Market Access Plan 2015-2017
|Kyiv||42.8 million||579,320 km²||Hryvnia|
Why Ukraine Matters
- a priority emerging market under Canada’s Global Markets Action Plan;
- a country of focus for Canada’s international development efforts. Canada is working with the Government of Ukraine on reforms needed to realize the country’s full economic potential;
- an important transit route for energy supplies moving from Eastern to Western Europe, thus lending strategic importance to Ukraine’s political and economic stability; and
- an opportunity for risk-tolerant Canadian companies, who recognize that the current business environment, while challenging, presents many opportunities for “first movers.”
Following the dissolution of the USSR and Ukraine’s independence (August 1991), an incomplete transition to a market economy followed. A strong oligarch class emerged (and persists) and it took full advantage of a corrupt privatization process. This resulted in an important decline in output through the 1990s. Despite recurrent bouts of political instability and lagging economic reforms, growth then returned until the global economic recession that caused Ukraine’s economy to contract by 15.1 percent in 2009. Economic performance remained weak and in 2014, the economy contracted sharply by 6.8 percent.
Canada’s diplomatic and economic focus on Ukraine, the long-standing ties between the two countries, as well as the anticipated government reforms and the stance against corruption demanded by the Maidan movement can over time significantly improve the business climate of Ukraine. While the outlook over the medium to long term is positive, 2015 output is projected to decline by 5.5 percent; then the economy is expected to post growth in the two to four percent range between 2016 and 2020 (International Monetary Fund (IMF), April 2015).
Domestic Economic Environment
Over the past few years, a large fiscal deficit and weak economic growth contributed to a steadily deteriorating risk profile. This problem was compounded by political instability and security concerns, which in April 2014, led to Ukraine securing support from donors and International Financial Institutions (IFIs) (approximately $9 billion and $17 billion respectively, totaling almost $27 billion over 2 years). This was centered on an IMF economic stabilization program aimed at overcoming the current economic crisis and setting a foundation for sustainable economic growth.
Subsequently, the IMF announced a new and enlarged program supported by additional funding from bilateral partners, including Canada, and other IFIs. Ukraine’s GDP declined by an estimated 6.8 percent in 2014 (IMF, April 2015). Their official reserve assets dipped below US$10 billion in November 2014, the first time since June 2004, and stood at US$5.6 billion as of February 2015 (IMF). At the same time, the value of the hryvnia (UAH) has fallen by just over a quarter (against the USD) between the start of February 2015 and mid April 2015, and access to long-term financing remains limited.
These factors serve as a significant disincentive for foreign trade and investment while recent and proposed austerity measures are also serving as a brake on domestic demand in the immediate term. The IMF projects real economic activity to contract by 5.5 percent in 2015, and then resume growing in 2016, at 2.0 percent (IMF, April 2015).
|GDP per capita||$3,374|
|Canada’s merchandise exports||$144.6 million|
|Canada’s merchandise imports||$99.2 million|
|Canada’s service exports||not available|
|Canada’s service imports||not available|
|Foreign direct investment||not available|
|Canadian direct investment in Ukraine||not available|
|Potential long-term export growth||1.8%|
Canadian Commercial Interests in Ukraine
Canada and Ukraine have modest commercial relations. The total value of two-way bilateral trade in 2014 was $243.8 million. In 2014, Canada’s exports fell by 31.1 percent to $144.6 million (led by mineral fuels and oils, pharmaceuticals, fish and seafood, machinery, and articles of iron and steel), following a 41 percent increase in 2013. At the same time, merchandise imports were down 11.9 percent in 2014, to $99.1 million. Main imports include articles of iron and steel, mineral fuels and oils, dyes and paints, and toys, games and sports equipment.
Ukraine has a long history of doing business with the countries of the former USSR. That said, the historic trade linkages have started to break down as Ukraine orients itself towards the West as a result of Russia’s recent illegal annexation of Crimea and the formation of the Russian-dominated Eurasian Customs Union and (more recently) the Eurasian Economic Union that does not include Ukraine. This is particularly true in the food and agriculture industry, as well as the manufacturing and aerospace sectors. Ukraine’s diversification of trade markets may create opportunities for Canadian companies.
Despite Ukraine’s challenging foreign investment climate, a small group of Canadian companies are seeking investments in the country’s strategic sectors (agriculture, energy and mining). Canada anticipates that, as the situation in Ukraine stabilizes, Canadian companies will renew their interest in exporting and partnering opportunities, and will seek out means to leverage the important development initiatives funded by the international community, including Canada.
The role of IFIs and Canada’s own development and technical assistance can also be a catalyst for more active engagement of Canadian companies in the building of a fully-developed market economy. As well, the deteriorating trade relationship between Canada and Russia may lead some Canadian companies to shift their regional focus to Ukraine’s emerging opportunities.
