How com­modi­tized is Ukraine's econ­omy, re­ally?

As­ser­tions that Ukraine’s econ­omy con­tin­ues to evolve as a raw ma­te­ri­als one as a re­sult of re­ori­ent­ing it­self on trade with the Euro­pean Union do not re­flect re­al­ity

The Ukrainian Week - - CONTENTS - Olek­sandr Kra­mar

Change in struc­ture and ex­ports af­ter the As­so­ci­a­tion Agree­ment

Over the last few years, mes­sages about the re­ori­ent­ing on trade with the EU and shed­ding Ukraine’s tra­di­tional FSU mar­kets—mean­ing mostly the Rus­sian mar­ket—as a dis­as­ter in the mak­ing for the coun­try have per­sis­tently and con­sis­tently been in­jected into the do­mes­tic me­dia field. They im­plied that the re­sult has been an even deeper com­mit­ment to be­ing a raw ma­te­ri­als sup­plier. Skep­ti­cism about the com­pet­i­tive­ness of Ukrainian goods on Euro­pean mar­kets has been com­mon even among those who are com­pletely against a re­turn to Rus­sia’s or­bit.

Mean­while, the real trends in trade with the EU con­tra­dict claims that Ukraine’s econ­omy is be­com­ing more con­cen­trated on pro­duc­ing and sup­ply­ing raw ma­te­ri­als be­cause of its strong ori­en­ta­tion on the Euro­pean mar­ket. Nor is there any ba­sis for con­cerns that Ukrainian-made goods are un­com­pet­i­tive and that Ukraine’s mar­ket will be flooded with cheap Euro­pean goods. First of all, most Euro­pean goods are sig­nif­i­cantly more ex­pen­sive, even with the cur­rent UAH/Euro ex­change rate. More­over, Ukraine’s cur­rency will most likely con­tinue to slip in value com­pared to the Euro.

In fact, quo­tas and re­stric­tions do limit the de­liv­ery of do­mes­tic prod­ucts to the EU. Still, they af­fect a rel­a­tively nar­row range of com­modi­ties that are sen­si­tive for Euro­pean man­u­fac­tur­ers and mostly con­cern those goods that crit­ics of eu­roin­te­gra­tion call raw ma­te­ri­als. Even if we look at the changes in trade with the EU over 2013-2016, it turns out that there has been a mar­ginal shrink­age in Ukraine’s over­all ex­port—from €12.5bn to 12.2bn or 2.4%—pre­cisely be­cause of a re­duc­tion raw ma­te­ri­als and semi-fin­ished prod­ucts. For in­stance, ex­ports of un­pro­cessed fer­rous me­tals fell more than 20%. By con­trast, ex­ports of fin­ished prod­ucts have in­creased sev­er­al­fold, from sugar, pro­cessed meat and fish, and but­ter to fur­ni­ture, glass­ware and even ship­build­ing prod­ucts. De­liv­er­ies of elec­tron­ics, equip­ment and machin­ery, and con­sumer goods have in­creased by dou­ble-digit per­cent­ages.

2016 turned out to be the first year af­ter the eco­nomic part of the As­so­ci­a­tion Agree­ment with the EU and the DCFTA came into ef­fect. The trend for ex­port­ing goods to Euro­pean coun­tries has be­come stronger

THE TEN­DENCY TO GROW­ING EX­PORTS OF FIN­ISHED PROD­UCTS IS CLEAR WHILE SALES OF RAW MA­TE­RI­ALS AND SEMI-FIN­ISHED PROD­UCTS ARE SLOWLY SHRINK­ING. THIS IS LOG­I­CAL, GIVEN THAT THE MA­JOR­ITY OF FIN­ISHED IN­DUS­TRIAL PROD­UCTS ARE CUR­RENTLY NOT RE­STRICTED BY ANY QUO­TAS

and demon­strates more and more clearly that there are pos­i­tive changes in its com­po­si­tion: from raw ma­te­ri­als and semi-fin­ished prod­ucts to fin­ished goods rep­re­sent­ing a broad range of sec­tors in the Ukrainian econ­omy.

