Head of International Finance Department

Rohach Oleksandr,

Professor, Doctor of Economics,

Head of International Finance Department

IIR, TarasShevchenkoNationalUniversity of Kyiv

Ukraine-Lithuania Economic Cooperation

Ukraine-Lithuania Trade Relations

Foreign trade exchange between the two counties has been growing steadily within the past years. In 2000 -2010 it increased more than four-fold (Fig.1). According to the State Statistics Committee of Ukraine, in 2010 foreign trade exchange between the two economies amounted to US$901.9 mln. That period saw only two episodes of a decreased exchange in goods, namely in 2005 and 2009, which was due to political instability in Ukraine (2005) and the word financial crisis that not only hitUkraine, but also complicated the economic situation of Lithuania (2009). 2008 witnessed the absolute peak in exchange in goods, when the exchange grew by US$400 mln in comparison with the previous year.

The 2011 data suggest that the peak may even be exceeded. In January 2011, that is within 7 months, the foreign trade in goods between Ukraine and Lithuania, as compared to the similar time span in 2010, increased by 29.5% and amounted to US$579.0 mln. At that, Ukrainian exports amounted to US$188, 8 mln, (+57. 5%), exports were US$390, 2mln (+18.7%), the negative trade balance being US$201.4 mln.

When comparing Ukraine’s volumes of trade with the Baltic States (see Table 3), we can see that Lithuania is our major partner among these states. Furthermore, the conclusion also holds true not only in respect of Ukraine’s exports (45% of Ukrainian exports to the Baltic States), but also concerning imports (79 per cent of Ukrainian imports from theBaltic States).

Figure 1. Foreign Ukraine-Lithuania Trade in 2000-2011 (mln US$)

Table 1. Foreign Ukrainian Trade: 2011 (January – July)

Exports / Imports / Balance
thsd. USD / in % to January-July 2010 / thsd. USD / in % to January-July 2010
Lithuania / 188783,4 / 157,5 / 390197,5 / 118,7 / –201414,1
Estonia / 94548,8 / 179,1 / 54298,4 / 76,0 / 40250,4
Latvia / 136377,8 / 143,4 / 48640,9 / 100,1 / 87737,0
Baltic countries / 419 710,0 / – / 493 136,8 / – / – 73 426,8

It should be mentioned that Ukraine has a negative trade balance with Lithuania. Moreover, the trend has been observed for a long period of time. In the past few years negative trade balance has grown considerably. Last year it reached US$373 mln; in the current year it is likely to be even higher, US$201 mln for the seven months in 2011.

Major Ukrainian supplies to Lithuania are ferrous and non-ferrous metals -19%, machinery and equipment - 10%,timber and wood products - 9%, food industry waste - 8%, crop products – 7%, off-the-shelf food products – 6% (Fig.2).

The Lithuanian export pattern to Ukraine was as follows: petrochemicals - 76%, polymerized products and plastic materials -5%; machinery and equipment - 4% (Fig.3).

Figure 3

One of the crucial issues here is the changing of the structure of trade. When comparing the current Ukrainian structure of exports and imports with 2006, one can see that the Ukrainian exports have become more diversified (e.g., the share of metals dropped from 50% to 19%). Meanwhile, in the Lithuanian exports structure, the share of the main item (petrochemicals) has considerably risen from 46% to 76%.

Among the major tasks that Ukraine is facing in its trade with Lithuania are the following ones:

- to ensure the sustainable growth in export and imports volumes;

- to reduce the negative trade balance;

- to further diversify export-import structure;

- to increase the share of exported high value-added goods, especially in the processing industries;

- to make its goods more competitive, especially with the view to prospective Ukraine-EU Free Trade Agreement.

Foreign direct investment

Foreign direct investmentflows to Ukraine has significantly increased in the last decade. While its total and per capita accumulated foreign direct investments are not at par with those of some Central and East European economies, Ukrainestill has a significant potential for foreign investors.

The relatively large and growing marketplace, availability (or maturity) of inputs, infrastructure, economic and geographic situations should be mentioned among the advantages, to name but a few. Ukraine harbours sizable raw material resources along with production and transportation infrastructures (coal, iron and manganese ores, sulphur, mercury, titanium, marble, mineral salts, gypsum, alabaster, etc.).

Ukraine belongs to the leading group of countries with high literacy rate. Relatively high standards of labour force quality are corroborated by the UN Human Development Index, well above average. Relatively cheap high-skilled labour also makes Ukraine attractive for direct foreign investments. Despite official wages and salaries rates keep growing in the structure of population income, the gap in the labour cost between Ukraine and developed economies remains rather significant.

