Ukrainian attacks on Wildberries strike at heart of Russia Inc

MOSCOW, Aug 7 (Reuters) - In the space of three weeks, Vasily Klimov's online shopping pick-up point in Moscow has gone from a healthy small business to a loss-making operation he is now desperately trying to sell.

Klimov runs one of 98,000 pick-up points in Russia and neighbouring countries where customers collect goods ordered through Wildberries, the country's leading e-commerce retailer.

But since July 18, when Ukraine began targeting Wildberries warehouses across Russia in a wave of near-nightly drone attacks, his business has taken a massive dive.

Attacks on at least 20 of the company's sites have sparked major fires, destroyed entire warehouses of stock, and disrupted its vast logistics network across the world's largest country.

A Reuters review of satellite imagery shows at least 1.18 million square metres of warehouse space - more than a fifth of the company's capacity - has been damaged or destroyed. Wildberries, which reported yet another attack on Friday, says it is seeking partners to open new storage hubs.

The disruption is sending shockwaves through Russia's retail sector, affecting not only franchise operators like Klimov but also tens of thousands of small businesses that rely on Wildberries to sell their products online.

"Sales have dropped by about 50% over the past month, and that is because there are almost no deliveries," said Klimov, whose outlet operates under a Wildberries franchise agreement.

"The last month has been entirely loss-making."

WAREHOUSE ATTACKS BRING WAR'S COSTS TO BUSINESS

At least 13 people have been killed in the warehouse attacks. Ukraine, which has been defending itself against Russia since February 2022, denies targeting civilians and says the strikes are part of a campaign to "bring the war home" to ordinary Russians and raise the cost to Moscow of continuing the conflict.

Russia this week killed at least 17 people in attacks aimed at commercial warehouses in and around Kyiv that it alleged were being used to store drone components and other "dual-use" goods with military as well as civilian applications.

Ukraine says Wildberries, whose vast product range includes items such as night-vision goggles, ammunition pouches and helmets, alongside regular clothing, cosmetics and electronics, is supporting Russia's war effort. The company and the Kremlin say it does not supply to the army.

The sustained targeting of Wildberries is significant because the company, together with other e-commerce platforms, handles goods and services worth the equivalent of 8.5% of Russia's economy.

Central bank governor Elvira Nabiullina said on July 24 that the bank would wait and see whether supply disruptions resulting from the attacks translated into higher inflation.

Elina Ribakova, an economist with the Kyiv School of Economics and the Peterson Institute for International Economics in Washington, said the attacks could complicate the central bank's efforts to lower interest rates from their current level of 14%.

"Even though the Russian economy is likely to register zero growth this year, and it was in contraction for the first quarter, inflation is still running high and therefore any small shock could force the central bank either to slow down significantly the cuts or even stop the cuts, so supply side shocks are very important," she said a phone interview.

In late July, Russia's largest lender, Sberbank, said it may increase loan-loss provisions after the drone attacks weakened the credit quality of online retailers and vendors, with about 300 companies seeking to restructure loans.

A source close to the Kremlin told Reuters that many small and medium-sized businesses with "absolutely nothing to do with the war" would suffer.

"There will be a wave of bankruptcies. No one has the kind of money needed to support sellers; we're talking hundreds of billions of roubles. That's a significant blow to the economy," the source said.

The Kremlin said in July that discussions had taken place within the government about possible support for Wildberries. This could include loans from state-owned banks to the company or its sellers, as well as tax breaks or subsidies, sources said at the time.

FOR SALE: WILDBERRIES PICK-UP POINT - 1 ROUBLE

According to Wildberries, 95% of orders are collected from pick-up points like Klimov's. He said deliveries have fallen to around 150 parcels a day from 400 previously. When Reuters visited on Tuesday, no packages arrived.

"I simply do not have enough financial reserves to hold out," he said, explaining his decision to put the business up for sale despite a lack of buyers. At one point, he jokingly offered to sell it to a Reuters reporter for 1 rouble.

Over 3,100 Wildberries franchised pick-up points were listed for sale across Russia on online marketplace Avito as of Wednesday.

Some businesses are hoping Wildberries will provide additional support. The company says it has increased discounts, granted payment deferrals and made initial voluntary compensation payments to more than 97,000 sellers who lost stock in the attacks.

Fashion brand Finn Flare lost products worth more than 100 million roubles ($1.24 million) in July when drones sparked a blaze at Wildberries' Elektrostal warehouse east of Moscow, sending huge pillars of black smoke into the air.

"Since available inventory decreased, orders also fell," the company's e-commerce director Marina Drozhzhina told Reuters. "We plan to negotiate with Wildberries."

Others are less optimistic. "I am not counting on compensation because I don't want to be disappointed later," said artisan toffee-maker Anna Starostina, who lost 170 boxes of handmade sweets in one of the first drone strikes on a Wildberries warehouse on July 18.

($1 = 80.9705 roubles)

(Reporting by Reuters in Moscow; additional reporting by Gleb Stolyarov, Darya Korsunskaya, Magdalini Gkogkou and Vinaya K; writing by Alessandra Prentice and Mark Trevelyan; Editing by Adam Jourdan and Ros Russell)