The Ad Hoc Research, an analytical paper recently released by the National Bank of Ukraine suggests that the regional and commodity structure of Ukraine’s external trade has undergone drastic changes over the last decade in response to global commodity market and geopolitical developments. The first issue of this paper analyzes the evolution of Ukraine’s external trade over the last decade.
The increasing role of European countries as a trading partner, among other reasons, thanks to the EU-Ukraine Association Agreement and the diversification of energy supply sources, has been one of the major trends shaping Ukraine’s external trade. In particular, exports of foods destined for European countries have increased five-fold over the last decade, placing Ukraine among the top three exporters of agricultural products to the EU in 2016. Across European countries, Italy is a major destination for Ukrainian exports (primarily metals, seed oil, and wheat), followed by Poland (ores and seed oil). Energy resources have gained a larger share of imports from Europe in recent years.
Meanwhile, over the past three years, Asian countries have become the main importers of Ukrainian goods, in particular, food products. Ukraine's sunflower oil exports to this region increased ten-fold between 2006 and 2016. With a pick-up in corn exports, the composition of grain exports shifted dramatically toward corn exports. Across Asian countries, the bulk of Ukraine’s exports is destined for Turkey (metals and oilseeds). China accounts for more than half of Ukraine’s imports, with import volumes having doubled over the past decade, driven by an increase in machinery (home appliances, spare parts) and industrial imports (clothing and footwear).
The CIS countries, primarily the Russian Federation, was the only region with which trade turnover decreased over the last decade. The trade and economic pressure put on Ukraine by Russia resulted in a substantial decline in trade turnover between the two countries since 2012. Due to the trade restrictions imposed by the Russian Federation, Ukraine’s machinery exports to Russia fell substantially, with food exports having declined to almost zero. Imports from the Russian Federation also fell markedly non-irradiated fuel elements, with the commodity composition of imports continuing to be dominated by non-irradiated fuel elements and coal. Ukraine’s trade turnover with CIS countries, especially exports to Kazakhstan, declined substantially due to the trade and transit restrictions imposed by the Russian Federation. Given Ukraine’s reliance on energy imports, import volumes from CIS countries decreased less markedly than from other regions.
Ukraine’s export structure will remain biased towards commodities in the coming years, thus making the Ukrainian economy highly vulnerable to external shocks in global commodity markets.
In addition, Ukraine’s heavy reliance on energy and high-tech imports will prompt Ukraine to maintain high import volumes. As a result, the current account deficit is expected to remain substantial at 4% of GDP, despite the projected favorable external price environment. Such current-account deficit is unlikely to pose a threat to the Ukrainian economy providing that it is mainly driven by investment demand.
Ukraine’s export potential may expand as Ukraine gains further access to new foreign markets thanks to the FTA agreements entered into with trading partner countries. Although, free trade agreements are no guarantee of an increase in trade turnover, they will encourage Ukrainian exporters to improve the competitiveness of their products.