Break­ing through the as­phalt

What's hap­pen­ing with Ukraine's ex­ports?

The Ukrainian Week - - CONTENTS - Olek­sandr Kra­mar

Ukraine con­tin­ues to be ex­tremely de­pen­dent on for­eign trade, not only in terms of fill­ing do­mes­tic de­mand for the bulk of its en­ergy re­sources, tech­nol­ogy and even con­sumer goods with sup­plies from other coun­tries. Most sec­tors of the coun­try’s econ­omy are also very de­pen­dent on ex­port­ing what they pro­duce. Of the goods that are the foun­da­tion of Ukraine’s in­dus­try and farm­ing, 30-70% is sold abroad—in some in­stances as much as 80-90% is.

PROGRESS ON MANY FRONTS

Not just the steel in­dus­try, heavy machin­ery, grain grow­ers and oil pro­ces­sors, but fur­ni­ture mak­ers, wood pro­ces­sors, cloth­ing man­u­fac­tur­ers and shoe­mak­ers also sell half or more of their out­put abroad. Even those who quarry rocks, sand and clay or man­u­fac­ture build­ing ma­te­ri­als are ex­port­ing more than 33%. One third of Ukraine’s con­fec­tionery, nearly 40% of its pa­per, car­ton and rub­ber prod­ucts end up on the mar­kets of other coun­tries. Nearly 90% of the car parts made in Ukraine also leave the coun­try. What’s more, lately the cir­cle of ex­port-ori­ented sec­tors has been steadily grow­ing as transna­tional cor­po­ra­tions set up show here and do­mes­tic en­ter­prises ex­port more and more of their pro­duc­tion.

To get a bet­ter sense of where Ukraine’s econ­omy is head­ing and what kinds of chal­lenges might face it with such a large part of the econ­omy ori­ented to­wards ex­ports, the trends and dy­nam­ics driv­ing it are worth an­a­lyz­ing.

If we look at the changes in the shape of Ukraine’s ex­ports over the last two years, there are clear signs of the vi­tal­ity of Ukrainian busi­ness. It’s con­tin­u­ously in search of ways to break through the as­phalt and move into those niches that it has the where­withal to take on, de­spite the lack of govern­ment pol­icy in support of eco­nomic growth and the pro­mo­tion of Ukrainian-made goods on for­eign mar­kets. What’s more, there’s a clear, if slow, largely evo­lu­tion­ary shift to a de­cline in the share and even the over­all vol­ume of ex­ports of raw ma­te­ri­als as the vol­ume of goods with at least some added value.

For in­stance, the lat­est fig­ures from Cus­toms about the ex­port of Ukrainian goods for Jan­uary-April 2018, com­pared to the same pe­riod of 2016, shows that the ex­ports of ed­i­ble oils and grain rose 25% and 15% over the two years, while ex­ports of meat and live­stock nearly dou­bled. Ex­ports of pro­cessed meat and fish grew 78% and are now worth tens of mil­lions of hryv­nia per month. Other an­i­mal prod­ucts are not far be­hind in their pace of growth—dairy, eggs and honey. The strong­est growth has been in ex­ports of cream­ery but­ter. Ex­ports of bev­er­ages have also nearly dou­bled, while ex­ports of vegetables grew 108%, and ex­ports of meal and flour rose over 75%.

Ex­ports of non-foods such as soap and clean­ing prod­ucts have also grown 33% in the last two years, while footwear has grown over 40%, glass and ceramic prod­ucts by 80%, and toys and sport­ing goods by 60%. Some quite un­ex­pected items are also now en­ter­ing for­eign mar­kets: Ukraine ex­ported nearly three times as many car­pets, with a to­tal value over UAH 100mn for the first four months of 2018. Ex­ports of elec­tri­cal equip­ment have grown 150%, while ship­build­ing has dou­bled its ex­ports. Ukrainian sup­pli­ers are adapt­ing them­selves to the chang­ing global mar­ket and find­ing their places in new mar­kets.

THE NEW EX­PORT MAP

The geog­ra­phy of Ukrainian ex­ports has changed sig­nif­i­cantly. Where ear­lier it was largely a choice be­tween the EU and Rus­sia with its Cus­toms Union, the sit­u­a­tion has changed rad­i­cally in the past few years. Although the EU mar­ket has dom­i­nated as the des­ti­na­tion for Ukrainian goods, with ship­ments re­cently ex­ceed­ing 2013 lev­els, when no Ukrainian ter­ri­tory was un­der oc­cu­pa­tion, ex­ports are grow­ing more and more ge­o­graph­i­cally di­verse.

In­deed, no in­di­vid­ual coun­try is the des­ti­na­tion of more than 8% of Ukraine’s goods to­day. Rus­sia’s mar­ket has been in­ex­orably los­ing its im­por­tance for Ukrainian pro­duc­ers and its share has been shrink­ing to the level of the seven other top coun­tries im­port­ing Ukrainian goods. Cus­toms sta­tis­tics for Jan­uary–April 2018 show that Ukraine ex­ported al­most as much to Poland as to Rus­sia, US $1.1bn­vsUS $1.2bn—7% and 7.7% of over­all­ex­ports. Tur­key is close be­hind, at US $0.94bn and 6.1%. The re­main­ing five top coun­triesare Italy, In­dia, Egypt, China, and Ger­many, each get­ting from 4% to 6% of Ukraine’s ex­ported goods.

