Ukraine – Germany: what to anticipate and what to watch out for in 2019

There are several factors which will affect trade and economic relations, as well as the investment component between Ukraine and Germany in 2019.

POLITICAL FACTOR

2019 is the year of elections in Ukraine. Until the presidential race on March 31, the business environment of both countries will be expecting the elections results which will define whether the current economic course with the already established connections and established the market will continue to be relevant, or vice versa, there will be a significant shift of emphasis on foreign business in Ukraine. Still, the political situation won’t stabilize even after the March events, as the next elections — to the Verkhovna Rada – will occur in the autumn. This can
strongly affect the trade and economic climate in Ukraine due to market and financial instability, as well as the threat of politicization of the economy (these are typical events of any pre-election period).

So, we should not expect significant investments from Germany or the launch of joint large-scale projects in 2019.

The situation might improve in the first half of 2020 when new governing institutions will be formed.

SOCIAL FACTOR

Military events in the east of Ukraine make German entrepreneurs extremely cautious when investing in the country. This tendency have been lasting from the beginning of the occupation of certain territories of Ukraine by the Russian Federation in 2013 (Chart 1).

The largest decline in FDI from Germany to Ukraine in comparison with other EU countries occurred in 2014-2016. Although investments have somewhat risen after this, their volume in the set of all EU FDI was almost two times lower than it used to be in 2012. Noteworthy, despite the fact that Germany occupies a leading position in Europe in terms of volume of its investments, it takes the 5-th position among the main investor countries in Ukraine. Ukrainian investments in Germany are very small — around $ 3.1 million — so it’s impossible to consider them a tendency.

If geopolitical instability is a constraining factor for significant investments in the construction of new production facilities or in long-term large-scale projects requiring territorial placement (production enterprises, service centers, terminals, elevators, etc.), the exportimport component between our countries (selling goods, services, and technologies) is gradually increasing. First of all, this happens due to the fact that Ukraine significantly reduced or even, in some cases, stopped trade relations with the aggressor country, the Russian Federation, during 2015-2016. Though, Ukraine has gradually intensified cooperation with EU countries, especially Poland, Italy, and Germany. There was a sharp decline in trade between Ukraine and Germany (export volumes fell almost twice) in 2015, compared to 2012-2013 (the beginning of aggression from the Russian Federation, and the annexation of the Crimea), the volume of exports and imports began steadily increase in 2016 (Chart 2).

According to the Federal Statistical Office of Germany, imports to Ukraine increased by 28 % in the first eight months of 2016, compared to the same period of the previous year. Export of Ukrainian goods to Germany also experienced positive changes – it rose by 31.6 %.

While the overall dynamics of Ukrainian exports was unstable and significantly fluctuated during the analyzed years (Chart 2), certain commodity groups steadily increased. The most popular were cable products and insulated wire, ores, profiles and pipes, timber products. The most active dynamics was observed in exporting food products: meat and poultry, honey, wheat and its mixture with rye, corn, sunflower, nuts, and rape seeds. The export of these products has grown by more than 34 times in 2016-2017.

Among the EU countries, Germany ranks third in terms of exports ($ 1.25 trillion), with its largest share in the sale of cars and car parts (almost $ 210 billion). However, the export of automotive products to Ukraine is not in the first positions among other products. First of all, this is so due to the relatively low solvency of Ukrainian buyers in terms of expensive products, as well as not sufficiently flexible pricing policy of automotive traders. Nevertheless, the steady growth of individual commodity positions is traced in this sector. For example, Audi experienced a growth in sales compared to 2017 – their market share of 2018 was 3.7 %. Additionally, the new Audi Q8 came to the market and has already gained popularity among people. The pricing was influenced by the Law of Ukraine No. 2611-VIII, adopted in November 2018, which regulated the amount of excise tax rates for the import of cars into the country. That is why prices for Audi (as an example) with diesel and gasoline engines from 3.0 liters have significantly dropped.

Another November event of last year is interesting in this context. This happened in Germany: during a meeting with the country’s largest automakers, German Transport Minister Andreas Scheuer, made a joint decision to retrofit diesel cars from the Euro-5 standard to Euro6. In Ukraine, we can expect an increased demand for relatively inexpensive diesel engines of Euro-4 and Euro5 standards, which may soon disappear from secondary car markets.

