Smart exports for Ukraine

Without governmental incentives Ukraine will struggle to move from selling raw materials to producing high-tech goods

According to the National Export Development Strategy, worked out by the Ministry of Economy of Ukraine, the country’s key exporting sectors are steel, agriculture, machine-building, and chemistry. Together they make up over 80 percent of exports.

The Strategy reads that exports make up over 50 percent of Ukraine’s GDP, and that these exports are mostly raw materials, which implies a considerable dependence on global market fluctuations, especially in regard to grain and metals.

Moreover, despite the abundant natural resources, strategically advantageous geography, and a certain amount of inherited scientific and manpower resources, Ukrainian exports are still dominated by low value goods. Meanwhile the high-tech capacities of the aeroscape, aircraft construction, shipbuilding, and other industries are not properly utilized, despite the fact that they could produce many of the products that Ukraine currently imports.

Recently the second meeting of the Council of Entrepreneurs at the Cabinet of Ministers of Ukraine tried to solve this paradox, and overcome the obstacles in developing high-tech exports. “There has been a foreign trade deficit over the past several years and it has had a negative effect on the domestic macroeconomic indices. All market operators are worried about the gold reserves of the National Bank, and their impact on the exchange rate. Ukraine’s most powerful businesses are export-oriented since the domestic market can’t consume even 20 percent of the products made. This is true of the steel, chemical, grain, cement, and other industries, so we’re ‘doomed’ to exports,” the Council Chairman Leonid Kozachenko noted in his report.

The Council believes that, to secure these exports, the export-oriented segment of the economy must be properly financed, but first it is necessary to determine which industries are top priorities.

Says Council member Viktor Valieiev: “Although we keep repeating, year in and year out, that our steel, chemical industries, and agro-industrial complex are competitive, recent economic events call this into question. We’ve lost almost all markets in China that once brought profits to our steel industry, whereas Arab countries are actively building their own steel industries, so this segment of the market will soon close for us. On the other hand, our software exports have grown unobtrusively, and at times despite our regulatory efforts. Our government must take a sober look at the current situation regarding exports and take decisive, even cruel steps discarding commercially unviable and concentrating on breakthrough trends.”

Experts point out that Ukrainian business in many respects is simply incapable of competing with foreign companies on foreign markets. “For any company expanding outlets is like stepping into outer space, so making arrangements for this step costs a lot, something most businessmen can’t afford,” explains Valieiev.

One could cite a number of objective and subjective reasons for this situation, notes Volodymyr Shchelkunov, president of the Ukrainian National Committee of the International Chamber of Commerce, head of the Secretariat of the Coordinating Council for Higher Competitiveness at the Cabinet of Ministers of Ukraine, “but at the moment it is important to find ways to solve the problems that have been piling up for years if not decades. Someone has to work on them, of course [...] giving them one’s undivided attention, from alpha to omega. The question is whether Ukraine has a single specialized structure that can take care of the problems facing Ukrainian exporters.”

In Finland, continues Shchelkunov, there is a private company, Finpro, that coordinates the promotion of exports for the national manufacturers, formation of joint ventures, and so on. In the People’s Republic of China, there is the All-China Export Relief Committee. Similar structures are found in Japan, [South] Korea, and Portugal. In Ukraine these tasks are handled by several government-run institutions and enterprises. Ukrainian products are supported on foreign markets by the Ukrainian embassies’ economic departments, with information support provided by the state company Derzhzovnishinform; investments are sought for by the State Investment and Development Agency of Ukraine. “As a result, Ukrainian businesses operating on foreign markets have practically no information, legal or financial support,” he sums up.

Shchelkunov says, however, that the idea of this kind of structure has been supported by the cabinet: “We have a pertinent directive from Prime Minister Mykola Azarov and we’re working on it.”

Regrettably, apart from the problem of setting up a special body to look after the Ukrainian exporters, there is the problem of Ukrainian tax legislation that is badly in need of upgrading, says the Council of Entrepreneurs. This problem became especially apparent when deliberating the export development strategy bill and that of the Tax Code of Ukraine.

Valieiev says the quickest positive effect in supporting exports can be achieved by budget appropriations for bills of credit, export risk insurance guarantees, and mass educational programs for potential exporters: “There are regional businesses whose people don’t even know how to write a commercial proposal.”