By Olga Samofalova for Vzgliad
Translated by Alena Begemot
Source: http://www.vz.ru/economy/2016/1/27/790903.html

Western companies continue fleeing the Ukrainian market with its growing losses. Considering doing business in the region no longer profitable, the American Groupon Inc., owning the popular service of collective discounts, as well as the computer giant Asus have just shut down. Shopping malls, formerly filled with brand outlets, are now selling second-hand clothes. It is not only retailers that are leaving the local market, however. Large financial corporations and oil and gas companies are eagerly following small businesses in their retreat.

It has been nearly two years since the first Western companies started leaving the Ukraine and the signs are this tendency will remain.  According to the Ukrainian media, such mass exodus has been caused by currency instability, decline in the local purchasing power and in some cases – by political pressure, as it happened with the Russian brand Bosco. The statistics show that not only has the Ukrainian market failed to attract new participants in the last eighteen months, but it has lost them – the record number of nearly 30 world-famous brands have stopped work. A third of them is chain stores of clothing and footwear. The German Esprit, the Dutch Mexx, the British Island, the Italian OVS, the French Minelli and others are all gone for good. The Russian company Bosco has too wrapped up its business with only one shop left in Kiev and has done so because of the political pressure, for most of the collections of its clothing are decorated with ornaments and symbols representing Russia.

Large Western oil and gas corporations, banks and companies from other spheres are too hastily closing down their Ukrainian branches. It was in the spring of 2015 when the Chairman of the GermanUkrainian forum Rainer Lindner announced the intention of the German businesses, disappointed in the Ukraine, to fold up their operations there but to do it with minimal losses possible. There were as many as several hundreds of the German companies represented at the local market at the moment. As for the Western banks, they are going away, too. Already in 2013 Raiffeisen, foreseeing looming problems in the country, put up its Ukrainian subsidiary “Raiffeisen Bank Aval” for sale. It was too late, however. The coup d’etat, the war in the Donbass and later the National Bank of the Ukraine with its ambiguous policies, – it alladded up to scare away any prospective owners of the banking business in the Ukraine.

More than two years elapsed till finally, in November 2015, the European Bank of Reconstruction and Development consented to buy 30% of “Raiffeisen Bank Aval” shares, having come into agreement with Raiffeisen to split the cost of 3,15 billion hryvnia for its daughter’s capitalization. There are quite a few foreign companies that are still working in the Ukraine merely because they are unable to sell their business. However, only major players can afford to take a wait-and-see position, compensating the losses they have been suffering at the insignificant on the global scale Ukrainian market by other revenue. Some companies are now present in the country only formally, with factual activities stopped and only a couple of key employees left in the local branches to sustain earlier concluded contracts.

The Ukraine was absolutely thrilled when three multinational oil companies at a time – Chevron, Shell and ExxonMobil – entered the market. They had all been going to extract shale gas in the country. They all left her. The American Chevron was the last to retreat after in the summer of 2015 it withdrew from the project on extraction of gas in Western Ukraine – in Olesskaya Ploshchad which is located on the territory of Lvov and Ivano-Frankovsk regions. If we take Shell, its decision to quit the market can be explained by unwillingness to run political or military risks, given that it had planned to extract gas on the territories of Donetsk and Kharkov regions, but Chevron’s? The reason is unofficially believed to be its displeasure at the new rules of the game the Ukrainian government had set by doubling payments for the use of natural resources for gas producers.

All the foreign companies, whether they do or do not run political or military risks, are abandoning the Ukraine for one major reason which is economical. Apart from that, the Western business is fearful of the country’s complex and frequently changing legislation. Besides, corruption, as rampant as ever, is now accompanied by another plague – redistribution of business. “Any business is cynical. Should it be the Ukraine that lures with profits, business will choose the Ukraine. Should it not, it won’t take it long to relocate to Vietnam. It is really hard to make money in the Ukraine now. General instability, military actions in the East, chaos with taxes… They have amended the tax code as many as four times lately. It’s the outside of enough”, says Alexander Okhrimenko, the CEO of the Ukrainian analytical center.

Prices of imported goods have moved sharply upwards, whereas the local purchasing power has dramatically decreased. In the period 2014-2015 the Hryvnia was devalued by nearly 300%. Most people simply cannot afford foreign products, which explains the contraction of imports by a third in 2015.  People have become more price-conscious and the very structure of the trade has changed. Shopping centers which used to sell designer labels are now almost invariably offering second-hand, elegantly calling it “reasonably priced European clothes”.

“Secondhand has always been the lot of street markets and its migration to malls – it is something unheard of. There are also the so-called stock shops that are too gaining in popularity“, says Okhrimenko. “Many retail brand-stores have closed down. They bring goods, translate their prices at the exchange rate and realize they will never sell. Shifting towards second-hand is not an option for it is considered as sinking beyond reproach and staining the brand’s reputation”, adds the Ukrainian economist. Imports of relatively cheap Chinese clothing and footwear fell as well – by 70% in 2015 if compared to those in 2014. “Even for the Chinese clothes the demand is weak, hence the decline”, explains Okhrimenko. Ukrainian banks have been suffering enormous losses for two years in a row, amounting, according to the National Bank of the Ukraine, to over 57 billion Hryvnia in 2015 and 22,4 billion in 2014. And these figures do not include insolvent bank. “Crediting just doesn’t work, the National Bank itself admits the fact. People won’t repay loans”, tells us Okhrimenko. The economist has little doubt that in 2016 foreign companies will continue fleeing the Ukraine. “The situation might change if the oil price picks up drastically, Europe and the USA plunge into euphoria of growth and feel it’s worth their while to try the Ukraine anew. Meanwhile, this year is unlikely to see anything but a downfall”, says Okhrimenko.