The range of goods sold to th­ese closer mar­kets is also rel­a­tively di­ver­si­fied, com­pared to more re­mote mar­kets where grains, oil, metal and ore go. Ex­ports to coun­tries like Poland and Tur­key in­clude a high pro­por­tion of other goods.

In ad­di­tion to the UAH600-700mn-worth of elec­tri­cal ca­bles that Poland im­ports every month, it al­sobought 55% Ukrainian-made­seat­ing over Jan­uary-April 2018, worth UAH 500mn. Poland also im­port­spro­cessed wood prod­ucts, such as 62% of Ukraine’s ex­ported par­ti­cle­board, worth UAH 130mn, and 32% of cab­i­netry and wood­work used in con­struc­tio­nand 50% of pipes, each worth over UAH 100mn every month. Each month, tens of mil­lions of hryv­nia in canned vegetables and fruits, in juices, in con­fec­tionar­ies, in air con­di­tion­ers and wash­ing ma­chines, in plumb­ing fix­tures and ceramic tiles, in cloth­ing and footwear, in leather goods, in pa­per and card­board, and in soaps and cos­met­ics are also shipped toPoland.

Di­verse Ukrainian goods are en­ter­ing the Turk­ish mar­ket at a good pace as well. Where semi-fin­ished steel prod­ucts and farm com­modi­ties dom­i­nated Ukraine’s ex­ports to Tur­key, ar­eas that are dom­i­nated by oli­garchs and traders, lately, Ukraine has been ex­port­ing a greater va­ri­ety of goods, in­clud­ing prod­ucts with higher added value.Tur­key al­ready im­ports over 40% of Ukraine’s ex­ported min­eral fer­til­iz­ers, nearly 20% of its but­ter and su­gar, 14% of ship­build­ing prod­ucts, and 16% of en­gine com­po­nents. It is a key mar­ket for Ukraine’s wood pro­cess­ing in­dus­try, as well. Each of th­ese ar­eas­brings Ukrainian ex­porters­from tens to hun­dreds of mil­lions of hryv­nia monthly.Most re­cently, Ukraine was cer­ti­fied to ex­port beef to the Turk­ish mar­ket fol­low­ing a tech­ni­cal mis­sion by the Main Direc­torate for Pro­tec­tion and Con­trol un­der Tur­key’s Min­istry of Agri­cul­ture. This could add an­other prof­itable item to prod­ucts ex­ported by Ukraine’sSMEs.

Ship­ments to th­ese two big­gest neigh­bor­ing mar­kets are the eas­i­est for Ukraine’s SMEs, espe­cially com­pared to dis­tant mar­kets in Asia, Africa or the Amer­i­cas. This ex­plains why Poland and Tur­key were key part­ners for Ukraine’s shut­tle trade in the 1990s. On the other hand, Pol­ish and Turk­ish com­pa­nies have long been in­ter­ested in a va­ri­ety ofop­tions for work­ing and co­op­er­at­ing with Ukrainian part­ners. In­deed, The share of Ukraine’s ex­ports go­ing to Pol­ish and Turk­ish mar­kets has al­most matched Rus­sia’s and could soon over­take it. Although this process is nat­u­ral, it could present sig­nif­i­cant risks in the longer term.

DANGER­OUS ORI­EN­TA­TIONS

An ex­ces­sive con­cen­tra­tion of Ukrainian busi­nesses, espe­cially SMEs, on trade with Poland and Tur­key could even­tu­ally lead to a danger­ous de­pen­dence sim­i­lar to the coun­try’s ear­lier de­pen­dence on Rus­sia, which has taken Ukraine a long time to over­come. The hege­monic mood that is­grow­ing in both th­ese coun­tries coulden­cour­age their lead­ers to ex­ert eco­nomic and po­lit­i­cal pres­sure on Ukraine at some point down the line. What’s more, there are other ar­eas in which Ukraine could po­ten­tially be­come de­pen­dent on th­ese two coun­tries.

To­day, Poland is not only rapidly catch­ing up to Rus­sia for the rev­enues Ukrainian ex­porters earn on its mar­ket, but it is al­soover­tak­ing Rus­sia’s sta­tus as the #1 des­ti­na­tion for Ukraine’s mi­grant work­ers. Ac­cord­ing to the National Bank of Poland, Ukraini­ans trans­ferred €2.7bn back home­dur­ing 2017. In 2016, this fig­ure was about a third­less. Based on this trend, mi­grants in Poland are likely to trans­fer over €3.3bn this year—which nearly matches rev­enues from Ukraine’s ex­ports to Poland. If Rus­sia com­pletes its gas pipe­lines by­pass­ing Ukraine and stops trans­mit­ting the nec­es­sary amount of gas to al­low re­verse flow through Ukraine’snet­work, Poland could­be­come the key al­ter­nate sup­plier for Ukrainian con­sumers, as it al­ready has an op­er­at­ing NLG ter­mi­nal on the Baltic coast and is pre­par­ing to re­ceive gas from Nor­way through an un­der­wa­ter pipeline sim­i­lar to Rus­sia’s Nord Stream.

