Ex­ports: A suc­cess­ful shift

Ukrainian ex­ports to the EU have reached record vol­umes and con­tinue to rise sharply. But the po­ten­tial for eco­nomic in­te­gra­tion is far from be­ing used ef­fec­tively

The Ukrainian Week - - CONTENTS - Olek­sandr Kra­mar

Ukrainian ex­ports to the EU have reached record vol­umes, but the po­ten­tial for eco­nomic in­te­gra­tion is far from be­ing used ef­fec­tively

On Septem­ber 16, it was four years since Ukraine rat­i­fied its Agree­ment on As­so­ci­a­tion with the Euro­pean Union. It’s also nearly three years since the eco­nomic sec­tion on the deep and com­pre­hen­sive free trade area kicked in at the be­gin­ning of 2016. Mean­while, this en­tire time — and even more so now that the 2019 elec­tion year is on the hori­zon — ret­ro­grade forces in Ukraine have been per­sis­tently and con­sis­tently putting it out in the do­mes­tic press that the coun­try’s eco­nomic shift to­wards the EU and the loss of sup­pos­edly tra­di­tional post-soviet mar­kets — read the Rus­sian Fed­er­a­tion and its satel­lites — has sup­pos­edly had a cat­a­strophic im­pact on Ukraine’s econ­omy and its growth prospects. Un­for­tu­nately, skep­ti­cism about the com­pet­i­tive­ness of “Made in Ukraine” prod­ucts on Euro­pean mar­kets and tired clichés about no­body want­ing Ukrainian goods with high added value there are also fairly com­mon among those who have per­sis­tently and con­sis­tently been against any re­turn to Rus­sia’s or­bit.

The ac­tual dy­nam­ics of bi­lat­eral trade with the EU I re­cent years paint a com­pletely dif­fer­ent pic­ture, es­pe­cially re­gard­ing the growth of sales to EU coun­tries. Ex­ports to the EU hit their peak last year, when they passed the €15.5 bil­lion mark. And they keep on ris­ing. For the first eight months of 2018, they are up an­other 18.6% ac­cord­ing to the State Fis­cal Ser­vice. Their share of to­tal ex­ports has also gone up from 40.0% to 42.1%. In­deed, in 12 of the 25 non-oc­cu­pied re­gions of Ukraine, ex­ports to the EU are be­tween 50% and 90% of to­tal ex­ports. What’s more, this is true not only of tra­di­tion­ally Europe-ori­ented west­ern Ukraine, but also east­ern­most Luhansk and Donetsk Oblasts, where ex­ports to the EU also ac­count for 50.0% of all ex­ports and are higher than many re­gions in cen­tral Ukraine.

Over­all, Ukraine’s ex­ports, in­clud­ing to other parts of the world, are largely well be­low, and even sev­er­al­fold be­low, their pre­vi­ous peaks in 2008 or 2013. This demon­strates just how sig­nif­i­cant Ukraine’s re­ori­en­ta­tion on EU mar­kets has been in the last few years (see charts).

Of course, these trends in bi­lat­eral trade since the AA and DCFTA came into ef­fect are bring­ing more ben­e­fits to Ukraine than to the EU. Fears that Ukraine’s sup­pos­edly un­pro­tected mar­ket will be flooded with Euro­pean goods ap­peared com­pletely ground­less. The re­al­ity is quite dif­fer­ent: Ukrainian ex­ports to the EU grew from €12.62bn in 2013 to €15.52bn in 2017, an in­crease of 23.0%. Mean­while, EU im­ports to Ukraine con­tracted by 9.6%, fall­ing from €20.36bn to €18.41bn over the same pe­riod — and this de­spite the fact that re­verse de­liv­er­ies of nat­u­ral gas, worth €0.64bn in 2013, nearly tripled to €1.70bn in 2017. If gas is taken out of the equa­tion, then the bal­ance of trade deficit for Ukraine fell from €7.1bn in 2013 to less than €1.2bn last year. What’s even more im­pres­sive is that the strong­est growth in Ukrainian ex­ports to the EU was not in raw ma­te­ri­als but in fin­ished prod­ucts and parts, in­clud­ing for ma­chine-build­ing.

It seems, then, that the real threat is that Ukrainian man­u­fac­tur­ers are suc­ceed­ing on the Euro­pean mar­ket and Ukraine’s econ­omy is re­ori­ent­ing to­wards the EU once and for all. Hence the very ac­tive bom­bard­ment of neg­a­tive state­ments about the lack of prospects for “Made in Ukraine” in the do­mes­tic press. Be­cause this clear and grow­ing suc­cess — in­evitable dif­fi­cul­ties with grow­ing mar­ket share not­with­stand­ing — will put an end to nos­tal­gia over the myth­i­cal “lost par­adise” on the “salu­tary” Rus­sian and post-soviet mar­kets whose pur­pose is to dis­cour­age po­ten­tial do­mes­tic ex­porters who have not found the courage or op­por­tu­nity to in­ves­ti­gate niches on the EU mar­ket as well as the gen­eral pub­lic. The longer the op­po­site is proved, the sooner the ar­gu­ments of those who fa­vor the “in­evitable re­turn to tra­di­tional mar­kets” will lose any sense what­so­ever.

