Wiener Institut für Internationale Wirtschaftsvergleiche. The Vienna Institute for International Economic Studies

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1 Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies Challenges of Ukraine Economic Transition Strategic Development Agenda Lessons from Transition Experiences Implementing AA/DCFTA Agreements Policy lessons Amat Adarov Peter Havlik Michael Landesmann Vienna Institute for International Economic Studies 2 Topics covered Lessons learnt from other transition experiences: Economic catching-up Industrial restructuring Attention to external imbalances Specific situation of Ukraine: directions and structure of trade Challenges of AA/DCFTA implementation FDI policies Policy recommendations

2 3 Income convergence: selected EU neighbours real per capita GDP, EU-28 average = RS TR AL BiH KZ RU UA NMS Source: wiiw estimates and forecasts. 4 Manufacturing value added, in % of GDP more than % in RO and CZ (as DE, IR); Ukraine: 12% Ukraine MT LV BG EE PO SI LT HU SK RO CZ EL FR DK NL UK BE ES IT SE FI PT AT DE IE Source: own calculations based on WIIW Database and Eurostat.

3 5 Manufacturing activity is increasingly concentrated in a Central European Core Change in value added share of manufacturing (-13) declining share constant share rising share Note: Manuacturing export intensity is manufacturing exorts(in EUR) / population 6 External trade, 3-15, in % of GDP - Persistent low export capacity in some groups of countries Goods exports Services, credit Goods and Services CEE-5 BG, RO Baltics ES, GR, PT WBC - 6 UA Source: wiiw Annual Database incorporating national and Eurostat statistics.

4 Composition of the current account of the balance of payments, 3-15, in % of GDP - pre-crisis: run-away deficits in some countries (trade balances, capital inflows); post-crisis ( sudden stop ; income effects) 7 Goods and Services Primary Income Secondary Income Current Account CEE-5 BG, RO Baltics ES, GR, PT WBC - 6 TR UA Remark: Components refer to BOP 6th edition as far as available, BOP 5th edition before. Primary income refers to Income Accounts, secondary income to current transfers. Source: wiiw Annual Database incorporating national and Eurostat statistics.. 8 Position of manufacturing and longer-term trade balances Share of manufacturing in GDP in 5 and exports/imports of goods and services, average 2-8 Manufacturing particularly important for medium-income countries! 25. Czech Republic Share of manufacturing in GDP, Serbia Bosnia and Herzegovina Albania Montenegro Romania Macedonia Bulgaria Portugal Latvia Greece Slovakia Slovenia Germany Finland Hungary Sweden Lithuania Austria Ireland Poland Italy Belgium Estonia Spain Denmark Croatia France Netherlands Exports/Imports of goods and services, 2-8 Source: Eurostat and wiiw own calculations.

5 9 Ukraine s trade dynamics, -14 Imports Exports Source: Observatory of economic complexity, MIT Ukraine s trade by partner, 14 Imports Exports Source: Observatory of economic complexity, MIT

6 11 Ukraine s trade by sector, 14 Imports Exports Source: Observatory of economic complexity, MIT 12 DCFTA implementation highlights Trade-related aspects: liberalization of trade in goods and services Deep aspects: food safety/sps measures, technical standards, public procurement, etc. Comprehensive aspects: competition/monopoly regulations, access to public procurement, intellectual property, sustainable development, etc. Approximation to (takeover of) the EU acquis communautaire Temporary autonomous concession of preferential access to the EU market Barriers to trade: binding low TRQs (agri-food produce), technical and SPS regulations, etc. Transitory arrangements for certain products (e.g. special regime for worn clothing and passenger vehicles; surcharge export duties for Ukraine)

7 13 Ukraine s trade regime change in 16 UA-EU DCFTA: autonomous preferences for UA exports by the EU (since 4/14) full implementation starting 1/16 UA-CISFTA: suspended by Russia upon DCFTA implementation Ukraine joined the sanctions against Russia Mutual embargo by Russia and Ukraine (food products), special transit regime, etc. Marginal impact likely limited in light of the trade collapse due to recession Other major background factors Military conflict and political infighting Deep recession and macroeconomic instability Sharp depreciation of hryvna and pass-through to inflation Feeble external conditions: Still weak demand in Europe, recession in Russia Soft global commodity prices Non-tariff barriers to trade: TRQs, technical and SPS regulations 14 Share of the EU and Russia in total trade of Ukraine, 3-15 Exports (down by 29% in 13-15) Imports (down by 44% in 13-15) 5% 45% 4% 35% 3% 25% % 15% % 5% % % 45% 4% 35% 3% 25% % 15% % 5% % Russia EU-28 Russia EU-28 Source: Calculations based on wiiw database.

8 I Ukraine s main trading partners 15, in % of total 15 UA exports (31.7 bn EUR) -29% less than in 13 UA imports (34.6 bn EUR) -43% less than in 13 RU, 12.7 RU,. RoW, 5.6 TR, 7.3 CN, 6.3 EG, 5.5 RoW, 36.3 DE,.4 IT, 5.2 IN, 3.7 DE, 3.4 Source. wiiw Annual Database, national statistics. PL, 5.2 IT, 2.5 US, 3.9 HU, 4.1 PL, 6.2 BY, 6.5 CN,.1 Structure of Ukraine s exports, 15, in % to EU-28 (34% of total exports) Grain II III Mineral products Textiles to Russia (12.7% of total exports) IV Chemicals V VI VII Source: Own calculations based on UKRSTAT. VIII IX X Base metals Paper XI XII Base metals XIII XIV XV Machinery Machinery XVI Transport equipment XVII XVIII XX