Th­ese changes in de­liv­er­ies of spe­cific do­mes­tic prod­ucts to Euro­pean mar­kets are pretty demon­stra­tive (see Non-com­modi­tized trends).

Although over­all Ukrainian ex­ports to the EU grew only 3.7% in 2016, ac­cord­ing to of­fi­cial dol­lar fig­ures from Derzh­stat, a slew of non-com­modi­ties in­creased sev­er­al­fold and even ex­po­nen­tially.

Thus, af­ter the eco­nomic part of the As­so­ci­a­tion Agree­ment came into ef­fect, at least three key branches of the ma­chine-build­ing in­dus­try showed sig­nif­i­cantly higher growth as over­all ex­ports to the EU ex­panded: elec­tri­cal en­gi­neer­ing, ship­build­ing and equip­ment and mech­a­nism man­u­fac­tur­ing. What’s more, the strong­est growth was in elec­tri­cal en­gi­neer­ing: US $1.6bn in 2016, com­pared to US $1.4bn in 2015, putting it in first place.

Grow­ing ex­ports in the steel and chem­i­cals in­dus­tries also il­lus­trates that fin­ished prod­ucts made in Ukraine are suc­cess­fully find­ing a place in Euro­pean mar­kets. For in­stance, fer­rous metal prod­uct de­liv­er­ies grew 6% in 2016, whereas ex­ports of raw ma­te­ri­als and semi-fin­ished prod­ucts grew only 2.3%.

Ex­ports of Ukrainian fer­til­iz­ers fell 31.8% over 2015, down to US $106.5mn, while non-or­ganic chem­i­cal prod­ucts dropped 41.9% to US $56.6mn. In­stead, chem­i­cal prod­ucts ex­ported from Ukraine to the EU with a higher added value and greater en­ergy ef­fi­ciency grew: phar­ma­ceu­ti­cals rose to US $14.0mn, up 59.9%, while soaps and de­ter­gents rose to US $14.6mn, up 18.4%. A clear pos­i­tive dy­namic was seen in ex­ports of plas­tics, poly­mers and prod­ucts made of them, go­ing from US $94.2mn to US $106.2mn, up 12.7%.

De­spite the ac­tive bat­tles over the ex­port of tim­ber from Ukraine, ex­ports of pro­cessed logs to the EU no­tice­ably in­creased, while ex­ports of un­pro­cessed tim­ber shrank: where de­liv­er­ies of fuel wood and un­pro­cessed tim­ber fell from US $169.1mn in 2015 to US $126.7mn in 2016, de­liv­er­ies of pro­cessed lum­ber and boards in­creased from US $224.8mn to US $266.6mn. Even more im­pres­sive has been the growth of ex­ports of Ukrainian fur­ni­ture to EU coun­tries, which brought in nearly 50% more in 2016 than they had in 2015: US $272.4mn vs US $183.8mn.

Other wood prod­ucts from Ukraine grew mod­estly, but still sev­eral times faster than over­all Ukrainian ex­ports to the EU: sheet wood for fac­ing went from US $99.1mn to US $107.1mn, while par­ti­cle­board, ply­wood, OSB and ve­neers went from US $100.9mn to US $109.5mn. Do­mes­tic pulp and pa­per prod­ucts also con­tinue to suc­cess­fully win over Euro­pean mar­kets: in 2016, ex­ports jumped 62.3%, from US $52.5mn to US $85.4mn.

Ukraine’s light in­dus­try is also con­fi­dently mov­ing ahead. For in­stance, sales of tex­tiles and knits to EU coun­tries grew 11.1%, from US $508.5mn to US $562.2mn; leather goods went up 9.4%, from US $32.4mn to US $35.5mm; and footwear rose 8.2%, from US $116.0mn to US $125.5mn. EU coun­tries are ex­hibit­ing greater de­mand for Ukrainian-made ceramic prod­ucts, which grew 32.7% from US 20.6mn to US $27.4mn, and glass prod­ucts, which rose 5.1%, from US $64.7mn to US $68.0mn.

