International Economic Conditions in Ukraine

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Table of Contents

Introduction
Ukraine and the International Trade
Economic Conditions that affect Ukrainian International Trade
Conclusion
Works Cited

Introduction

Ukraine is the largest country in Europe in terms of land mass. The country borders Belarus on the northwestern side, Russia from its eastern and northeastern side, and Black Sea from its southwestern side. Ukraine also borders Poland, Hungary, and Slovakia. It continues to enjoy the second largest military body among all European nations.

The country has a population of about 45.4 million people. Most of the Ukrainian Christians are members of the Eastern Orthodoxy. Ukraine has a market economy that formed immediately after the planned economy of the former Soviet Union.

However, after the collapse of the Soviet Union, the economy of Ukraine began experiencing a major slump. Ukraine’s population also gradually became poor. In the efforts to curb this situation, the government successfully liberalized trade in 1991.

The government also subsidized most of the public industries and the agricultural sector in the country. However, high rates of inflation grew speedily in 1990s to a hyperinflation. For example, Ukraine had the highest rate of inflation in the world within a period of one year.

In 2008, the economy suffered the great economic crisis effects. As the paper reveals, the country is currently facing various international economic conditions.

Ukraine and the International Trade

Many countries have expanded their businesses to the global levels as a way of boosting their productivity. Ukraine is not an exception. As Dabrowski and Taran confirm, the country has been a major player, especially in the European Union (2). The major international trade partner to Ukraine is Russia.

Other trade partners include Turkey, Italy, Germany, China, Poland, USA, France, and Turkmenistan among others. Ukraine is both an exporter and an importer of various goods to and from other countries.

The major exports from Ukraine include iron and steel, mineral fuels, oil, gasoline, nuclear reactors, machinery, cereals, tools, and base metals. Ukraine also imports goods from various nations in the world.

Such commodities include mineral fuels and crude petroleum, nuclear reactors, vehicles, electronics, paper and paperboard, and articles of pulp (Hoekman, Jensen, and Tarr 796). For several years before the onset of economic and political crisis, the economy of Ukraine was rated one of the best in Europe.

The country has relied on imports to sustain its economy. Several factors come into play to necessitate the country’s imports. To begin with, Ukraine’s internal energy sources can only cater for 15% of its yearly energy needs (Dabrowski and Taran 6).

This finding implies that Ukraine has to import energy sources, including oil, nuclear reactors, and electricity. Secondly, the forest cover in Ukraine is small and inadequate for its timber and wood product needs. Hence, for it to sustain its pulp, timber, and paper-dependent industries, it has to import wood products.

Thirdly, Ukraine does not have the absolute advantage of manufacturing cars as the situation is witnessed in Germany and Japan. Therefore, it is economical for it to import cars from various nations of the world.

Deploying the Heckscher-Ohlin model, a nation that is abundant in the production of a particular factor has the advantage of exporting the item it produces extensively. The model also affirms that a country will export goods that it produces intensively through resources that it is endowed with.

This theory explains the iron, steel, grains, and grain products that Ukraine exports. Hoekman, Jensen, and Tarr assert that Ukraine has abundant fertile farmland that it uses for the production of grains for local markets and export (796). On the other hand, the demand for energy and energy products outdo the country’s local production.

Bilateral trade between Ukraine and Russia can be seen from the specific factor model. Although, Russia has played a major role in positioning and projecting the economy of Ukraine, Russia’s gains are incomparable to the losses that Ukraine encounters (Dabrowski and Taran 4).

According to the specific factor model, the international trade has the ability to change income distribution in countries. The result is the witnessed unleveled gains and losses by some people.

For instance, the Russian economy is currently slumping due to the political crisis and demonstrations in Ukraine concerning Russian annexation of the Ukrainian land. Trade agreements that were signed by the two countries in the view of streamlining the economy of Ukraine have not taken off.

Ukraine import cars and electronics from Russia since it has an absolute advantage over such products (Hoekman, Jensen, and Tarr 796). Export of grains, iron, and steel to Russia does not compensate the gap.

In fact, the population of Ukraine demonstrates regularly to press the government to cut its ties with Russia over the annexed land and political interference.

