Ukraine Business Roundup — Is Russia’s war decarbonizing Ukraine?

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The following is the July 23, 2024 edition of our Ukraine Business Roundup weekly newsletter. This version is condensed as the author was out of the office. To get the biggest news in business and tech from Ukraine directly in your inbox, subscribe here.

Decentralizing a power grid is a huge undertaking, even in peace times, Kyiv Independent reporter Andrea Januta writes in her latest. Countries around the globe are shifting toward "decentralization" - or generating smaller amounts of energy closer to where it is used, rather than at centralized hubs -- as they look to produce greener energy or build grid resiliency in the face of climate disasters. For Ukraine, however, Russian missile strikes that have crippled Ukraine's grid have created an existential need to move energy production away from large facilities that have become targets for Russian attacks.

With Ukraine facing up to 20 hours of daily blackouts this winter, the country is looking to replace coal-powered thermal plants destroyed by Russian forces with new gas-powered turbines, solar panels, and "mini thermal plants," among other efforts to decentralize as quickly as possible. One contact quipped to Januta that "Russia helped us to decarbonize much more quickly than we thought could work," although the method can hardly be called sustainable. While the war has generated the willpower for a radical overhaul, it has also created serious obstacles to decentralization, including worker shortages, supply chain difficulties, struggles to find financing - and a fast-ticking clock before energy demand jumps in the winter.

Read the full article here.

Ukraine's Finance Minister Serhei Marchenko at the International Conference on the Reconstruction of Ukraine in Berlin on June 11, 2024. (Kay Nietfeld/picture alliance via Getty Images)

Ukraine and its bondholders reach debt deal

After months of negotiations, Kyiv has reached an agreement in principle with some of its creditors to restructure the country's more than £20 billion in external debt, a move that will help the country continue to finance its fight against Russia's aggression. Ukraine's bondholders holding around a quarter of Ukraine's bonds agreed to accept nominal losses of 37% of their holdings, or around £8.67 billion of claims. Why does it matter? The deal should allow Ukraine to potentially save around £11.4 billion over the next three years, and around £22.75 billion by 2033 with lower coupon rates and maturity extensions.

The less Ukraine has to spend servicing its debt, the more money it has to fund the war effort. And "Once completed, it will also pave the way for Ukraine's market re-entry as soon as possible when the security situation stabilizes to fund our country's swift recovery and reconstruction," Finance Minister Serhiy Marchenko said. What's next? To finalize the restructuring process, (the government) needs to get consent from the majority of bondholders and is expected to launch a formal voting process soon, Olena Bilan, chief economist at Kyiv-based investment bank Dragon Capital, told the Kyiv Independent.

The deal should go through. Viktor Szabo, an EM fund manager at Abrdn Plc that holds Ukraine sovereign bonds, told Bloomberg that he thinks they will get the necessary votes, as Ukraine's government moved closer to the bondholder's original proposal than expected.

Hungarian Foreign and Trade Minister Peter Szijjarto speaks at the St. Petersburg International Economic Forum (SPIEF) in Saint Petersburg, Russia on June 6, 2024. (Sefa Karacan/Anadolu via Getty Images)

Delivery debacle

Hungary and Slovakia say they are working to resume oil deliveries by Russia's second-largest oil producer Lukoil after tougher Ukrainian sanctions against the company came into effect.

What happened? Kyiv's hardened sanctions against Lukoil in June effectively prohibit the company from using Ukraine as a transit country for its oil. "There's now a legal situation in Ukraine based on which Lukoil is not currently delivering to Hungary," Hungarian Foreign Minister Peter Szijjarto said on July 16, without going into further detail over what that legal situation was. "We are now working on a legal solution that will enable us to resume supplies because Russian oil is important from the perspective of our energy security," he said.

Both Hungary and Slovakia have turned to the European Commission to force them to respond and have threatened to go to international courts if it doesn't. But later on June 22, CEO of Ukraine's oil and gas giant Oleksiy Chernyshov said that despite the sanctions and the absence of Lukoil gas being transited through Ukraine, volumes in July "are standard." "Ukraine cannot transport Lukoil oil, but the volumes of general transit remain unchanged," he said, adding that "we don't think there is a risk of an oil shortage in Europe," and that this is more of a "political issue."

Despite the war and sanctions on Russian crude, Hungary and Slovakia have been allowed exemptions from sanctioned Russian natural gas and oil to give them time to find alternative supplies. Both countries rely heavily on the supplies and have maintained friendly ties with the Kremlin.

