Russian Strikes on Power Grid Push Ukraine’s Businesses to Breaking Point

Production costs for Ukrainian industrial giant Interpipe have more than doubled. An artisanal cheesemaker had to throw out more than 200 pounds of product spoiled by power cuts. The country’s second-largest move-theater chain was forced to refund more than 80,000 tickets during the first half of the year.

Renewed Russian attacks on Ukrainian power plants have squeezed the lifeblood of its economy, pushing some businesses to the breaking point.

“We’re not talking about profit,” said Nataliya Baydan, chief executive of the cinema chain, Planeta Kino. “We’re talking about survival.”

With winter looming, Ukraine is racing to restore power supply that has been crippled by Russian missile and drone bombardments. Unless it succeeds, cities could become unlivable during the colder months, driving an exodus from the country. That would further weaken the economy, undermining Ukraine’s ability to sustain the war effort against a much larger enemy. 

“To keep up the fight, you really have to have your economy functioning,” said Maksym Samoiliuk, an economist at the Kyiv-based Center for Economic Strategy. “How can the soldiers fight if their families are starving at home?”

Ukrainian President Volodymyr Zelensky has pleaded with Western allies for more air- defense systems to shield energy infrastructure against Russian attacks.

The effort to keep Ukraine’s economy ticking is central to the war effort. Russian President Vladimir Putin wants to wear down the will and means of Ukraine to fight—and the appetite of its Western backers to make up for any deficits.

Billions of dollars from the U.S. and other Western partners have kept Ukraine’s economy afloat since Russia’s invasion slashed output by nearly a third in 2022.

The European Union is putting together aid for Ukraine aimed at supporting Kyiv in the medium term. The bloc on Friday announced a loan of up to $39 billion as part of a U.S.-backed plan to raise $50 billion against future profits from frozen Russian state assets. The EU loan, which will need approval from a majority of member states and the EU parliament, is intended to reduce U.S. exposure, to address concerns in Washington that had held up disbursals.

Despite huge challenges and uncertainty, the economy grew 5.3% last year, buoyed by a record harvest and higher military spending.

As the war entered its third year, a new corridor through the Black Sea was beginning to ease a chokehold on exports, particularly of grain, iron ore and metallurgical products. Economists were forecasting growth of more than 4% this year.

Then Russia struck again.

In waves of attacks beginning in March, Russia knocked out half of Ukraine’s power- generation capacity, prompting economists to downgrade growth forecasts. The damage has added to challenges for businesses already grappling with labor shortages and logistical bottlenecks.

Beyond winter, the outlook for foreign financing is unclear. Plans are in place to cover $20 billion of the estimated budget deficit next year, but the country needs a further $15 billion, Prime Minister Denys Shmyhal said.

To help cover the energy deficit, Ukraine has increased imports of electricity from neighboring EU countries, nations to which it was exporting power as recently as March. Capacity is limited, however, and the cost of imported electricity is higher than its domestic equivalent.

Consumer electricity prices were doubled earlier this year to help pay for repairs to power infrastructure. The government is also encouraging consumers to reduce their dependence on the country’s energy system by scrapping import duties and value-added tax on energy equipment and offering affordable loans for companies to buy and install gas-fired power generation units. State energy company Ukrenergo is holding auctions to purchase any surplus produced by private companies.

The EU announced €160 million (roughly $179 million) in funding on Thursday to help Ukraine repair its energy infrastructure and provide additional renewable-energy sources.

Decentralization will make Ukraine’s energy system less vulnerable to Russian attack, but it will take time.

For now, many businesses are muddling through.

The crunch is particularly painful for energy-intensive enterprises such as Interpipe, which makes train wheels and pipes for the oil-and-gas industry. The company needs huge amounts of electricity to turn scrap metal into the steel billets from which its railway wheels and pipes are made.

“Apart from scrap, electricity is the main raw material we use,” said Andriy Bibik, director of the company’s steel plant near the eastern city of Dnipro.

In response to Russia’s attacks this year, the government imposed new conditions on businesses: It would only guarantee uninterrupted power supply to those that imported 80% of their needs from the European Union.

“We’re still operating but costs have increased by 1.5 times,” said CEO executive Andriy Korotkov. Raising prices would only make Interpipe’s products uncompetitive on international markets, he added.

Gas turbines could offer an alternative energy source in the long term, but for now there is no viable substitute for imports.

Steel giant ArcelorMittal has lobbied the government to lower the quota of energy it must import to 50%. “Otherwise, the company will be forced to furlough 1,200 people,” said Olha Buslavets, a former energy minister who advises ArcelorMittal Kryvyi Rih on energy issues.

Lower production means less tax revenue for the government, she said. “This will affect the country in a negative way,” she said.

Supermarket chain Aurora was well-prepared for the latest energy crunch. After the first winter of the war, it equipped its 1,400 stores with generators and other alternative energy sources. In sunny weather, solar panels now generate nearly all the power needed to run its three distribution centers, said Chief Executive Taras Panasenko.

“We are quite adapted to uncertainty,” he said. Nevertheless, rising energy costs have made the business about 30% less profitable.

Wavering power supply has compounded the struggles of Ukraine’s second-largest cinema chain. While seven of Planeta Kino’s 11 movie theaters have a backup power source, 4DX screens, which use more electricity for motion platforms and other special effects, can’t operate on a generator. When a power outage interrupts an IMAX screening, it can take up to one hour to switch over to a generator, said chief executive Baydan. Many customers won’t wait that long.

The situation has led to a 45% increase in the number of tickets refunded over the first six months of the year compared with the same period in 2023.

Every evening, Solomiya Bratakh and her husband check the power schedule for the following day. Their cheese-making business depends on electricity for everything from milk pasteurization to storage.

“We wrote a business plan—there was a five-year development strategy—but now we plan from one day to the next,” said Bratakh, co-owner of the company, called Harbuzoviy Rai.

The couple bought a diesel-powered generator, but certain stages of the cheese-making process demand more electricity than it can produce. Production of their prizewinning Forest Song cheese was put on hold because it requires a stable temperature to mature properly.

A heat wave in July made things especially tough. Energy companies imposed rolling blackouts as demand for electricity surged, resulting in lengthy power outages that caused two batches of cheese to spoil.

To defray the rising costs of energy—and milk—they marked up their products by about 10%, but can’t increase prices further without losing customers. Orders from smaller stores declined because of the difficulty—and cost—of keeping cheese refrigerated.

Even so, they broke even in July, and electricity supply improved in August. “We’re not ready to give up,” Bratakh said.