After 20 years of running a large commercial tube-manufacturing plant out of eastern Ukraine’s biggest city, Leonid Filshtinskiy is moving some of his operations westward — to Spain.
“I decided to do it because I fear losing Russia as a market,” Filshtinskiy said, explaining how his business, which mostly depends on buyers in the former Soviet Union, struggled as political upheaval gripped Ukraine. “This political situation, this bad experience, has pushed us toward these kinds of changes.”
In larger Kharkiv, a Russian-speaking region known for its universities, factories and farms, evidence of an adverse political situation is scant. There have been no big protests for months, the war with separatists in neighboring Donetsk and Luhansk has not spilled over the region’s borders, and life in the regional capital has been almost boringly calm — apart from a late-April assassination attempt on the mayor, Gennady Kernes.
But even relatively quiet parts of Ukraine have not escaped the economic backlash of the country’s political problems. In Kharkiv, the setbacks come with a special challenge: how to revive a flagging economy largely dependent on trade with Russia and Ukraine’s other neighbors to the east when Ukraine as a whole is making a concerted turn to the West.
“Before, when 100 percent of contracts went to Russia, why did you have to think? You didn’t,” said Eduard Rubin, deputy chairman of the Kharkiv chapter of the European Business Association, a large international nonprofit group in Ukraine. “But the situation in Ukraine, it changed.”
The long-anticipated association agreement that Ukraine signed Friday with the European Union will open up a free-trade zone between Ukraine and its Western neighbors.
But the reorientation will probably come at some cost. Russia had vowed “consequences” if Ukraine signed the E.U. agreement, ranging from new tariffs and customs on exports to an end to commerce in certain sectors altogether. If it makes good on all its threats, Ukraine could stand to lose its biggest trading partner: In 2012, Russia accounted for about a third of all Ukraine’s imports and a quarter of all exports nationwide. (The E.U. member nations together made up the country’s second-largest trade partner in 2012, accounting for about 30 percent of imports and a quarter of exports.)
In Kharkiv, the loss would be even greater.
“There’s only 20 percent left of the volume of trade that there used to be with Russia,” said Oleg Tentyuk, 40, whose company, EuroCarriage, has facilitated imports and exports across Russia’s border with Kharkiv for a decade. “Russia has made it much harder for Ukrainian goods to cross the border. . . . We have to rethink and do something about our economic approach in regional eastern Ukraine.”
The Ukrainian government thinks the best solution is the full about-face to Europe that it initiated Friday — a move Kiev hopes will prompt European leaders to start pumping foreign capital into the local economy.
“Ukraine is going back to Europe,” said Sergiy Yevtushenko, who heads Ukraine’s state agency for investment and national projects. “Signing the agreement will give more security to international investments.”
Ukraine entered the current period of political transition hungry for foreign help to buoy a shrinking economy, pay off mounting debt and jump-start economic reforms. But over the past eight months, protracted instability and war in the east have deterred the Western investors it is so feverishly courting.
“It’s very hard to explain to foreign investors that there is war in Donbas but everything in Kharkiv is fine,” said Rubin, who also heads the Ukraine-based software development company Telesens, in a reference to eastern Ukraine’s industrial heartland, where separatists are openly fighting the Kiev government. “All the contracts that were coming from the U.S. and the E.U., they stopped growing. . . . The new projects and the new contracts are all on hold.”
Even sectors without significant ties to Russia have felt the squeeze. For the past few years, the information technology industry, which contracts mainly with Western clients, has been Kharkiv’s brightest economic success story. But since the uprisings started, fewer and fewer clients have wanted to start projects in the east.
“Because of this political situation, the main offices for Kharkiv companies are going to west Ukraine and to other countries,” said Max Volobaev, 24, a recruiter with the local agency Ols Time, who estimated that the number of IT jobs has shrunk by about 30 percent since 2012. “The business is getting smaller and smaller.”
Ukraine’s sizable agricultural sector is also hoping that new investment partnerships with Europe will fuel its resurgence.
Since the protests started in late 2013, Ukrainian banks have balked on loans, interest rates have soared and the local currency has depreciated by about 40 percent, forcing farmers to cut back on planting. That means this year’s national grain harvest is on track to be about 12 to 15 percent smaller than last year’s — not an ideal development for a country seeking to reclaim its pre-Soviet place as the “breadbasket of Europe.”
“I don’t think we’re talking Marshall plans, but I think the U.S. and the E.U. need to step up,” said John Shmorhun, who has worked in Kharkiv’s agricultural sector for almost 20 years. His company, Harmelia, recently merged its 73,000 acres of farmland with the French farming company AgroGeneration, which let it ride out a difficult season better than most farmers. “But it’s been severe,” he said.
Despite bleak estimates from the World Bank, which forecast this month that “geopolitical tensions” would cause Ukraine’s economy to contract by 5 percent in 2014, Ukrainian officials are bullish on the restorative effects of their new association with Europe.
“I think that our traditional sectors are attractive and promising,” Yevtushenko said. “I am absolutely confident that there will be inflow of investment in the coming 18 to 24 months.”
But not all Ukrainian businesses are so sure Europe can save the day that quickly.
Kharkiv’s manufacturing sector has suffered not only because relations between Russia and Ukraine iced over but also because the factories that used to send parts for cars, helicopters and advanced weapons systems to Russia cannot pivot: Those goods were tailored to Russian specifications, and the facilities cannot easily be converted to meet Western requirements.
It’s a similar situation with cheese. About the time President Viktor Yanukovych was ousted in February, Russia stopped importing most Ukrainian cheese, claiming the need for quality reviews. Until that point, Ukrainian dairy and meat producers had been sending so much of their output to Russia that only a very few ever bothered to get certified to export to Europe. That process — one of many Ukraine must undertake to ready various products for the European-focused future — may take more time than some Ukrainian businesses can afford.
“People in the government do not see the difficulties to get into the European market,” said Alex Lissitsa, president of the Ukrainian Agribusiness Club. “So long as we are not certified, we cannot export anything.”
CORRECTION: An earlier version of this article incorrectly quoted Eduard Rubin of the European Business Association as saying that all the contracts that had been coming to eastern Ukraine from the United States and European Union have “just stopped.” Rubin said the contracts have “stopped growing” and that “the new projects and the new contracts are all on hold.” The article has been updated.