Collapse of Ukrainian exports to Russia and Europe in first six months of 2015

‘To the shame of the once powerful industrial republic of Ukraine, in 2015, the country’s main export commodity has become corn.’

Introduction by New Cold War.org, August 20, 2015

Enclosed are three recent news articles from Ukraine reporting on statistics of the economic performance of the country during the first six months of 2015. The numbers have been published by the state statistics bureau of Ukraine.

Corn field in Vinnitsa, Ukraine

The main article of the three is the second one enclosed here. It is a comprehensive analysis of Ukraine’s economic performance since the Maidan counter-revolution, written by Сергей Арбузов, a columnist at Forbes Ukraine.  He titles his column ‘Corn republic’, referring to the high risk of degradation of agricultural production in Euromaidan Ukraine. The country is losing its industries, including food processing, and is in danger of becoming a simple exporter of agricultural and other raw materials. From the column:

Is there a way out? Sure there is. Besides the obvious need to stop the war in the Donbas and the resumption of normal trade relations with Russia, it is the search for new markets.

These markets, above all, can be Asia. As can be seen from the statistics, the economy is already on the way to feeling out the Asian subcontinent. But in order to export not only corn, funds are needed for modernization and promotion of Ukrainian goods. And here the role of government should be to attract investment, including public investment, especially in the now most vulnerable high-tech production…

* * *

1. Exports to the EU decreased by 35.6%

Eurointegration.com.ua, Friday, August 14, 2015. Translation by New Cold War.org.

In the first half of this year, Ukrainian exports to the EU fell by 35.6% over the same period last year. This is according to figures released by the State Statistics Service of Ukraine.

Ukraine’s exports to Europe in USD, first half of 2015. The list in red on the left is the percentage decline of exports by country. The largest declines are Cyprus (82%), Belgium (56%), Hungary (51%), Great Britain (49%), and Finland (48%). The graph bars in blue show the only two increases recorded: Malta (697%) and Slovenia (41%). Exports to Europe decreased by 36% and to Commonwealth of Independent States by 54 %. Ukraine is colored yellow on the map.

Total exports of goods to EU countries amounted to $6,062,800,000, representing 32.7% of total exports. At the same time, imports from EU countries to Ukraine decreased by 25.7%.

In general, according to the State Service statistics, imports from EU countries amounted to $7,389,900,000, or 42.8% of the total.

Compared to the first half of 2014, total exports by Ukraine decreased by 35.0%, to $9.988 billion; imports decreased by 38.5%, to $ 10,827,500,000.

During January-April this year, Ukrainian exports to the EU fell by 34.4% compared to the same period of last year. But in the coming months in Ukraine, it is expected that exports to Europe will be restored.

2. Corn republic

Where it Ukraine going in its economic ties to Europe?

By Сергей Арбузов, columnist, Forbes Ukraine, August 18, 2015. Original in Russian here. Translation to English by New Cold War.org.

The difference was in the details – in the speed of the process and the assessment of the risks that carried European integration to the economy. However, replacing the voice of a professional discussion, our opponents forced upon society their point of view.

Now, after a year and a half, under conditions of war and political instability, it is difficult to give an objective assessment of the choice made by Maidan. However, this period is already quite sufficient to assess the validity of many forecasts and statements.

Expectations

The main and generally indisputable argument, expressed by the supporters of European integration, was the need to modernize the Ukrainian industry. At the same time, according to the “Euro-optimists”, the signing of the EU Association would speed up this process many times thanks to European investment, new technologies and transition to more advanced standards. This, in turn, would help to increase the export of industrial products with high added value, and enter our country in the club of prosperous European states.

It was near-to peremptorily stated that after the establishment of a free trade zone with the EU, Ukraine will be able to increase exports in almost all commodity groups. At the same time, our opponents unofficially considered the EU market as a main resource for the Ukrainian economy to reduce dependence on Russia, whose economy they saw as geopolitical threat.

