The free-trade zone between Ukraine and the EU opens up huge opportunities for Ukrainian business. Delo.UA found out whether small and medium-sized enterprises could use these opportunities and take their place in the sun on the promising EU market.
In general, Ukraine has signed 16 free-trade agreements covering 45 countries. In the coming years, this list can be supplemented by a few more, including Israel, Turkey and, possibly, the United States. The most symbolic, the most cherished and one of the most economically promising for our country was the signing of the free-trade agreement with the European Union.
The free-trade zone with the EU means not just the cancellation of customs duties for goods from Ukraine. It also means the “economic integration” of Ukraine as well as the “building our country into value-added chains”. But for economic integration, our country must do a great job. In particular, to bring the requirements for product safety in full compliance with European ones as well as to carry out all procedures for monitoring the compliance with these requirements.
For entrepreneurs, who have not previously worked on the EU market, this means new troubles and costs because it was necessary to bring the quality of products and their security to a higher European bar. But in the long run, business is in the black, gaining easier access to the markets of the EU states.
Delo.UA investigated what changes occurred in the Ukrainian export to the EU in recent years, and whether Ukrainian small and medium-sized enterprises managed to take their place in the sun on this promising market.
Business enters the EU market with new products
Ukraine traditionally supplies to foreign markets, including to the European market, first of all, raw materials and semi-finished products. It was impossible to completely reverse this trend for several years, during which the free-trade zone is working. But the Institute of Economic Research and Policy Consulting (IER) notes positive trends.
What goods the Ukrainian business sells to the European Union, $ million
|Iron ore and concentrates||1496|
|cables and wires||1276|
|semi-finished products made of carbon steel||1048|
|flat carbon steel products||879|
|clothes and shoes||517|
|electric kettles and coffee machines||225|
|telephones and their parts||195|
|oil and petroleum products||142|
|Bottles, ampoules and bottle caps||76|
If in 2013 raw materials, semi-finished products and processed products held approximately the same shares in exports to the European Union, in 2017 the share of processed products increased by 10 to 11 percentage points – up to 43%. The share of raw materials and semi-finished products in supplies to Europe decreased up to 29% and 27% respectively.
“We did really increase the export of processed products to the EU. But you need to understand that this is not only the products of final consumption, but also largely the products of intermediate consumption,” explains the head of the Center for Economic Research of IER Veronika Movchan. – For example, the share of sunflower oil exports to the EU increased from 2 to 7%. It is oil that primarily explains why the share of processed products has grown”.
Veronika Movchan clarifies that by the end of 2017, up to 84% of the export of processed products to the EU was just the goods of intermediate consumption. This, she said, means that Ukraine participates in the European chains of creating added value, supplying intermediate goods for the creation of finished products already in Europe.
Ukraine also increases exports of final consumer goods to the European Union.
“The share of finished products for the past few years has grown from 9 to 13%. And the growth occurred not through the food products, but through the consumer goods, household goods, in particular teapots, home appliances, furniture,” says Veronika Movchan.
At the same time, she notes that Ukraine sells very few means of production to the European Union (which are also included in the processed products); their share is only 2%. “Though, if you look deeper at the statistics, Ukraine still began to bring more such products to the European states, for example, machines for textile production,” Veronika Movchan said.
Entrepreneurs are gradually entering the European market with new “more complex” products, the Ministry of Economic Development said.
Last year, the Ukrainian business began to sell new products to the EU according to 357 items of product range.
This is an additional USD 90.1 million in revenue, the agency calculated.
What new products the business started to sell to the European Union in 2017, $ million
|oil and petroleum products||28.9|
|lighthouses and fireboats||8.4|
|cruise, excursion ships and ferries||5.4|
|aircrafts with weight exceeding 15 thousand kg||1.6|
|railway and tram signaling||0.6|
Revenues are growing, but are the volumes of supplies growing?
Last year, Ukrainian export of goods increased by 19%, total revenues amounted to USD 43.3 billion. However, the country is still far from the outcomes of 2012-2013, when revenues reached USD 70 billion per year. The key reason is the occupation of Donbas, where there were significant industrial capacities of Ukraine, and the restriction of trade with Russia, which has always accounted for about a quarter of Ukrainian export.
If 2012 to 2013, on the European Union accounted for up to a quarter of Ukrainian exports, then in 2017 its share drastically increased up to 38%. At the same time, export to Europe last year increased by as much as 30% – up to USD 17.5 billion.