Tur­key is al­ready buy­ing a large share of Ukraine’s ex­ported goods and could po­ten­tially be­come an­other al­ter­nate gas hub for Ukraine to com­pen­sate for the loss of tran­sit Rus­sian gas through Ukraine’s GTS.How­ever, it al­ready ef­fec­tively has po­ten­tial con­trol over the trans­port of Ukrainian ex­ports and a large share of Ukraine’s im­ports, be­cause the lion’s share of Ukrainian goods, such as grain, soy beans, oil, ore and metal goods, as well as a large por­tion of other goods, is shipped by sea. This means it goes through the Bospho­rus and Dar­danelles, the only way for Ukrainian goods shipped by sea to get to the Mediter­ranean, let alone to the At­lantic Ocean.

In the past, con­trol over th­ese straits was a key source of power and wealth for the Ot­toman Em­pire and its pre­de­ces­sor, the Byzan­tine Em­pire. Aseries of in­ter­na­tional agree­ments signed in the 20th­cen­tury stripped Tur­key of this priv­i­lege, but the coun­try’s lead­er­ship has been push­ing for the con­struc­tion of the Is­tan­bul Canal, an ar­ti­fi­cial al­ter­na­tive to the Bospho­rus through the Euro­pean part of Tur­key, which would be un­der Ankara’s full con­trol. Traf­fic through the Bospho­rus could then be min­i­mized un­der a va­ri­ety of pre­texts.

Ad­mit­tedly, con­struc­tion has been slow, but even­tu­ally it will likely be fin­ished, just like Rus­sia’s pipe­lines by­pass­ing Ukraine. And that means that the lion’s share of Ukraine’s for­eign trade from Black Sea and Azov ports will de­pend on Tur­key’s good will and the con­di­tions it sets.

The growth of Ukrainian ex­ports to Poland is al­ready up­set­ting lo­cal busi­nesses. Ac­cord­ing to me­dia re­ports, Elż­bi­eta Bo­dio, the vice pres­i­dent of the Pol­ish-Ukrainian Cham­ber of Com­merce, says that Pol­ish busi­ness­esare­al­ready de­mand­ing that their govern­ment re­strict Ukrainian sup­pli­ers. This is prob­a­bly just the first sig­nal. Given the re­cent rise in­bi­lat­eral con­fronta­tionsover his­tor­i­cal and ide­o­log­i­cal is­sues, the pos­si­bil­ity that trade wars and bi­lat­eral trade could be used as an in­stru­ment for putting Kyiv in its place and pres­sur­ingthe coun­try can­not be ruled out. If Ukraine’s busi­ness fo­cuses too much on Pol­ish mar­kets, the coun­try could find it­self far too vul­ner­a­ble.

Ukrainian man­u­fac­tur­ers re­ally need to in­crease their pres­ence in all the coun­try’s clos­est large mar­kets while keep­ing in mind that both Ankara and War­saw, even if less hos­tile than Moscow, could­turn Ukraine’s eco­nomic and trans­port de­pen­dence to their own geopo­lit­i­cal ad­van­tage. This means that Ukraine should be cau­tious and con­tinue to di­ver­sify mar­kets and trans­port cor­ri­dors—and be pre­pared to nip any at­tempts bythese two big trad­ing part­ners to usetheir­sig­nif­i­cance to Ukraine’s econ­omy for po­lit­i­cal lever­agein the bud.

Ukraine’s gov­ern­ment­needs to play the key role here. It’s in a po­si­tion to de­ter­mine whether do­mes­tic SMEs are­overly fo­cused on th­ese neigh­bor­ing mar­kets and whether they have the in­stru­ments, the support and the nec­es­sary in­fra­struc­ture to enter more dis­tant Asian, African, Amer­i­can, and Western Euro­pean mar­kets. For now, mostly only Ukraine's big cor­po­ra­tions and transna­tional traders de­liver there.

Open­ing more dis­tant mar­kets and ship­ping larger quan­ti­ties of Ukraini­ans goods from do­mes­tic SMEs can and should help Ukraine avoid de­pen­dence on two neigh­bors that have geopo­lit­i­cal am­bi­tions of be­com­ing lead­ers in the re­gion.

IT DE­PENDS ON UKRAINE WHETHER OUR SMALL AND MEDIUM-SIZED EN­TER­PRISES ARE OVERLY FO­CUSED ON THE NEIGH­BOR­ING MAR­KETS AND WHETHER THEY HAVE THE SUPPORT AND THE NEC­ES­SARY IN­FRA­STRUC­TURE TO ENTER MORE DIS­TANT MAR­KETS

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