Our government, based not on political preferences but economic facts, considered Russia primarily as a major trading partner. At the end of 2013, exports to Russia and the CIS countries accounted for 36% of Ukrainian exports while exports to the EU countries were only 26%.

This imposed certain limits on the rhetoric of the government and on the actions that it could take. But, most importantly, unlike our opponents, we did not perceive the Russian factor as a problem. We believed cooperation with the Russian economy was advantageous for Ukraine for many reasons. Last but not least, because Ukraine supplied goods to Russia with a higher added value than it did to other countries.

The main commodity groups of Ukrainian exports to Russia in 2013

Source: Federal Customs Service of Russia

The main commodity groups of Ukrainian exports to the EU in 2013

Source: Ministry of Finance of Ukraine

Top ten Ukrainian exports of goods in 2013

Source: HPS Ukraine

This structure of exports and the inability to quickly reorient the export of labor-intensive and high-tech products to other countries forced on our government a balanced approach to the issue of cooperation with Russia. We could not allow European integration at the cost of losing the Russian market, knowing that it would lead to irreparable loss to the country. As subsequent events showed, this position was not unreasonable.

Reality

After creating an association with the EU, our opponents were expecting a significant increase in exports from Ukraine not only to the European Union but also to other foreign markets. According to the calculations carried out in 2013 by the Kyiv School of Economics and actively disseminated in the press, it would increase the share of high-tech products in total exports to 28-29%. At the same time, in the first year, Ukrainian exporters were promised a chance to put on the foreign market $9-10 billion more goods in comparison with the existing trade regime.

However, things turned out differently. In 2014, compared with 2013, Ukrainian exports fell by 13.5% – from $ 63.3 billion to $ 54 billion. During the first seven months of 2015, Ukraine sold goods for $21.7 billion. Such a catastrophic collapse occurred because of the losses of the Russian market, which, in spite of this, still remains the main market for Ukraine.

According to the State Statistics Service, in 2014, Ukraine reduced export of goods to Russia by 33.7%. In the first half of 2015, exports fell by another 59.4%. All exports to the Russian Federation for the first six months in 2015 amounted to only $ 2.3 billion.

Moreover, almost a third are old contracts in the machine construction industry, many of which come to an end this year. This and the continuing significant level of political tension suggest that in the second half of 2015, exports to Russia will continue to decline, to reach $5 billion by year end – a record low for Ukrainian-Russian trade.

Thus, contrary to the reassuring statements of our opponents, the EU market could not even partially compensate the losses the country has suffered in Russia and CIS country markets. And it is not the fault of the European partners.

On April 23 came into effect the EU autonomous trade preferences under which Ukrainian producers were able to export goods to the EU without paying customs duties. But the producers are not able to take advantage of this opportunity, including because of the evident technological backwardness and a mismatch of industry standards.

For the year 2014, exports of goods to the EU countries amounted to $17 billion, or 31.5% of total exports, an increase compared to 2013 of only $ 431.2 million, or 2.6%. At the same time, in 2013, before the signing of the association and the start of the preferences, the increase was 26.6%.

In 2015, the situation has worsened. For the six months of this year, the volume of Ukrainian exports amounted to $6 billion, or 32.7% of the total, a decrease compared to the first half of 2014 by 35.6%.

It is of no less concern than the decline in exports are causing a change in the structure of exports, which does not benefit Ukraine. We supply less and less machinery and equipment – the most science-intense products – that has caused the crisis in the leading enterprises in Eastern Ukraine. Meanwhile, for Russia, which accounted for the lion’s share of supply, decoupling is a lot less painful. With the ability to attract capital, Russia is building new facilities, upgrading old ones and replacing Ukrainian products.

The main commodity groups of Ukrainian exports to Russia in 2014

Source: Federal Customs Service of Russia

The main commodity groups of Ukrainian exports to the EU in 2014

Source: Ministry of Finance of Ukraine

Ukraine has not found new markets in the EU. Products which we sold in Russia, as one could expect, are not needed in the EU. As a result, in the last 1.5 years, heavy machinery products have completely disappeared from the top ten export products of Ukraine and the proportion of metallurgical industry has fallen significantly. In first place now are agricultural products.