FACTS ARE STUB­BORN THINGS

A cross-sec­tion of the kinds of goods that have been ex­ported to the Euro­pean Union in re­cent years gives a pretty good pic­ture of the di­rec­tion Ukraine’s ex­port is de­vel­op­ing in. For in­stance, in 2015, just be­fore the eco­nomic sec­tion of the As­so­ci­a­tion Agree­ment and DCFTA with the EU kicked in on

The trends in bi­lat­eral trade are bring­ing more ben­e­fits to Ukraine than to the EU If gas is taken out of the equa­tion, then the bal­ance of trade deficit for Ukraine fell from €7.1bn in 2013 to less than €1.2bn last year

Jan. 1, 2016, can be com­pared to 2017, which is the last full year for which ex­port data is avail­able. In in­di­vid­ual cases, the most cur­rent trends can be seen from the fig­ures of­fered by the State Fis­cal Ser­vice (SFS) for trade over Jan­uary–Au­gust 2018.

In par­tic­u­lar, three branches of ma­chine-build­ing sec­tor have seen sig­nif­i­cant growth in ex­ports to the EU: elec­tri­cal en­gi­neer­ing, ship­build­ing and the man­u­fac­ture of machin­ery and mech­a­nisms. The sharpest growth has been in ship­build­ing, where ex­ports to the EU grew 140%, from to $66.5mn in 2017. The most strik­ing im­prove­ment in ab­so­lute terms was in elec­tri­cal en­gi­neer­ing, whose ex­port sales grew from US $1.40bn in 2015 to US $2.04bn in 107, an in­crease of 45.7%. De­spite talk about the EU need­ing noth­ing from Ukraine but raw ma­te­ri­als, the over­all ex­port of equip­ment and machin­ery to EU coun­tries in 2017 was US $2.70bn, a 15.3% share of all goods ex­ported to the EU, com­pared to a 11.6% share of such prod­ucts in Ukraine’s ex­ports glob­ally.

The same can be seen in met­al­lurgy and chem­i­cals. A closer look shows that fin­ished Ukrainian goods with a higher added value are hav­ing an eas­ier time break­ing into EU mar­kets than half-fin­ished goods with a lower added value. For in­stance, fer­rous metal prod­ucts grew 38.9% from 2015 to 2017, but fer­rous met­als them­selves and semi-fin­ished goods only grew 21.6%. Ex­ports of fer­til­iz­ers from Ukraine to the EU dropped by nearly 67% from 2015 to 2017, while nonor­ganic chem­i­cal prod­ucts fell 20.4%. By con­trast, de­liv­er­ies of Ukrainian chem­i­cal prod­ucts with higher added value and greater en­ergy ef­fi­ciency have been grow­ing: phar­ma­ceu­ti­cals have leaped 66.9%, plas­tics, poly­mers and prod­ucts made of them have jumped over 53.0%, and soaps and de­ter­gents have gone up 35.0%.

Ex­ports of Ukrainian-made fur­ni­ture to the EU have sky­rock­eted nearly 130% in just two years, and were worth over US $418mn in 2017. Lately, more than UAH 1bn in fur­ni­ture made in Ukraine is be­ing de­liv­ered to the EU ev­ery month. Trends for other fin­ished man­u­fac­tured goods are also show­ing very pos­i­tive growth: ceramic prod­ucts have in­creased to US $144.1mn, up 90.6% over the last two years; pa­per and car­ton have risen 81.7% to US $95.4mn; and glass­ware has risen 32.7% to US $85.8mn. The list goes on.

Food ex­ports are no ex­cep­tion. Low-added value prod­ucts are slowly los­ing their po­si­tions, with grain ex­ports grow­ing only 5.0% from US $1.63bn in 2015 to US $1.72bn in 2017. De­liv­er­ies of food pro­cess­ing wastes and other food used for fod­der inched up from US $490.0mn in 2015 to $500.0mn in 2017. Mean­while, sales of fresh fruit and prod­ucts made from them have gone up 14.7%, to US $126mn, and sales of honey have jumped 65.0% to US $98.7mn.

Al­though MHP owner and bil­lion­aire Yuriy Ko­siuk has com­plained pub­licly about low quo­tas, ex­ports of Ukrainian poul­try to the EU sky­rock­eted 94.0% over 2015-2017. In fact, the EU ac­counted for 34.3% of all the earn­ings from ex­ports of Ukrainian poul­try world­wide — US $133.7mn. Ex­ports of cream­ery but­ter be­gan in 2016 and have been grow­ing sharply, from US $2.6mn the first year to US $13.7mn by the end of 2017, and were al­ready at US $7.6mn by mid-2018. Yet, un­til not long ago, dairy prod­ucts also seemed to not have a place on EU mar­kets. From 2015 to 2017, ex­ports of edi­ble oils and other fats jumped 120%, to US $1.48bn.

