Life on the back burner: How Ukraine’s food industry survives without light

23/ 12/ 2022

Authors: Maximilian Luz Reinhardt, a consultant for economics and sustainability at the Liberales Institut, Tetiana Schyrochenko, Committees Manager of the European Business Association Tetiana Schyrochenko. Committees Manager of the European Business Association. Russia’s war of aggression against Ukraine has been going on for nine months now. Nine months in which Ukrainians have been fighting for their sovereignty, their set of values, and last but not least, their lives. Since the Russian invasion, nothing has remained the same: A year ago, snowmen were still being built in Mariupol, but today, the city lies in ruins and over 90 per cent of the inhabitants have fled or were killed. In recent months, however, this terror has spread far beyond the directly contested areas. Since the summer months, Russian doctrine has shifted to indiscriminately bombarding Ukrainian cities with missiles and drones while deliberately destroying the country’s essential and critical infrastructure. Undoubtedly, a new phase of the war has started, in which Russia is explicitly targeting the civilian population in Ukraine. Despite everything, the Ukrainian food industry is trying to maintain domestic food supplies while also supplying fragile world markets. Since the war began, the industry, along with retailers, had worked tirelessly to keep shelves stocked. Notwithstanding destroyed infrastructure, disrupted logistics and labour shortages – let alone the risk to life and limb – companies had managed to adapt and operate under these conditions. In a sense, they had almost gotten used to the new circumstances - but now their problems are exacerbated even further. Blackouts. The continuous missile attacks against Ukraine’s energy infrastructure are increasingly taking their toll. Whether power plants, substations or control centres: the Russian attacks on important arteries of the power supply are affecting the entire country. According to Ukrainian authorities, not a single power plant remains undamaged. Frequent and long-lasting power outages, which affect citizens and businesses alike, are the result. A pernicious, but probably not wholly unintended side-effect, is the severe impairment of the general food supply. One example: the dairy industry. Power outages are particularly catastrophic for the dairy industry. Due to the high perishability of dairy products, continuous refrigeration or adherence to certain process standards is imperative. Some dairy companies report that they had to dispose of over 40 tons of dairy products due to power outages and interruptions in the cold chain. In addition, modern, large-scale dairies have a high degree of automation. Therefore, a continuous power supply is urgently needed to maintain operations and ensure hygiene standards. Frequent power outages are also fatal for livestock farming. In fully automatic milking machines, for example, the milking processes are delayed due to blackouts. This in turn leads to an overload of the cows’ udders, which can lead to serious health problems and inflammations of all kinds. Leaving animal welfare aside, the Russian missile strikes thus additionally reduce farm productivity. In addition, the power cuts lead to a number of other technical problems: whether in feeding the animals or storing and transporting the milk - the processes collapse without electricity. Moreover, the food sector itself is also frequently the target of Russian missile strikes. While a halt in production during the bombardment is a given, the power outages also frequently lead to production stops. The result is already clear: the supply of Ukrainian foodstuffs has dropped. This is making itself felt both on domestic markets and elsewhere in the form of sharply increased food prices. Retail chains. But even beyond the manufacturing sector, the consequences of the power outages are clearly noticeable. For example, the blackouts are also forcing supermarkets and food stores to close. In addition, goods that require refrigeration have to be disposed of. The store closures restrict food availability in the affected areas, which aggravates the suffering of the civilian population. The economic consequences are also clearly felt by grocery stores. In the case of one major supermarket chain alone, losses from power cuts in the period between October and November amounted to hundreds of thousands of euros. According to a non-representative survey by the Ukrainian European Business Association (EBA), 70 to 90 per cent of Ukrainian retailers were directly affected by power cuts. As a result, sales in some regions have dropped by half. This makes an already difficult situation even more complicated. Generators. These examples also illustrate the importance of the humanitarian aid currently being provided by Western partners to Ukraine. For example, the German Federal Agency for Technical Relief (THW) alone is providing Ukraine with around 470 generators and emergency power stations worth almost 20 million euros. Granted, while this is far from enough, it still significantly contributes to a more constant power supply by decentralized means, a factor that will also be important in the coming months. It is becoming apparent, however, that the availability of generators is still far from sufficient. Companies of all kinds are desperately seeking generators at the moment - a scarce and therefore extremely expensive commodity in the current environment because it is often the only way to ensure the continuation of business and economic activities. However, in addition to the scarcity itself, the installation and proper commissioning of generators is also cumbersome due to a lack of skilled workers but also bureaucratic hurdles. Thus delivery of generators takes 3-5 weeks before the equipment can be connected and put into operation. More over, questions of fire protection put an additional straint to emergency power generation capacities. Once a generator is up and running, its operation still involves immense costs - for example, the cost of electricity provided by a generator is about three to four times the normal rate. As a result, the companies’ production costs also increase significantly, which has an additional impact on prices. Further measures. Ukrainian companies are also adapting to the shortage situation through a variety of different measures. For example, some factories have switched to working at night so as not to burden the power supply during the day with additional customers. In addition, electricity consumption that is not absolutely necessary is being rationed. This means that neon signs remain dark, temperatures and lighting are kept to a minimum, and cooling capacity is only used where it is really needed. In addition, some companies are experimenting with alternative fuels to maintain their energy needs. It is clear that innovation, entrepreneurial activity and a solution-oriented approach are still in vogue, even and perhaps especially, in times of crisis. And yet, despite all these measures, production costs remain significantly higher. Problems with internet access. In addition to power supply, maintaining internet access is also a pressing issue. This is because many stores operate with fully autonomous information and accounting systems and are obliged to report accounting transactions to the tax authorities without interruption. The collapse of the energy infrastructure on the one hand, and the destruction of servers and Internet nodes on the other hand severely affect access to the internet. Ordering processes as well as billing and inventory reports are thus slowed down or prevented altogether. This makes operational business less seamless, but it also makes tax collection more difficult. In other words, beyond generators for emergency power supply, there is an immense need for decentralized Internet access such as Starlink. Light at the end of the tunnel. What is true for the food industry is also true for many other economic sectors. Voltage drops in the glass industry and steel smelting can even lead to the destruction of production facilities. Against this background, the effects of the Russian missile terror are much more far-reaching than they appear at first glance. The economic consequences can only be roughly estimated in the current situation, but it is certain that Ukraine’s economy will be set back by years due to the destruction of the infrastructure alone. In order to ensure food security and prevent a worsening of the global food crisis, it is urgently necessary to maintain the power supply. Therefore, humanitarian support from Western partners, such as the provision of generators, is very important. They literally create a light at the end of the tunnel. At the same time, it is already evident that Western support through state-of-the-art air defence systems is bearing fruit. Defensive shields around essential infrastructure, as well as urban centres, protect Ukrainian civilians as well as power networks and production facilities. In order to guarantee a return to normality, however, there is no way around the liberation of the occupied territories and a complete withdrawal of the aggressor. Only then will the Ukrainian people be able to devote all their energies to reconstruction and a return to a peacetime economy. Source: Friedrich Naumann Foundation