When Fleming/SARS Consortium looked into the motifs of foreign direct investing in Ukraine, it found out that the major bulk of foreign companies find the scale and growth potential of the Ukrainian market, along with prospects of access to a newregional market to be among the critical factors. High-skilled labour and cheap production factors were minor factors for the FDI. Tax incentives and access to research and development attainments were not considered essential.

Fig.9 shows the total amount of EU direct foreign investment to Ukraine. According to the State Statistics Committee of Ukraine, as of July 2011, direct Lithuanian investments to Ukraine totalled US$87.7 mln (about 0.2 of the overall amount). Ukraineranks 6th among the recipient states of Lithuanian investment.

Fig. 4. FDI in Ukrainefrom Baltic countries (mln. US$)

Volume of direct investment as of
1.01.2010 / 1.01.2011
Lithuania / 81,9 / 83,5
Latvia / 87,5 / 82,5
Estonia / 137,4 / 128,7
Total from Baltic countries / 306,8 / 294,7

Within the framework of investment projects, about 270 enterprises with Lithuanian capital operate on the Ukrainian territory.

In a similar way, foreign direct investment has been growing within the last decade, with only two years excluded. Somewhat reduced FDI was noticed only in 2005 and 2010, the reasons being the same as in trade.

When comparing the positions of the three BalticStates in the field, Fig.5 shows that Estonia ranks first, which has considerably outpaced both Latvia and Lithuania in FDI to Ukraine.

Fig.5 FDI from Baltic countries to Ukraine 1996 -2011 (mln.US$)

Ukrainian-Lithuanian trade and economic relations are governed by a number of bilateral documents, inter alia, by the Agreement of Promoting and Mutual Protection of Investment, the Convention on Avoiding Double Taxation and other agreements covering finance, customs regulations, administrative assistance among tax institutions and the like. As of today, the Ukrainian-Lithuanian regulatory framework in the field of trade and economic ties consists of 65intergovernmental and interbranch treaties and agreements, and also agreements on regional cooperation.

The Lithuanian business is mostly interested in furniture making, wood processing, construction materials production, real estate and construction.

Among the enterprises that are actively involved in our country the following Lithuanian businesses stand out: JSC Hanner, JSC Utyanos Trikotazhas, PC Arvi, JSC Vakaru miadenos grupe, PC BT Invest, PC Kalvis, Kraytiane, Paneviezhio Kialei, Narbutas and Co, Neollitas.

To quote an example, the well-known Lithuanian knitwear manufacture Utyanos Trikotazha bought out the controlling interest in Mria Mukachevo Garment Factory and invests US$10 mln in the daughter enterprise. Most of its output is exported to Lithuania, Norway and Sweden. Yet another successful business project is in Viking Logistics Project. It is cited as one of the best logistic projects of Europe in 2010. Viking provides transit cargo transportation from Klaipeda through Byelorussian territory to Odessa and Illichivsk.

In 2005 almost 100% shares of the Ukrainian Agio Bank were bought out by the leading Lithuanian banking institution SEB Vilniaus Bankas, which transferred to Ukraine 80 mln litas (around US$32 mln). In August 2006, Šauļi JSC Neuastienniu miaghagu Fabrika bought Ukrainian Bofika in Berdychiv, Zhytomyr Oblast. Another successful project is Kalvas -Volyn Company producing solid fuel boilers. Now, the town of Kovel makes very much sought-after equipment for Ukrainian consumers.

The overall amount of direct investment from Ukraine to Lithuania equalled US$ 3.9 mln. on 01.01.2010. As of June 2011 the State Committee of Ukraine did not make public the data quoting the Law of Ukraine on Statistics concerning information confidentiality.

Three enterprises have been registered. Ukrainian entrepreneurs do not find the Lithuanian market sufficiently large, while the major cause of minor investments in the Lithuanian economy, at the moment, is noticeably high prime cost of production in the LithuanianRepublic. At the same time, it is rather revealing that in the latter half of 2006 Ukrainian Roshen bought 100% shares of Klaipedos Konditeria, which is estimated at about US$2 mln.

Both Ukraine and Lithuania have a considerable growth potential for FDI attraction. This potential, however, especially as far as Ukraine is concerned, has been largely untapped. The Ukrainian Government should do a lot to improve the investment attractiveness of its state, to build up its investment competitiveness.

Slides 15, 16, and 17 prove the differences in the positions of our nations in the field. Regrettably, the Ukrainian positions look too modest. In this respect Ukraine should thoroughly look into and learn from the Lithuanian expertise in order to develop transparent, understandable for investors competitive environment, combat corruption, reduce business regulation and grant larger investment freedom.