Cabinet of Ministers of Ukraine: The Loss of the Russian Market Has Become a Serious Problem for Ukrainian Producers

Translated by Ollie Richardson & Angelina Siard

15:11:38
28/01/2018

glavnovosti.com

Euromaidan, the annexation of Crimea that followed it, and the anti-terrorist operation in Donbass launched by the acting President of Ukraine Aleksandr Turchynov led to a catastrophe in trade relations between Ukraine and Russia.

Ukraine counted on membership in the European Union and hoped to enter the markets of Europe, however to conquer the European consumers with its goods was problematic because of the quotas introduced by the EU and the absence of considerable consumer  interest in goods from Ukraine.

In only three months 2017 Ukraine completely exhausted it’s EU duty-free export quotas for goods in six commodity groups: honey, sugar, grain and flour, processed tomatoes, apple juice, and corn.

The Cabinet of Ministers developed a strategy of trade until 2021 in order to correct the current situation.

The export strategy of Ukraine

As the Cabinet of Ministers reports in its “road map” for the strategic development of trade for 2017-2021, in 2008 the total amount of export of goods from Ukraine to Russia totalled 22.4%. In 2016 it fell to 9.9%.

The Cabinet of Ministers noted that the loss of the Russian market is a serious problem for Ukrainian producers focused on export, especially in those sectors that substantially depend on demand from Russia, such as, for example, mechanical engineering.

The war in Donbass led to the fact that in 2016 the export of goods made in the Donetsk region was reduced by 7.2%, and as a result Ukraine lost $264.5 million.

Following the results of 2016 the share of Lugansk and Donetsk regions in the total amount of export of goods from Ukraine remained at almost the level of 2015 – 10.4%.

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The Cabinet of Ministers emphasises that the presence of Ukraine in the world markets still remains insufficient. In order to change the situation for the better the country must switch to average and hi-tech production. Thus, the volume of export of Ukrainian goods to the markets of the CIS countries significantly decreased, and in 2016 totalled only 16.5%.

The Cabinet of Ministers named the European Union as the main market of export. Weak production activity, the fall in the real income of the population, a reduction in domestic demand, the devaluation of the hryvnia, and the introduction of temporary additional import duties led to the importation of goods in recent years also significantly reducing – totalling $39.2 billion in 2016.

A decrease is also observed in tourism. In 2013, Ukraine was able to earn $358.1 million from tourists, while in 2016 the tourist sphere brought only $205.2 million.

For the purpose of ensuring financial support for the export of Ukrainian enterprises, the Cabinet of Ministers created an export credit agency.

Investments in Ukraine

Investments in Ukraine at the beginning of the 2000’s happened due to the privatisation of large state enterprises and the attraction of investments in the energy and telecommunication sectors.

During 2000-2008 the growth rate of direct foreign investments (share capital) in Ukraine totalled 43.8% annually, and in 2008 the volume of arrivals of direct foreign investments totalled $10.8 million.

Due to the global financial crisis, in 2009 the volume of foreign investments decreased twofold – to $5.6 billion. After a considerable deterioration of the economic situation in Ukraine, in 2014, the volume of foreign investments in Ukraine decreased to $2.5 billion.

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In its “road map” the Cabinet of Ministers blames Russia for the low investment appeal of Ukraine. And this is despite the fact that as of December 31st, 2016, Russia was included in the three largest investors in the Ukrainian economy.

In total, four countries became the leaders for the amount of investment in Ukraine. 57.8% of the total amount of direct foreign investments in Ukraine come from them. This is Cyprus ($9.7 billion), the Netherlands ($5.8 billion), the Russian Federation ($4.3 billion), and Great Britain ($2 billion).

It should be noted that its not only the Russian Federation that is blamed by the Cabinet of Ministers for the circumstances. As it turned out, the biggest obstacles for investment in Ukraine is the adverse geopolitical situation, the high level of corruption, and the underdeveloped transport infrastructure.

Investors also don’t want to make investments in a country with a high level of bureaucracy and an imperfect law-enforcement system, which won’t be able to provide the protection of both their property rights and intellectual property rights. Against the background of these facts stated in the “road map” of the Cabinet of Ministers, the statement of Prime Minister Groysman – that Ukraine becomes a country that is attractive for investors – look strange in the very least.

“We grow and become a country that is attractive for investors. Ukraine started to create a normal business climate,” said the Prime Minister to us.

However, just words were not enough for foreign companies, which made the decision to leave Ukraine until better times arrive. On December 4th, 2017, it became known that the largest producer of Intel microprocessors closed its representation in Ukraine because of the adverse business climate.

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