Ukraine is emerging as the gateway to growing markets in Russia and Eastern Europe. No longer just a Soviet hangover, Ukraine is becoming an economic power in its own right. It’s a market with a population twice the size of Australia, strategically positioned between Eastern Europe, Russia and the Middle East, thus with the potential to service a number of growing areas. According to Valentyn Adomaytis, Ukrainian Ambassador to Australia and New Zealand, interest in Australia is increasing, just as bilateral trade has grown to more than AUD500 million over the past few years. "In the current global economic recovery we are witnessing a growth of business cooperation between Ukraine and Australia," he says, noting that Australian exports to Ukraine more than doubled in the first quarter of this year. While Australia isn’t generally well known in Ukraine, there are sectors where we are well regarded, says Dan Tebbutt, senior trade commissioner in Austrade’s Moscow office which services Ukraine: "In mining, we have an extremely positive reputation and in agriculture we're widely known and respected." And with Ukraine evolving its agribusiness and mining industries, it’s a country wide open to Australia’s expertise in those areas.
Ukraine is not really a market for new exporters, warns Tebbutt. "It's a country of great potential but it's also a country of considerable challenges. It's still an emerging market and it's still a country where issues such as the rule of law is a concern." He does, however, suggest that leveraging our expertise in agriculture may help. "It has a fair bit of unrealised potential. Australia has a lot to offer Ukraine in terms of services for increasing the efficiency of their agricultural production," he offers. Another aspect of agriculture is livestock, suggests Stefan Romaniw, chairman of the Australian Federation of Ukrainian Organisations. "I’ve been put in touch with people who are interested in exports from Australia. They want cattle and sheep, of all things, because they’re trying to build their industry." Similarly, the mining sector can play to Australia’s strengths. Ukraine has an energy shortage and is largely reliant on Russian gas. Australian companies can help by providing more modern techniques for exploiting their coal reserves and unconventional gas. "We know of Australian companies actively looking for those types of opportunities in Ukraine as Australia has a lot of knowledge and experience in that area," says Tebbutt. New exporters to Ukraine tend to be larger as they are able to take greater risks. Smaller businesses should watch out for the offshoot opportunities that arise from bigger players making moves in the market.
Mining and agricultural technology and services are more the domain of small to medium sized businesses than big corporates and the two sectors are just a launching pad for other services that Australia could introduce, notes Romaniw. "We have a lot of intellectual property: for example, we could go to government and provide some of the expertise in processes that we have here." He suggests that concepts such as occupational health and safety training to reduce mining accidents could reach other areas: "There’s a huge market in Ukraine, because that’s not a concept that people have quite grasped, especially when you see some of the building sites." He adds that although Ukraine is very advanced for an ‘emerging’ market, Australia could offer complementary services. "There are opportunities such as in operational maintenance; you may have the great planes but we can certainly service them," he says.
Adomaytis agrees, citing the aerospace, IT, real estate, civil infrastructure and hospitality sectors, in addition to resources and agribusiness: "Most sectors of the domestic market have considerable potential for development." An important thing to note about Ukraine is that its government aspires to a global export market too, according to Tebbutt. Politically and geographically, Ukraine is wedged between Russia and Europe. Tebbutt believes Ukraine is keen for European integration after President Viktor Yanukovych, who contested and won office in February this year, "indicated that Ukraine's path towards European integration continues", he says. "He has made plans to include Russia but that's not to the exclusion of Europe." As such, "they have a lot of work to do in terms of getting their production infrastructure up to the standards that would be required to sell effectively into the EU [European Union]," says Tebbutt. "They have a long way to go before EU integration but in terms of trade links, they will keep building. It's a ground floor opportunity; it's probably where some of the new EU members like Romania were 10-15 years ago. Romania developed very quickly as a result of its European integration." Adomaytis comments: "The necessary preconditions for successful development of such cooperation already exist in both of our countries: in Ukraine, it is the need and the readiness to create a friendly environment; in Australia, it is the availability of necessary experience in the relevant sectors." He hopes Australian entrepreneurs see the vast opportunity in "diversifying and opening up new rapidly developing markets like Ukraine".
Romaniw believes the best action for more advanced exporters is to make a move and build relationships with Ukraine. While he’s concerned that there’s a lack of high level government initiatives to bond the nations, he encourages Australian businesses "to do deals directly with Ukrainian businesses and, where you can, avoid bureaucracy". Ukraine’s entry into the World Trade Organisation (WTO) is a positive step, "which gives people confidence," he adds. Furthermore, Russia invited Ukraine to be part of a customs union with Russia, Kazakhstan and Belarus, which has removed customs barriers and tariffs between the three. Although Ukraine "politely declined", Tebbutt says we may yet see some steps towards liberalising trade between the two countries, making it an ideal stepping stone into the behemoth Russian market. Investment should also be a consideration. Romaniw says mining companies have flourished expressly because "people have been drivers and someone has seen the opportunities", resulting in inbound and outbound investment in Ukrainian and Australian mines. Ukraine is crying out for investment, Tebbutt concurs: "There are Australian investors-both big investors and small investors-looking at Ukraine." Adomaytis sees the democratic, market-oriented country as having "positive conditions for the successful development of any interested Australian investors, exporters and importers", he says. "Moreover, their activities and persistence in moving into and within the economy of Ukraine will always be welcomed and encouraged by our state." He further suggests that joint partnerships will extend Australia’s potential in the market and, "with the appropriate Ukrainian base, experience and links" Australian businesses can then move in all directions "to the markets of the new independent post-Soviet Black Sea region and European Union countries, to all of which Ukraine is the valued partner, besides forging successful undertakings in Ukraine itself". Ukraine is a substantial market in itself, Romaniw stresses. He suggests considering Ukraine if you’re looking at Russia, precisely because Ukraine is often overlooked-though not for long. "The Canadians and Americans are certainly buying in, why shouldn’t Australia buy in? There’s very limited initiative in terms of Ukraine," he says.