Economic Conditions that affect Ukrainian International Trade

Government Policies on International Trade

The Ukrainian government has enacted protectionist policies to gain its international trade. For instance, the Ukrainian government has put tariffs on automobile imports (Hoekman, Jensen, and Tarr 798).

Although this move vehemently affects international trade with various countries such as Germany, Japan, and Russia, Ukraine has gained some milestones from it with reference to the Heckscher-Ohlin Model. For instance, these laws have benefitted the local business, but not the international business.

Automobile tariffs make it prohibitive for Ukrainian importers and exporters to bring automobiles for sale.

Such countries may opt to export their automobiles to other parts of the world consistent with the specific factor model of international trade where trade between one nation and the other may affect the partners in a way that one partner gains while the other loses.

In this case, Ukraine has gained by imposing high trade tariffs on automobile imports. As a result, its automobile manufacturing industry has grown to the extent that the country can now export its household automobiles.

In addition, owners and employees of Ukrainian automobile industries have benefitted from the protection policies that the government has imposed on automobile imports (Hoekman, Jensen, and Tarr 798). The growth of the automobile industry implies more employment opportunities and technological advancement in the country.

Moreover, the other consequence of automobile import tariff is that prices of Ukrainian automobiles such as cars have gone up very much. Cars are very expensive in Ukraine. Competition for car manufacturing is just within where few international motor dealers can penetrate the automobile markets in Ukraine.

Therefore, exporting automobiles such as cars, airplanes, motorbikes, and other vehicles to Ukraine is a venture that the country’s international trade partners reject. With the imposition of steel tariffs by the World Trade Organization (WTO), prices went up for steel and steel products in the US where Ukraine imports its items.

Since steel is used in the manufacturing industry, its rise in price is likely to affect exports from the manufacturing industry (Kostenko 56). Therefore, international trade policies are likely to affect the global business relationship between Ukraine and its partners.

The implication is that the protectionist policies benefit the country that imposes them, as opposed to the situation with the specific model theory.

Non-membership of Ukraine in the World Trade Organization

According to Kyzym et al., although there has been an outcry in Ukraine for the country to join the WTO, it has not yet become a member (7). Lack of membership to the WTO makes the trade relationship between them strained. Ukraine is likely to face limitations when trading with the WTO members.

Most of the trading partners of Ukraine are members of WTO, apart from Russia. However, its major trade partner (Russia) is on the verge of registering its membership in WTO (Kostenko 54). Therefore, Ukraine is likely to face protectionist rules in its trade with members of the WTO as a nonmember.

Ukraine is not protected from the abuse of patent or trade disputes in the international markets. Therefore, whenever there is a trade dispute concerning quotas, protectionism, and duties between Ukraine and its partners, the situation remains at the partners’ mercies.

Most of the trading partners such as China are also cautious of lack of surety that Ukraine puts on the table in trade relations. Membership in the WTO provides some confidence to traders in the international market (Kyzym et al. 8). The WTO rules bind all members.

Hence, as a non-member, Ukraine cannot be bound by the rules and regulations of WTO whenever it contravenes them. Lack of membership to the WTO has negatively affected Ukraine’s imports and export processes. For example, there were embargoes on Ukraine grains in 2006 and 2007.

This case contradicted the WTO regulations on exports. However, since Ukraine was a non-member, nothing could have been done.

Trade Embargoes

The impact of the 2006-2007 trade embargoes on Ukraine grains still affects its international trade (Kyzym et al. 22). According to the WTO, trade embargoes can only be applied when an exporter is suffering from a serious shortage of the commodity.

However, no serious shortage of grains was witnessed in Ukraine during the period when it embargoed its grains. As a result, most of the exporters of grains from Ukraine suffered great losses and cancelation of international contracts. In addition, a general imbalance of grain products was witnessed in the international market.

Traders also suffered losses from the depreciation of grain prices locally. Moreover, the country’s farmers also suffered a lack of the market share since it was oversupplied to the tune of $200million (Dabrowski and Taran 3).

Today, grain exporters fear buying grains for exports from Ukraine, unless the prices are discounted to cater for the appreciation in the international market. The government must also provide a room for the high risk that grain traders pose to Ukraine.

