Aug. 8 (Bloomberg) -- In November, Ukrainian Trade Guild Consulting fielded calls from retailers including Abercrombie & Fitch Co. and Japan’s Uniqlo Co. about leasing space before this year’s opening of the country’s biggest shopping mall.
Then came protests, the street violence and Ukrainian President Viktor Yanukovych’s ouster. By January, UTG’s phones stopped ringing. Now, as deadly battles rage in the east, the 74-acre (30-hectare) Respublika concept, planned to include eastern Europe’s largest entertainment complex on Kiev’s busiest road, sits unfinished behind sagging chain-link and wooden fences, the project abandoned by foreign investors.
“Investors are simply afraid and they’re asking how safe it is,” UTG Managing Partner Vitaliy Boyko said in an Aug. 1 interview at the developer’s headquarters. “We explain it’s very safe in Kiev, but they still keep canceling meetings.”
As the former Soviet republic enters a ninth month of war and political turbulence, executives across the country of 43 million people are struggling to keep their companies afloat as capital from abroad dries up, markets sink, sanctions against Russia threaten to spill over the embattled border and the country remains Europe’s riskiest place to do business.
The government in Kiev, about 600 kilometers (370 miles) from the conflict in the east, is already saddled with a legacy of corruption and cronyism and mired in the deepest recession on the continent. The effect of the contraction is spreading across society, damping retail and real estate sales as well as construction and infrastructure upgrades, a staple of industrial growth.
“The war is demolishing the domestic market,” said Alexander Valchyshen, head of research at Investment Capital Ukraine, in an Aug. 5 e-mail. “In other words, sectors that cater to domestic consumers, including businesses, are suffering the most.”
Investors selling Ukrainian assets sent its sovereign and company bonds tumbling 5.3 percent in August through yesterday, the worst loss for the period among 77 nations tracked by the Bloomberg Dollar Emerging Market Composite Bond Index. The yield on the nation’s Eurobonds maturing in July 2017 rose for a sixth day today to 11.20 percent, the highest in 11 weeks.
The hryvnia, the world’s second-worst performing currency this year, depreciated as much as 2.6 percent yesterday to 12.68 per dollar, its weakest intraday level in almost four months. It traded at 12.55 today by 6:04 p.m. in Kiev.
The country’s economy shrank 4.7 percent in the second quarter from a year ago, the biggest contraction since 2009. Gross domestic product will drop by 6.5 percent this year, according to government and International Monetary Fund forecasts. At the same time, industrial output fell 5 percent in June from a year ago, led by machine building and chemical production.
From steelmakers, such as billionaire Rinat Akhmetov’s Metinvest BV, to food producers such as UkrLandFarming Plc, the country’s largest agricultural company, industrial companies are taking the brunt of the conflict and EU sanctions against Russia, according to analysts including Elena Bilan at Kiev-based Dragon Capital.
Metinvest Chief Executive Officer Yuriy Ryzhenkov said one of the biggest risks for the company is a mass exodus of its workers, especially from unsettled areas. More than 1,000 employees from the 14,000-strong workforce at Metinvest’s Krasnodonvugillya plant have quit, while the Avdiyivsky coke-producing plant is running at one-third capacity, he said.
Steelmaker DMK Dzerzhinsky, part of the Industrial Union of Donbass, said on Aug. 6 it only has one furnace operating out of three because the railway line for coke-coal delivery is mined with explosives.
As heavy industry feels the pain, the retail sector is the most visibly hit, with shopping centers devoid of customers across Kiev and international retailers, including Marks & Spencer Plc and Gap Inc., either cutting back on outlets or shutting up shop altogether.
Retail sales rose 0.8 percent in the first six months, compared with growth of 11.1 percent in the same period last year, according to the state statistics office. Since Jan. 1, retail sales in three of Ukraine’s 24 regions have dropped, conflict-stricken Donetsk and the Luhansk region among them.
“The slowdown in retail is quite sharp and pronounced,” with across-the-board declines expected in the second half, said Elena Bilan, an economist at Kiev-based Dragon Capital. “There needs to be an inflow of direct foreign investments to boost production.”
Instead, most investors are gone, said Steffen Gruschka, the chief investment officer at SG Alpha fund that has $20 million under management. The few that remain are simply waiting it out for eventual reforms and the country’s move toward a more European-style framework, he said.
Warsaw-traded Ukrainian stocks have fallen for seven sessions, sending the WIG-Ukraine-Index to 295.80 yesterday, the lowest since January 2011, according to data compiled by Bloomberg. The index closed today 0.89 percent higher at 298.42 from the opening of 292.02.
Without the military conflict in the country’s east, ‘the market certainly would be higher,’’ Gruschka said. The flip side is that “the more country has to fight, the easier it will become to carry out painful reforms because politicians will be forced to do the right thing,” he said.
Meantime, consumption will decline in all industries that focus on domestic consumption, such as food, clothing and appliances, Bilan said. That, in turn, will hurt companies such as DTEK Holding BV, the country’s largest utility.
Some of DTEK’s mines have temporarily halted coal extraction because they’re too close to the fighting, the company’s chief financial officer, Vsevolod Starukhin, said in an Aug. 6 e-mail.
The company’s Luhansk thermal power station is unable to operate at full capacity after a railroad bridge used to deliver coal was destroyed, Starukhin said.
Clients of computer-services company Luxoft Holding Inc. urged management to move their operations out of Ukraine and Russia, Chief Executive Officer Dmitry Loschinin said by phone in May. He didn’t name the clients.
Ukraine’s leadership “forced business to play by its rules for years and it’s going to take more than a year to overcome the existing system of corruption,” said Daniil Vladov, head of DCH Real Estate, in an e-mail.
The winter demonstrations that led to Yanukovych’s government collapse were sparked in part by a grassroots effort to end corruption in administrative offices. The current government has been unable to change that perception, leaving investors unwilling to spend money on Ukrainian assets, said Dmitry Sennychenko, head of JLL’s Kiev office.
“The transparency of the market and predictability are things so far not associated with Ukraine,” Sennychenko said. “Implementation of reforms in economic policy has been talked about a lot and now needs to be done.”
In a leafy suburb of south Kiev, work has ground to a halt at Respublika, a complex of 450 shops, 50 restaurants and an entertainment center with eastern Europe’s largest indoor rollercoaster. The plan also includes apartments for the country’s growing middle class.
Respublika’s purple-and-chrome signature facade towers over piles of earth and weedy clumps where the parking lot is meant to be. Around the premises, devoid of workers on Aug. 4, a rickety wooden green fence topped with barbed-wire bars the entrance and a watchman sits alone in a wooden shack.
Nevertheless, Boyko is optimistic that the project will go ahead later this year.
“We’re actively working on getting new brands to enter Ukraine’s market,” Boyko said. “But at this moment we can’t win them over.”
To contact the reporters on this story: Kateryna Choursina in Kiev at email@example.com; Daryna Krasnolutska in Kiev at firstname.lastname@example.org; James M. Gomez in Prague at email@example.com