"We’ve suggested to Australian government officials that if you’re taking goods over to Russia for an exhibition or so on, why not, for an hour’s flight, divert to Kiev and expose exporters to other opportunities?"
As with many post-Soviet nations, Ukraine has a few challenges in the form of financial and legal infrastructure. This affects business at every level, from property ownership and leaseholding in agribusiness to the unfamiliar legal system based roughly on the Napoleonic code, now under renovation after decades of Soviet influence. "The court system is still an emerging legal system and you wouldn't look at it as the most reliable but it is improving," Tebbutt remarks. Bureaucracy can also be a problem and, paired with an uncommon foreign language, it can quickly turn into a nightmare for doing business. As a result, many businesses try to take shortcuts through the red tape, making corruption a serious problem. Romaniw thinks this will start to change as businesses lobby the government for better operating conditions. "There are some good strong businesses in Ukraine that have stood up to the system, that have said ‘we’re not interested in paying bribes, we’re a business’. Some big business people in Ukraine have said to government, ‘get out of the way, we’ll pay our taxes but let us do our thing’." Tebbutt agrees that "the sheer volume of paperwork that needs to be done can make things quite slow" but also says the government is committed to reform, making banking and finance improvements, simplifying the tax system and reducing complexity in regulatory requirements. "Under the current government there seems a real desire to tackle some of those challenges," he notes. Other barriers may actually be opportunities, says Tebbutt. "One very limiting part of their agricultural sector is their grain storage infrastructure. They grow more than they use and struggle to store it so they have fairly high spoilage rates. Australia can help with this." Romaniw proposes that the real problem is the lack of buy-in at government level to promote Ukraine as an attractive market. "Both Ukraine and Australia have dragged their feet. There have been lots of negotiations but nothing ever comes to fruition," he says. "I’m just talking purely about things like double taxation, which are the sort of norms that people operate under."
Ukraine is seen as a difficult market when it shouldn’t be, says Romaniw. Like any other potential destination, exporters should do their homework and explore the market, then it’s about building relationships. "There are good serious business people in Ukraine who want to do business with Australia-why shouldn’t Australia take up that opportunity? A Federation like ours can make the links. While we’re not a business organisation, we certainly have the network." Although Ukraine isn’t high on the export radar, it hasn’t fallen by the wayside either. Adomaytis says there is an increasing interest in Ukrainian-Australian relations, with a number of official trade missions initiated by both the Australian and Ukrainian governments as well as chambers of commerce, going both ways. "It isn't a market for everyone but for people with the right products or strategy, or a particular interest in the market it can be a successful market," says Tebbutt.
While the growing markets of Asia lure many an exporter, doing business in Asia conversely led Bronx International to explore other markets. "The 1997 Asian crash changed our approach," explains Rod Sawyers, Bronx's managing director. "Fortunately we survived and it opened our eyes to the global market." Bronx is the manufacturer's manufacturer: it provides coil processing solutions for metal, such as galvanisation, levelling and colour coating, which allow its customers to produce construction materials. "Emerging markets are obvious markets because that's where housing is improving," says Sawyers. Bronx began doing business in Asia with the company now known as BlueScope Steel before the crash prompted a search for additional markets in Africa and Central America. Today it also operates in South America, Eastern Europe and the Commonwealth of Independent States (CIS-formerly the USSR), including Ukraine. It was Russia that acted as a gateway into the Ukrainian market. After Bronx completed some projects with a Russian company, one of the directors partnered with a Ukrainian entrepreneur, says Sawyers: "Basically he wanted to do what had been done in Russia and recommended Bronx." While Ukraine is considered an emerging market, Sawyers says it is far more advanced than many others in the same category. However, he admits challenges exist in the level of bureaucracy required to do business there and exporters will need to learn to make paperwork more efficient. You'll also need patience as Ukraine consolidates its financial and political position, Sawyers advises. He says Bronx was able to do business there only after government credit agency Export Finance and Insurance Corporation provided a loan guarantee for the Ukrainian buyer, as the country's financial infrastructure is not as robust as Australia's. Now, Bronx is serious about the market and the region. "We now have a team in Ukraine responsible for business development in CIS and Russia, which currently provide us with the greatest number of opportunities of any global region," says Sawyers. "We see Ukraine as the gateway into Europe so once they get their financial and political position under control, a reference from Ukraine will become more important."
* Get on the ground. Desk research and talking to the exporters doesn't prepare you for any given market. You have to get on the ground to understand the conditions. * Commit. You have to be geared up and prepared to commit. It's rarely less than two years before you'll see results.
Risk profile chart
Business Cycle Risk Very high Currency Risk Very high Currency Inconvertibility Risk Very high Systemic Banking Risk Very high Sovereign Default Risk Very high Difficulty Enforcing Contracts High Source: EFIC (www.efic.gov.au)
Capital: Kiev Government: Democratic Language: Ukrainian (Slavic) Currency: Hryvnia (UAH) Tipping custom: Around 10-15 percent for good service. Visas: Australian citizens require a visa. Religion: Eastern Orthodox, Catholicism and Judaism Seasons: Summer is May to September, winter is October to April. Source: FCm (au.fcm.travel)
Australian Federation of Ukrainian Organisations: www.ozeukes.com Department of Foreign Affairs and Trade: www.dfat.gov.au/geo/ukraine Embassy of Ukraine: www.mfa.gov.ua/australia Ukrainian-Australian House: www.uah.org.ua Ukrainians in South Australia: www.ukraine.com.au (includes business section)