But there is an important “but”: enterprises only pushed off from the bottom, in fact regaining their positions in the European Union after the fall in 2015.
The greatest growth last year was demonstrated by the following key products of Ukrainian export: iron ore and concentrates (additional USD 563 million), corn (“plus” USD 395 million), rapeseed (USD 357 million), semi-finished products made of steel (USD 276 million) and cord sets for vehicles ($ 211 million).
In this case, compared with the profitable 2013-2014, not only income from exports but also physical volumes of supplies of goods to the European Union increased.
According to the Ministry of Economic Development, last year Ukrainian companies increased their exports to the European Union by almost 2,000 commodity items. Among the fastest growing are plums and blackthorns, polyethylene, chicken eggs, boats and motor boats, silver, milk and cream, men’s coats and suits.
An exception to the trend of constant growth is the output of metallurgy (the conflict in the Eastern Ukraine hit, first of all, this sector, since the enterprises of metallurgy were concentrated in the territory of Donbas). For example, revenues from the export of iron ore and concentrates fell by 22% compared to 2014, and physical volumes by 9%. Indicators of export of semi-finished products made of steel are even less promising: revenues decreased by 42%, and the volumes of supplies – by 31%.
The export by large business is growing, but where is the place of small business?
Primarily large companies earn on export and enjoy the tariff advantages of the free-trade zone with the European Union. After all, they are the ones selling abroad the goods that are leading in terms of supplies.
There are still few Ukrainian small and medium-sized enterprises on the trading map of Europe, but they are noticeable.
“If we talk about the deliveries of key commodities to the European Union that ensure the largest contribution to export proceeds, there are few SMEs,” Veronika Movchan said.
There are sectors and segments simply not involving are small producers, says Andrii Yarmak, Economist of the Food and Agriculture Organization of the United Nations (FAO). “This is primarily the grain as well as oil and fat industries. They give the largest revenues from exports. But these are commodities, where the size of an enterprise is important for competitiveness,” Yarmak clarifies.
The same goes to metallurgy, adds Veronika Movchan. “But, for example, the products of mechanical engineering, for instance, cables and wires (included in the top 10 goods in exports – Ed.) – this is closer to the average business,” clarifies the economist. Mineral products, according to her, are supplied to Europe by large companies. Among the exporters of chemistry products, fertilizers are sold by large businesses, while powders and pharmaceutical products are sold by smaller companies.
In the dairy and meat industries – mix. Small, medium-sized and several large producers participate in the export, Andrii Yarmak adds.
According to the calculations of the Institute of Economic Research and Policy Consulting (IER), the share of SMEs in the cost of export in 2012 was only 14.5%.
“This is a common cliché that Ukrainian exporters are only large agricultural holdings or producers of steel and coal. Ukraine exports many value-added products in a variety of sectors: engineering, electronics, agricultural products, textiles,” said the Ambassador and Head of the EU Delegation to Ukraine, Hugues Mingarelli.
Many exported products are manufactured by medium and small companies, Veronika Movchan said. “In some cases, an exporter can be a wholesale intermediary company, which buys goods to form sufficient lots, although a small business in the chain is also welcomed. In other cases, SMEs export on their own. I think that the only exception is metallurgy, there are only large companies there,” Movchan said.
Exporters of fruit and vegetable products, honey, organic products are classified as small, emphasizes Andrii Yarmak. Almost all exports of these goods go to the EU states.
“And I see a boom in these segments. We have a boom in honey exports, we almost caught up with Argentina, and only China is ahead in the world. And ten years ago we were in the second ten. We raised raspberry exports from scratch and became the third largest exporter in Europe and the fourth in the world. We are one of the key suppliers of organic products in the EU,” Yarmak shares.
The main products exported by the Ukrainian SMEs are grains, sunflower oil, timber, plywood, flour and cereals, milk and cheese, sand, gravel and clay, engines and turbines, furniture, sugar, vegetables and fruits, pumps and compressors, the Ministry of Economic Development gives its data.
In addition, according to business surveys, SMEs also export their services abroad. In particular, in the field of IT, 20% of SMEs sell their services to the European Union, and 33% of small companies to other countries.
But for the most part, Ukrainian enterprises are still far from developing and exporting high-tech products with high added value. And not least of all because export means significant costs and difficulties in overcoming such barriers as bureaucracy and customs procedures for small and medium-sized enterprises.
The original article is published on Delo.UA under the communication campaign “Moving forward together”