For years, Russia has been the cash cow for Ukrainian dairy producer Anatoliy Yurkevych. These days he's looking to skim some of the cream in the European Union, thanks to Ukraine's sweeping new trade deal with the EU.
For years, Russia has been the cash cow for Ukrainian dairy producer Anatoliy Yurkevych. These days he’s looking to skim some of the cream in the European Union, thanks to Ukraine’s sweeping new trade deal with the EU.
The deal, which President Petro Poroshenko is set to sign Friday in Brussels, would give Ukraine’s economy and society a massive shove toward Europe. It will lower trade tariffs and in theory open Europe’s market of 506 million people — if Ukraine can comply with the many complex provisions in the 1,200-page document that will take 10 years to fully implement.
Yurkevych’s Milkiland N.V. is aiming to be part of the country’s pivot. That’s even though Milkiland still gets more than half its revenues from Russia, 53 percent of its 77.3 million euros in sales there in the first quarter. The company both exports to Russia and owns a dairy plant there.
But Russian officials in April halted imports from its cheese plant in Okhtyrka, ostensibly on technical grounds. Ukrainians find the timing suspect, with Ukraine and Russia at odds over an insurrection by pro-Russian separatists in the east.
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Russia is “a market we’re accustomed to, and a familiar one,” says Yurkevych, the company’s founder and CEO. “But unfortunately it’s politicized and unstable … The market has become very risky, and to be oriented only on it has become very dangerous. So we’re looking for diversification.”
The EU trade agreement is far more than a technical document of interest to businesses. In some ways, it’s the spark that lit Ukraine’s revolution in February. Then-President Viktor Yanukovych backed out of signing the deal in November under pressure from Russia. Protests in Independence Square in Kiev mushroomed into a broader expression of disgust with the country’s misrule and corruption — and wound up driving Yanukovych from office.
Here’s a look at the deal and its potential benefits and risks.
The heart of the agreement is a comprehensive trade deal that eliminates 98 percent of EU tariffs and 99 percent of Ukrainian ones — taxes that governments put on imports to protect their domestic producers. Eliminating tariffs on goods and services should spur more trade, jobs and growth. The prime beneficiary would be Ukraine, which sends a quarter of its exports to Europe.
Still, the EU kept restrictive quotas in agriculture, a traditionally sensitive sector, to protect against low-cost competition from Ukraine.
Milkiland is pushing to become the first Ukrainian dairy producer to get through the demanding technical certification process to get permission for its Ukrainian plants to ship the EU market, adding to its facility in bloc member Poland. Approval could take up to a year.
“We see potential, and we think that we can compete,” Yurkevych said Wednesday in an interview in one of his Kiev offices.
Perhaps more important than the trade deal is an accompanying 10-year plan for Ukraine to adopt EU product regulations. Such rules — which determine, say, what food coloring is allowed in rum (only caramel) — are important because they ease the way for international trade beyond Europe.
The deal also demands that Ukraine change the way it does business. Adopting EU rules on government contracts, competition policy and the copyright for ideas and inventions should improve the economy by making it more investor-friendly and reducing corruption.
“The question is the modernization of the whole economy,” said economist Volodymyr Sidenko at the Razumkov Center research institute in Kiev. “Without institutional change, all the trade and investment will not be very efficient.”
But meeting the EU’s technical and health requirements will take time.
A key short-term risk for Ukraine is Russia’s reaction. Officials in Moscow say that if Ukraine signs, Russia will drop Ukraine’s current free-trade privileges and start imposing tariffs on goods.
It’s not an empty threat, since Russia is Ukraine’s largest export market, at 25.6 percent slightly larger than Europe.
Some cite Russian pressure tactics as one reason to sign the agreement.
“We need markets without such surprises,” said Viktor Pynzenyk, a member of the Ukrainian parliament’s economy committee and a former finance minister.
A NOTE OF CAUTION:
The agreement aims to shake up Ukraine’s outdated economic model, in which the biggest companies tend to be privatized former state enterprises in mining, metals and machinery such as cars and trains from Ukraine’s days as part of the Soviet Union before it broke up in 1991.
Some in Ukraine are more cautious about the deal. Transitions to new industries can be wrenching for those working for older industries, and even EU officials concedes that there will be winners and losers.
Ukraine’s government bargained a 15-year period for phasing out protective import tariffs on cars to give its domestic auto industry time to adjust to increased competition.
Oleg Papashev of the Ukrainian Automobile Corporation, UkrAVTO, said Ukraine companies face unequal conditions such as high business borrowing costs of 20-25 percent annually, compared to 2-5 percent in much of Europe.
Papashev said he doesn’t oppose the agreement, but cautioned that the “economic model that Ukraine has today is not capable of working in the framework of a single large market.”
“The government should have spoken earlier about a new economic model and a new economic policy that would have permitted us to compete equally in this large market,” he said.