CONSUMER FACTOR

Commodity import from Germany to Ukraine has the largest share among all EU countries (11 %). This is primarily caused by the stable traditional quality of German products. Many companies which products have long been present in the Ukrainian market have already become legendary. For example, BMW, Mercedes-Benz, Audi, Opel, Volkswagen and Porsche, manufacturers of household and industrial equipment like Bosch and Siemens, Braun, Liebherr. So, the main positions of imports from Germany belong to machines, vehicles and electrical engineering. As for the food imports to Ukraine, Germany took the second position after Poland in 2018.

Technical and industrial-technological goods from Germany are most demanded by the domestic consumer due to the high quality. Therefore, it is expected that the demand for these products in Ukraine will gradually increase in 2019. Considering the trend of past years (Chart 2), German imports will significantly outstrip Ukrainian exports and further deepen the trade deficit between countries in 2019.

ECONOMIC FACTOR

Germany’s economy is considered to be the most developed one among all EU countries. Over the past 50 years, its GDP has grown from $ 215 billion to $ 3.4 trillion dollars. At the same time, the GDP of the country has grown by more than 2 % in recent years (inflation is at the annual level of 1.5-1.7 %) while gross income per capita has amounted to $ 44000, and this tendency is
going to continue.

According to Danish Saxo Bank forecasts, there is a threat of a certain economic downturn in the country in 2019. The cause for this may be in the already mentioned automotive industry which is still not able to quickly reorient to the production of electric vehicles which is considered the future of the industry in general. According to forecasts, the sale of German cars should
increase to 100 million units in 2018, but it was only 81 million, which is only 2 % more than sales in 2017.

In this context, it is worth mentioning that many experts anticipate “the collapse of the German economy” almost every year. For example, in 2014, the expert of the Association of German Chambers of Industry and Commerce (Dihk E.V.) Volker Treier warned not only about the decline in the economy but also about the signs of stagnating the country’s economy. He named the crisis in Ukraine one of the reasons for that… Similar predictions were heard for many times before and after that forecast. So, given the strong position of other industries in the country, problems in the automotive industry won’t significantly affect the overall economic situation of Germany

The economic situation in Ukraine, on the contrary, has a tendency to a certain deterioration, as noted by the World Bank in the report on January 2019, “Prospects for the World Economy”. They predicted a decrease in GDP of Ukraine compared with 2018 from 3.5 % to 2.9 %.

So, a slight decrease in the dynamics of trade between Ukraine and Germany may be observed in 2019.

AGRARIAN FACTOR

The economic factor described above is complemented by an agrarian component which is rather interesting and significant. There is a fundamental difference between the two countries in the macroeconomic context. This difference is gaining momentum now, after the ratification of the Association Agreement on 1 September 2017, when Ukraine has started the integration with the EU.

Germany has been increasing its manufacturing potential for decades while developing its own market in a tight competition with the European economic environment. At the time of creating the European Union, Germany naturally occupied the position of one of the leading powers in that community.

Although, Ukraine has been only increasing its production potential in the XX century, and the market could not be formed under the conditions of the Soviet Union’s planned economy. What’s more, this did not contribute to the quality of products, as producers were not motivated. The collapse of the Soviet Union has led to reformatting relations between the postSoviet republics at all levels. So, Ukraine’s production potential could not survive in the new market-oriented environment due to uncompetitive products and services of poor-quality, due to the distortion of well-established logistic mechanisms of sales/supply, and due to the lack of competent managers. By the way, the last factor was one of the reasons for the bankruptcy of high-tech enterprises (mainly military ones) which could compete in the international market.

So, Ukrainian entrepreneurs are almost absent in the German market, as noted by many German expert economists. On the other hand, according to the German Embassy, there are about 250 representative offices of German companies in Ukraine, and more than 1200 joint ventures or projects with German capital (as for 2018). In addition to a large market, German companies are
attracted by sectors in which Ukraine has been holding steady positions for a long time. First and foremost, this is the agricultural sector which potential can be enriched
by large areas of high-quality agricultural land and a rather powerful scientific base of agronomic and soil science formed over centuries.