None of this is to deny that, in fact, Ukrainian ex­ports to the EU con­tinue to be based too much on raw ma­te­ri­als and semi-fin­ished prod­ucts with a low added value. Still, this is less a prob­lem of trade with the EU but the na­ture of Ukraine’s over­all econ­omy and ex­ports. In­deed, the grow­ing shift in Ukraine’s ex­ports to the EU and gen­eral trends sug­gest that Euro­pean in­te­gra­tion is ac­tu­ally help­ing the coun­try to move away from be­ing pri­mar­ily a source of raw ma­te­ri­als. Be­sides, a large and wealthy mar­ket like the EU is the best in­cen­tive for do­mes­tic SMEs that are fo­cused on pro­duc­ing goods with a higher added value to de­velop and ex­pand. Work­ing with dis­tant and of­ten very pe­cu­liar mar­kets in do­ing busi­ness with Asia and Africa, not to men­tion South Amer­ica, suits Ukraine’s big, gen­er­ally oli­garch-owned busi­nesses. But they con­tinue to largely ex­ploit the coun­try’s raw ma­te­ri­als po­ten­tial or else are openly de­vel­op­ing their own strat­egy for de­liv­er­ies out­side the home mar­ket, be­cause semi-fin­ished goods are what their out­dated decades-old — some­times even a cen­tury old — fac­to­ries can read­ily pro­duce.

LOOK­ING AT PROSPECTS

The AA and the re­ori­en­ta­tion of Ukraine’s econ­omy to­wards EU mar­kets is not the rea­son why the coun­try’s ex­ports con­tinue to be dom­i­nated by raw ma­te­ri­als and semi-fin­ished prod­ucts: this is what the coun­try in­her­ited from soviet days and has not man­aged to ame­lio­rate. On the con­trary, Euro­pean in­te­gra­tion is spurring the trend to­wards fin­ished goods and a re­duc­tion in the share of com­modi­ties with low added value. The pos­si­bil­i­ties are enor­mous and the share of EU ex­ports, which reached 42% in the first 8 months of 2018, could eas­ily be­come greater. To gain even a few per­cent­age points of mar­ket share in EU im­ports means to in­crease de­liv­er­ies from Ukraine sev­er­al­fold.

More­over, there are plenty of niches in Euro­pean mar­kets where no do­mes­tic busi­ness has a pres­ence, but very well could. So far, even though the EU is the coun­try’s big­gest trad­ing part­ner, the vol­umes and types of Ukrainian goods that are de­liv­ered to big­ger and wealth­ier EU mem­bers like France or Great Bri­tain are still sev­eral times less than what the coun­try sells to much smaller and poorer Moldova and Ge­or­gia. What’s more, Ukrainian ex­ports to the eco­nomic core of the EU (Ger­many, France, Benelux and the UK), which rep­re­sents more than half of its eco­nomic power and over 45% of its pop­u­la­tion, re­main con­sid­er­ably less than ex­ports to the Viseg­rad Four with their far weaker economies.

Ex­ports to the big­gest Euro­pean coun­tries also re­main nar­row pro­filed and co-pro­duc­tion is still nascent, al­though this form of co­op­er­a­tion is com­mon in the lion’s share of bi­lat­eral trade within the EU and proved to be the cat­a­lyst for eco­nomic in­te­gra­tion into the Union for the most suc­cess­ful post-so­cial­ist economies. By con­trast, Ukraine en­joys a sub­stan­tial trade re­la­tion­ship only with Ger­many and the Viseg­rad Four.

All the com­plaints about no­body want­ing “Made in Ukraine” is sim­ply an in­di­ca­tor of how lit­tle will­ing­ness to change and flex­i­bil­ity there is among pro-Rus­sian busi­nesses. Those busi­nesses that want to and make an ef­fort are grad­u­ally find­ing op­por­tu­ni­ties and a place for them­selves on dif­fer­ent mar­kets, with­out nec­es­sar­ily even com­pet­ing head-on with Euro­pean com­pa­nies. Some­times just com­pet­ing with cor­po­ra­tions out­side the EU is enough. De­liv­er­ies to the EU have quo­tas and re­stric­tions, but these are gen­er­ally aimed at those very raw ma­te­ri­als about which Ukraine’s fifth col­umn so likes to make noise. In­deed, trade con­di­tions with the EU are mak­ing it dif­fi­cult for Ukraine to con­tinue to be pre­dom­i­nantly raw ma­te­ri­als based and eas­ier for the coun­try to fo­cus more on fin­ished prod­ucts.

Slowly but surely, Ukraine is in­te­grat­ing into the pro­duc­tion cy­cles of ma­jor transna­tional cor­po­ra­tions. Hope­fully, this prac­tice will be ex­panded to the en­tire coun­try in the near­est fu­ture, in­clud­ing the south­east, which is see­ing the demise of its ob­so­lete man­u­fac­tur­ing sec­tor. This is where en­ter­ing Euro­pean mar­kets is putting pres­sure on the pas­sive man­age­ment of many com­pa­nies that, un­til not long ago, were only fo­cused on “tra­di­tional” post-soviet mar­kets.

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