To the shame of the once powerful industrial republic, in 2015, its main export commodity became corn. From the beginning of the year, more than $2 billion worth has been sold. In second place of exports for Ukraine is – sunflower oil.[1] Products with a high degree of processing, such as machine building, chemical and food industries, are reduced to less than 10%. Ukraine has de facto turned into a raw materials appendage of the Asian and African countries. Only the absence of banana production separates Ukraine from the new title of “banana republic”.

The main commodity groups of Ukrainian exports in first seven months of 2015

Source: HPS Ukraine

Top 10 most purchased Ukrainian goods for first seven months of 2015

Source: HPS Ukraine

Against this background, official statements about reducing dependence on Russian market do not sound very convincing. In the same way as statements of leveling the trade balance. A slight trade surplus which appeared lately is of little help against the backdrop of an enormous outflow of foreign investment; rather, it indicates serious problems in the economy.

Falling imports are due to both the reduction of consumer goods demand, due to the impoverishment of the population, and the reduction in imports of components parts, which are simply not needed under conditions of a collapse of industrial cooperation with Russia and with the CIS. A trade surplus reached at such a cost is no cause for joy.

Problem in 2016

Unfortunately, the bad news for the Ukrainian economy does not end there. And the source of the bad news, again, promises to be the association agreement with the EU. Next year, thelist of losers will be supplemented by enterprises serving the domestic market.

On January 1, 2016, the agreement on a free trade zone between Ukraine and the European Union comes into force. It provides for the abolition or significant reduction of about 95% of tariff duties. This means that we will drop protections from European consumer goods and Ukrainian producers will have to compete with the Europeans not only externally but also domestically. The result of such competition in conditions of the complete cessation of credit and a lack of investment to modernize production is easy to predict.

It’s safe to say that for the sake of signing the association with the EU, the country made considerable sacrifices. And it may be that many of them were made to no purpose. According to the document signed last year, Ukraine is given from four to ten years to synchronize to EU standards the production, storage and transportation of goods.

There is no doubt that in the current circumstances, domestic business does not have the money for that. This means that Ukraine will have to revise the terms of the association, and the enforcement of many regulations will be postponed to a later date. In fact, Ukraine will have to do what our government proposed to do in 2013.

Is there a way out? Sure there is. Besides the obvious need to stop the war in the Donbas and the resumption of normal trade relations with Russia, it is the search for new markets.

These markets, above all, can be Asian countries. As the statistics show, the economy is already on the way to feeling out the Asian subcontinent by itself. But in order to export to there not just corn, funds are needed for modernization and promotion of Ukrainian goods. And here the role of government should be to attract investment, including state investment, especially in the now most vulnerable science-intense industries.

Another source for economic growth and exit from the crisis could be the internal market. But Ukraine would have to agree to negotiate the postponement of the introduction of a free trade zone with the EU for at least another year, and also seriously address the need for growth in domestic demand, starting with income growth.

All the measures in question are not compatible with the policy pursued by the present government under the leadership of the IMF. Therefore it is obvious that the implementation of an anti-crisis plan will need radical solutions, and not just solutions to the long-standing problems with cadres. The future of our country depends on whether the president and Rada deputies will be able to make these very difficult decisions.

Note by New Cold War.org:
[1] Ukrainian farmers know very well that corn and sunflower are two crops which strip soils of nutrients and require high fertilizer inputs. An opening of the floodgates to plantings of these crops by an expanding agro-industry in Ukraine is not good news for ecologically aware agriculture in the country. A correspondent in Ukraine writes, “Collective farms in Soviet Ukraine usually planted no more than 10-15 per cent of the land with corn and sunflower. Rotation of the plantings of these crops was carefully adhered to. Nowadays, as I travel through Ukraine, I see almost everywhere fields of corn and sunflower. There is a risk that the rich, ‘black’ soil of Ukraine will be quickly exhausted. And today’s farmers cannot afford expensive fertilizers.”

