Ukreximbank chairman sees reasons for optimism in Ukraine

Q: How have the geopolitical events of the past few years affected the Ukrainian economy and business community?

A: Russia’s annexation of Crimea and its subsequent intervention in eastern Ukraine, together with a trade embargo and transit barriers, have had a negative impact on the Ukrainian economy and individual businesses. Many Ukrainian enterprises have been hard hit by the current crisis [due to their] relations with Russia. Some businesses physically lost production facilities (those located on territories beyond the control of Ukrainian authorities), while some exporters lost access to their traditional markets.

The Ukrainian business community has responded resourcefully to this challenge: business leaders are looking for new markets, adapting their products to meet new demands, and entering into new contracts. If you have been selling your products ‘just around the corner’ for decades, it is extremely difficult to change your entire export strategy within a year, or to immediately begin conducting sales on the other side of the world. However, Ukrainian businesses are doing their best to find new markets, and their efforts are proving quite rewarding.

Q: What is the foreign trade situation at present after three years of the current crisis?

A: In 2016, the Ukrainian economy was gradually recovering from the severe impact of the Russian intervention while adapting to the new market conditions. However, trade volumes have decreased significantly over the past three years. While trade turnover in 2013 was an impressive $180bn, the total for 2016 was only about $97bn.

The geographical structure of Ukrainian foreign trade is also undergoing drastic changes and experiencing a fundamental shift from the Commonwealth of Independent States to European and Asia markets. The share of trade turnover with Russia has dropped from 27% in 2013 to 14% in 2016, while the share of trade with Europe has increased by 10% since 2013. The share of Asia and other countries is also steadily growing.

The Ukrainian economy benefits from this shift of trade flows, as it has allowed for a reduction in its traditional dependence on the Russian market (which turned out to be as unpredictable as the country itself). It has also allowed Ukrainian companies to diversify both market outlets and product portfolios.

However, due to the extreme economic conditions of the past few years, entry into new markets by Ukrainian enterprises has been more of a revolutionary than an evolutionary process. Ukrainian exports to Russia have dropped more than 80% in recent years, from $17.3bn in 2012 to $3.6bn in 2016. In 2016, Europe and Asia have both become major export destinations for Ukrainian goods, accounting for 37% and 32% of 2016 export volumes, respectively.

The devaluation of the Ukrainian hryvnia since 2014 has contributed significantly to the country’s terms of trade. The volumes of export and import goods achieved a balance in 2015, while the 2016 trade deficit was predominantly due to a rise in machinery imports. The growing need for industrial modernisation will create further demand for similar imports.

Key Ukrainian exports include staple products and traditional manufactured exports totalling $25.4bn – about 70% of total exports in 2016. There have also been growing export volumes of some quite new and innovative science-intensive and value-added products, which have been developed and produced, such as IT services and the aircraft and space industries.

Q: What can the Ukrainian government do to improve the situation?

A: In March 2017, the government presented the strategic trade development roadmap of Ukraine [STDR]. It provides systemic analysis of the obstacles facing Ukraine as it seeks to move towards knowledge- and innovation-based exports for sustainable development and success in global markets. The STDR elaborates three objectives:

• to create an enabling environment that stimulates trade and innovation for diversified exports;
• to develop business and trade support services that improve the competitiveness of enterprises, in particular SMEs; and
• to strengthen the skills and competencies that enterprises, particularly SMEs, require to engage in international trade.

Modernising the Ukrainian business environment and economy is at the core of this roadmap. Several existing and potential sectors are prioritised and identified as being drivers of innovation and high value addition, as well as having the potential to invigorate SME development and stimulate entrepreneurship.

Q: What role can the banking sector play in the recovery and in supporting trade?

A: The losses incurred by the Ukrainian economy in recent years have been considerable. Nevertheless, we believe it is possible to identify the first signs of a new dawn. Foreign trade, which is very important for the export-oriented and open Ukrainian economy, is recovering gradually. However, as World Economic Forum experts have pointed out, limited access to trade financing is one of the major remaining problems hindering the further development of Ukrainian export businesses.

