It is just 60 kilometres from Kharkiv to the Russian border, and nearly a thousand kilometres to the nearest EU border. The geopolitical preferences of local citizens are undoubtedly influenced by this reality, just as the foreign trade preferences of local businesses are. Despite these geographic facts, Ukraine’s current situation demands that these preferences change. We discussed potential next steps in making these changes with Oleksandr Chumak, president of the Association of Private Employees and a Team Europe expert.
On March 17, the European Commissioner for Humanitarian Aid and Crisis Management, Christos Stylianides, and the head of the EU Delegation to Ukraine, Jan Tombiński, announced the opening of the Centre for Support to Small and Medium-sized Enterprises (SMEs) in Kharkiv. What kind of support do SMEs need, especially in the context of opportunities for free trade with the EU?
Firstly, Ukrainian local authorities should pay more attention to SMEs. Unfortunately, the Regional Council of Entrepreneurs is not currently functioning effectively in this role because it was created with the Soviet principle of appointing its participants. Neither municipal, nor regional authorities are interested in the activities of our SME Coalition. This may be because their priority for the Kharkiv region is to preserve peace and prevent the expansion of war outside the Donbass, and there is no attention left for business. In the past two years there have been no events, meetings, or other public activities devoted to the subject of SMEs. Despite these challenges, we are looking forward to cooperation in the future.
Governmental assistance is crucial for Kharkiv businesses looking to enter the EU markets. The state should explain the advantages of free trade with the EU, and help businesses in the transition to conforming to EU technical regulations, which is part and parcel of entering EU markets. Finding EU business partners is another crucial step; this also concerns those companies that are interested in entering our regional market and establishing business partnerships in Ukraine. Investments and the availability of financial opportunities are also important elements for Ukrainian SMEs. The existing loan programmes in Ukraine are too expensive for these businesses; it makes no financial sense to take out a loan for business development that will involve an unmanageable financial burden.
Are there examples of Kharkiv entrepreneurs successfully trading with the EU under these conditions?
Yes, of course. This is primarily happening in the IT sector. I’ve recently seen analytics that show that Ukrainian IT outsourcing is among leading in Europe. Such companies have always been oriented toward foreign clients, and now the EU is their top priority.
Good examples of Ukrainian leadership in Europe include “Brig” and “Grand Marine”, which both produce inflatable boats. In terms of the benefits of the Association Agreement, we have a company that produces tap fittings, filters, and valves, that has shifted its exports from Russia to the EU. The company established its branch in Poland, and started working there. Its biggest challenge was to adapt to the EU technical regulations. This is a common problem. Indeed, many of our businesses, focused on the post-Soviet market, are accustomed to working according to the technical specifications of the Soviet Union standards (GOSTs).
How do companies like “Brig” and “Grand Marine” develop in Kharkiv, which is so far from “big water”?
These success stories are the result of a right approach. ”Brig” was established by former military officers: aviation specialists. Today the company has enough European clients that it has no problem getting its products to the seas and oceans. The company is growing and prospering.
Journalists who report on free trade between the EU and Ukraine complain that successful Ukrainian companies are not open enough with the media. Businesspeople are often not willing to talk about themselves.
Businesses are simply afraid of too much attention from the government, with its aggressive fiscal approach. Successful businesses attract more attention from the tax authorities, which make a point to visit these companies more often. Illegal takeover is another threat. Such cases have become increasingly common in the last decade. Successful entrepreneurs are afraid to draw the attention of dishonest businesspersons who might wrest their business away.
To reduce these risks, Ukraine should move away from state regulation of economic activity as much as possible. State policy should become more liberal. The state should also protect businesses from illegal takeovers. In this context, the role of business associations becomes even more important.
How can Kharkiv citizens, including entrepreneurs, better understand the benefits of European integration?
There should be more exchange of successful practices. Companies that managed to enter EU markets should share their experiences and make this opportunity attractive for others. Their experience can help make the process easier and cheaper for other companies.
Business associations interested in developing their members by helping them enter EU markets should join in the public discussion.
Local authorities should also join the process. Today, the state still applies a post-soviet approach to business development. Some state programmes even try to encourage entrepreneurship via tax services, pension funds, and employment centres. This is paradoxical, because to popularise entrepreneurship we should involve entrepreneurs who already have success stories.
The business community is interested in this discussion. Kharkiv businesses had close ties with Russia, but now they can compensate for the loss of the Russian market by accessing EU consumers.
So are business-based arguments the most effective way of discussing the benefits of the Association Agreement?
For sure. The economy is the best reason to make the European choice. Numbers are the best illustration of how entering the EU markets can compensate for the loss of the Russian market. The EU market is three times larger than the Russian one and has much more consumer purchasing power.
Today, one-third of Kharkiv exports go to Russia, is that correct?
Yes, for now. Businesses are still have difficulties to re-orient their economic ties. This is especially the case for medium and medium-large-sized businesses. Small businesses adapt faster to external conditions.
Is Kharkiv’s geographical position a big obstacle to developing trade with the EU?
It is a big obstacle. In the state of war with Russia, Kharkiv is in a deadlock. There used to be circulation of goods and services from Russia to the EU. Today that trade has shrunk, which has a tangible impact on retail centres, like Barabashovo. This problem can be solved by increasing exports to Europe. There is potential in areas other than IT: in farming, production of textiles and shoes for example. One third of all shoes produced in Ukraine are produced in Kharkiv. If manufacturers maintain high quality for their products, EU customers will be willing to buy them.
You mentioned farmers. The EU promotes cooperatives through its projects in Ukraine. But Ukrainian farmers tend to distrust cooperatives, associating them with Soviet-era ‘kolkhoz’ (collective farms).
It may sound strange, but agriculture in the Kharkiv region developed in the form of agricultural cooperatives back in the 1990s. Today’s idea of creating cooperatives based on private households is actually quite attractive. Cooperatives could unite people who live far from Kharkiv. Some farmers grow herbs, while others grow tomatoes or cucumbers, but they cannot sell their goods because of the cost to transport them to the regional centre. However, if they unite into cooperatives, the logistics of trade become much easier. Of course, people with post-soviet thinking see cooperatives as a different version of soviet ‘kolkhozes’, so they reject this idea. More needs to be done to explain to people the real purpose and goals of cooperatives. The Kharkiv region has huge land resources and human potential in villages. There is also a high level of unemployment, so cooperatives could help solve both the employment problem and the challenges of infrastructure development in villages.