Searching for trade partners

Maxym Shevchenko

The outcome of Ukraine’s foreign trade this year is far from encouraging. In January-May, our exports were down by 35.9%, imports fell by 38.8%. This forces the government to introduce urgent measures to promote trading flows.

In 2014, the exports of goods from Ukraine decreased by 13.5% - to $53.913 billion following Russia’s military aggression, and in 2015 there was a further drop by another 35.9% - down to $15.437 billion. The imports decreased by 38.8% in the same period - to $14.528 billion. The collapsing indicators are due to the fall in industrial production in the east of Ukraine amid intense fighting. In addition, the financial state of the corporate sector is poor due to the crisis and the devaluation of the hryvnia, while the access to international credits is limited at the level of the national banking system and also on the foreign borrowing markets.

Against the background of the objective factors of the exports reduction stands out the fact that in 2014, the fall of trade with Russia amounted to 43%.

"This is - a serious fall ... There are a number of reasons. The aggression on their part, their tough foreign policy - not only toward Ukraine. As well as the reduction of Russia’s economy volumes. The fall [in oil prices] to $60 per barrel takes $200 billion from Russian economy in a year... " said Aivaras Abromavicius, Minister of Economic Development and Trade of Ukraine.

While part of Ukrainian Euro-skeptics insists that the open access to the EU market will not compensate for the loss of the Russian market, the Euro-optimists believe that the reorientation will be easy. But the numbers are inexorable - the decline of Ukrainian exports to the EU in the first five months of this year was a staggering 33.5%.

This dynamics partly reflects the real state of the economy and of our export capacity. On the other hand, in indicates that the EU, our new key trading partner, provides tremendous opportunities for Ukrainian businesses after losing the Russian market. A $909.2 million foreign trade surplus gives hope for a future growth of foreign trade turnover.

This may also indicate future macro-financial stabilization, and reduction of devaluation expectations and inflation

Trading status quo in the form of surplus of exports ahead of the entering into force of the economic part of the Association Agreement with the EU (AA) from January 01, 2016 may be a perspective opportunity for our economy to rise from its knees while Russia tries to pull Ukraine back down.

Given the fact that the Kremlin no longer asks to delay the implementation of the AA, the Ukrainian government has a direct path to the extremely large market and the preferences, which are necessary to take advantage of as soon as possible.

Europe vs Russia

The FTA does not provide for further tariff reductions and quota increases, since the EU unilaterally reduced trade barriers for Ukrainian goods in the fall of 2014.

But the main advantages of the implementation is simplification of the bureaucratic procedures for exporters to enter the European market, as well as the gradual reduction of tariffs and quotas by Ukraine regarding European goods, which will result in reduction of their price.

According to the Institute for Economic Research and Policy Consulting, implementation will give Ukraine the opportunity in a five-year term to increase exports to the EU by 4-5%, or $800 million annually.

"Since 2016, when the AA is to be implement, Ukraine will start to open up [for goods from the EU], but it will be a gradual process. This means that Ukraine from the first year of implementation will see a 4-5% of export growth," said director of the Institute, Ihor Burakovsky.

According to him, due to the FTA, agriculture, chemical, light and textile industry will benefit primarily.

In a 5-year term, the net effect of the introduction of a free trade zone with the EU will be about $300 million a year, even with the loss of the Russian market, according to the calculations by the Institute

Optimism about the AA, among other things, is supported by our neighbors’ experience.

According to the World Bank, the economy of Poland, Slovakia, Romania and Hungary has been growing by an average of 3% annually since 1992, while the economy of Ukraine in the same period has been falling by an average of 0.7%, although “enjoying” the preferences of the free trade with Russia.

The main advantage of the AA for Ukraine is the reduction of tariff barriers on the majority of commodity groups down to zero.

In addition, open access to the market of the eurozone is a huge advantage compared to the Russian market.

Seeking the exports benefits

The European market, as a priority, still does not allow to fully cover the potential of Ukrainian exports, especially in agriculture. In this regard, the government announced a policy of active trade policy.

In particular, the Cabinet plans to double the volume of exports by 2020 with aggressive trading. The agenda includes the signing of the FTAs with Canada, Turkey, Israel, the Cooperation Council for the Arab States of the Gulf and the Economic Community of West African States by 2018.

"We believe that the best help for us is the opening of markets. This assistance is not for a year or two, it is for a long term," said Ukraine’s trade representative Natalia Mykolska.

While the negotiations with Turkey, Israel, Arab and African countries are only starting, talks with Canada have already been successfully completed. On July 14, Prime Minister of Ukraine Arseniy Yatsenyuk signed an FTA during his working visit to Ottawa.

Terms of the agreement provide for the opening of 98% of the Canadian market to the Ukrainian exports, including important agricultural and industrial product groups.

At the same time Ukraine has managed to defend the asymmetric liberalization of markets of goods to protect domestic producers in sensitive areas. After the agreement enters into force, Canada will immediately open up 98% of its market, while Ukraine will eliminate tariffs for almost 80% of Canadian exports, followed by the elimination of other tariffs in three, five and seven years.

The potential of exports growth to Canada is enormous - in the first quarter of this year, Ukraine has supplied the goods worth only $ 7.5 million to this country, while for the whole past year – only worth  $72 million.

"Among the main Ukrainian products that will benefit from duty-free access to the Canadian market are sunflower oil, sugar, chocolate, confectionery and bakery products, alcoholic beverages and beer, clothing, ceramics, iron, steel and minerals. In addition, Canada will eliminate all above-quota tariffs for primary processing products, such as dairy products, poultry and eggs," said Mykolska.

Another country, which Ukraine intends to intensify trade relations with, is the United States, now the world’s largest market. The Government managed to achieve the resumption of the General System of Preferences for Ukraine. Since July, the Ukrainian companies have been able to export duty-free nearly 5,000 kinds of goods to the United States.

In particular, the system of preferences regards chemical industry, minerals and building stone, jewelry, various types of rugs and carpets, agriculture and fisheries.

State support of exporters: it would be enough to just let the businesses live

Despite some gains, Ukrainian exporters need  the system of state support to enter the highly competitive and bulk markets, which has been clearly lacking for the past two decades of the country’s economic history.

According to Anatoly Baronin, director of Da Vinci AG, for Ukraine to compensate for the loss of the Russian market and the effects of macro-economic crisis, it is necessary to implement the state program of exports support, including loans to key producers and protection of their commercial interests.

He believes that the government should work on establishing foreign trade missions and accelerate the establishment of export-credit agency.

However, according to Mykolska, an export credit agency, as well as a development bank, will not be created in 2015. Instead, the prime minister proposed the establishment of the Council of exporters under the Ministry of Economic Development and Trade, and a network of efficient foreign trade missions.

Trade Mission will definitely be created in the US, Germany, China and the Middle East.

Creating a Board of exporters and trade missions can greatly contribute to the diversification of Ukraine’s trade relations. Even in a difficult economic state of individual industries, they show amazing achievements. In particular, in the first half of 2015 Ukraine has topped the list of corn exporters to China, outrunning the United States.

These facts suggest that in many cases, it is enough for the state to just let the businesses live and not interfere by licensing of export quotas, creating artificial monopoly of grain traders, corruption in sea ports and in the rest of the state logistics. In this case, doubling of exports by 2020 would indeed be possible, despite all hardships.

Maxym Shevchenko (UNIAN)

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