EU trade area promises new markets, but demands change

Ukraine’s hard-won Association Agreement with the European Union includes a free-trade deal that should open doors into markets long-closed to Ukrainian exporters. But to take advantage of the new opportunities, Ukraine’s exporters are going to have to make changes in marketing, business culture and production.

The EU market purchased 34.5 percent of Ukrainian exports in 2015, while another third went to Asia – the second main market for Ukrainian goods.Ukraine’s biggest exports are agricultural products – grain, poultry and honey – and commodities such as metal and machinery, produced by oligarch-controlled companies.

EU journey starts

But in many ways, Ukraine is only at the beginning of its reorientation away from Russia and towards the EU in trade. The Kyiv Post Capturing New Markets Conference, on March 29 at the Hilton Kyiv Hotel, will enlist speakers to help speed this transition.

According to Ukraine’s economy ministry, trade with the EU declined by 25 percent over 2015, amounting to $11.9 billion over the first 11 months of 2015. But trade volumes are expected to grow with the Deep and Comprehensive Free Trade Area agreement that came into force on Jan. 1.

The deal canceled some customs duties and will phase out others by 2020, while duty-free quotas on several types of exports will be raised over the same period.

Changing culture

According to business consultant Oleh Myroshnichenko, the agreement represents an opportunity for domestic producers but also a challenge. It’s not just a question of Ukrainian exporters meeting the standards demanded by EU legislation, but one of changing Ukraine’s business culture.

Part of that change will have to be improving communications with partners both present and potential, Myroshnichenko told the Kyiv Post.

‘Inferiority complex’

“They call people and write to them, but if no one responds they just throw up their arms and give up, confirming their inferiority complex,” he said.

He advised Ukrainian producers to visit enterprises abroad, get in touch with business associations to look for partners, and learn English. According to Myroshnichenko, Ukrainian producers should get their names into association databases, describe their goods and hire an agent, at a cost of about 2 percent of revenues.

“The European market requires transformation,” Myroshnichenko said, adding that knowledge of English would help business people communicate directly with potential clients.

Examples of successful transformations can be found among companies in eastern Ukraine, which were shut out of the Russian market and were forced to adopt new business rules, “because they were pressed against the wall,” Myroshnichenko said. Ukrainian firms are already taking the plunge into the tough European markets.

Reporting in parliament on Feb. 10, Prime Minister Arseniy Yatsenyuk said that 10 agriculture companies had entered the EU market since the trade agreement came into force. This market is competitive, especially in the agricultural sector. “This is significant progress, but this progress has to be consolidated,” Yatsenyuk added.

Taras Vysotsky, general director of the Ukrainian Agribusiness Club, knows how difficult it was for 10 milk producers to gain a foothold. The procedure of certification alone lasted for two years, starting with an overhaul of state quality control services and then checks on the companies’ production processes.

And while the big exporting companies are grumbling that quotas for goods that can be exported duty-free to the EU have been set too low, Vysotsky hasn’t got much sympathy, especially as the smaller Ukrainian exporters earlier had no access to the market at all. “The European Union is not a charity organization,” he said.

Galicia juices

Ukrainian company Galicia Trade produces juices under the trade name Galicia by direct extraction, not using concentrates or added sugar or water. They’ve successfully taken their healthy products to the Polish market, and could potentially penetrate the markets in the Baltic States and other EU countries.

Most of the raw materials Galicia uses are grown in western Ukraine, where workers can control the growing environment, company director Andriy Yelin told the Kyiv Post. In the future, they have plans to produce “bio-juice” from fruits and vegetables grown in biologically certified soil. Galicia’s biggest sellers are apple and cherry, apple and pear, and apple and blackcurrant juice.

Exhausting quotas

The trade deal reduced customs duties, but put quotas on 36 kinds of products. After the quota is exhausted, further exports are subject to the full customs duties. The quotas on apple and grape juice, honey, were exhausted by Feb. 16, according to the Ukrainian Agribusiness Club.

But that makes no difference to Galicia, Yelin said, as the big exporters exhaust duty-free quotas in the first few days or weeks of the year, and small companies like his export the bulk of their products under full duties for most of the year anyway.

The deal hasn’t helped cut the price of imported inputs for Galicia either – while it no longer pays a 5 percent customs duty on packing materials from Poland, the fall in the value of the hryvnia more than cancelled out that saving.

“They were of no help to us,” Yelin said of the new free trade zone conditions. At the same time, the implementation of the deal has caused a rise in paperwork.

Norwegian seafood

However, the trade potentially provides not only duty-free trade, but also also a way to breathe new life into the investment climate. Ukraine hopes to gain manufacturing production to sell to EU consumers.

Norwegian seafood company Pelagia exports fish to 40 countries, and started working in Ukraine in the 1990s. The company went on to build a storage center in Mykolayiv in 2007 and launch an importing company, Egersund Seafood, in 2009, said company business developer Oyvind Satren. Still, “I cannot hide the fact that this is a challenging market,” Satren said. Because of economic difficulties, the company has seen a fall in sales of salmon, more expensive than others such as herring. If Ukraine manages to push through anticorruption reforms, the company may invest in production facilities here, he said.“There are great possibilities to start a fish processing industry in Ukraine,” Satren said. “We could then re-export to the European market.”

UAC Information Center by information Kyiv Post