When Yuri Davydov needed investors to expand his Ukrainian food company, he looked west to the European Union, not east to Russia, even though his VAT Creativ Industrial Group is in the Russian-speaking part of the country.
“We have good connections with Russia, but we prefer to trade with non-Russian companies,” Davydov said after a Jan. 19 presentation to potential investors in Vienna. “If the European Union removes barriers, we can find a niche.”
His attitude may explain why both contenders in the Feb. 7 runoff presidential election, Viktor Yanukovych and Yulia Timoshenko, have vowed to sign a trade accord with the EU. They favor it even though Yanukovych had Russian backing for his first run in 2004 and Timoshenko accused President Viktor Yushchenko of being too confrontational toward Russia.
The EU is looking more attractive to executives from Ukraine’s eastern industrial centers of Donetsk and Dnipropetrovsk, as well as in Kiev and Lviv farther west. The need to diversify from Russia, Ukraine’s largest single trading partner, has business leaders pushing politicians for easier access to the 27-nation EU. Its market of 449 million people is more than triple the population of Russia.
Opposition leader Yanukovych, 59, topped 18 candidates in the Jan. 17 first-round election with 35 percent support. Prime Minister Timoshenko, 49, took 25 percent, while Yushchenko was eliminated after garnering 5.5 percent. Polling less than two weeks before the vote is prohibited.
Both finalists say they will repair relations with Russia that deteriorated under Yushchenko, and they question entry into the North Atlantic Treaty Organization. Both plan to work with the International Monetary Fund to unblock $5.8 billion in loan funds that were frozen in November when the parliament failed to adopt a budget or cut spending.
Timoshenko says she wants to abolish the value-added tax, while Yanukovych would cut that tax rate to 17 percent from 20 percent and cut the corporate tax rate to 19 percent in 2011 from 25 percent now.
Both also promise to sign a trade deal this year with the EU. The accord is part of a pledge made by Yushchenko, a former central bank governor, after the 2004 Orange Revolution.
Yanukovych’s presidential bid that year, against Yushchenko, was supported by then-Russian President Vladimir Putin and outgoing Ukrainian President Leonid Kuchma. Kuchma courted Russia and picked Yanukovych, his prime minister at the time, as the candidate to succeed him.
Talks over the EU trade accord have been stalled for more than a year. European Commission President Jose Barroso said on Dec. 4 that Ukraine has only “partly met” its promises to change laws needed for closer EU ties. The next discussions are set for early March in Brussels.
Ukraine needs more trade: Gross domestic product probably shrank 15 percent in 2009, Yushchenko’s office estimates, as the global financial crisis cut demand for Ukraine’s products, dried up investments and weakened the currency. Exports make up more than 40 percent of GDP.
The accord is intended to ease trade in all goods and services, including energy, and to eliminate a range of tariffs on both sides. The plan would also provide a blueprint for making Ukraine’s regulations on competition, public procurement and customs more transparent, according to the EU’s Web site.
“For Ukraine, it is very important to have a European perspective,” Yanukovych said in an interview on Jan. 21 while campaigning near the Black Sea. “The most important thing is to create a real mechanism for real integration into the EU.”
Timoshenko and Yanukovych were both invited by Ukrainian billionaire Viktor Pinchuk, Kuchma’s son-in-law and a 2004 supporter of Yanukovych, to address investors at a luncheon at the World Economic Forum in Davos via satellite on Jan. 29.
The two also attended the opening of a soccer stadium in Donetsk financed by Rinat Akhmetov, Ukraine’s richest man. Grammy-winning singer Beyonce performed at the August event.
A political leader who wants to support business needs to promote easing trade restrictions to the west, said Jathan Tucker, head of trading at BG Capital investment bank in Kiev.
“Most business leaders lean towards a free trade agreement with the EU,” Tucker said an interview. “It would open up a new market for exports that they could take advantage of.”
The EU restricts the import of agricultural products that don’t meet EU norms, as well as limiting such manufactured goods as steel pipes and imposing tariffs on chemicals and drugs.
Exports to Russia
Exports to the 11-nation Commonwealth of Independent States, which includes Russia, Belarus and Kazakhstan, accounted for 34 percent of Ukraine’s $35.6 billion in international shipments in the first 11 months of last year. Exports to Russia alone totaled 21 percent.
Exports to the EU, including steel, food and chemicals, were 24 percent of the total, the government said Jan. 13.
“Ukraine needs to win western market share, we need to export more,” said Mykola Tolmachov, chief executive officer of TMM Real Estate Development Plc, Ukraine’s largest property developer, in Kiev. “We believe our investors are not in Russia.”
TMM is among Ukrainian companies that have raised money by selling shares in the EU, including in Frankfurt, London and Warsaw, the largest bourse in the EU’s eastern states, rather than in Russia.
Kharkiv-based Sintal Agriculture Plc, which grows grains, raised $13 million in October on the Frankfurt Stock Exchange through a private placement of a 17.2 percent equity stake.
Creativ offered shares on the Frankfurt Stock Exchange in 2007. After falling 75 percent from October 2007 to April 2009, the stock has soared 135 percent since then.
Davydov is CEO of the company, based in Kirovograd, a Russian-speaking city 299 kilometers (185 miles) southeast of Kiev. He was at the Vienna Euromoney magazine conference seeking as much as $50 million to expand and improve production of his cooking-oil products.
His EU market is limited to Italy and Spain because meeting EU standards reduces the products the company can ship there.
“Ukraine has a great possibility to export” to the EU, he said. “Standards are very high and only a small quantity of Ukrainian enterprises are certified.”