Authors: Maximilian Luz Reinhardt, a consultant for economics and sustainability at the Liberales Institut, Tetiana Schyrochenko, Committees Manager of the European Business Association

Tetiana Schyrochenko Committees Manager of the European Business Association

Russia’s war of aggression against Ukraine has been going on for nine months now. Nine months in which Ukrainians have been fighting for their sovereignty, their set of values, and last but not least, their lives. Since the Russian invasion, nothing has remained the same: A year ago, snowmen were still being built in Mariupol, but today, the city lies in ruins and over 90 per cent of the inhabitants have fled or were killed. In recent months, however, this terror has spread far beyond the directly contested areas. Since the summer months, Russian doctrine has shifted to indiscriminately bombarding Ukrainian cities with missiles and drones while deliberately destroying the country’s essential and critical infrastructure. Undoubtedly, a new phase of the war has started, in which Russia is explicitly targeting the civilian population in Ukraine.

Despite everything, the Ukrainian food industry is trying to maintain domestic food supplies while also supplying fragile world markets. Since the war began, the industry, along with retailers, had worked tirelessly to keep shelves stocked. Notwithstanding destroyed infrastructure, disrupted logistics and labour shortages – let alone the risk to life and limb – companies had managed to adapt and operate under these conditions. In a sense, they had almost gotten used to the new circumstances – but now their problems are exacerbated even further.

Blackouts

The continuous missile attacks against Ukraine’s energy infrastructure are increasingly taking their toll. Whether power plants, substations or control centres: the Russian attacks on important arteries of the power supply are affecting the entire country. According to Ukrainian authorities, not a single power plant remains undamaged. Frequent and long-lasting power outages, which affect citizens and businesses alike, are the result. A pernicious, but probably not wholly unintended side-effect, is the severe impairment of the general food supply.

One example: the dairy industry

Power outages are particularly catastrophic for the dairy industry. Due to the high perishability of dairy products, continuous refrigeration or adherence to certain process standards is imperative. Some dairy companies report that they had to dispose of over 40 tons of dairy products due to power outages and interruptions in the cold chain. In addition, modern, large-scale dairies have a high degree of automation. Therefore, a continuous power supply is urgently needed to maintain operations and ensure hygiene standards.