Export Taxes and Prohibitive Energy Cost

Export taxes on some commodities such as scrap metal, skins, sheep and goats, and sunflower in Ukraine are prohibitive (Kyzym et al. 8). These taxes negatively affect Ukraine’s poor citizens who rear sheep and goats, grow sunflower, and/or buy scrap metals. On the other hand, rich citizens who are involved in this trade gain highly.

This observation reflects the specific factor theory where the international trade affects the participants differently. Hence, the affluent class grows wealthier while the underprivileged one continues to be deprived while still trading.

For instance, sunflower farmers in Ukraine are forced to pay a 16% tax on their sunflower overseas sales as export tax (Kyzym et al. 23). As an implication, the farmers opt to smuggle their sunflower to other parts of the world, thus resulting in uncontrolled domestic prices.

In line with Heckscher-Ohlin model, export taxes benefit the rich people and not the poor ones. They also prohibit the commitment of the international investors.

The energy sector in Ukraine is prohibitive for foreign investors (Dabrowski and Taran p.3). Laws and policies on energy in Ukraine are also limiting for foreigners to operate. For instance, foreign companies that are interested in oil exploration in Ukraine are required to bid and complete their tasks within a period of not more than five years.

Such policies prohibit the entry of international explorers of the Ukraine market. Another crippling factor in the energy sector is that the government does not offer any information concerning energy resources (Hoekman, Jensen, and Tarr 812). The contract winner is supposed to collect data and explore the resource within the limited period.

This situation has affected the gas industry. Hence, Ukraine continues to import gas. Energy regulations in Ukraine also make it difficult for foreign investors to run their industries.

Prohibitive Laws and Regulations on Investment

Laws that guide the business environment in Ukraine make it difficult for foreign direct investment to succeed. Foreign investors face difficult processes in terms of registering businesses and running them in Ukraine (Kyzym et al. 7).

For instance, the law requires businesses that are owned by foreigners to be regularly inspected and satisfied for health and human resource safety. This rule has become an avenue for corruption through bribery where investors bribe government inspectors to avoid prosecution and withdrawal of permits.

Laws on business regulations in Ukraine do not come from a specific arm of the government (Kostenko 54). For example, the president, ministers, and individuals who are in charge of the department can enact them. This flexibility makes it difficult for foreign investors to carry out their business operations smoothly.

Dabrowski and Taran say that obtaining the right of ownership in joint companies is difficult in Ukraine (4). A deficiency in laws that regulate shareholding in joint stock companies opens up the economic environment to corruption. This gap has negatively affected the stock markets in Ukraine.

As a result, major firms in Ukraine have turned into investing in foreign markets, for instance, in the United Kingdom and China. Foreign and international companies avoid investing in Ukraine since no clear laws on joint stock companies have been established (Dabrowski and Taran 4).

This situation contradicts the specific model theory since both the national economy and the international investors do not benefit from poor joint stock laws in Ukraine.

Conclusion

Ukraine is one of the major economic hubs in Europe. Since its independence in 1991, the country has experienced both vicissitudes in its international economic endeavors. As discussed above, various conditions influence Ukraine’s international economic environment.

Such conditions include government policies on international trade, protectionist policies, non-membership of Ukraine in the World Trade Organization, and trade embargoes.

Besides, export taxes, prohibitive energy cost, prohibitive laws and regulations on investment, laws on business environment, inconsistency in commercial laws, and deficient laws on joint stock companies are part of the conditions that influence Ukraine’s global business operations.

Works Cited

Dabrowski, Marek, and Svitlana Taran. “Is Free Trade with the EU Good for Ukraine?” CASE Network E-briefs 1.6(2012): 1-4. Print.

Hoekman, Bernard, Jesper Jensen, and David Tarr. “A Vision for Ukraine in the World Economy.” Journal of World Trade 48.4(2014): 795-814. Print.

Kostenko, Nataliya. “Geo-Economic Strategy of the European Union: Experience for Ukraine.” Economics & Business 25.1(2014): 54-60. Print.

Kyzym, Onesmus, Vera Yaroshenko, Yasmin Matyushenko, Bahma Semyhulina, and Malik Makhansova. “Opportunities and Threats of Ukraine WTO Membership to the Production and Foreign Trade of Grain Crops with the EU and Customs Union and EurAsEC.” Problems of Economy 1.2(2014), 7-24. Print.

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