Thursday, February 28, 2019

Trade in a time of war: How true is it that trade with Russia is on the rise again and that is causing this?


About a year ago, The Ukrainian Week wrote about the rise in trade with Russia and the fact that a slew of Ukrainian sectors had grown more, not less, dependent on the Russia market. But at the end of 2018, claims that there was a “sharp increase in bilateral trade” began to be used as a propaganda tool by a variety of politicians who claim to be from the “party of peace.” Indeed, this was the main argument to “prove” that Ukraine could not grow without cooperating with Russia, even with the war, and that it was time to refocus on “traditional markets” once more. The question is, what is really going on in trade between Russia and Ukraine now. We decided to find out.


Which export goods are on the rise and which are declining? What kind of change is there in the dynamic of Ukrainian goods going to Russian markets and Russian goods coming to Ukraine? What kind of impact on the impression of “steep growth” in trade volumes with the enemy has the fact that prices for energy and raw materials have sharply gone up had, given that these commodities traditionally dominated in Ukrainian imports from the Russian Federation and have lately taken over a growing share of those imports?

A continuing decline
Exports of Ukrainian goods to the RF hit the bottom, US $3.59bn, in 2016, which was about one sixth of what it had been at its peak in 2011, US $19.80bn. In 2017, a correctional rollback could be seen: although the share of trade with Russia, now at 9.1%, continues to shrink, the actual value of these exports has risen to US $3.94bn. Moreover, this adjustment did not alter the underlying dynamic and quickly faded. In 2018, trade continued to be curtailed: according to the State Fiscal Services actual data on customs statistics, exports of domestic goods to Russia fell 7.7% from 2017 to 2018, bringing in US $3.65bn, very close to what it had been in 2016.

Just about the only major item in Ukraine’s exports to Russia that showed growth in deliveries in 2018 was alumina from the Mykolayiv Aluminum Plant, which is in fact a subsidiary of the vertically integrated Russian company Rusal, founded by Roman Abramovich and run by CEO Oleg Deripaska. The value of these exports grew 9.2%, from US $392mn to US $428mn. However, the volumes barely changed in the first 10 months of 2018 compared to the first 10 months of 2017: 1.40mn t vs 1.37mn t. The reason for the growth in value was a rise in the global price for a tonne of alumina from US $286 to $307.

The biggest items in Ukraine’s exports to the Russian Federation remain domestic machinery and equipment. For the first 10 months of 2018, they accounted for nearly 27.0% of all domestic exports to Russia. At this point, however, they amount to a mere shadow of their former multi-billion dollar turnover. As before, absolute numbers in most positions have been in a steady decline, even as the cost of a unit has gone up.

Derzhstat data for this period shows that, compared to the same period of 2017, the only growth has been in deliveries of electrical equipment, up 18.0%. Exports of ships and related items shrank another 7.8%, exports of locomotive engines were down 10.3%, optical instruments and apparatuses were down 20.9%, other heavy machinery – mostly mechanical and industrial equipment – was down 21.6%, vehicles and spare parts were down 30.0%, and deliveries of aircraft and parts have pretty much stopped.

As before, nearly a quarter of Ukraine’s exports to the RF remain ferrous metals and steel products, posting at 23.8% in the first 10 months of 2018. But overall volumes have also fallen: ferrous metals are down 9.0% and steel products are down 6.6%. Moreover, this has happened despite a substantial increase in prices for the main types of Ukrainian-made steel products that are shipped to Russia. For instance, uncoated hot rolled carbon steel sheet over 0.6 m wide was up on average at US $555/t in 2018 compared to US $484 in 2017, while cold-rolled product was up at US $562 vs US $534, coated product was up at US $667 vs US $567, and so on.

It appears, then, that the decline in trade among Ukrainian suppliers is the result of volumes shrinking faster than prices are rising – in some cases 50% and more. Shipments of coated steel product shrank from 108,500 t in 2017 to 71,700 t in the same period of 2008, while deliveries of angles and other profiled steel went from 314,100 t in 2017 to 184,600 t in 2018. The price for one tonne of seamless steel piping jumped from US $1,036 in 2017 to US $1,540 in 2018, but export volumes to Russia were down from 70,000 t in 2017 to 47,700 t in 2018.

In short, the volume of deliveries of Ukraine’s main export commodities to Russia not only has not grown, but has for the most part declined significantly in the last year. The main exports that bucked this trend were mainly secondary product groups (see Bucking trends) whose share of overall Ukrainian deliveries to Russia and of production volumes in their respective sectors is not significant.

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