Is it possible for EU to become substitute for Ukrainian goods after loss of Russian market?

Author : Oleksandr Okhrymenko

01:27, 23 November 2015

Is it possible for EU to become substitute for Ukrainian goods after loss of Russian market?

Author : Oleksandr Okhrymenko

By itself, EU market is large, but competition is stronger and more complex than in other countries

01:27, 23 November 2015

Since starting from January 1, 2016 Russia closes its market for food products labeled Made in Ukraine, the question arises whether Ukraine will be able to substitute the Russian market with European? Especially since on January 1, 2016, the economic part of the Agreement on Association with the EU, which contains what is allowed and what is prohibited, comes into force.

Despite the fact that since January 1, 2016 the economic part of the Association comes into force, food supply quota limits to the EU remain. In fact, technically, from May 1, 2014, the EU has cancelled on a unilateral basis the duties on Ukrainian goods. Actually, the economic part of the Agreement was launched. But quota limits remained and will remain in future since they are an integral part of the Association Agreement between Ukraine and the EU, which is clearly set out in Annexes I-A.

One may trade with the EU with no quotas but in this case the customs duty must be paid even after the start of the economic part of the Agreement. The customs duties, in some cases are quite large, and it makes the export of Ukrainian food to the EU not profitable. Thus, for example, one has to pay 17.3% on honey or 149 euros per ton of poultry meat, or 95 euros per ton of wheat, or 93 euros per ton of flour. There are no fees in case the sales are within the quota range, and it's really good for business. The very logic of the association suggests that it should stimulate the export of Ukrainian products to the EU, since there are no extra payments, while other countries will be paying those fees, and their products will be less competitive than Ukrainian.

Related: Russia to launch food embargo against Ukraine

The quotas were, are and will be, since the EU considers them as a protection of its market. Friendship is one thing, but will not create unnecessary problems on its food market because of Ukraine.

If you look on how Ukrainian exporters use the EU quotas, it is very clear. The quota on 400 thous. tons maize supply to the EU has already been fully implemented, the 950 thous. tons quota on the wheat supply has already been done. The quota on the supply of 5 thous. tons of honey is also fully fulfilled. The quota on supply of 20,07 thous. tons of sugar to the EU was used by 98%. But, interestingly, that there are quotas on sugar supply from the EU to Ukraine. Its not that easy with these quotas and trade.

Ukraine may supply 18 thous. tons of poultry meat according to quota limits to the EU, and this quota has already been completed by 56%. But the quota for the pork supply to the EU in the amount of 20 thous. tons, haven’t been used at all so far. The same applies to the quota for the supply of beef and mutton. It turns out that there is a quota, but that Ukrainian exporters do not use it. Not because I don’t want to, but because it is difficult. In order to supply meat to the EU, it’s obligatory to not just replace most of the equipment on the plants, but also to create the lab in accordance with EU standards and to take products certification. Thus it is necessary to certify everything from the quality of the land, where they grow food, and the whole chain: to certify grown nutriment and animal welfare, methods of slaughter and meat processing, storage and transportation. Only large agricultural holdings could do so, which may agree to incur substantial losses for certification in the hope of future profits. And even this time, one of the biggest "chicken oligarchs" passed certification in accordance with the requirements, and only he can supply poultry to the EU. But there is another problem: this poultry has to be bought. And if someone doesn’t know, the EU is the world's largest producer and exporter of poultry meat. Here, as they say, two rivals have met.

But everything described above are raw materials, and what about the food sale to the EU? There is even harder. Ukraine didn’t use quotas on selling confectionery and dairy products, doesn’t sell tobacco products, although it has the right, and even the alcohol is not sold to the EU, although there is a right. If agricultural commodities Ukraine they have learned somehow to sell to the EU, finished food products are difficult to be sold to the EU. Again, this is due largely to the requirement to pass a complex certification procedure. But what is most difficult in order to make it, one needs to invest more money. For example, Ukraine has a right to supply 8 th. tons of dairy products to the EU. But it’s obligatory to certify nutriments which will be given to cows, then to certify cows and it’s advisory to replace breed since our traditional cow doesn’t correspond to European Standards, after that certification of production and transportation. But since the large part of the milk produced in private farms, that make it practically impossible. Ukraine needs its "dairy kings" the same as "chicken kings".

Ukraine has a quota for the supply of confectionery products to the EU at a rate of 2 ths. tons. Now it is used by only 12%. In addition to certification, there is another significant problem - brand awareness. In order for Ukrainian chocolate or biscuits to be bought in the EU, consumers should know the Ukrainian brand. And brand promotion is long and expensive process. The matter is complicated by the fact that the EU has the world's monsters for the production of confectionery, and it's hard to compete with them, even if you really want. And the quota is small itself. Because of such volumes, not everyone will be willing to start certification process and switch production to the European standards. Though, maybe someone will be interested.

By itself, the European market is large, but competition is stronger and more complex than in other countries. Therefore, there is need to work extremely hard to gain the market. The market realities must be taken into consideration. At present, Ukraine is good at corn, wheat export to the EU and, most likely, this sector should be developed. In some cases, Ukraine is grain selling id attractive, even in excess of quotas, as the customs duty will still allow find the best price for European consumers. As for finished food products, the EU market is very complex and, by large, is not interesting. Exclusions are milk powder, starch, flour. Though, these are not ready goods. As for the sweets and biscuits, and even more yogurt and dairy spreads, then it’s even more complicated and difficult, because without well-known brand it’s hard to sell in the EU market, and small sales are not reasonable.

This is a real picture of food products which Ukraine could possibly sell to the EU, and which – possibly not.

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