This fact is also confirmed by the positive dynamics of Ukrainian agrarian and food commodity turnover: it amounted to $ 159.4 million in the first part of 2017, and to $ 239 million in the same period of 2018 – the increase was of 66.7 %. The assortment of the Ukrainian export of agrarian products amounting to $ 88.2 million is traditional for the country – Ukraine mainly exports oil and cereal crops (Chart 3).

In general, agricultural products traditionally account for almost half (41 %) of the total volume of goods in the structure of Ukrainian exports.

Noteworthy, the agro-industrial complex takes less than 1 % of German GDP. In Ukraine it takes over 16 %, and, given the increase in processing volumes, there is a tendency for this complex to grow to 20-25 % of GDP.

The interest of German entrepreneurs in Ukrainian agrarian production is confirmed by a number of interstate projects initiated by the Federal Ministry of Agriculture of Germany, including agrarian trade, organic farming, technological support of the agricultural sector, specialized education, and the forestry reform in the long run. There are several reasons for such active participation of German businessmen in the Ukrainian agroindustrial complex. Creating a favorable market for the export of German products and services necessary for Ukrainian agrarian sector is one of those reasons. As for products and services, this refers to what is the most developed in Germany: agricultural machinery, equipment for the processing of raw materials, plant protection products, cattle selection, etc.

So, it is expected that the trade turnover with Germany in the agrarian sector will tend to increase due to the growth in demand for domestic products in 2019.

MIGRATION FACTOR

According to the draft of the migration law, the German government plans to significantly simplify the visa regime in 2020 by allowing qualified foreigners to work in Germany, even if they don’t have higher education. The country’s economy is rapidly evolving, so it requires an effective workforce, the lack of which has been a problem for the country for a long time. Germany’s economic potential is traditionally one of the highest among the leading European countries. This makes it possible to open nearly 2 million vacancies, according to the country’s leadership. In comparison with Poland, Italy and the Czech Republic, which are the main recipients of labor migrants from Ukraine, the working conditions and salaries in Germany are much better. The approximate salary level even on non-prestigious jobs will be around 1.8-2.1 thousand euros. This trend can be traced: if about 30 thousand Ukrainians were officially employed
in Germany in March 2013, more than 30 thousand were employed in 2017, and more than 40 thousand of Ukrainians worked in Germany in 2018 (+10 % compared to the previous year). In general, about 150 thousand Ukrainian citizens live in Germany (or 230 thousand according to other data); 80 thousand of them have a permanent residence permit

So, in 2019, migrant workers will probably move to Germany from Poland, Hungary, the Czech Republic, Slovakia, Bulgaria, Romania in particular. This will lead to a sharp outflow of a significant part of the labor population from Ukraine to Central Europe, especially to Germany. According to the Work Service agency (2018), about 60 % of Ukrainians currently working in Poland are going to move to Germany thanks to the liberalization of German emigration rules.

This phenomenon will have both negative and positive consequences. As for negative ones, Ukraine will lose active labor potential, which will cause a sharp shortage of highly skilled workers, engineers, IT specialists on the domestic labor market. The Ukrainian population is mainly old – a significant part of citizens is of retirement age. So, the lack of labor resources can lead to slowing down economic development in general. However, this phenomenon also has positive aspects, for example, the inflow of significant foreign funds to the country. Another
important factor is the acquisition of knowledge and skills by Ukrainian citizens working in Germany. That’s why after returning home, this category of people (approximately hundreds of thousands) will be able to use the best practices acquired abroad to start their own businesses and to work for enterprises in Ukraine based on German technologies and German equipment. However, this depends on whether the Ukrainian authorities will be able to encourage these citizens to return home or create attractive conditions for their decent employment.

