine.
Russia's aggression against Ukraine has led to the de facto shutdown of several companies for several weeks due to hostilities, and retail has virtually stopped. The war hit the comparative advantages of the furniture and woodworking industries of Ukraine significantly: lower cost and availability of labor and materials, good position and access to the sea, as both supply of raw materials and shipments of finished products were carried out through Black Sea ports. Mobilization of men and departure of women from Ukraine caused shortage of staff.
Shortage of raw materials has begun, especially regarding metal supplied from eastern Ukraine. During the reorientation towards the European market, there was a significant increase in the cost of raw materials, which will affect the finished products price and worsen Ukrainian products’ competitive advantages. Logistical problems with finished products delivery appeared. In response to the challenges, furniture manufacturers have resorted to exports. First, this component of sales, as we noted above, also tended to increase before the war; secondly, in Ukraine the fall in GDP and, accordingly, consumer demand is expected to be prolonged and very significant, by more than 50%. An important component of gaining new market share is replacing furniture exports from Russia ($ 916 million) and Belarus ($ 715 million).
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UCA projects, news initiatives and activities
UAFM board member Oksana Donska said that according to a survey conducted by the association in mid-April, only 62% of companies continue to operate on humanitarian orders and/or for export. Currently, the domestic market is virtually frozen, furniture stores are closed. But most major international networks have maintained and even increased orders. In general, the furniture industry is very import-dependent. There are no textiles, not enough dyes/varnishes, no mechanisms. Only two manufacturers could produce furniture dyes before the war. There is only one MDF manufacturer, and its volumes have always been insufficient. We convince the government that raw materials and components for furniture production should be included in critical imports.
For example, IKEA has suspended operations in Ukraine, but many Ukrainian products are exported by JYSK and Home Center. Today, Ukrainian plants cannot receive payment for contracts with the UAE directly. Similar difficulties are with other Arab countries, but they are being resolved. Option found – payment through third countries. The most important thing is that orders are growing.
The industry faced a sharp rise in price of raw materials and components by 25-30%, and the main raw material for cabinet furniture production, chipboard, has risen by a third since the war bigining. Resin (for particleboard production) we have from Russia, paper – from Belarus. Now they have switched to Polish components, they were already more expensive, and against the background of the survey, manufacturers have increased the price of popular decors for export.
"It is estimated that the option of import substitution, creation and launch of resin production in Ukraine requires investment of several million dollars," said Oksana Donska. As for the logistics chains, they have suffered, there is free traffic to Ukraine (humanitarian), so the carrier takes double payment plus – for the risks, because today they do not have insurance coverage for flights to/from Ukraine. Literally in the second week of the war, our logistics partners organized a hub in Constanta, now we are just taking it by land to Romania, and from there we are already going to Israel, the Persian Gulf countries and others. Before the war, a little more than 3% of orders were shipped by sea, through Odessa.
UAFM plans to promote our furniture manufacturers at professional exhibitions. The earliest – in Poznan, Mebli Polska, we already carry expositions from 20 factories, and three of them – companies which never went out for export. We are currently working on organizing national stands at exhibitions in Germany, MOW and IMM Colon, and in the UAE at the Big5 exhibition. The furniture makers’ representative stressed that at this stage only access to the retail network abroad can save Ukrainian producers, as the expert sees recovery of the domestic market in the medium and long term, not earlier than 2023.
"Finally, there is a lot of talk about houses for migrants, including the provision of partially equipped housing. We even calculated in UAFM the project of creating not trailers but compact houses which will for sure last not less than 10 years. Furniture factories can also be used to create such projects,” Oksana Donska concludes.
UCA projects, news, initiatives and activities
The end of the second month of UCA operation can be marked by the following results:
- The management structure of UCA has adjusted the functions of planning, regular events, internationalization and fundraising.
- The greatest effort is being made in internationalization, and this is where the greatest progress is noticeable.
- Among other areas at the end of April are: UCA growth to 35 participants (the whole list is here); regular work of the Analytical Center, in particular in the issuance of digests and educational webinars; working group “Blockade of Orcs in RF – Resumption of Supplies to Ukraine” (WG BORU) has developed a benchmarking leadership model that is used for assessing behavior of international corporations; UCA approved the concept of Rapid Response Centers, which provides for the consolidation of clusters in 4 sectors: food industry, light industry, engineering-machinery and housing/municipal services.
- New in April is the Ambassadors of Industry4Ukraine initiative, a network of foreign partners formed by Ukrainians, industry and high-tech professionals who are temporarily or permanently abroad. The initiative is positioned on behalf of Industry4Ukraine, as it takes into account the previous numerous developments and activists of the platform in the field of innovation, digitalization and sustainable development, which have been going on since 2019. In May, the initiative will receive wider promotion in foreign circles.
- At the end of April, 2 important areas of activity remain the most problematic. The first is the field of fundraising – the whole UCA initiative is still based on volunteerism, and it concerns the time and energy of more than 15 of the most involved people. Despite numerous requests and communications, donors are reacting very slowly. Also, UCA does not yet have enough resources to start regular GR activities. After several unsuccessful attempts in early March (lack of response from the ministries to our appeals), activities in this direction have been suspended.
