Having mainly relied on trade with Russia since the dawn of national independence in 1991, Ukraine has not done much to enter new markets.
However, the need has become urgent, since the trade turnover with Russia shrank by 23 percent in the first half of this year alone amid the Kremlin-backed war in the Donbas, dropping Russia to second place after the European Union on the list of Ukraine’s trading partners.
An association agreement with the EU, however, opens free trade between Ukraine and the 28-nation bloc, removing many quotas and tariffs for goods and services.
However, the free trade pact will become fully active only in 2016 after Russia pressed the EU for a one-year delay.
The Kyiv Post’s Nov. 19 Tiger Conference special panel “Capturing New Markets” gave movers and shakers of the business community and industry experts a forum to share their views about the future of Ukraine’s foreign trade, given closer cooperation with Europe.
Olena Voloshina, head of the International Finance Corporation operations in Ukraine, moderated the discussion. She was joined by former Economy Minister Pavlo Sheremeta, Credit Agricole bank board member Jean-Jacques Herve, chief trade officer of the European Commission’s delegation to Ukraine Nicholas Burge and chief executive officer of the investment fund Horizon Capital Natalie Jaresko.
Burge was excited about the export opportunities for Ukraine with the elimination of 95 percent of the tariffs between Ukraine and the EU. “Market access is going to open up. In the early years, this will be beneficial for agriculture, but of course it will be beneficial for all exporters in the future,” he said.
In fact, Ukrainian exporters already are benefitting from the liberalized connection with the EU. Ukrainian exports to the EU rose by 25 percent in May and June, year-on-year, alone.
Adaptation of EU health, safety and environmental protection standards for permission to enter the market of the Brussels-led union is the hardest part of the trade deal, though Burge says it will allow Ukraine to produce goods of better quality. “Ukrainian companies will start moving into the global market, become more competitive by adapting to more demanding standards,” he explained.
The underdevelopment of the small and medium business sector in Ukraine is largely a result of the necessity for companies to invest an immense amount of time and money into getting various permits from government offices at the initial stage of entrepreneurship. State tax agency audits, sometimes once a week, is another major headache. This needs to be changed, along with bringing healthier practices into the judicial system and financial sector. Local banks remain focused on making short-term profits, which is why many businesses complain about high interest rates and small loans.
The reforms “have to be delivered now to give business the confidence that there will be positive and long-lasting changes in this country, and that the reforms and trade agreement package will be a success,” Burge said.
Voloshina of the IFC talked about the lack of trust among government, investors and business. “The whole mindset of the government needs to be changed for trust to come back,” she emphasized. The government should serve the needs of business instead of acting as a dictator, she said.
Credit Agricole’s Herve said that flaws in tax collection are ruining the business environment, leading to bribery. “When a company that is exporting doesn’t get the value added tax repaid by the government, it will pass that cost on to the farmers,” he explained.
Sheremeta, who resigned from the Economy Ministry in August after complaining about bureaucratic sabotage of his initiatives, said that the government can take simple steps such as refunding value-added tax payments. But by not even getting the basics right, Sheremeta said that “the government never has time for marketing, innovation, or development of human capital, and those are important.”
But businesses shouldn’t use the economic crisis and lack of reforms as excuses for not having a development strategy, said Jaresko of Horizon Capital. “While this economy is struggling, we all have to find new markets for our products, and that’s going to require developing the knowledge base,” she said. “Business should … start building the resources inside the company.”
More is expected from the embassies that Ukraine keeps around the world. The embassies still do not provide much support for Ukrainian businesses operating abroad, while more developed nations commonly help businesses in their home countries enter new markets for trade. Knowledge of individual markets is crucial, she said. “Selling bricks in Bulgaria, Lithuania or Poland on the ground is completely different,” Jaresko says.
Ukraine should also look beyond the EU to find demand for its goods, the Horizon Capital CEO said.
Changing Ukraine’s image as global commodities supplier to producer of high-added value products would be useful too. Moreover, small-and-medium businesses need help to increase exports, a segment still dominated by tycoons, Jaresko said.
Kyiv Post staff writer Olena Gordiienko can be reached at [email protected].
