BUILDING BILATERAL BUSINESS BRIDGES

POLAND IN UKRAINE: Ukrainian businesses yet to make most of Polish partnership potential

Poland-Ukraine economic ties are robust but huge scope remains for greater bilateral trade and investment

Bartosz Musialowicz and Slawomir Matuszak
Saturday, 05 November 2016 18:32

Over the past quarter of a century, Polish-Ukrainian economic relations have evolved to make Poland Ukraine’s most important EU trading partner and a major investor. Meanwhile, in recent years a new trend has emerged that has seen an unprecedented influx of Ukrainian workers into Poland. Despite the ever-strengthening nature of current bilateral economic ties, there remains huge scope for further improvements – particularly in the sphere of large infrastructure projects.

 

Challenging beginnings

Poland was the first country in the world to recognize Ukrainian independence. The establishment of political relations enabled the development of economic cooperation, although in the beginning the relationship was not marked by excessive optimism. In 1992, Polish-Ukrainian trade stood at USD 285.4 million. This figure grew rapidly, exceeding USD 1 billion by 1995. During the 1990s, the biggest obstacle to economic cooperation was the lack of synergies between the Polish and Ukrainian economies, with an absence of strategic goods. Instead, the focus was on SMEs, which emerged as the driving force of bilateral economic cooperation. Polish companies seeking to expand in Ukraine faced a number of all-too-familiar obstacles including legal instability, excessive bureaucracy and corruption. The 1998 financial crisis in nearby Russia led to a collapse in bilateral turnover, leaving trade at the turn of the millennium stuck at the levels of the mid-1990s.

 

Poland’s added EU appeal

Growth has returned since 2000, thanks in large part to Polish economic modernization, Poland’s economic integration into the EU, and the increasing attractiveness of Polish exports to Ukraine. Bilateral trade topped USD 2 billion in 2003 and peaked at nearly USD 8.8 billion in 2008. The global credit crunch slashed that figure virtually in half, but a return to dynamic growth saw the total climb back to almost USD 8 billion by 2013. The turmoil in Ukraine over the past three years has inevitably resulted in fresh setbacks, leading to a trade decline of around 20-30% per year. There has been a clear slowdown in this downward trend since the start of 2016, producing an increase of 13% in turnover over the first half of the year. This can be attributed to Ukraine’s tentative economic recovery and the entry into force of the country’s free trade agreement (DCFTA) with the EU. In terms of EU trade, Poland’s importance for the Ukrainian economy can hardly be overstated. Poland is the largest single recipient of Ukrainian exports to the EU and the number two EU importer to Ukraine. Poland’s strategic importance makes it a key partner in Ukraine’s pivot towards European markets. In 2010, a quarter of Ukrainian exports went to EU markets. Following the full implementation of the DCFTA, this figure rose in Q1 2016 to 41.4%.

 

Investing in Ukraine

The post-1991 era has also witnessed the intensive development of capital investment. From the very beginning, Ukraine aroused strong interest among Polish small and medium-sized businesses. By 1994, there were already approximately 700 Polish companies working in Ukraine, with investment commitments amounting to nearly USD 12 million. This figure grew to USD 60 million by 2000. The real breakthrough came along with Polish integration into the European Union. In 2005, Polish investments in Ukraine were close to USD 225 million. Over the next five years this growth continued, reaching a high of nearly USD 936 million in 2010. This figure has fallen in recent years in a steady but undramatic manner in response to the armed conflict and accompanying economic crisis in Ukraine. Poland currently ranks eleventh among Ukraine’s largest foreign investors. Poland is also unique in terms of the number of companies operating in Ukraine. Official Ukrainian figures identify more than 2,900 businesses entities with Polish capital registered in the country, 2200-2500 of which are operational.

The largest share in Polish direct investment in Ukraine (45.3%) focuses on the finance and insurance sectors. Despite the challenging conditions in Ukraine’s banking industry, major Polish investors are doing extremely well. Key investors include Kredobank and Getin Holding’s Idea Bank. In the latest ranking compiled by the Ukrainian edition of Forbes magazine, Kredobank took first place for profitability among Ukrainian banks for the second consecutive year. Meanwhile, in the insurance industry, Insurance TOP ranked Poland’s PZU Ukraine among the top ten leaders of the Ukrainian insurance market in several categories.

