Yaroslava Boiechko’s bakery and grocery store, in a small town at the foot of the Carpathian mountains, has been feeding the local community with bread and pastries for 22 years. Her croissants fly off the shelves, but she doesn’t know how much longer she can go on.
Unreliable electricity supplies, the dwindling spending power of local people, and the loss of staff and customers to the war, emigration, and Ukraine’s cities mean her small business is rapidly becoming unsustainable.
After massive Russian attacks on the country’s power infrastructure, Ukrainians are expected to have only between two and six hours of electricity per day in the winter, and for the bakery that will not be enough.
Even before the full-scale invasion in 2022, there was a tendency for residents in Ukraine’s villages and small towns to seek a better life in big cities or abroad, but now this migration has skyrocketed. As a result, the search for staff has become more complicated than ever before.
Around five million Ukrainians are abroad, meaning the number of workers and buyers has decreased drastically. Two of Yaroslava’s bakers recently went to Poland, planning to make some money and return in several months.
There is little chance of finding people with the skills to replace them and training would take months. Yaroslava fears there may be no business for them to come back to.
The demands of the frontline also make it harder to find male workers. While some big enterprises have a right to claim economic mobilization exemptions for their employees, small businesses do not even have the right to exempt their owners.
A draft law proposing companies pay $530 a month for each worker exempted from mobilization was tabled in the Ukrainian parliament in June, immediately provoking a wave of criticism that would allow the rich to avoid military service.
Yaroslava said even if the law came into effect, her bakery, like many other small businesses, would not have the resources to pay. The 48-year-old mother of one said if she was able to use it she might exempt the company’s co-owner, her husband.
The Ukrainian economy is far from self-sufficient, and needs $3bn of macro-financial assistance from Kyiv’s Western allies per month, according to Minister of Finance Sergii Marchenko. Without this help, the whole financial system would be in danger of collapse.
Kyiv has acknowledged a $5bn budget deficit this year due to army spending, and bondholders are planning to push Ukraine to resume debt payments in August 2024, increasing the risk of default.
In the midst of war and with growing expenses, Ukraine must find ways to finance itself. The bluntest tool would be to raise taxes, but businesses already suffering from inflation, high logistics costs, and electricity outages might not survive any increase.
Rural small businesses are facing a spectrum of hardships and increased food prices have been met with hostility by a population whose income is already limited. The government’s plan to increase business taxes and excise duty on fuel will add to spiraling costs that will need to be passed on to consumers.
Yaroslava says the government could help small businesses by permitting exemption from mobilization for owners, keeping the current tax system, which allows some simplifications for small enterprises, and giving food production companies cheaper raw materials from the government’s stores, as it did during the food crisis in 2003 and 2004.
Oleg, the owner of a factory with more than 1,000 workers in Odesa, is in a better position. (He asked for his family name to be withheld.) Because his factory, which makes canned food, fulfils a government contract and exports goods abroad, crucial workers can exempted from mobilization.
He believes the war is existential, and the main goal is to survive. In those circumstances, increasing taxes will help the country preserve its economy, he said.
The crisis is a crash test for businesses and their ability to adjust and survive hardships, Oleg said. He had been preparing for such a situation for a while and explained that increased production costs would lead him to increase efficiencies, raise the prices of his products, and find new export opportunities.
He believes the government should support businesses by being more protectionist to increase the volume of Ukrainian goods in the shops.
While the decision of the G7 to lend $50bn from frozen Russian assets to Ukraine will help to stabilize the Ukrainian economy when it arrives later in the year, the government now faces a dilemma over its fiscal plans.
A harsh winter with unpredictable energy supplies awaits, the demographic crisis is deepening, and inflation is beginning to rise. Under these circumstances, raising taxes on fuel and entrepreneurs might shift many small businesses into the grey economy or provoke their closure, leading to further depopulation of rural areas.
While economic independence is necessary, it is hard to see how the budget gap can be filled by such measures before the winter ends. They might make it worse.
Mykyta Vorobiov is a Ukrainian political adviser, journalist, and political science student at Bard College Berlin. For the last two years, he has been developing articles on politics and law for CEPA, VoxEurop, JURIST, and others.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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