Much work to be done to up Ukrainian exports

By Ilya Timtchenko

Ukraine still has a long way to go to become a great exporter.

The country is still at its initial level of developing its export strategy and finding new markets. Outdated regulations, a poor financial market, a lack of business experience – all are holding the country back as it tries to compete in the global marketplace.

But despite the challenges, some progress was made last year.

In 2017, the country upped goods and services exports by 16 percent, or by $7.2 billion, to $52.3 billion. Exported goods alone increased by 19 percent, to $43.3 billion. Ukraine exported $17.5 billion to the 28-country European Union, and almost $4 billion to Russia. Other top export destinations include Turkey, India, China, and Egypt.

Nataliya Mykolska, the deputy economy minister of Ukraine, who is responsible for promoting the country’s exports, says that 2017’s exports increase was a good sign.

“We had an increase of almost 27 percent, but what’s most important is that we almost reached the pre-crisis level,” Mykolska told the Kyiv Post on March 21. This shows that Ukraine’s association agreement with the EU, which came into force in September last year, is working. “It’s not only about the increasing value of our exports, but also the increasing number of our companies that are exporting to the European Union.”

After the provisional agreement with the EU came into force, the number of Ukrainian companies exporting to the union doubled, to more than 14,100 companies, she said.

Developed markets

Denys Krasnikov, the vice president of the Ukrainian League of Industrialists and Entrepreneurs, or USPP, one of Ukraine’s largest unions of businesses and organizations, says it makes much more sense for Ukrainian companies to enter developed markets.

Krasnikov, has been at USPP for more than 15 years, and over the past few years has focused his efforts on export promotion.

“About four years ago we understood that there was a lot of pressure on Ukrainian exporters in the eastern markets, and we had to start a really serious move forward to find new markets and new opportunities for our enterprises,” he said.

“We try to promote our companies mostly in developed markets, where there are more stable economies and more stable partners,” he said.

It’s much easier to enter Arab and Asian countries for companies that are professional and have good quality products, he said.

“But while you can enter such markets easily, it’s also very easy to lose these markets.”

Non-developed countries have more of a short-term contract business culture, where enterprises are ready to switch business partners regularly.

“Very often the situation in such countries is even less stable than in Ukraine, and so if we move forward to these markets, it means there won’t be a serious reorientation of the Ukrainian economy to other strategic markets.”

On the other hand, it is much more difficult to enter the European Union, Canadian or the U.S. markets, even with a good team and product.

“But if they start to work, it is much more stable” than working with other countries, Krasnikov said.

And once Ukrainian companies enter developed countries, and Ukrainian products are seen on the shelves of, say, U.S. stores, then other countries order these products as well.

For example, Ukraine’s Galicia, a juice company that sells its products in U.S. supermarkets, is now entering the Latin American and Asian markets. Another example is Ichnya, a producer of condensed milk that also exports to U.S. supermarkets and is now receiving offers from countries like Bolivia, Panama, and Mexico.

Ukraine connection

Ukrainian companies also have much more export success if they have professional contacts in the West who are familiar with Ukraine already.

“Only in this case do you have a real chance of starting to work with really big, serious players,” Krasnikov said. “Because if we estimate and analyze our exports to Canada and the United States, we see that most of these exports are between Ukrainian companies and former Ukrainians who moved to the United States.”

“Many of the Ukrainian companies present on the U.S. market for the past 15 years are there, and selling products, because former Ukrainians moved there.”

Examples of such Ukrainian companies are food companies Chumak and Veres, and tire-maker Rosava.
Former Ukrainian citizens who emigrated to Western countries and received top-level jobs are more open to doing business with Ukrainian companies, and encourage the rest of their team to work with them.

If there is no connection, then typically it is very difficult to start cooperation, because of perceptions abroad that Ukraine is still a post-Soviet nation with bad products and poor workers.

Value-added

But even if a company does enter a Western market, Ukraine’s exports are still dominated by commodities, rather than finished goods of the type that could provide more added value for Ukrainian exporters.

Ukrainian regulations, including those of the central bank, the National Bank of Ukraine (NBU), are to blame, making it easier for Ukrainians to export raw materials while discouraging them from exporting finished products.

Instead, foreign companies come to Ukraine to source raw materials and collect the added value, opening offices to purchase raw materials for export to other countries.

For example, Ukrainian sunflower oil is sold on Amazon through a company called Sunvella for $8 per bottle. The Ukrainian producer only gets up to a dollar per bottle.

It’s the same story for Ukrainian exporters of honey.

“Unfortunately, Ukrainian exporters of honey get even less of the cake,” Krasnikov said. “If a U.S. customer buys honey for $20 per kilogram, Ukrainian companies supply honey at $2.50 per kilogram at most. So you can see the difference.”

