Ukraine has strongly diversified its exports in terms of goods and destinations over the years of independence. But local companies must do more to promote their products in new promising markets
Ukraine keeps putting off ratification of the Association Agreement with the EU to keep Russia calm. Meanwhile, Russia launches a full-on trade war on Ukraine. On July 28, Russia’s consumer watchdog Rosselkhoznadzor restricted the import of Ukrainian dairy to Russia. Last week, it sent four shipments of meat and several shipments of honey and eggs back to Ukraine, and threatened to ban fruit and vegetables. On July 29, it banned the import of Ukrainian pickled fruit and vegetables and canned fish.
Unsurprisingly, all consultations and attempts of the official Kyiv and EU to please Moscow and give it no reason to restrict Ukrainian import have proven futile. Even if Russia abolished the CIS FTA terms in trade with Ukraine, it would only cause customs duties to rise slightly. Instead, the latest bans from the Kremlin (with the CIS FTA agreement still valid) have once again shown that Russia can totally ban the imports of any Ukrainian product at any moment, and it will always find an excuse to justify that.
This signals that procrastination on the Association Agreement ratification has no sense. This also underlines the absurdity of the situation where the enemy remains an “important trade partner” for Ukraine despite openly sending its diversionists here and despite Ukraine’s plea for international sanctions against Russia.
The Ukrainian Week has written many times that the loss of the Russian market will have no catastrophic impact on the Ukrainian economy. This magazine has also provided plentiful arguments in favor of curtailing trade contacts with Russia as an unreliable and unpredictable trade partner guided by the political mood in the Kremlin.
Last month, this idea was finally expressed by Ukraine’s government. On July 18, Premier Arseniy Yatseniuk said during the discussion of diversification of markets and suppliers of industrial goods that “we should prepare for almost total stoppage of mutual trade with Russia… I realize what economic consequences that will have, and you do, too. But I realize equally well that Russia is not the only market in the world where Ukrainian goods should be exported. Therefore, the government should take every effort to diversify markets for our goods in the short-term prospect.” On July 23, he announced that “the Government of Ukraine has set up a committee to impose sanctions on Russia… that includes officials who should, within the next seven days, prepare and submit draft decisions on entities involved in the military aggression against Ukraine, occupation of Crimea and financing of terrorists”. On August 1, Oleh Bilous, Head of the State Fiscal Authority of Ukraine, said that it has prepared a list of companies with over 50% of Russian capital for the Government that could face sanctions from Ukraine. “There are hundreds, if not thousands of them,” he concluded.
Over the years of independence, Ukraine’s economy has reoriented its exports geographically and in terms of the range of goods it sells abroad, although less intensely than it could have. The groups of goods exported have changed over the years to adjust to international competition beyond the former Soviet Union.
In the mid-1990s, Ukraine still exported over 50% of its goods to former Soviet Union countries, like Belarus does today. In the next 17 years, this share plummeted. From 1996 to 2013, Ukrainian export grew in value 4.4 times in US dollar equivalent; it jumped 3.1 times to CIS markets; 5 times to the 28 EU member-states; 5.8 times to Asia, and the startling 24.3 times to African markets.
As a result, the share of CIS countries in Ukraine’s exports fell sharply from the dangerous 50.1% in 1996 to the moderate 34.9% in 2013. Instead, Ukraine began to sell more to the EU (from 23.1% in 1996 to 26.5% in 2013 of total exports), Asia (from 20.1% to 26.6% respectively), and Africa (from the barely noticeable 1.5% to 8%). Import has followed a similar pattern growing 4.4 times over the past 17 years, including just 2.5 times from the CIS countries, 4.7 times from America, 5.3 times from Africa, 6 times from the 28 EU member-states, and 22.7 times from Asia. As a result, the share of CIS countries in Ukraine’s total exports almost halved from 63.5% to 36.3%.
Driven by the crisis
The global financial crisis of 2008-2009 caused particular changes in Ukraine’s exports that have been in place for the past six years.