A Sense Bank branch in Kyiv, Ukraine, on Jan.

16, 2023. (Okondrat/Wikipedia)

Global IT outage affects Ukrainian bank, telecoms

There's little chance you missed the news last week about the update from CrowdStrike, a cybersecurity software, that caused outages for millions of Microsoft users, halted banking operations, and grounded thousands of flights. The outages affected almost every industry across the globe, including in Ukraine.

Sense Bank, one of Ukraine's largest banks, reported that day that its app wasn't working due to "an unplanned technical outage," saying its cause was the global IT failure. The issue was quickly resolved, the bank said. Vodafone Ukraine -- Ukraine's second-largest mobile provider -- also reported that "some of its subscribers in Ukraine had experienced difficulties in receiving services" during the morning "due to the failure in the work of global information systems."

And Nova Poshta, Ukraine's largest private parcel delivery company, also reported a "technical failure in the operation of the customer service system due to some software updates."

(Community, Territories and Infrastructure Development Ministry)

Going home

The hype around reconstruction has faded into the background of Russia's war as it continues to rage and investors stay away. On the local level, there are some smaller projects underway to rebuild people's homes, such as one apartment building recently rebuilt in the Kyiv suburb of Irpin with funding largely from United24, a government fundraising platform. It's the first reconstruction project completed in cooperation with the platform and one of 18 apartment buildings in Kyiv Oblast slated to be rebuilt with United24 funds.

A total of 325 residents can now return to their homes. The apartment building -- which cost £1.8 million dollars to repair -- was damaged at the start of Russia's full-scale invasion in March 2022. Russian artillery fire destroyed all the apartments on the building's top floor and caused one of the building's entrances to burn down.

According to the government, the apartments were refitted in line with "build back better" principles, which included new walls, siding, roofing, windows and doors, the restoration of facade walls, their insulation and drainage and water supply systems, as well as the repair of heating system and interiors of the apartments. Overall, United24 has raised £17.5 million for the restoration and reconstruction of residential buildings.

What else is happening

Naftogaz has accumulated 76% of gas storage target ahead of winter

Naftogaz, Ukraine's state-owned oil and gas company, has accumulated 10 billion cubic meters (bcm) of gas reserves, or 76% of the 13.2 bcm target, for the upcoming winter period, the company said. "The figure goes beyond the expected consumption and represents a "safety cushion" for the upcoming months, the company's spokesperson, Vladyslava Smolinska, told the Kyiv Independent.

Ukraine's Antonov company plans to cooperate with Boeing in defense projects

Boeing has signed a memorandum with Ukraine's largest aircraft manufacturing company, Antonov, to further collaborate on defense-related projects, according to a statement published on July 22. "A strong, innovative, and efficient defense industry is key to sustainable economic development and national security, and we are extremely excited to collaborate with Boeing," said Yevhen Havrylov, Antonov's CEO.

Azerbaijan could export gas through Ukraine after Russia deal expires

Ukraine and the EU have approached Azerbaijan to discuss supplying natural gas to Europe via Ukraine once an existing contract with Russia expires at the end of 2024, President Ilham Aliyev said. All sides -- including Ukraine, the EU, and Russia -- are interested in continuing gas transit, Aliyev said at a conference on July 20 in the city of Shusha, Bloomberg reported. "We will help if we can," he said. "I think it's possible to prolong this deal."

Dragon Capital sells stake in one of leading developers of shopping centers in Ukraine

The Dragon Capital investment group announced on July 19 that it has withdrawn from the shareholding of Arricano Real Estate PLC, which manages one of the biggest shopping malls in Ukraine. "This final step is the result of a recent transaction under which Arricano Real Estate PLC bought back its shares from Dragon Capital," the investment group's statement read. "From now on, both companies will be able to focus on their independent strategic goals and further development."

EBRD pledges £220 million to boost Ukraine's energy security, create gas reserves

A key goal of the investment is to help create strategic natural gas reserves at Naftogaz, Ukraine's state-owned energy company.

As of July 16, the EBRD's 10 projects in Ukraine's public sector have amounted to 2.1 billion euros (£2.3 billion), while the bank's assistance across all sectors has reached nearly 4 billion euros (£4.36 billion).

The bank plans to continue investing between 1.5 billion to 2 billion euros (£1.6 billion to £2.18 billion) annually in Ukraine, the Finance Ministry said.