NBU regulations

The regulations for selling value-added products are “completely different,” Krasnikov said. “If you want to sell such products, you have to have representative offices in other countries.”

And establishing a representative office requires a license from the NBU. The procedure takes a lot of time, is heavily regulated, and a company must send all of its earnings to Ukraine within a 180-day period.

“No country in the EU or even among our post-Soviet neighbors has such a law,” Krasnikov said.

The requirement, designed to curb money laundering, might have made sense during Ukraine’s first years of independence, Krasnikov said. “But now Ukraine says it wants to be a part of EU, and to be open to the free flow of capital.”

Because of this over-regulation, many businesses have given up trying to export value-added products.

“They just see that it’s impossible to follow Ukrainian law and export value-added products legally,” Krasnikov said.

The requirement to send money to Ukraine within a 180-day period is a big problem for engineering exporters in particular, since many products, such as engines, need a couple of months of testing before a foreign client will pay for them.

“This is a really serious problem,” Krasnikov said.

And with a weak banking industry and local currency, as well as high interest rates, most Ukrainians cannot find any affordable and stable financing. Most are left with only one option – to finance their operations with their own money.

Sanitary regulations

However, Ievgeniia Lytvynova, the CEO at Ukrainian Exporters Club, a consulting firm, says that the biggest problem for her clients is not so much NBU regulations, but rather phytosanitary and veterinary certificate regulations.

“The most important are of course veterinary agreements between countries, because they make it a lot easier to legally export Ukrainian goods… minimizing the cost of production, and increasing their competitiveness on the global markets.”

Mykolska, the deputy economy minister, said that the EU would like to see more progress from Ukraine in bringing phytosanitary regulations into agreement with EU standards under their Deep and Comprehensive Free Trade Area agreement, or DCFTA.

To do that, the country needs to reform its state sanitary and phytosanitary service, adopt several EU regulations, and strengthen its inspections of enterprises.

“At the end of last year and beginning of this one our parliament adopted a number of laws that are bringing our sanitary and phytosanitary regulatory system into compliance with the DCFTA’s requirements, and the same also applies to technical regulations,” Mykolska said.

But Ukrainian companies also need to “do their homework” in terms of investing in modernizing their own sanitary controls, and modernizing production facilities in order to comply with EU requirements, Mykolska said.

Trade shows

It is also difficult for companies to attend international trade shows and exhibitions, as a lot of bureaucracy is involved.

Ukrainian businesses do find international trade shows and exhibitions valuable, and are participating in more events, but Ukraine’s global presence is still very small.

But not every company can afford to participate in such events, especially the smaller businesses, Lytvynova said.

“Exhibitions can be productive, but you need to choose them carefully,” she said.

In 2017, 112 Ukrainian companies participated in nine trade missions globally, and Ukrainian companies held over 1,000 business-to-business meetings.

Krasnikov says that the ministry did a lot of work, but mostly in terms of marketing the country’s image. The reform of export regulations, meanwhile, is being neglected.

“The government has to do everything that it needs to do, and not just marketing,” Krasnikov said. “The government’s marketing is only a very, very small factor in success.”

“Every time we talk about regulations, it looks like they find it just too difficult to understand,” he said. “We like what they do… but we have to keep criticizing them even more, and pushing our ideas forward.”

Source: KYIV POST

Job Opportunity: CUCC PROJECT DIRECTOR

Canada-Ukraine Trade and Investment Support Project – Management Position
The Canada-Ukraine Chamber of Commerce has partnered with the Conference Board of Canada to implement a five-year project aimed at increasing trade and investment between Ukraine and Canada.  The Canada-Ukraine Chamber of Commerce is seeking to fill the following management position:

CUCC Project Director – Canada
This position will be based in Toronto, Canada and will report to the President of the Canada-Ukraine Chamber of Commerce.

The selected candidate will be a self-motivated, independent, resourceful and results oriented individual who has demonstrate an ability to multi-task, set priorities, work under pressure and meet deadlines.

Main Responsibilities

  • Administer the work activity of the CUCC Project Teams in Canada and Ukraine
  • Provide day to day management of the operation of the CUCC Project Team in Canada
  • Provide leadership and direction in all aspects of the work performed by the Unit
  • Develop and implement a results-based management system for the assigned portions of the Project Scope
  • Assist in providing overall management of the Project

Job Qualifications

The successful applicant will have a Business or Finance degree or comparable experience in a related field.  In addition, the successful individual will have a minimum of six years of work experience in project management including strategic planning. Excellent written and oral communications skills in both Ukrainian and English.