Food ex­ports are no ex­cep­tion. Prod­ucts with lower added value are los­ing po­si­tion. For in­stance, grain ex­ports went from US $1.63bn in 2015 to US $1.28bn in 2016, while food wastes and other prod­ucts to feed live­stock went from US $490mn to US $440mn. But sales of sugar to EU mar­kets have jumped 61.5%, from US $32.9mn to US $53.15mn, veg­eta­bles have gone up 67.8% from US $11.9mn to US $20.0mn, honey has gone up 22.6% from US $59.8mn to US $73.3mn, pro­cessed meat and fish have jumped 63.9% from US $4.0mn to US $6.5mn, and poul­try meat has gone up 5.9% from US $64.8mn to US $68.7mn.

Ex­ports of oils and fats sky­rock­eted 77.5%, and 2016 was a break­through year for de­liv­er­ies of milk to the EU. In the first year since the eco­nomic part of the AA came into ef­fect, ex­ports of cream­ery but­ter to Euro­pean mar­kets were worth US $2.6mn; ear­lier Ukraine’s dairy prod­ucts never even made it there. Mean­while, the num­ber of cer­ti­fied dairy ex­porters in Ukraine keeps grow­ing steadily.

The fact that com­modi­ties still dom­i­nate Ukraine’s ex­ports to the EU is not the re­sult of the As­so­ci­a­tion Agree­ment or of Ukraine’s re­ori­en­ta­tion from Rus­sia to the EU, but sim­ply the per­sis­tence of past tradi- tions. Thanks to eco­nomic in­te­gra­tion with the EU, the ten­dency to grow­ing ex­ports of fin­ished prod­ucts is clear while sales of raw ma­te­ri­als and semi-fin­ished prod­ucts are slowly shrink­ing. This is com­pletely log­i­cal, given that the ma­jor­ity of fin­ished in­dus­trial prod­ucts are cur­rently not re­stricted by any quo­tas.

More­over, Ukraine is slowly in­te­grat­ing into the pro­duc­tion chains of ma­jor transna­tional cor­po­ra­tions. Their parts man­u­fac­tur­ing plants are be­gin­ning to pop up in western oblasts. Still, if of­fi­cials and busi­ness man­agers in other re­gions were to ex­ert the nec­es­sary ef­fort, this trend could eas­ily spread to other parts of the coun­try. This in­cludes the south­east, which is go­ing through dif­fi­cult times as its hope­lessly out­dated man­u­fac­tur­ers die off. A much larger share of Ukraini­an­made prod­ucts could be en­ter­ing the Euro­pean mar­ket and see its ex­port vol­umes grow if not for the in­er­tia of the man­age­ment at many com­pa­nies, who were too used to de­pend­ing on “tra­di­tional” FSU mar­kets.

Even though the EU share of over­all Ukrainian ex­ports is al­ready around 50%, Ukraine is quite ca­pa­ble of in­creas­ing that ten­fold, be­cause the EU mar­ket will re­main one of the most sol­vent and so­phis­ti­cated mar­kets in the world for a long time to come. For in­stance, to­tal im­ports to EU coun­tries were €4.7 tril­lion in 2016, hun­dreds of times more than what Ukraine ex­ported to the EU in 2016—€12.1mn. To win over even a few per­cent­age points of this huge mar­ket would mean mul­ti­ply­ing de­liv­er­ies by sev­eral times for Ukrainian producers.

AF­TER THE ECO­NOMIC PART OF THE AS­SO­CI­A­TION AGREE­MENT CAME INTO EF­FECT, AT LEAST THREE KEY BRANCHES OF THE MA­CHINE-BUILD­ING IN­DUS­TRY SHOWED SIG­NIF­I­CANTLY HIGHER GROWTH AS OVER­ALL EX­PORTS TO THE EU EX­PANDED: ELEC­TRI­CAL EN­GI­NEER­ING, SHIP­BUILD­ING AND EQUIP­MENT AND MECH­A­NISM MAN­U­FAC­TUR­ING

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