Grow­ing trends

Kyiv Post Legal Quarterly - - Consumer Goods -

Omelianchuk says that at the grass-roots level, Ukrainian fash­ion is boom­ing, and that most Ukrainian fash­ion brands ap­peared only in the last two years. It’s not a co­in­ci­dence that the boom has hap­pened since Ukraini­ans ousted their cor­rupt for­mer gov­ern­ment, he thinks.

“It’s due to a change in men­tal­ity, be­cause af­ter the (Euro­maidan) Rev­o­lu­tion in 2013 a lot of peo­ple re­al­ized that some­thing had shifted in the con­scious­ness of the na­tion,” Omelianchuk said.

In­deed, af­ter the rev­o­lu­tion, lots of Ukrainian en­trepreneurs jumped into new fields of busi­ness, and mak­ing clothes was a pop­u­lar choice. The num­ber of Ukrainian cloth­ing brands is now any­where be­tween 500 and 600.

But Ukraine’s cur­rent leg­is­la­tion is not help­ing these en­trepreneurs to de­velop their new busi­nesses, and the do­mes­tic cloth­ing in­dus­try is a typ­i­cal ex­am­ple of how dif­fi­cult it is for busi­nesses both new and old to carve out and main­tain a niche in an econ­omy that is dom­i­nated by big busi­ness groups.

Tatyana Abramova, the di­rec­tor of Ukrainian knitwear pro­ducer RITO, has been in the cloth­ing busi­ness in Ukraine for 24 years. To­day her com­pany has one knit­ting fac­tory out­side of Kyiv em­ploy­ing 100 peo­ple. The com­pany pro­duces at least 25,000 items of cloth­ing per year.

Abramova was con­sid­er­ing whether to build a new fac­tory last year, but bu­reau­cratic has­sles, un­cer­tainty and wor­ries over the sta­bil­ity of the econ­omy quickly put her off the idea.

“Why should I start do­ing this – just for the sake of los­ing sleep at night?” Abramova said. “To­day our com­pany doesn’t have a prob­lem with find­ing fi­nanc­ing, we’re even get­ting pro­pos­als to in­vest in our busi­ness from our own clients.”

One of those pro­pos­als was to build a fac­tory abroad.

“Our Lithua­nian part­ners have pro­posed that we start up pro­duc­tion in Lithua­nia, and we’re still look­ing at this ques­tion,” Abramova said. “Of course a Euro­pean bridge­head would be very in­ter­est­ing for us as a spring­board.”

Af­ter vis­it­ing a cloth­ing fair in Copen­hagen, Den­mark, RITO re­cently started to ex­port to the Euro­pean Union. But most of the de­mand re­mains in the do­mes­tic mar­ket. Her com­pany ex­ports goods worth €6,000, no more than 5 per­cent of pro­duc­tion.

But the rise in de­mand and the post-rev­o­lu­tion­ary boost to en­trepreneur­ship might be short-lived if Ukraine’s gov­ern­ment doesn’t make some key changes soon.

Ed­i­tor-in- chief of Vogue Ukraine fash­ion mag­a­zine Masha Tsukanova says that while the cloth­ing in­dus­try got some good press in the wake of the Euro­maidan Rev­o­lu­tion that drove Pres­i­dent Vik­tor Yanukovych from power, it’s prov­ing dif­fi­cult to trans­late this into more ex­ports.

“A lot of peo­ple started to write about Ukraine, Western jour­nal­ists wanted to sup­port Ukraine by the means avail­able to them, and started to write more about Ukrainian de­sign­ers,” Tsukanova said. “But it’s a lit­tle dif­fi­cult for us to ex­port what we make in Ukraine, be­cause the leg­is­la­tion is writ­ten in such a way as to be com­pletely against this.”

The Ukrainian cus­toms ser­vice re­mains the top prob­lem for cloth­ing com­pa­nies in Ukraine.

Abramova says that Ukraine is still con­sid­ered a “zone of risk” by po­ten­tial investors, who are scared off by Ukraine’s cor­rupt and un­pre­dictable cus­toms ser­vice.

Af­ford­able fi­nanc­ing and Ukraine’s high value-added tax rate are also prob­lems, es­pe­cially for small- and medium-sized en­ter­prises.

“Ev­ery­thing has a 20 per­cent value-added tax on it, even on tech­ni­cal equip­ment, for the cre­ation of jobs and more pro­duc­tion,” Abramova said. “Right now we’re bring­ing in equip­ment that costs €45,000, and we have to pay 20 per- cent VAT.”

Ex­porters are also drained of their earn­ings from abroad by the reg­u­la­tions of the Na­tional Bank of Ukraine. Com­pa­nies are re­quired to sell 75 per­cent of their for­eign cur­rency earn­ings as soon as they bring the money into Ukraine.

The tem­po­rary cur­rency con­trol was im­posed by the gov­ern­ment to sta­bi­lize the econ­omy fol­low­ing Ukraine’s rev­o­lu­tion and the 2014 start of Rus­sia’s war against Ukraine, but it has been in place for two years now.

Ex­porters also have to sell all of their goods within a 90-day pe­riod.

“This also lim­its our abil­i­ties to ex­port un­be­liev­ably,” Abramova said. “Es­pe­cially when we’re talk­ing about sea­sonal col­lec­tions, when you can’t sell ev­ery­thing right away.”

Most of the growth in the in­dus­try has so far been at the lux­ury end of the mar­ket. Fac­to­ries that make goods for Western brands for ex­port are also grow­ing.

“But the mid­dle niche, which is sim­i­lar to where our com­pany works, ba­si­cally doesn’t ex­ist,” Abramova com­plains.

Tsukanova agrees. There is a big gap in the do­mes­tic cloth­ing mar­ket be­cause do­mes­tic clothes man­u­fac­tur­ers need ex­port earn­ings to fuel their growth on the home mar­ket. And for that, they need to be able to ex­port.

“In or­der to work in the mass mar­ket, ideally you need to sell glob­ally as well,” Tsukanova said. “Since noth­ing can be eas­ily ex­ported legally out of Ukraine, then there are prob­lems of how to man­u­fac­ture for the mass mar­ket in Ukraine.”

Abramova puts the in­dus­try’s prob­lems down to the short­sight­ed­ness of Ukrainian of­fi­cials, who she thinks fa­vor com­mod­ity ex­porters, rather than sup­port­ing mid-sized man­u­fac­tur­ing.

“Light in­dus­try is un­de­servedly be­ing ig­nored… even though it cre­ates the most turnover,” Abramova says.

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