They say that necessity is the mother of invention, and this has proved particularly true for the recent international expansion of Ukraine’s booming agribusiness sector. The geopolitical necessities of the past four years have forced Ukrainian agribusinesses to look beyond the comfort zone of Russian export markets, fueling a drive towards greater global reach that looks set to pick up pace in 2018.
Asian and African Expansion
Larysa Bondarieva, Member of the Board at Credit Agricole Bank in Ukraine responsible for Corporate Business, SME and agri-agro, says Ukrainian agribusiness exports to markets in Africa and Asia have demonstrated the most attractive growth dynamics since 2014. She says that while media coverage focuses mostly on the export potential created by the free trade dimension of Ukraine’s Association Agreement with the European Union, African and Asian markets are becoming more enticing for Ukrainian agricultural exporters. This is driving efforts to establish a local presence in these key markets, with Ukrainian agribusiness leaders increasingly ready to invest in on-the-ground representations that will help to strengthen their position. “Naturally European markets are strategically interesting to Ukrainian agricultural exporters because they are logistically close and convenient. At the same time, the EU market is still not easy to enter with quotas remaining in place,” she says.
In contrast, markets in Asia and Africa offer more easily navigable terms of entry while also representing long-term appeal thanks to fast-growing populations and challenging ecological conditions that make it difficult for domestic agricultural sectors to meet internal market demand. “The main export focuses at present for Ukrainian agricultural exporters are North Africa, the Middle East and Asian markets,” Ms. Bondarieva says. “More and more Ukrainian agricultural holdings are now establishing trade hubs in countries like Egypt, Saudi Arabia, the United Arab Emirates, and China. This is an increasingly noticeable trend among Ukraine’s most significant agribusiness market participants. They are generally looking to establish a physical presence in order to develop local networks of contacts and to conduct negotiations while also carrying out market analysis and promotional work. This requires significant investment. So far, we are talking about pioneers leading what is the first wave of Ukrainian trade hubs in these regions. However, I expect the trend to strengthen in 2018, becoming more structured and more organized.”
As the geographical scope of Ukraine’s agricultural exports continues to expand, Ms. Bondarieva anticipates further investment in the kind of domestic infrastructure required to get Ukrainian crops to international markets more efficiently. She points to major recent international investments into Ukraine’s Black Sea ports and the country’s major breadbasket gateway city, Mykolaiv, and says 2018 will likely see further development of Ukraine’s river and seaport facilities.
Ukraine’s waterways will be a particular focus in the coming year as agricultural investors look to take advantage of the country’s currently underutilized but excellent river network. “The Dnipro River will definitely play a bigger role moving forward. It offers direct competition to road and rail options while enjoying considerable cost advantages. Road vehicles can be expensive to maintain, while during peak harvesting periods we regularly see that there are often not enough railway wagons to meet seasonal demand. Meanwhile, the Dnipro River has considerable untapped potential that the industry is not utilizing. Inevitably, this will become more of a focus for agricultural exporters.”
Ms. Bondarieva envisages a gradual expansion of the Dnipro River’s role as river port facilities undergo upgrades further and further inland. She likens it to a creeping process that began along Ukraine’s southern Black Sea coastline and is now steadily working its way northwards along the country’s main waterways. “Larger river fleets and the development of barge transportation are a genuine long-term alternative to traditional land routes.”
SMEs Gaining Confidence
Beyond the ports themselves, large-scale agricultural infrastructure investment in 2018 will focus on key features like elevators, drying facilities and storage facilities. Meanwhile, at the Small and Medium-Sized Enterprise (SME) level, Ms. Bondarieva expects to see the recent trend towards greater investment in agricultural equipment including combine harvesters and tractors continue. Strategic investments in equipment upgrades by small and medium-sized agricultural holdings largely froze following the crash of 2014-15, but over the past twelve months, there has been a noticeable return to this type of investment as agricultural SMEs begin to look beyond the short-term financial necessities of the current planting season and plan for the future. “Ukraine’s SME farmers tend to be quite conservative in nature and memories of 2014 remain all-too-vivid, so there has been a marked reluctance to take on any nonessential financial obligations. However, there are signs of a change in mood among SMEs. Every second request we receive is now for long-term financing, not just to cover seasonal expenses. SMEs in the agriculture sector appear to be realizing that it will take them a very long time to develop if they rely solely on their own financial resources.”
Brain Drain Challenges
With domestic and international investment into the agricultural sector likely to remain relatively high in 2018, the greatest challenge facing Ukrainian agribusinesses may well be the loss of skilled employees to neighboring EU nations. This has long been a factor in western Ukraine’s EU borderlands, but it is becoming increasingly noticeable across the country, creating shortages and forcing employers to increase salaries in order to remain competitive. “This is now an issue for the whole of Ukraine, including regions far from the EU border,” says Ms. Bondarieva. “I am hearing similar complaints from agribusinesses in places like Sumy Oblast and Zaporizhia Oblast who are observing an outflow of qualified specialists to Poland, Hungary and Slovakia. More and more recruiters from these countries are active in Ukraine, seeking to secure qualified workforces.”
She says the appeal is obvious on both sides of the equation: Ukrainians are attracted by significantly higher salaries that allow them to earn the equivalent of their annual salary via a few months of seasonal work. Meanwhile, the recipient countries are able to replenish their own westward migrating workforces with Ukrainians whose cultural, religious and historic closeness helps them to assimilate and largely removes the threat of social tensions that often accompanies waves of economic migration. Ms. Bondarieva expects this trend to remain prominent in 2018, with indications already evident that it is expanding from short-term seasonal work towards longer-term migration. “Many of the countries seeking to recruit skilled Ukrainian agricultural workers are now putting infrastructure in place to allow Ukrainians to settle for longer periods. They are offering school places for children, family accommodation, and other social support.”
This increasingly competitive recruitment environment is creating HR headaches for Ukrainian agricultural concerns that have forced them to increase the salaries they offer in order to avoid losing key personnel. As agribusiness employers look to recoup this loss to their margins, many will seek to embrace the industry’s growing enthusiasm for efficiency-enhancing IT solutions. Ukraine’s agriculture and IT sectors have been the two big success stories of the past four years, leading the country’s economic recovery while highlighting the huge “Brains and Grains” potential Ukraine has to offer. In recent years, there has been a marked effort by Ukraine’s agribusinesses to tap into the country’s IT talent pool in order to boost modernization and efficiency efforts.
This process has become a two-way street, with a growing number of Ukrainian IT companies also looking to focus on the kind of products that the agribusiness sector requires. Ms. Bondarieva says that in 2018 we are likely to see more agribusinesses expanding their own in-house IT capabilities as the importance of this segment continues to grow. “Many Ukrainian agribusinesses, especially the larger holdings, are now hiring IT specialists straight from university in order to develop special programs from scratch that meet the specific needs of the company. They tend to prefer this approach rather than opting for off the peg IT packages. Outsourcing IT tasks is still a relatively popular option, but the trend is now increasingly towards in-house solutions. This increases efficiency and also has the potential to reduce staffing requirements.”