KHARKIV IN FOCUS

Kharkiv: seeking new horizons

Ukraine’s second city hard hit by the ongoing Russian hybrid war but economic recovery already well underway as search for new partners continues

Kharkiv: seeking new horizons
Kharkiv is hoping to receive EBRD funding for further development of the city's metro transportation system. The EBRD opened a regional office in Kharkiv in late 2016 (Photo: UNIAN)
Adrian Bonenberger
Tuesday, 03 January 2017 00:19

During Tsarist and Soviet times, Kharkiv was always one of Ukraine’s great cities. Indeed, it served as Soviet Ukraine’s capital city between 1919 and 1934 as the Bolsheviks sought to lessen the authority of Kyiv as a focus of Ukrainian nationalist sentiment. An economic and educational hub conveniently positioned on the Ukrainian border with Russia, Kharkiv was always historically the first stop for commercial and cultural exchange between the two countries. The fall of the USSR in 1991 did nothing to alter Kharkiv’s productive and profitable position.

The events of the past few years have placed these historic ties with Russia under enormous strain. The Euromaidan Revolution and subsequent hybrid war, together with Ukraine’s pivot westward towards Europe and the US, have had a disproportionate impact on Kharkiv. No city in unoccupied Ukraine besides Lviv has faced as much change as quickly as Kharkiv. While Lviv experiences unparalleled GDP growth and enjoys successes like Ukraine’s first nonstop express train to Poland, how is Kharkiv coping with the loss of its greatest trading partner and the realities of vastly reduced cooperation with Russia?

During Tsarist and Soviet times, Kharkiv was always one of Ukraine’s great cities. Indeed, it served as Soviet Ukraine’s capital city between 1919 and 1934 as the Bolsheviks sought to lessen the authority of Kyiv as a focus of Ukrainian nationalist sentiment. An economic and educational hub conveniently positioned on the Ukrainian border with Russia, Kharkiv was always historically the first stop for commercial and cultural exchange between the two countries. The fall of the USSR in 1991 did nothing to alter Kharkiv’s productive and profitable position.

The events of the past few years have placed these historic ties with Russia under enormous strain. The Euromaidan Revolution and subsequent hybrid war, together with Ukraine’s pivot westward towards Europe and the US, have had a disproportionate impact on Kharkiv. No city in unoccupied Ukraine besides Lviv has faced as much change as quickly as Kharkiv. While Lviv experiences unparalleled GDP growth and enjoys successes like Ukraine’s first nonstop express train to Poland, how is Kharkiv coping with the loss of its greatest trading partner and the realities of vastly reduced cooperation with Russia?

 

Increased industrial self-reliance

The loss of Russian business and partnerships has put a serious dent in Kharkiv’s economy. Some peg the value of lost business at 50% of Kharkiv’s prewar output. While 2016 saw Kharkiv make up around 7% of that lost ground via expanding exports to Europe and elsewhere, there is still a great deal of lag in exports. Challenging times lie ahead for the Kharkiv economy, but current trends suggest that those industries capable of weathering the storm stand to emerge much stronger, leaner, and competent.

Kharkiv has not yet fully replaced the loss in Russian business, but the ongoing hybrid war in the Donbas has helped the city to solidify its historic position as one of the most crucial regions when it comes to Ukraine’s defense establishment. Kharkiv’s Malyshev Tank Factory, once dependent on components manufactured in Russia, now sources its parts internally from Ukraine, as well as from other European countries that use similar vehicles in their militaries. While the plant is still not operating at 100% capacity, new tanks are a regular sight leaving the factory on lowboy trucks. They travel to the railhead for shipment to the frontlines, via Kramatorsk or Konstantinovka.

Likewise, the Kharkiv State Aircraft Manufacturing Company is learning to live without Russia. In December of 2016, the company produced the first Antonov-family aircraft featuring components sourced entirely within Ukraine. It was once said that no rocket could be launched in the Soviet Union without parts from Kharkiv. Until 2014, the reverse was also true, with Kharkiv rockets equally dependent on components from elsewhere in the former Soviet world. Now, though, Kharkiv produces rockets and aircraft for the Ukrainian military without outside assistance from Russia.