The changing range of goods sold abroad means that Ukraine is switching to selling items in which it has natural advantages. For instance, its total export grew almost 1.3 times (from USD 49 to 63bn) from 2007 to 2013, while the export of grain soared almost eightfold over that period from USD 0.76 to 6.37bn; threefold (from USD 0.67 to 2.05bn) for oil seeds; and 1.7 times (from USD 2.06 to 3.56bn) for oils and fats. Apart from that, Ukraine sold 1.7 times more semi-processed foods and almost 1.5 times more meat. Overall, the share of foodstuffs in Ukrainian exports grew from 12.7% to 26.8% over the past six years, exceeding the share of ferrous metals.
The export of coal grew almost threefold over the past six years (from USD 266mn to USD 737mn), electricity – 1.5 times (from USD 380 to 580mn), and electric equipment – 1.4 times (from USD 2.24 to 3.13bn); paper, cardboard and printed goods – 1.6 times (from USD 0.77 to 1.25bn); wood and timber – 1.4 times (from USD 0.83 to 1.14bn); furniture – almost twofold (from USD 287 to 556mn), pharmaceutical products from USD 129.5 to 251.5mn; and footwear – 1.3 times (from USD 143.5 to 191.5mn).
The export of goods Ukraine had relied too heavily on before the crisis shrank or stagnated. In 2007, ferrous metals and chemicals (including polymers, plastics and rubber) constituted over 50% of Ukraine’s total exports. In 2013, the share of these goods fell to 35.8%. The export of ferrous metals shrank from USD 19.66 to 16.91bn; plastics and rubber products – from USD 0.99 to 0.79bn; and chemicals (save for pharmaceuticals) grew a mere 3% from USD 3.93 to 4.05bn. The lowest dip was in the export of vehicles – it fell 2.5 times by 2013 compared to the pre-crisis 2007, from USD 1 to 0.38bn.
Export destinations changed too. In January-May 2014, total exports (USD 24.4bn) were slightly below the rate of January-May 2008 (USD 25.65bn). Meanwhile, the share of exports to most post-Soviet countries, especially the Customs Union, plummeted, Kyrgyzstan and Turkmenistan being the only exceptions (but exports there have always been low).
Instead, Ukrainian export to the Pyrennees countries (Spain and Portugal), Benelux (Belgium, Netherlands and Luxembourg), Great Britain and Ireland, as well as Poland, Czech Republic and France soared. Sales to Hungary, Austria, Italy and Finland increased, too. Export to other European countries, particularly to the Balkans (Greece, Bulgaria, Macedonia, Serbia, Albania, Bosnia and Herzegovina, Croatia, Slovenia), Estonia and Latvia, as well as to Switzerland and Norway, declined over the past 6 years. In America, the sales of Ukrainian goods increased in Mexico, Cuba and Panama only.
In Asia, the fastest growth of Ukrainian export, from 1.5 to 4 times, was seen in Iraq, Israel, Malaysia, Far East (China, Japan and South Korea) and South Asia (India and Bangladesh). In absolute terms, this is particularly visible in exports to China, India and Iraq: total sales to those countries over January-May 2014 made up half of Ukraine’s export to Russia. Another comparison: the Indian market is currently bigger for Ukrainian producers compared to the German or Hungarian ones; the Chinese market outruns the Polish or Italian destination.
Ukraine’s export to Africa has seen the biggest growth over the past 6 years, heading mainly to Northern Mediterranean part, primarily Egypt. In January-May 2014, Egypt imported USD 1.2bn-worth of Ukrainian goods, i.e. more than any of Ukraine’s European trade partners, seconded only by Russia and narrowly by Turkey. Four other big African importers of Ukrainian goods include Morocco, Tunisia, Algeria and Libya. Sub-Saharan Africa has seen stable or declining imports from Ukraine, with South Africa, Ethiopia, Djibouti, Kenya, Senegal, Liberia, Equatorial Guinea, Togo, and the two states of Congo being the exceptions.