9 17 Top 15 biggest export industries of Ukraine, 13 bubble size = export value in USD million 75 7 OIL SEEDS AND OLEAGINOUS FRUITS; INDUSTRIAL OR MEDICINAL PLANTS; STRAW AND FODDER; RESIDUES AND WASTE FROM THE FOOD INDUSTRIES;923 Share of the EU in total industry exports from Ukraine, % WOOD; 1144 ORES, SLAG AND ASH; 3918 ELECTRICAL MACHINERY AND EQUIPMENT; MINERAL FUELS; CEREALS; 6371 IRON AND STEEL; ANIMAL OR VEGETABLE FATS AND OILS ; 357 ARTICLES OF IRON OR STEEL;259 NUCLEAR REACTORS; 3835 FERTILISERS; 1171 PAPER AND PAPERBOARD;8 5 INORGANIC CHEMICALS 1744 RAILWAY OR TRAMWAY LOCOMOTIVES, 2463 Share of Russia in total industry exports of Ukraine, % Source: own calculations based on UN Comtrade data Regional composition of exports, 12 (pies proportional to the value of exports in USD mn) 18 Belarus Russia PL SK HU RO MD

10 EU imports from Ukraine, 15 (total 1226 EUR mn) growth (Y: -8.1%) and shares in total (X) Wood Fats El. Mach. Cereals Oil seeds 957 Ores Major outliers: Iron & steel Meat: +14% (EUR 65 mn) Glass: +13% (EUR 6 mn) Copper: +14% (EUR 54 mn) Dairy: +6% (EUR 48 mn) wiiw calculations based on Eurostat Comext database. Wrap up summary on recent foreign trade developments Ukraine 15 exports to EU down by 8% since 13, highly concentrated (top : 8%) imports from EU down by 4% since 13 trade deficit with the EU (EUR 1.5 bn in 15 after EUR bn in 13) Memo (other DCFTA countries performed better in exports) Georgia 15 exports to EU up by 9% since 13, highly concentrated (top 5: 8%) imports from EU down by 8% since 13 trade deficit with the EU (EUR 1.1 bn in 15 after 1.4 bn in 13) Moldova 15 exports to EU up by 27% since 13, highly concentrated (top : 8%) imports from EU down by 9% since 13 trade deficit with the EU (EUR.9 bn in 15 after 1.3 bn in 13)

11 Regional specialisation, by value added of economic activities in Agriculture, Wood-based Mining, Industry, 22 FDI inflow in % of GDP : EUR 2.7 bn (3.5% of GDP) Belarus Poland Romania Ukraine CESEE Source: wiiw FDI Database.

12 Inward FDI stock by main investors, EUR 44.3 billion, end-14 (revised, including debt instruments) France 3.1% Virgin Islands, British 4.5% Switzerland 3.6% Italy 2.2% Poland 2.3% USA 1.8% 23 United Kingdom 5.2% Austria 6.5% Cyprus 37.6% Russia 6.4% Sources: wiiw FDI Database. Netherlands 12.8% Germany 13.3% Inward FDI stock by main investors, EUR 46.9 billion, end-15 Virgin Islands, British 4.2% United Kingdom 4.8% Switzerland 3.8% France 3.1% Poland Italy 2.2% 2.4% USA 1.8% Cyprus 35.4% 24 Austria 6.5% Russia 8.1% Netherlands 13.8% Germany 13.1% Sources: wiiw FDI Database.

13 25 Policy recommendations from earlier wiiw study How to Stabilise the Economy of Ukraine ; available at: Conflict resolution necessary to allow less military and more social and infrastructure spending Exchange rate regime should move towards more stability; requires more Forex reserves Energy tariff hikes will not suffice without energy-saving investments Social support programs to maintain support for reform measures Institutional, legal reforms, de-oligarchisation required for FDI and a sustainable economic development Ideally: Marshall Plan for Ukraine with more funds and strict conditionality on implementing institutional, legal, political reforms. 26 Policy recommendations (II) Consider careful phasing-in of implementation of DCFTA between Ukraine and EU Attention to adjustment costs; limited resources to deal with macroeconomic stabilisation and industrial restructuring at the same time Keep in mind longer-run market access to Russia and other CIS Trilateral talks (EU-Ukraine-Russia) on TBT and SPS Attempt to keep Ukraine also in CISFTA Long-run vision of Ukraine as a bridge between EU and EAEU; will contribute to FDI attractiveness

14 27 Policy recommendations (III) FDI policy: Institutional, legal reforms vital for investment climate Active FDI promotion agency Improve local authority administration (focus on some first) Set up industrial / business parks Individual package of incentives for large investors Support interaction of foreign investors with local authorities and domestic businesses Policy recommendations (IV) 28 Industrial heartland is currently in the East Most affected by the military conflict and in the past oriented largely towards Russia Requires massive investments, also public: infrastructure; market reorientation and industrial modernisation/diversification Western provinces Less affected by the war but also less developed and poorer; however scope for diversification (agro-food, wood-based, light industry, 2 nd tier cities: tradable services) Can benefit from cross-border cooperation with NMS (PL, SK, HU) De-concentrate market structures: effective competition authority, facilitate entry of new companies; liaise with FDI policy measures Technical assistance from EU; labour market policies essential

15 Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies More details in the 15 wiiw study How to Stabilise the Economy of Ukraine by Adarov, Astrov, Havlik, Hunya, Landesmann, Podkaminer freely available at: Thank you for your attention! wiiw is currently working on a new in-depth comparative analysis of AA/DCFTA costs and benefits implementation