Up next – more about the latest UCA activities in key areas.
Blockade in Russia, restoration of VAC in Ukraine
WG BORU held the "Leadership of International Brands" webinar on April 26. In the report posted on the APPAU group on Facebook, we note that the 2-month silence of brands continues. Although there is more good news, the public position of international corporations on working in Russia and targeted support for their clients in Ukraine has remained unclear. Rare branches in Ukraine are able to publicly explain their position through the leaders. Meanwhile, good examples were presented at the webinar, and FANUC Ukraine is leading. APPAU together with the Refrigeration Association of Ukraine and on behalf of all UCA clusters once again called on brands to provide more complete and comprehensive support in Ukraine. The full webinar recording is here.
Webinar on "Leadership of International Brands"
UCA educational webinars
On April 28 and 29, with the support of the Zaporizhia Trade and Industry Chamber, two educational webinars were held on the strategy of maintaining the economic front, as well as on export-internationalization. The most interesting and practical was the second webinar on April 29, where practical cases from a number of UCA clusters were presented: the Ukrainian Association of Furniture Makers, Podillya Fashion Cluster, APPAU and the Ukrainian Automotive Cluster. Among the methodological recommendations, the new UCA regulations on preparation for C2C meetings were presented here. Record of the webinar – follow the link, the main presentation – here.
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Measures for internationalization and international cooperation
April was rich in events of internationalization and international cooperation. Every morning, the basic needs of Ukrainian enterprises and clusters were discussed at meetings with the European Cluster Alliance. Our community generated 14 specific queries.
At the initiative of the Ukrainian Cluster Alliance, it was proposed to hold meetings of cluster groups by industry. In April, two meetings were held at the European level between Ukrainian and European clusters.
The first such meeting took place on April 6 between textile clusters of Ukraine and EuroTEX from European clusters. The first agreement was reached on joining and lobbying the interests of Ukrainian textile clusters at the Brussels level.
The second meeting, organized by the European Cluster Alliance, was held on April 20 for 6 clusters in the engineering industry, including automotive and shipbuilding. From the European side, the meeting was attended by ORGALIM and CECIMO, the most powerful associations in the field of mechanical engineering and tool making.
On April 27, UCA (leader of internationalization – Olga Trofimova) initiated a meeting between two metalworking clusters in Poland and six machine-building clusters in Ukraine. Clusters were presented at the meeting, as well as patches of some interested Ukrainian companies-members of the clusters. After each company, 18 B2B meetings were held in separate virtual rooms for Polish and Ukrainian companies. All the participants not only received useful information, but also had an opportunity to negotiate with potential partners and customers.
On April 27–28, Olga Trofimova held 21 B2B meetings with cluster managers and potential partners for further organization of C2C and B2B events as a part of Speed-Match 2022.
After the webinars and meetings on clusters’ preparation for C2C and B2B meetings, one of the results is the increase in number of participants from Ukraine (up to 81) on The Supply Chain Resilience (SCR) platform – the largest number of all countries represented in this platform. About 50% of the participants are UCA representatives or involved through UCA activities.
One of the most significant results of April was granting of a free 2-year membership to APPAU system integrators in the American CSIA. This is the result of several exchanges in March-April, which ended with a webinar on April 13 and a meeting of the CSIA Board. Such a connection to the world's largest association of leading engineering companies in the field of industrial automation and IT opens up numerous benefits for Ukrainian engineering companies. The CSIA management is also promoting the outsourcing base established by APPAU and initiating the collection of financial aid. The article by Oleksandr Yurchak, APPAU CEO and UCA Coordinator, on this topic is available at the following link.
The APPAU example, together with the previous successes of the Podillia Fashion Cluster (Digest 4), proves that internationalization is not just about "long history" of international integration that has lasted for years. With proper organization, it can take months.
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Coordination points for the next period
In May, UCA will continue to develop areas of internationalization, fundraising and improving intercluster cooperation. Much attention will be paid to the launch of four rapid response centers.
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Next Cluster-2-Clusters meeting: The Ukrainian Furniture Makers Association and the Lviv Construction Industry Cluster meet with EU clusters
Matchmaking event for EAM clusters and other UCA participants
Cluster-2-Clusters meeting with Turkish clusters
Webinar "Review of EU grant projects for industrial innovators"
Cluster-2-Clusters meeting on the food industry with EU clusters
Webinar "Sustainability during the war - rethinking and new facets" in conjunction with the Association for Sustainable Development
Matchmaking event for food industry clusters of other UCA participants
Webinar "Sectoral policies: proposals from APPAU in the field of industrial automation and IT"
Digests of the Analytical Center of the Ukrainian Cluster Alliance are aimed at informing and coordinating among the leaders of business associations and clusters of the community of industrial and high-tech sectors. The information presented reflects the point of view of the management and participants of the platform.
The information is intended for dissemination in the circles of participants of clusters and business associations of the Industry4Ukraine platform and our key partners: government agencies, international organizations, NGOs, experts. For previous issues, comments and suggestions, please contact: email@example.com.
Editorial board: Volodymyr Panchenko, Fedir Dzen, Nataliia Reznikova, Denys Zhmuryk.
Editor-in-Сhief: Oleksandr Yurchak.