To this day, Ukrainian exporters are barely present in a number of African and Latin American, even Asian countries, even if their neighbors import ten- or hundredfold more Ukrainian goods per capita. The African terra incognita for Ukrainian producers covers Burundi, Gabon, Gambia, Guinea-Bissau, Zambia, Zimbabwe, the Comoro Islands, Mauritius, Madagascar, Namibia, South Sudan, Swaziland, the Seychelles, Sierra Leone, Central African Republic, and Mali. In Latin America, Ukrainian goods have failed to penetrate most countries of the Caribbean, Chile, Bolivia, Venezuela, Nicaragua, Honduras, Guyana, Paraguay, and Uruguay; and Cambodia, Laos and Nepal in Asia.
An enduring stereotype is that Ukraine is only capable of exporting raw materials and products with little added value beyond the former Soviet Union, while its goods are uncompetitive on the European market. Facts point to the contrary.
Take Denmark: it imported USD 164mn-worth of Ukrainian goods in 2013, including 29% of agricultural produce and foodstuffs; 28.6% of clothes, footwear and leather goods; 11.8% of machinery; 11.5% of items made from ferrous metals; 7.4% of furniture; 5.9% of wooden and paper goods; and 3.8% of chemicals. In its exports to Latvia worth over USD 180mn in 2013, Ukrainian engineering is the leader with 32.1%, followed by foodstuffs with 19.5%, and clothes with 9.4%. 43.9% of Ukrainian export to Estonia (total worth over USD 103mn in 2013) and 53.8% of export to Norway accounted for the products of the engineering sector, mainly vessels.
The products of Ukrainian engineering sector are actively exported to Asia, Africa and Latin America. In 2013, it accounted for 10.8% of Ukraine’s total export to China (worth USD 2.7bn); 21% to Iran (worth USD 0.8bn); and nearly 25% to Vietnam (USD 185bn). Machinery makes 90.6% of Ukraine’s export to Myanmar, 79.7% to Niger, 64.9% to Angola (mainly electric machinery); and 52.6% to Equatorial Guinea. The volumes of export to these countries are considerably lower compared to other destinations, but the annual supply of Ukrainian machinery there is already estimated at UAH 100-200mn today.Export to a number of bigger European countries who actively trade with Ukraine is similar. In 2013, 27.2% of Ukraine’s total export to Germany (USD 1.6bn in 2013) accounted for engineering; 19.1% for ferrous metal products; and 13% for consumer goods. In its exports to Poland (USD 2.5bn in 2013), Ukraine sold 26.3% of ferrous metal goods; 13.9% of machinery; 12.7% of foodstuffs, and 2.4% of furniture, clothes and footwear each. Engineering accounted for 34.2% of Ukraine’s total exports to Hungary (USD 1.6bn in 2013). 22.3% of the goods sold to Romania accounted for ferrous metal goods; 13.9% for clothes and footwear, and 12.3% for the engineering industry.
Ukrainian exporters could now diversify their markets into the European segment of consumer goods, including parts that were hardly accessible for them until recently because of high European standards which Ukrainian produce often failed to meet. According to Ihor Shvaika, Ukraine’s Minister for Food and Agriculture, the European Directorate General for Health and Consumer Affairs (SANCO) will visit Ukraine on September 28-October 2, to check the local livestock farms. If the Ukrainian parliament adopts a series of necessary amendments regulating quality in this sector by that time, Ukrainian farmers will end up with vaster opportunities to export their livestock products, especially dairy, to the EU in the short-term prospect.
