In Ukraine’s heavily dollarized economy, where the national currency is in disfavor, hardly anybody is rejoicing that the hryvnia’s value has tumbled from 8 to 13 to the dollar this year.
But Metinvest’s Chief Financial Officer Aleksey Kutepov doesn’t mind. And with good reason, according to an interview Kutepov gave with Steel First, an industry publication.
Up to 80 percent of the nation’s largest steelmaking group’s revenues come from export contracts in dollars or euros, while half of their expenses are in hryvnias. “A 10 percent in depreciation provides us with about $250-$300 million that positively effects our earnings before interest, taxes, depreciation and amortization,” the executive said.
No question, a weak hryvnia helps stimulate some exports, but not so much amid trade wars and when competitors also suffer devaluation of their currencies.
In May, a record volume of more than one million tons of ferrous metal was shipped from the Azov Sea port in Mariupol. Yet despite the political crisis, Donetsk-based Metinvest shipped 80 percent of total ferrous volumes by sea. In the first five months of 2014, Ukraine’s export of ferrous metals totaled $6 billion. Last year Ukraine’s exports reached $82.7 billion, of which $63.1 billion in goods, the rest in services, according to the World Trade Organization (WTO).
Exporting is the only way to bring hard currency into Ukraine that potentially supports the hryvnia, and it helps minimize shocks such as Russia’s annexation of Crimea and the damage from Russian-backed separatists in eastern Ukraine.
Globally, Ukrainian exporters play a crucial role on commodity markets. The country is known as an exporter of ferrous metals, grain and fertilizers.
“Ukraine has nearly a third of the arable land of the whole European Union, and is the world’s 12th largest producer of cereals and within this is the 11th largest producer of wheat. Also Ukraine has the world’s largest supply of titanium, the third largest deposit of iron ore and 30 percent of the world’s manganese ore,” said Sarah Boumphrey, head of Strategic, Economic and Consumer Insight at Euromonitor International.
Commodities exports bring more than half of export revenues and are mostly driven by locally-owned companies. Notably, oligarchs are the main exporters. They are Rinat Akhmetov – Metinvest, and energy giant DTEK; Donetsk governor Sergiy Taruta – Industrial Union of Donbas; Andriy Verevskiy – grain and sunflower oil trader Kernel; Dmytro Firtash – chemicals holding OSTCHEM; Viktor Pinchuk – industrial holding Interpipe; and Viktor Nusenkis – Donetsk Steel holding.
When everything is constant, Ukrainian exports should increase as the hryvnia falls. But exports sunk 5.1 percent in the first five months over the same period last year to $24.19 billion. Russia bought 23.9 percent fewer goods and services, while the EU took in 12.9 percent more.
Russia’s trade war with Ukraine partially explains the decrease, said Volodymyr Vlasyuk, director of state-owned Ukrainian Industrial External Expertise. Another reason is that the currencies of other commodity exporters devalued since the beginning of the year, including the Russian ruble by 9.6 percent, the Turkish lira by 7.2 percent and the Brazilian real by 4.4 percent.
Thus, Ukraine lost $4.55 billion in trade with Russia so far this year, noted Vlasyuk, with export volumes of ferrous metal, railway wagons and pipes falling by 50 percent or more.
EU free trade deal
The upside is Ukraine’s economy is benefiting from the free trade agreement with the European Union. The trade balance turned positive by $500 million for the first time in years, said former Finance Minister Viktor Pynzenyk, a member of parliament. Exports to the EU increased by 38 percent in May. Swiss-headquartered iron ore company Ferrexpo, with assets in Ukraine, but with a traditional customer base in Austria, Slovakia, the Czech Republic where 48 percent of its supplies are sent, saw profits increase by 65 percent to $208 million in the first half of the year.
However, the increase in EU exports is only of those goods that are traditionally sold: ferrous metals, ores, grains, fats and oils, and machinery. There are no signs that new Ukrainian products are being sold on the European market, however. “The Ukrainian producer understands the Eastern market much better than they understand Western. This weakness must be removed,” Economy Minister Pavlo Sheremeta said.
As the largest import market in the world, the EU remains an important export market for Ukraine, but experts said that due to stiff competition, Ukrainian producers continue developing new markets. Also, Ukraine mostly supplies commodities to the EU, not the high-technology goods it produces.
Value-added exports
Besides having a reputation as a commodity exporter, Ukraine is a world leader in rocket design, development and flight. It is also the former Soviet Union’s largest aircraft engines producer, a top four world exporter of turbines for nuclear power plants, a top 10 world arms exporter, and the biggest eggs producer.
As the CIS region’s biggest aircraft engine producer, Motor Sich’s exports reached $500 million in 2013.
State-owned Yuzhmash in Dnipropetrovsk leads in rocket production. It has created four generations of strategic missile systems, 400 spacecraft 0f 70 modifications and three space launch vehicle families.
Arms
In 2013, Ukraine overtook Israel in arms exports. According to the Stockholm International Peace Research Institute, Ukraine was the eighth largest arms exporter in 2009-2013, accounting for 3 percent of world deliveries.
Kyiv Post staff writer Iana Koretska can be reached at [email protected].