BUSINESS IN GERMANY

There is another important factor which also has the potential for the Ukrainian economy – opening own businesses in Germany by Ukrainian citizens. This perspective mainly concerns people who have already successfully worked as labor migrants in Germany and are familiar with the peculiarities of the country, who are impressed by German punctualities, the culture of production and the responsible attitude to entrepreneurship. So, while planning your business in Germany, keep in mind the following things:

1. The local government of Germany does not require bribes like their “colleagues” from Ukraine do. On the contrary, it helps future entrepreneurs adapt in new legal and economic conditions in all possible ways.
2. The most optimal option is to establish a limited liability company (LLC). In this case, both person or entity can start a business, even if a person doesn’t have German citizenship.
3. To establish a joint-stock company, it is necessary to have a charter capital of 50000 euros or more, 25 % of which must be paid at the registration stage.
4. You can also purchase an already existing business in Germany – a company with employees, equipment and its existing customers. The purchase procedure is quite simple.
5. Selling real estate is considered to be one of the most profitable business. However, other activities can also bring stable income, for example, homes for elderly people – the state provides such facilities with privileges and subsidies.
6. Stores (food, clothing, household chemicals) and catering facilities can be successful as well. Though, you should keep in mind that expensive restaurants and bars are becoming less popular: the Germans tend to eat something inexpensive and delicious.
7. Enterprises, which activities are aimed at preserving the environment – production of solar panels, the development of know-how in this direction – are especially popular.
8. Significant advantages in export-import activities may be given to enterprises founded by Ukrainian citizens who have been working in Germany for a certain time already. On the one hand, they already know consumers’ interests, on the other hand, they are well-informed about the availability of exportattractive products in Ukraine and are also familiar with the right people, therefore, they can establish mutually beneficial exports to Germany.
9. Surely, Ukraine is not competitive in the sphere of production of high-tech products. For example, we can’t supply Ukrainian automotive, industrial, electronic products or home appliances to Germany. Nevertheless, Ukraine has a rather strong scientific potential in high technologies, for example, in the IT sector. This potential can be realized in economic cooperation. Scientific and technological cooperation between the two countries has increased in almost all areas of fundamental research over the past years. First of all, countries cooperate in: materials sciences on new materials and their production; physical and chemical technologies; nano- and biotechnology; information and communication technologies; efficient use of resources and energy; sustainable environmental technologies, and so on. These areas determine the technological future of mankind as a whole and have a huge capital intensity. Among the German partners, there are research laboratories of universities, research institutions of The Helmholtz Validation Fund, The Max Planck Society which promote the development of sciences, The Fraunhofer Society, The Leibniz Association, etc. The German-Ukrainian Scientific Community (Die Deutsch-Ukrainische Akademische Gesellschaft e.V.) was founded on the initiative of Ukrainian scholars residing in Germany. Almost all projects and programs initiated under this cooperation are supervised by relevant ministries and scientific state institutions of Ukraine. Thus, the
   entrepreneurial sector is almost not involved.
10. It is necessary to highlight one of the most important components in starting a successful business in Ukraine. German institutions which are actively searching and cooperating with Ukrainian scholars are mentioned above. However, the funding of research projects by such institutions is minimal (around several thousands of euros), and the cooperation ends once the project ends. What’s more, the research results do not belong to the Ukrainian side – the organization has the ownership of all projects financed by it. Moreover, state institutions between the Ukrainian academic executor and the German customer organization create bureaucratic obstacles and “take away” a considerable share of the project’s funds.

As there is enormous scientific potential and appropriate material base in our country. First of all, we have an extensive network of research institutes in the structure of the National Academy of Sciences of Ukraine (more than 100 institutes and scientific centers of natural science). Funding science in the country steadily falls. Research organizations do not actually get state orders. On the one hand, many already completed developments and pieces of research stay unclaimed, and on the other hand, promising research is suspended due to the lack of funding. We talk about areas like biotechnology, semiconductor materials, energy technology, nanomaterials, ultrasonic laser technology, software, and so on…

Scientific institutions have considerable potential and no customers for their development. A Ukrainian investor could be this customer. They could master the chain: “a scientific idea / development — product / technology — customer / market of Germany”. So, we could offer a competitive result of this work with a high added value to German partners.

So, investing in the development of technologies and the establishment of high-tech industries, involving both individual specialists and research institutions and centers of Ukraine, would be one of the most promising areas for implementing in German markets for Ukrainian entrepreneurs in the future.

Entering the German market opens up the prospect of establishing of Ukrainian companies in all EU markets. This primarily happens due to the authority of the German production economy and high demands to its subjects. If a company successfully operates in this country, it meets the highest requirements for technologies, the quality of products or services, the decency of its management and punctuality in its relations with partners.