Additional information regarding this position is available here: March 15 2018 update – CUCC PROJECT DIRECTOR Job Description

NOTE:  Please submit CV along with a covering letter for receipt no later than noon
March 23, 2018..either electronically to info@cucc.ca or by Canada Post to:

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Ukraine Scores Major Win over Russia and Gazprom


Naftogaz Chief Executive Andriy Kobolyev speaks at the Yalta European Strategy annual meeting in Kyiv, Ukraine,
on September 15, 2017. Credit: YES © 2017. Photographed by Sergei Illin, Aleksandr Indychii and Aleksandr Pilyugin

BY TIMOTHY ASH

Ukraine received a useful fillip on February 28 when the Stockholm Court of Arbitration ruled in favor of the state gas supply and transit company, Naftogaz, and against its Russian counterpart, Gazprom, in a four-year dispute over gas transit. The court awarded Naftogaz $4.63 billion in damages, finding that Gazprom failed to pump agreed upon volumes through Ukraine’s pipeline system, thereby depriving it of transit revenues. An earlier ruling against Ukraine over the 2009 “take or pay” gas supply contract for $2 billion means the net payment due to Naftogaz is $2.56 billion, or more than 3 percent of Ukraine’s GDP.

No two ways about it, this is a major win for Ukraine.

It’s important to remember that the original Gazprom claim on Naftogaz was for over $80 billion, so merely dodging this bullet was a major positive for Ukraine, as a full claim against Naftogaz would have been highly detrimental to the country’s solvency given it amounted to about 75 percent of GDP. And in the context of the broader Ukraine-Russia conflict, this award is also a major psychological victory for Ukraine.

And then there is the plus of $2.56 billion net payment to Ukraine.

A couple of questions around this victory:

First, will Gazprom pay?

While Gazprom and Russia immediately reacted by questioning the fairness of the award and signaled a desire to challenge the decision, I cannot see a situation in which Gazprom does not pay. Both sides agreed to participate in the arbitration on the understanding that there is limited scope to appeal. And not paying would send a bad message about Gazprom’s creditworthiness. Given the close proximity between Gazprom and the Russian state, such an outcome is undesirable. The Putin regime has worked hard in recent years to ensure Russia’s ascent back to an investment grade rating. Instead, Gazprom will likely stall for a few months, but it has the cash and financing options to pay, and will have to eventually pay or face further litigation from Ukraine, and potential reputational damage as a result.

Second, could Russia ask for the $2.56 billion to be set against the $3 billion claim by Russia currently before the UK court over Ukraine’s failure to honor Eurobonds issued to Russia in December 2015 by former Viktor Yanukovych’s regime?

I doubt it. These are separate claims: the latter by the Ukrainian and Russian state, whereas the Stockholm ruling is by the two respective gas companies. The original 2009 gas deals were shaped by bilateral agreements, negotiated by the respective governments, but they were signed by the two gas companies. I think this means that the Ukrainian Ministry of Finance will have no obligation to net all this out. There might be an attempt at some backroom quid pro quo, but in the run-up to Ukraine’s 2019 elections, paying the $3 billion would be political suicide for any Ukrainian leader. Given the context that this loan was seen as a bailout of the Yanukovych regime, and then considering the damage done to Ukraine by Russia as a result of the subsequent annexation of Crime and then Russian military intervention in Donbas, this scenario is unlikely.

So how will Ukraine use the award?

It is a big number, and a positive win for Ukraine’s cash balance. The one potential fly in the ointment is that in securing the $2.56 billion there will likely be considerable domestic political pressure to continue resisting gas price hikes and liberalization, as currently demanded by the International Monetary Fund and already agreed on (but not delivered) in April 2017 by the Groisman government. Having a cash windfall of $2.56 billion at the end of the heating season will also provide considerable pork for the Poroshenko administration heading into the elections, which may be called early. Early elections could make a near-term agreement to restart the $17.5 billion IMF program less likely which would set back the long-term reform agenda in Ukraine. From an IMF perspective, the longer Gazprom holds out, the more cash strapped Ukraine becomes, the more likely it is to bow to IMF conditionality and push on with the broader reform agenda. If Gazprom wants to ensure a fissure between Ukraine and the international financial institutions, it should pay up quickly.

And what about the future relationship between Naftogaz and Gazprom?

Both sides seem to be moving further apart with Naftogaz continuing to source gas supplies from third parties, and Gazprom pushing on with rival transit routes, including Nord Stream 2 and Turkish Stream. Immediately after the announcement of the Stockholm ruling, Gazprom is reported to have returned an advance payment from Naftogaz for future slated gas purchases, halting gas sales to Ukraine and forcing Naftogaz to seek to gas from a very tight European gas market at high prices.