The next biggest focus of Polish investments is industry and the manufacturing (33.4%). Key companies include Barlinek (production of wooden floors), Cersanit (ceramics), Sanitec-Kolo (sanitary fittings), Can-Pack (packaging), Maspex- Wadowice (juice producer), Sobieski Group (alcohol), TZMO (hygiene products), Inter-Groclin (manufacturer of automobile equipment and accessories), and furniture companies BRW and Nowy Styl. Polish investments in wholesale and retail trade, as well as in vehicle repair, make up approximately 10.2% of total Polish investments in Ukraine, while the service sector accounts for 11.1%.

Ukrainian investment in Poland had reached USD 50 million by 2016, with the manufacturing sector attracting 20% of this total. Since 2015, there has been rising interest among SMEs - especially within the IT sector - towards relocation to Poland due to the prospect of economic stability and lower administrate-fiscal charges.

Cooperation is also developing in the fields of capital market finance and banking. Twelve Ukrainian companies have listed on the Warsaw Stock Exchange, although the recent crisis has caused the suspension of previously planned IPOs by Ukrainian companies.

 

Labour flows

The presence of a large Ukrainian workforce in Poland has long been an important element of broader bilateral relations, and this community has grown significantly in recent years. Whereas the Ukrainian presence on the Polish labour market had traditionally come largely from the western regions, today Ukrainians from across the country are seeking employment opportunities in Poland. Statistics from recent years reflect the scale and dynamics of this growth, while testifying to the attractiveness of the Polish labour market for Ukrainians hit by domestic economic hardships. In 2008, the number of declarations of intention to employ Ukrainian citizens registered with district labour offices was below 143,000. In 2015, this figure rose to 760,000. More than 600,000 declarations were registered in the first six months of 2016. Based on current trends, the number of Ukrainians working in Poland is set to exceed one million by the end of this year. This phenomenon is not well known elsewhere in Europe, but the scale of the Ukrainian influx into Poland is worthy of greater attention at a time when the EU as a whole is struggling to cope with migrant flows from Syria and the wider Middle East. The growth of the Ukrainian community in Poland is essentially a success story. The rapidly expanding number of Ukrainians has not led to any serious internal social issues or problems in bilateral relations with Ukraine. On the contrary, Polish employers have been appreciative of the role played by Ukrainian staff and regularly indicate the need for further simplifications that would allow them to gain legal employment in Poland.

 

Future prospects

Any analysis of the past 25 years of the Polish-Ukrainian economic relationship will inevitably lead to the conclusion that far greater cooperation is possible. Taking into account the fact that the two countries are neighbours, and considering the sheer size of both domestic markets, the current bilateral turnover of around USD 5 billion can hardly be regarded as satisfactory. The same is true for investments. While Polish entrepreneurs have made a significant capital commitment to Ukraine, the level of investment could clearly be far higher when compared to the Polish presence in other regional markets. 

A number of objective reasons have restricted the growth of Polish-Ukrainian economic cooperation, including numerous financial crises and the ongoing military conflict in eastern Ukraine. However, there is no avoiding the fact that the greatest single obstacle to better results remains the unfavourable business climate in Ukraine. Since the changes of 2014, the Ukrainian authorities have implemented a number of measures aiming to address these issues, such as the reform of the public procurement system. Nevertheless, much work still needs to be done in order to improve the Ukrainian investment climate. Polish entrepreneurs continue to report serious problems when trying to manage their Ukrainian businesses. Key issues include extensive bureaucracy and corruption, the instability of the legislative framework, and the weakness of the Ukrainian justice system. We hope the continuing implementation of the trade component of the EU-Ukraine Association Agreement will serve as a catalyst for further positive changes in Ukraine, stimulating an acceleration of the reform process. Legal harmonization with EU norms will help to reduce corruption and improve the functioning of the Ukrainian legal system, leading to the development of a better business climate. The adoption of EU standards by Ukraine should also help eliminate a significant portion of the existing barriers to expanding bilateral trade cooperation.

Despite these challenges, the great potential for the further development of Polish-Ukrainian economic relations remains obvious. This is especially true in terms of large investment and infrastructure projects in the energy sector. Major infrastructure projects of this kind could serve as successful business ventures in their own right, while also providing additional stimulus for the strengthening of strategic cooperation between two countries with common geopolitical interests and shared security concerns. As bilateral economic ties develop over the coming quarter of a century, this strategic component could become an increasingly important dimension of the relationship.

 

About the authors: Bartosz Musialowicz is Head of the Trade and Investment Promotion Section at the Embassy of the Republic of Poland in Ukraine. Slawomir Matuszak is Head of the Economic Section at the Embassy of the Republic of Poland in Ukraine.

 

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