Ukraine’s economy in general remains underdeveloped, weak, energy inefficient, and resource-based, yet it is quite diversified. The signing of the European Union–Ukraine Association Agreement and the resulting need for Ukraine to adopt European Union (EU) standards provide good opportunities for Canadian companies with niche and specialized products and services. Underlying that, the positive reputation of Canada as a long-time ally of Ukraine provides excellent opportunities for Canadian companies to compete and succeed.
While the Ukrainian government, the media and the international community continue to focus on the local security situation, there is evidence of increased Ukraine-Canada engagement in the defence and security sectors, as well as in the possible spin-off effects of Canada’s humanitarian projects (both public and private) in medical services, equipment, information technology, etc.
Key Elements for Exporters to Consider
Russian aggression in 2014 and the ongoing instability in Eastern Ukraine have resulted in an unstable business climate. After former President Yanukovych fled Ukraine in February 2014, the new government began initiating anti-corruption policies and reforming the regulatory systems which had enabled corruption. While these reforms are gaining momentum, it will be some months (or years) before widespread improvements take effect and positively impact the business environment.
If the necessary reforms are implemented and if there is no further insecurity in Eastern Ukraine, slight GDP growth is expected to occur by 2017. Ukraine, however, will remain a transition economy for at least the next three years. It will undergo the growing pains of adapting to the new obligations under its European Union-Ukraine Association Agreement, including the Deep and Comprehensive Free Trade Area Agreement, while probably dealing with various trade irritants and restrictions from Russia, its major trading partner.
Concerning Canadian direct investment into Ukraine, there could be a very small number of exploratory investors seeking prospective projects (and initial market entry) at reduced costs. Overall, the unstable and poor business climate, including issues of corruption and weak rule of law, is a deterrent to many Canadian investors. However, the international business community will be watching for a genuine commitment to government reform. IMF measures will dictate higher industry taxes as well as improved regulations.
Canada already has a strong brand in Ukraine and this has been further reinforced by our leadership role in supporting the country‘s efforts to restore stability and implement democratic and economic reforms in the face of ongoing Russian aggression. Canada has committed $575 million in support of Ukraine’s economic and social development, including two $200 million low-interest loans. Prime Minister Stephen Harper was the first G7 leader to visit Ukraine during the crisis and the first foreign leader to meet bilaterally with President Poroshenko after his inauguration on June 7, 2014.
In July 2014, International Trade Minister Ed Fast led a trade and development mission to Ukraine to promote Canadian business expertise and bilateral trade opportunities, and thus helped strengthen the Canada-Ukraine partnership. The mission reinforced a deepening of the links between the Canadian and Ukrainian business communities, and allowed Canada to position itself as a potential key trading partner as Ukraine re-directs its economic links toward Europe and North America.
Sector-specific Opportunities and Challenges
Aerospace, defence and security
Though exports over the past two years have been modest, aerospace remains a high-value niche sector in Ukraine and continues to be largely government controlled. The sector is very dependent on political and military developments. Opportunity exists for the export of aircraft (helicopters, business jets, commercial regional jets), technology partnerships and outsourcing to Ukraine's science and production capacity, joint projects on maintenance, repair and overhaul and modernisation of AN-family aircraft (AN-32s) fleets (and other types), co-operation in Ukraine's national satellites programs, joint space exploration, and more business-to-business activity during trade events.
Agriculture and processed foods
The greatest opportunities exist for exporters of cattle (beef and dairy), small ruminants (sheep and goats), as well as meat (beef, pork, poultry). In addition, there are significant opportunities for the full range of agricultural machinery (no-till equipment), artificial insemination and livestock management technologies. The political strife may affect the agriculture and processed foods sector, but to a lesser extent than other sectors such as oil and gas.
With continued proactive efforts by the Embassy of Canada to Ukraine, interest has grown significantly in the education sector. Canadian educational institutions can serve all segments of the sector and student recruitment is active in all sectors. There is demonstrated interest in Ukraine for more advantageous market niches with colleges/polytechnics and short-term English as a Second Language training. The 2013 “Imagine” branded fairs, a program that promotes study in Canada, attracted 5,000 prospective students and parents with 25 institutions participating. The education sector may be less affected by political strife than other sectors.
Fish and seafood
Fish and seafood continue to be one of Canada’s top exports to Ukraine and Canada is Ukraine’s ninth largest supplier of fish and seafood. Ukrainian consumers continue to increase their consumption of fish and seafood and domestic production is not able to adequately meet demand. Imports are therefore expected to continue to grow over the medium term.
Oil and gas
Energy independence is one of the chief economic preoccupations of Ukraine. Because the EU-Russia relationship has deteriorated due to Russia’s illegal annexation of Crimea and support of unrest in Eastern Ukraine, the EU is also concerned about its energy security. Ukraine is eager to reduce its dependence on Russian energy and this presents an emerging opportunity for Canadian private sector expertise in both conventional and non-conventional oil and gas extraction.
Oil and gas, and in particular unconventional (shale) extraction, continues to be a sector of interest for Canadian companies who have capacity in exploration, equipment and services. Opportunity exists for exports of equipment (drilling) and services/technologies, especially horizontal onshore and offshore drilling, technologies for reviving exhausted fields, on-site laboratory services, and investment projects.