Timothy Ash is a London-based senior emerging markets sovereign strategist for Bluebay Asset Management Company.

 

Source: Atlantic Council

Ukraine’s Unexpected Leaders BY Diane Francis

Ukraine’s Unexpected Leaders

BY DIANE FRANCIS

In the summer of 2013, Alex Ryabchyn completed his master’s degree at Sussex University in the United Kingdom, then moved back with his wife and daughter to teach at Donetsk National University in eastern Ukraine.

That December, the Maidan erupted and he watched from afar with concern. Then in March 2014, after little green men seized Crimea and Russian-backed troops appeared in eastern Ukraine, his life changed.

He became one of Ukraine’s 1.7 million internally displaced persons and eventually a member of parliament with Yulia Tymoshenko’s Batkivshchynafaction.

“Russia’s action was a shock,” he said in an interview during those difficult days. “I’m a Russian-speaking person. My mother was born in Russia. I have lots of Russian-speaking friends, but the Russian part of me died.”

After Russia invaded Crimea, he helped organize a series of “Donetsk Is Ukraine” rallies that drew thousands in February, March, and April 2014. “We didn’t want to be like Crimea,” he said. “I never thought that I’d become a politician.”

He left Donetsk on May 27, 2014, when jets started to fly over Donetsk, and intended to stay only a week in Kyiv. He never returned.

Tymoshenko’s party recruited the thirty-four-year old green energy expert and he serves on the parliamentary energy committee, and is responsible within his party for the Donetsk and Luhansk oblasts where many displaced persons live.

“I’m not able to come to Donetsk. I look at pictures and my heart is torn apart that my region and its industries have collapsed. My home has been destroyed. People have been killed. It will never be the same,” he said.

In 2014, he responded to an email recruiting young leaders and was selected. He met Tymoshenko and was charmed by her poise and warmth.

He, like all reformers, is fed up with President Petro Poroshenko and was sympathetic to opposition politician Mikheil Saakashvili’s calls for reform.

“I did not support him as a Ukrainian politician,” said Ryabchyn, referring to Saakashvili. “He is too emotional, and I wonder who funded him, but Ukraine is a democracy and even if he is saying something against the president he must be protected.”

In 2017, Saakashvili was stripped of his Ukrainian citizenship. In February, Ukrainian border guards detained Saakashvili in a Kyiv restaurant and transported him to Poland on a private jet. He has been banned from reentering Ukraine until 2021.

“It was embarrassing to the country,” he said. “Poroshenko is not a king who can provide citizenship and then take it away. This is not his kingdom… It’s a democratic state.”

As one might expect from an opposition politician whose party is riding high in the polls, Ryabchyn is optimistic about Ukraine’s future.

“I hope Yulia [Tymoshenko] will bring in more new blood to change this country,” he said.

Critics charge that Tymoshenko isn’t reform-minded, something Ryabchyn calls “untrue.” His party supports another round of judicial reform, electoral reform, modifying parliamentary immunity, legislation that can impeach the president, the creation of an anti-corruption court, and NATO membership, he said.

While other young reformers tend to be downbeat about the country’s foot dragging on reforms, Ryabchyn is anything but on his issues.

He said that there’s a consensus among elites that Ukraine needs to consume less Russian gas.

On raising energy prices to world levels, he said the government should have retrofitted housing with thermostats and meters so that people could reduce costs by lowering temperatures. Instead, they have raised prices which benefits oligarchs and handed out subsidies to 60 percent of Ukrainians.

“The only choice people have is to open their windows and let the heat out,” he said.

But the absence of any rule of law, judicial reform, and parliamentary immunity remain the biggest challenges, he said.

“Crooked judges are the biggest problem in Ukraine. This is why there is no new investment. Oligarchs have all the benefits because they know to bribe the judges to get the results they need,” he said. “We know [Poroshenko’s] judicial reform did not work. The new process failed to elect good judges.”

Ryabchyn says that leadership starts at the top and is critical to transforming Ukraine.

He said that Tymoshenko knows how to makethe oligarchs behave and knows what they do, citing a $4.8 billion dollar re-privatization deal in 2005.

Despite enormous challenges, he’s glad he took the plunge into politics even though there are downsides. History, he believes, is on Ukraine’s side.

“All the time I receive threats. But you get used to it. The Russians tried to hack my email. We have a lot of stress with Russia as a neighbor, but as we become stronger economically, the Russian people will see we are a democratic and prosperous society, and they will start questioning their president and authorities.”

Diane Francis is a Senior Fellow at the Atlantic Council’s Eurasia Center, Editor at Large with the National Post in Canada, a Distinguished Professor at Ryerson University’s Ted Rogers School of Management, and author of ten books.

 

Source: Atlantic Council