Frequent power outages are also fatal for livestock farming. In fully automatic milking machines, for example, the milking processes are delayed due to blackouts. This in turn leads to an overload of the cows’ udders, which can lead to serious health problems and inflammations of all kinds. Leaving animal welfare aside, the Russian missile strikes thus additionally reduce farm productivity. In addition, the power cuts lead to a number of other technical problems: whether in feeding the animals or storing and transporting the milk – the processes collapse without electricity.

Moreover, the food sector itself is also frequently the target of Russian missile strikes. While a halt in production during the bombardment is a given, the power outages also frequently lead to production stops. The result is already clear: the supply of Ukrainian foodstuffs has dropped. This is making itself felt both on domestic markets and elsewhere in the form of sharply increased food prices.

Retail chains

But even beyond the manufacturing sector, the consequences of the power outages are clearly noticeable. For example, the blackouts are also forcing supermarkets and food stores to close. In addition, goods that require refrigeration have to be disposed of. The store closures restrict food availability in the affected areas, which aggravates the suffering of the civilian population. The economic consequences are also clearly felt by grocery stores. In the case of one major supermarket chain alone, losses from power cuts in the period between October and November amounted to hundreds of thousands of euros. According to a non-representative survey by the Ukrainian European Business Association (EBA), 70 to 90 per cent of Ukrainian retailers were directly affected by power cuts. As a result, sales in some regions have dropped by half. This makes an already difficult situation even more complicated.

Generators

These examples also illustrate the importance of the humanitarian aid currently being provided by Western partners to Ukraine. For example, the German Federal Agency for Technical Relief (THW) alone is providing Ukraine with around 470 generators and emergency power stations worth almost 20 million euros. Granted, while this is far from enough, it still significantly contributes to a more constant power supply by decentralized means, a factor that will also be important in the coming months.

It is becoming apparent, however, that the availability of generators is still far from sufficient. Companies of all kinds are desperately seeking generators at the moment – a scarce and therefore extremely expensive commodity in the current environment because it is often the only way to ensure the continuation of business and economic activities.

However, in addition to the scarcity itself, the installation and proper commissioning of generators is also cumbersome due to a lack of skilled workers but also bureaucratic hurdles. Thus delivery of generators takes 3-5 weeks before the equipment can be connected and put into operation. More over, questions of fire protection put an additional straint to emergency power generation capacities.

Once a generator is up and running, its operation still involves immense costs – for example, the cost of electricity provided by a generator is about three to four times the normal rate. As a result, the companies’ production costs also increase significantly, which has an additional impact on prices.

Further measures

Ukrainian companies are also adapting to the shortage situation through a variety of different measures. For example, some factories have switched to working at night so as not to burden the power supply during the day with additional customers. In addition, electricity consumption that is not absolutely necessary is being rationed. This means that neon signs remain dark, temperatures and lighting are kept to a minimum, and cooling capacity is only used where it is really needed. In addition, some companies are experimenting with alternative fuels to maintain their energy needs. It is clear that innovation, entrepreneurial activity and a solution-oriented approach are still in vogue, even and perhaps especially, in times of crisis. And yet, despite all these measures, production costs remain significantly higher.

Problems with internet access

In addition to power supply, maintaining internet access is also a pressing issue. This is because many stores operate with fully autonomous information and accounting systems and are obliged to report accounting transactions to the tax authorities without interruption. The collapse of the energy infrastructure on the one hand, and the destruction of servers and Internet nodes on the other hand severely affect access to the internet. Ordering processes as well as billing and inventory reports are thus slowed down or prevented altogether. This makes operational business less seamless, but it also makes tax collection more difficult. In other words, beyond generators for emergency power supply, there is an immense need for decentralized Internet access such as Starlink.

Light at the end of the tunnel

What is true for the food industry is also true for many other economic sectors. Voltage drops in the glass industry and steel smelting can even lead to the destruction of production facilities. Against this background, the effects of the Russian missile terror are much more far-reaching than they appear at first glance. The economic consequences can only be roughly estimated in the current situation, but it is certain that Ukraine’s economy will be set back by years due to the destruction of the infrastructure alone.

In order to ensure food security and prevent a worsening of the global food crisis, it is urgently necessary to maintain the power supply. Therefore, humanitarian support from Western partners, such as the provision of generators, is very important. They literally create a light at the end of the tunnel. At the same time, it is already evident that Western support through state-of-the-art air defence systems is bearing fruit. Defensive shields around essential infrastructure, as well as urban centres, protect Ukrainian civilians as well as power networks and production facilities. In order to guarantee a return to normality, however, there is no way around the liberation of the occupied territories and a complete withdrawal of the aggressor. Only then will the Ukrainian people be able to devote all their energies to reconstruction and a return to a peacetime economy.

Source: Friedrich Naumann Foundation