3. Ukrainian exports: Has the bottom been reached?

Yury Panchenko, Eurointegration.com/ua, August 17, 2015. Translation by New Cold War.org.

Ukrainian exports have gone through a year of falling. If we recall that the rapid reduction of the Ukrainian economy (as well as exports) started in the middle of last year [2014], the statistics for the first half of 2015 are the best illustration of a “bottom” being reached.

In the first half of this year, Ukrainian exports declined 35% (to $ 8.5 billion). Imports declined even more rapidly – by 38.5%. As a result, foreign trade surplus for the year has more than tripled – from $408 million to $ 1.25 billion.

Fresh statistics for the first six months of 2015 from the State Statistics Service shows the new economic reality of Ukraine.

First of all – a sharp reduction of deliveries to Russia and CIS countries. The overall drop in trade with the CIS countries was 54% – to $ 3.78 billion.

Taking into account that exports to the EU in the same period totaled $ 6.06 billion, it turns out that the European market is 1.5 times more than that of the CIS countries.

The fall in exports to the CIS was expected. At the same time, decreases of exports to the EU were 36%.

In the next quarter, we expect gradual improvement in the statistics. However, the reason for this is primarily an effect of the change of the base of statistical comparison, because now we will compare this year’s results with the period of the beginning of the rapid fall of the Ukrainian economy.

A field of corn in Ukraine

Recall that according to the results of the first half of 2014, the growth rate of exports to the EU were 14.9%. But decreases began in the third quarter of the year. This is largely due to the military conflict in the Donbass, which strongly affected exports of Ukrainian metallurgy products. Until recently, these were a key article of Ukrainian exports to the EU.

In the coming months, Ukraine may face new challenges. We can predict significant sales of agricultural products beginning in September. This additional inflow of foreign currency into the country would be able to stabilize the hryvnia exchange rate, but the current world price for wheat is 15% lower than last year!

What may further facilitate the entry of Ukrainian goods to the EU? Recall that in our relations with Europe we now have a regime of preferences in which Ukrainian producers do not have to pay customs duties when exporting to the EU. But even in this situation, Ukrainian exports to the EU continue to fall!

On the optimistic side, a significant number of new Ukrainian companies have begun in recent months to reach into European markets. According to the Institute for Economic Research and Policy Consulting, from the early April 2014 till the end of that year, 5,302 enterprises which had not before exported to the EU market began to do so. However, another 2,299 enterprises which were exporting to the EU previously ceased doing so.

The problem is that it was large enterprises that exited European markets, including those from Donbass region. It was smaller companies, instead, which began entering EU markets.

However, the very large number of new companies, which started to work in the EU, gives a hope for a rapid growth in exports.

Traditionally, economic progress can be expected by the second year of entering a new market. That is why those Ukrainian companies that entered the European market last year are gradually adapting to the new environment and beginning to compete in the new market more effectively.

Until that began happening, the main buyers of Ukrainian products were so-called “third world countries”, not least because access to these markets does not require from enterprises such changes as compared to exporting to the EU.

These [third world country] markets cushioned Ukrainian exports from an even larger fall.

In particular, Ukraine’s export to Iran grew up by 30,9%. Given the fact that sanctions against Iran have been lifted, this country can quickly return to oil and gas markets, becoming thus a very promising product market for many countries.

Also, there is a slight increase of Ukrainian exports to China (0.5%) and South Korea (2.6%).

Two important markets for Ukraine – Turkey and Egypt – are now showing a fall of about 20%. This drop is due to the numerous restrictions for Ukrainian exporters which government officials have not had the time to resolve.

In sum, Ukrainian export recovery depends on the speed of adaptation of Ukrainian business to the terms of EU trade and on the government’s assistance to companies operating in eastern markets.

Progress in these areas should protect the Ukrainian economy from the new restrictions imposed by Russia. How successful this will be will be shown to readers of Yevropravda [European Truth, a Ukrainian media] in the coming months in our new infographics of foreign trade.

All of the above translations were revised slightly at 1930 Eastern Time on August 20, 2015.