This industrial expertise and growing self-sufficiency hold obvious investor appeal. Kharkiv’s abundant twentieth century industrial infrastructure make the city a natural choice for projects that depend on creating heavy machinery, such as the automotive industry. Because of its perceived proximity to perpetually unstable Russia, external companies have been slow to invest in Kharkiv. Nevertheless, the capacity for production is there, as are transportation hubs including a modern international airport and a major rail junction.

The region also boasts significant energy advantages. Almost half the gas produced in Ukraine comes from Kharkiv Oblast, and the region is self-sufficient when it comes to electrical generation. This makes Kharkiv more economically stable than other regions of Ukraine. It also contributes to the city’s status as an unusually affordable place to rent and maintain office space.

 

Education leader, IT innovator

Over 180,000 students currently call Kharkiv home, including many thousands of international undergraduates. This huge student population is testimony to the city’s robust university education system. In addition to Kharkiv’s Polytechnic Institute, which is widely regarded as Ukraine’s finest institution of higher education, Kharkiv has dozens of other universities and institutes. Inspired by the examples of university/tech clusters in San Francisco and Boston, Kharkiv is currently attempting to incentivize graduates to stay in Ukraine rather than depart to make higher salaries in Europe or the US.

This educational excellence has helped create a vibrant IT and startup scene. IT is one of Ukraine’s key growth sectors and Kharkiv is at the forefront of this trend. In comparison to other Ukrainian IT hotspots such as Kyiv and Lviv, Kharkiv is currently an underrated, underdeveloped source for both recruiting and investment. Western companies looking to find relatively inexpensive European-level expertise and quality can do so in Kharkiv for much less than they would pay in their own countries.

 

Agricultural appeal

Beyond the city limits, Kharkiv Oblast boasts some of Ukraine’s more productive farmland. The region produced over four million tons of wheat in 2016. The Kharkiv agricultural sector has room for improvement. It would certainly benefit from modernization of its equipment and infrastructure. However, as with the city’s industrial facilities, there is already a solid agricultural base available in terms of personnel, systems, and experience. Kharkiv region already produces a significant share of Ukraine’s annual agricultural output, but it could be much more productive given additional external investments and partnerships.

 

Restaurant renaissance

As self-reliance increases in Kharkiv, and as traditional industries scale back their production due to curtailed cross-border trade, restaurants and other service sector businesses have adjusted by going local. A wide range of bars and restaurants opened for business recently in the city. Places like the Premier Palace Kharkiv’s “Sky Lounge,” “Fabrika.space”, and “Lumber” all feature English-speaking staff and a hipster feel. They offer menus and cocktails with ingredients drawn partly from local sources, making them very much in line with revolutions in cuisine and farm-to-table processes pioneered in the West. This post-Maidan generation of Kharkiv restaurants and bars employs similar strategies to their contemporaries in Berlin, Pittsburgh, Brooklyn and Paris, including the use of existing architecture to create unique and appealing atmospheres that any urban Westerner will immediately recognize.

Daily life in Kharkiv is comfortable and convenient by Ukrainian standards. The city continues to upgrade its subway system (alongside Kyiv and Dnipro, Kharkiv is one of only three cities in Ukraine with a metro system) and its trash collection mechanisms. As with other post-Soviet countries, Ukraine lags behind the West in terms of recycling and ecologically friendly garbage processing. In this respect, Kharkiv is no different.  

 

Challenging present, bright future

Apart from those areas directly affected by the ongoing hybrid war with Russia, no Ukrainian city or region has suffered as dramatic or debilitating a drop in business since 2014 as Kharkiv. For industries comfortable with lengthy and established dealings between Ukraine and Russia, it’s been a difficult road. Nevertheless, with local industry realigning to domestic and Western markets, and a vibrant academic scene guaranteeing a steady stream of recruits for the city’s booming IT sector, the future still looks relatively bright for Kharkiv as Ukraine’s industrial engine and foremost university town.

 

About the author: Adrian Bonenberger (This email address is being protected from spambots. You need JavaScript enabled to view it.) is the News Editor of The Ukraine Business Journal (UBJ)

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