The sector requires constant monitoring in view of the tensions between Ukraine and its natural gas supplier, Russia, including the prospect for embargoes and the potential for significant price increases and shortages. The extent to which Ukraine is able to successfully navigate in this new energy environment, combined with its regulatory regime, will influence further exploration, and production in Ukraine by key players. Future plans of key international players such as Shell, Chevron, and ExxonMobil are uncertain due to the on-going political, fiscal and economic crisis in Ukraine and more specifically, to extensive political and economic strife in the key areas of Eastern and Southern Ukraine.
The oil and gas sectors will remain very dependent upon the political and military developments in Eastern Ukraine, where much of these sectors are concentrated. In the first half of 2014, Canadian energy interests have been largely impeded in Luhansk, Donetsk, and Dnipropetrovsk regions, and of course in Crimea. It will be difficult to sustain Canadian interest in these areas, let alone attract new interest even though the bulk of Ukraine’s industrial potential is located there. This could therefore inhibit Canada’s competitiveness in this new era of Ukraine’s development.
Major Negotiations and Agreements
Canada-Ukraine Free Trade Agreement (CUFTA)
The conclusion of the CUFTA negotiations was announced on July 14, 2015. The CUFTA will benefit many sectors of the Canadian economy, most notably the agriculture sector including grains, pork, beef, pulses, animal feed and pet food, as well as processed food. It will also provide increased access for Canadian services to the Ukrainian market, address non-tariff barriers, and facilitate economic relations.
Canada – Ukraine Foreign Investment Promotion and Protection Agreement (FIPA)
Brought into force on July 24, 1995, the FIPA is a bilateral agreement aimed at protecting and promoting foreign investment through legally-binding rights and obligations, giving businesses the confidence and protection they need to invest. FIPAs accomplish their objectives by setting out the respective rights and obligations of the countries that are signatories to the treaty with respect to the treatment of foreign investment.
Convention for the Avoidance of Double Taxation
In force since 1997.
Air Transport Agreement
This Agreement has been in force since 1999, with recent 2014 amendments applied on an administrative basis. Air transport agreements play an important role in improving international connectivity for Canadians.
Development Perspectives in Ukraine
Ukraine is a country of focus for Canadian development assistance. Canada supports economic reforms, including increased economic opportunities for the Ukrainian people in a strengthened democracy, and promotes sustainable economic growth in Ukraine, including more inclusive private sector-led growth, investment, and job creation, particularly for small and medium-sized enterprises (SME).
Support for economic growth is focused in three sectors: agriculture, local economic development, and extractives (particularly oil and gas). Canada is also supporting Ukraine:
- in its efforts to improve macroeconomic stability and the business regulatory framework in order to attract domestic and international investments into these sectors to develop untapped potential;
- to address bottlenecks restricting the development of SMEs in these sectors;
- through interventions aimed at building accountable and transparent public institutions; and
- to develop judicial and civil service reforms and local governance, as well as commercial and other courts involved in resolving commercial and business-related matters.
Selected Trade Initiatives – Seize the Opportunity!
- Aerospace, defence and security
- Farnborough International Airshow biannual, July 11-17, 2016
- Paris Air Show biannual, alternates with the Famborough International Airshow
- Annual Aerospace Industries Association of Canada (AIAC) Summits & outreach
- Agriculture and processed foods
- Seafood Expo Global/Seafood Processing Global Exposition Brussels, annual, April 26-28, 2016
- Canada Education Fairs, February 2016
- Oil and Gas
- Global Petroleum Show, Calgary, June 7-9, 2016
- Canadian Trade Commissioner Service in Ukraine: The Trade Commissioner Service offers foreign market intelligence, introductions in key networks, cost- and risk-reduction advice, business problem troubleshooting and on-the-ground support.
- Embassy of Canada to Ukraine: Canadian government offices abroad provide a variety of services, including consular services.
- Agriculture and Agri-food Canada (AAFC) has a representative in the region.
- Export Development Canada (EDC): With representatives in the region, the EDC services can include market knowledge, credit insurance, bank guarantees, foreign buyer financing, political risk insurance, foreign investments and foreign affiliate support.
Where not otherwise indicated, the information is provided by the Embassy of Canada to Ukraine. This document is not intended to provide specific advice and should not be relied on as such. It is intended as an overview only. No action or decision should be taken without detailed independent research and professional advice concerning the specific subject matter of such action or decision. While Foreign Affairs, Trade and Development Canada (DFATD) has made reasonable efforts to ensure that the information contained in this document is accurate, DFATD does not represent or warrant the accurateness, timeliness or completeness of the information contained herein. This document or any part of it may become obsolete at any time. It is the user’s responsibility to verify any information contained herein before relying on such information. DFATD is not liable in any manner whatsoever for any loss or damage caused by or resulting from any inaccuracies, errors or omissions in the information contained in this document. This document is not intended to and does not constitute investment, legal or tax advice. For investment, legal or tax advice, please consult a qualified professional.
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