Ukrainian business sees opportunities in otherwise bleak Brexit conditions
On June 23, 2016, the people of the United Kingdom voted in a referendum to leave the European Union. That decision — now known simply as “Brexit” — has led to nearly three years of protracted political turmoil in the country.
The unexpected decision raised many concerns about how a U.K. exit from the European Union common market will affect international trade, currently governed by the bloc’s common quotas and duties.
Bilateral trade between Ukraine and the U.K. is far from enormous. As of 2018, it stands at only $2.53 billion, with a negative trade balance of $247 million for Ukraine, according to the State Statistics Service.
But even Kyiv is feeling Brexit’s shockwaves. Ukrainian business is asking: How will trade now work? What will the tariffs be? How will duties and logistics look once the U.K. gets a “divorce” deal?
But despite these concerns, some segments of the Ukrainian business community see Brexit not as a risk, but as an opportunity for growth.
“Trade between Ukraine and the U.K. could increase very sharply,” says Bate Toms, a Kyiv-based lawyer and president of the BritishUkrainian Chamber of Commerce. “We should become the principal trading partner of Ukraine in Europe, and maybe the principal trading partner in the world.”
Brexit has already been postponed twice. The EU has set Oct. 31 as the new deadline for an agreement in order to avoid the worst case scenario: the U.K. leaving the bloc without a deal.
“Everyone expected that there would be an agreement before the (2019) New Year, and after that U.K. would have three months to settle trading relations with other countries,” said Alex Lissitsa, president of the Ukrainian Agribusiness Club. “But something went wrong.”
Lissitsa said the U.K. has failed to sign free trade agreements with many different countries, including the most important ones — China, Japan and the United States.
“They signed trade agreements with Fiji, Panama and some other small countries,” he says. “On the one hand, they’re losing the EU, and on the other hand they have (gained) nothing. They are deadlocked.”
There are other more technical concerns.
“The U. K. has been part of the EU for a very long time,” says Anzhela Makhinova, partner at the Sayenko Kharenko law firm. “The U. K.’s own customs authorities, which will stand at the border, the border itself, the certification bodies — they don’t exist.
“It all needs to be created from scratch and, therefore, it is difficult to guess how it will be done in practice and what problems may arise.”
But with the U.K. leaving the EU, Ukraine may get a new market for its goods.
Between 2013 and 2016, bilateral trade between the countries fell sharply — from $3.5 billion to $2.05 billion. However, over the last two years, it has seen a 23-percent recovery.
However, there has not been a single year in which Ukraine’s exports to the U.K. have exceeded its imports from the U.K.
But if Brexit goes ahead, experts believe Ukraine’s powerful agricultural sector could prove a big winner.
“The U. K. is a significant net importer of food. Removing quotas and eliminating the remaining food tariffs would be good for the British consumer and benefit Ukraine in terms of its opportunity to sell more food and agricultural produce to the U.K.,” says Martin Potter, the founder of BlueBirch, a Lviv-based consultancy for U.K. businesses that operates in Ukraine.
In 2018, 35 percent of all goods the U.K. imported from Ukraine were food and agricultural products, worth a total of $238.7 million, according to the Ukrainian Exporters Club.
Ukraine's largest agricultural holding, Myronivsky Hliboproduct, or MHP, exported a modest 484 tons of poultry to the U.K. last year. But that number could be much higher if the company is able to bypass the EU, experts forecast.
“When I talk to people in Britain, they all say they can’t trade with Ukraine under the EU’s rules. So, they’re sourcing (produce from) Romania, France and Germany, but it’s much more expensive and it limits food security,” says the BritishUkrainian Chamber of Commerce’s Toms.
Toms thinks that Ukraine will be among the U.K.’s safest options to ensure food security. Both Germany and France are consistently growing in population, meaning the amount they can export is limited.
“Ukraine is the opposite — the population is declining and producing more food,” he says.
Ukrainian agriculture isn’t the only sector that could potentially benefit from Brexit. Metallurgy faces four anti-dumping duties in the EU. After Brexit, there will only be one such duty — the one London imposed as a World Trade Organization member.
Britain is a major consumer of metal, but lacks a domestic manufacturer.
“Definitely, those Ukrainian producers will benefit,” says Sayenko Kharenko’s Makhinova.
According to Mark Pritchard, the U.K. prime minister's trade and investment envoy to Georgia and Armenia (Ukraine has no envoy), there is also a huge opportunity to increasing trade and investment between the U.K. and Ukraine.
“This is especially true in financial services, education, new and emerging technologies, as well as U.K. companies investing in major infrastructure projects in Ukraine,” says Pritchard.
However, some experts are much more skeptical about Ukraine’s opportunities to increase exports to the U.K. after Brexit.
According to Ievgeniia Lytvynova, CEO and founder of the Ukrainian Exporters Club, Ukraine will face significant competition from powerful countries that prioritize trade with the U.K.
“Why should this be such a great opportunity for Ukraine when everyone else will do everything possible to maintain their positions there?” she asks.
But while Brexit could benefit Ukrainian exporters, it might deal a blow to Ukrainian importers.
In 2018, Ukraine’s imports from the UK reached $1.4 billion. Currently, goods from the U.K. enter Ukraine at lower rates under the Kyiv’s Deep and Comprehensive Free Trade agreement, or DCFTA, with the EU. If the UK leaves the EU, it will become like any other member of the World Trade Organization.
Until a new trade agreement is reached, Ukraine and the U.K. will not have any preferential rates, according to Makhinova.
“For example, for fertilizers there is a 6.5 percent duty for WTO members, but under the DCFTA there is a zero taxation. So, if the U.K. leaves the EU it will have to pay more,” she says.
As a final result, Ukrainian imports from the U.K. could decrease for a while.
But that is not guaranteed, says the Ukrainian Agribusiness Club’s Lissitsa. Ukraine largely imports cars and expensive luxury goods from the U. K. In 2018, cars made up 44.8 percent of imports. As a result, he believes imports will remain stable.
“I do not think that it will be a problem for those who pay $200,000 to buy a single Range Rover to (now) spend $215,000,” Lissitsa says. ■
A significant proportion, almost 12 percent, of the all UK's import to Ukraine in 2018 were cars with a total worth of $106 million, among which British carmaker Land Rover is one of the most popular. (Volodymyr Petrov)