Ukraine’s current presence on the African and Asian markets is mostly through oil and grain, ferrous metals and fertilizers. This leaves vast potential for the products of other industries, including foodstuffs, livestock products, fruit and vegetables, as well as engineering and wood-processing goods, on these markets. For instance, Egypt, the biggest African buyer of Ukraine goods, imported mostly ferrous metals (USD 1.1bn), grain (over USD 1bn) and oil (USD 0.36bn), compared to just USD 16mn-worth of vehicles, USD 16mn-worth of electric equipment, and USD 9mn-worth of other machinery; USD 3.6mn-worth of meat and dairy products, USD 1.7mn-worth of vegetables, USD 1.5mn-worth of flour and cereals, and USD 1.6mn-worth of wood and timber goods. Libya buys USD 6mn-worth of meat and dairy annually from Ukraine, followed by Angola and Liberia importing USD 4mn-worth of these foodstuffs each, and Nigeria and Sudan with USD 3mn and 2mn-worth of imports respectively.
Asian countries consume much more Ukrainian meat and dairy, with Iraq spending USD 77.5mn, Jordan – USD 38mn, United Arab Emirates – USD 20, Turkey – USD 13mn, China – USD 5mn, Indonesia – USD 3.6mn, Kuwait – USD 1.4mn, Pakistan – USD 1.1mn, and Oman – USD 1mn. India, one of the biggest Asian buyers of Ukrainian goods, mostly imports Ukrainian oil (54.1%), as well as vegetables (USD 7.4mn), furniture (USD 4.8mn), and machinery (USD 144mn). USD 2.6mn-worth of Ukrainian vegetables were sold to Pakistan and Malaysia each last year.
This shows that Ukraine has vast markets to expand into with its consumer goods ousted from the Russian market. If increased properly, trade with these markets would compensate for much of the loss of the Russian market: over H1’2014 (January-May), Ukraine exported just USD 112mn-worth of meat and dairy to Russia, USD 65mn-worth of vehicles, and USD 49mn-worth of vegetables over the entire year of 2013.
Tactics and strategy
Belarus was recently forced to step back and cancel the licensing of a series of Ukrainian goods introduced on May 1 after Ukraine imposed special duties on July 26, ranging from 55.3% to 60.05%, on a number of Belarusian confectionaries, dairy products, beer, rubber tires, electric lamps, mineral fertilizers, and refrigerators. This showed how effective tough response to attempts of the neighbors to harm Ukrainian suppliers can be.
And, surprising as it may seem to many, Ukraine can equally effectively respond to the trade war from Russia. Contrary to the widespread opinion, Russia sells more to Ukraine than just gas, oil and petroleum. Over H1’2014, Russian export to Ukraine was worth over USD 2.9bn, i.e. just 1.5 times less than Ukraine’s total export to Russia over that period. Russian goods sold to Ukraine over January-May 2014 included USD 800mn-worth of machinery, USD 400mn-worth of steel and steel products, USD 293mn-worth of foodstuffs, USD 211mn-worth of plastics and rubber, USD 193mn-worth of fertilizers, and USD 101mn-worth of essential oils, soap and detergent, followed by USD 37mn-worth of pharmaceutical products. This statistic covers less than six months, so the subsequent loss Russia could face in its trade war with Ukraine (non-fuel exports only) could hit USD 7-8bn. Moreover, Ukraine can find alternative suppliers to replace Russian oil and petroleum.
With Russia, however, the scenario Ukraine applied to Belarus to protect its producers, will hardly be effective since Moscow is overwhelmingly dominated by the imperialistic geopolitical ambitions rather than sound reason. The pattern in Ukraine-Russia trade over the past few years confirms this. Putin’s attempts to force Ukraine into the Customs Union and unacceptable price of gas have caused the decline of Ukrainian export to Russia by more than 1.5 times (from H1’2011 to H1’2014), while Russian export to Ukraine nearly halved from USD 12.6 to 7.1bn. Hopes of long-term stabilization in trade with Russia are thus futile, and Ukraine’s future strategy should aim to bring trade with Russia to a minimum. Having survived this loss once and replaced the Russian market with alternatives, Ukraine will find long-term stability and far more reliable new trade partners.