Thanks to the current challenging economic environment, the financial standing of many Ukrainian companies has deteriorated significantly, placing them in the ‘non-bankable’ category. Meanwhile, the banks themselves have suffered from worsening loan book quality and a deleveraging of balance sheets, leaving them reluctant to accept new credit risk, especially by providing credit to tier-two companies or SMEs. This situation is now showing signs of change; demand from corporate clients is scaling up and as they recover from the worst of the recent turmoil, the banks themselves are becoming less risk-averse. This positive trend could increase bank lending to the real economy and add momentum to existing economic growth.

We are currently observing a downward trend in interest rates on the local market (our bank is one of the driving forces behind this process). During the past year, the central bank, National Bank of Ukraine, has decreased its rate from 32% to 14%. We hope that our commercial foreign partners will be able to propose more attractive funding conditions.

Last but not least, we see long-term co-operation with international financial institutions [IFIs] under several existing and new projects, which are being developed with the aim of helping Ukrainian businesses to satisfy demand for long-term financing, including for investment.

Financing of foreign trade is a key strength of Ukreximbank, which has historically always been a corporate-oriented bank focused on trade facilitation. The main tasks of the bank are the performance of foreign trade settlements for businesses, the attraction of foreign funds into the economy, and supporting companies looking for new international markets with advisory and financial services.

Ukreximbank provides a range of options to help companies receive financing for their foreign economic activity and mitigate the risks inherent in entering new foreign markets. In order to provide the best service, we seek to utilise our long-standing correspondent relations with foreign state and private banks all over the world, as well as special programmes managed by our multinational partners. 

Q: Energy efficiency is very important to Ukraine. How is Ukreximbank supporting its development?

A: Ukraine’s energy industry is a strategically important sector worth individual attention as it could provide huge impetus to the country’s economic development while boosting exports. Thanks to the legacy of an inefficient Soviet system where domestic energy rates were of little practical importance, prices for energy resources in Ukraine remained artificially low throughout the post-independence years.

The lack (or slow pace) of reforms in the energy sector resulted in Ukraine suffering from levels of energy efficiency that were well below modern standards. For example, at the end of 2013, Poland (with a GDP of $518bn) posted an energy consumption of 65,271 kilotonne of oil equivalent (ktoe), while Ukraine (with a GDP of $144bn) posted an energy consumption of 70,097 ktoe.

Faced with the absolute necessity of decreasing energy wastage and improving the situation, Ukraine has made some significant progress in reforming the energy sector in the past few years. Nevertheless, further reforms lie ahead in order to make the regulation process transparent and to stimulate market competition. This could allow Ukraine to achieve an ambitious objective: reducing energy intensity by 50% by 2030.

Our bank understands the huge potential of energy reform. In co-operation with IFI partners, we are focusing our efforts on making a positive contribution to the country’s balance of payments. A good example of this co-operation is the recently completed energy efficiency $200m credit line with the World Bank. This will result in estimated annual energy benefits exceeding 4.2 million megawatt hours (comparable to the energy demand of a city of about 1 million inhabitants such as Odessa or Dnipro).

The bank has made a strong commitment to sustainable energy development. This includes a dedicated internal energy efficiency policy, and the development of standardised lending products and environmental and social risk management tools. These efforts benefit from the bank’s nationwide network and from IFI involvement. We have gained valuable market expertise in project origination, channelling targeted funding, and the pioneering of numerous success stories necessary to scale up energy efficiency countrywide.

Q: Given the large challenges, how does Ukreximbank view Ukraine’s prospects?

A: The past few years have been shaped by the desire of the Ukrainian people to live in a free and democratic country, along with the emergence of a strong entrepreneurial spirit and readiness to build a stable and developed economy. I have highlighted two particularly interesting aspects: trade financing and energy efficiency. Both offer great scope for potential co-operation with our foreign partners.

Today, Ukreximbank stands ready to further support Ukrainian and international businesses working in Ukraine by fostering greater financial, technical and advisory co-operation in the energy sector and in the trade finance sphere. The bank is planning to maintain the pace of financing for priority projects. We are now seeing some positive signs of moderate growth in the economy and the revival of core banking sector functions in the country. This gives us a sense of optimism and opens up huge opportunities for partner banks and foreign investors.