Breaking through the asphalt
What's happening with Ukraine's exports?
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.
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