Zsuzsa Ludvig Hungarian-Ukrainian economic relations While due to the poor availability of statistics on regional or county level it is rather difficult to analyse direct economic links between bordering Ukrainian and Hungarian counties (oblasts) characteristics of general Ukrainian-Hungarian economic trade and investment - links based on national statistics are the following. Despite the facts that Hungary has one of the most open economies in Central-East -Europe, and Ukraine is a neighbouring country of her, direct economic relations are far from being ambitious. Beside Hungarian reorientation and integration efforts towards West-Europe the main reasons for sluggish trade turnover and low level of mutual investments lies in the poor economic performance of Ukraine, lack of clear legislation, Hungarian fears of Ukrainian corruption, high level of risks and other well-known phenomena. Anyhow it must be emphasised that there exist a vivid interest toward potentially huge Ukrainian market on part of Hungarian business circles, but they are waiting for better circumstances. 1. Trade links a. Characteristics of turnover Ukraine's theoretical trade potential with European ex-cmea-countries - many of them having common border with her - has been significant. In practice, in the first years after the collapse of the Soviet Union it was extremely difficult even to find the traditional Ukrainian trading partner companies due to the particular feature of the Soviet era according to which all deals were concluded by the central trading companies located in Moscow. Nevertheless for the past ten years Ukraine has always ranked the second place in major CIS -partners of Hungary. Its share in the Hungarian exports to the CIS-countries has been around 20% for the last decade arising to 27% in 2001, while its proportion in Hungarian imports from the same group of countries has been only a bit more than 10% - due to the huge energy imports from Russia. Anyhow, taking into consideration the whole Hungarian foreign trade turnover, the Ukrainian share has been marginal, for example in the first half of 2002 amounted to only 0,7% regarding exports, and 1,3% regarding imports. Table 7. Hungarian foreign trade with Ukraine, 1997-2001 1997 1998 1999 2000 2001 Hungarian exports Million USD 249.8 219.9 127.8 165.6 209.3 Yearly change,% 106.9 88.0 58.1 129.6 126.3 Country ranking 16. 18. 22. 24. 21.
Hungarian imports Million USD 285.1 226.4 214.9 234.6 295.2 Yearly change,% 97.7 79.4 94.9 109.2 125.8 Country ranking 16. 22. 24. 26. 24. Hungarian balance Million USD -35.2-6.5-87.0-69.0-85.9 Change In million USD 22.9 28.7-80.5 18.0-16.9 Turnover Million USD 534.9 446.3 342.7 400.2 504.5 Yearly change, % 83.4 76.8 116.8 126.1 Source: Hungarian Ministry of Economy
A characteristic for the Hungarian-Ukrainian trade turnover is the growing Hungarian deficit, which is partly due to the sharp reorientation of Hungarian exports toward West-European countries, partly a sign of numerous difficulties on the Ukrainian market. Another major reason is low solvent Ukrainian demand. After a sharp fall of bilateral turnover following the Russian crisis in years 1999-2000, when Ukrainian position went down to 22-24 th place in exports, and 24-26 th in imports, trade with Ukraine in absolute terms recovered getting near the results of 1997. Based on official statements and on the Hungarian strategy on foreign economic relations Ukraine is an outstanding relation for Hungary, with which trade - and investment - links have to be developed. The present low Hungarian involvement in the Ukrainian economy is explained by the low Hungarian state support in the so-called former difficult time, when Western competitors supported by all kind of state help like providing and insuring export credits, taking over risks from the exporter etc. undertook dominant positions on the Ukrainian market. Recently the Hungarian Export Credit Insurance Ltd (the MEHIB) has began to develop facilities in order to support Hungarian exporters on the risky market of Ukraine. Beside all the above mentioned problems Hungarian foreign trade with Ukraine was a relative success story till the explosion of the Russian financial crisis in August 1998. Ukraine was almost the only CIS-country to which Hungarian sales showed permanent increase - with the exception of 1996, which was a special year due to significant changes in Ukrainian foreign trade regulations. (Hungarian turnover - first of all export - with all other CIS-countries has fluctuated year by year.) This is an apparent sign of Ukraine's specific role for Hungary, as the only neighbouring CIS-country. Imports from Ukraine have grown to an even bigger extent; they almost doubled between 1992 and 1997. The product structure regarding Hungarian exports can be characterised by slight shift from Hungarian deliveries of mainly foodstuffs to different processed products. Meanwhile major product groups of imports from Ukraine are represented by energy and energy products, and also by the group of processed products. Table 8. Main product groups of Hungarian exports to Ukraine (1997-2001), % 1997 1998 1999 2000 2001 Food, drinks, beverage (SITC 0+1) 33.9 27.7 15.2 22.6 12.4 Raw materials (SITC 2+4) 2.7 1.8 3.8 1.0 1.6 Energy carriers (SITC 3) 1.8 1.0 1.2 0.7 0.5
Manufactured products (SITC 5+6+8+9) 44.2 49.2 65.2 59.2 65.1 Machinery, equipment (SITC 7) 17.5 20.1 14.6 16.5 20.4 All together 100.0 100.0 100.0 100.0 100.0 Source: Hungarian Ministry of Economy Table 9. Main product groups of Hungarian imports from Ukraine (1997-2001), % 1997 1998 1999 2000 2001 Food, drinks, beverage (SITC 0+1) 1.2 1.2 1.1 3.7 3.3 Raw materials (SITC 2+4) 13.2 16.2 15.2 17.5 13.4 Energy carriers (SITC 3) 49.2 35.5 39.6 32.6 15.7 Manufactured products (SITC 5+6+8+9) 34.0 42.6 38.4 42.9 63.4 Machinery, equipment (SITC 7) 2.5 4.5 5.7 3.3 4.1 All together 100.0 100.0 100.0 100.0 100.0 Source: Hungarian Ministry of Economy As far as Hungarian companies involved in mutual trade are concerned, many of them belong to the group of small or medium-sized firms, that work at a very low, 4-8% profit rate. This involves the extreme vulnerability of their business, the very serious impacts of all kinds of risks. 1 As Table 10. and 11. show the position of Hungarian suppliers in Ukraine is still not bad in a Central-European comparison. The leading role of Poland is wholly understandable, but after her Hungary ranks second. There are signs of worsening market position of Hungarian suppliers, while for example Polish firms could strengthen and even improve their ranking. Table 10. 1 At recent time for example exchange rate risks regarding the USD/euro rate are among major ones.
Ukraine s 15 major foreign trade partners 2000 2002 I. half Ukrainian exports Ukrainian imports Ukrainian exports Ukrainian imports 1. Russia 1. Russia 1. Russia 1. Russia 2. Turkey 2. Germany 2. Turkey 2. Turkmenistan 3. Germany 3. Turkmenistan 3. Italy 3. Germany 4. USA 4. Belarus 4. China 4. USA 5. Italy 5. Kazakhstan 5. Germany 5. Poland 6. China 6. USA 6. United Kingdom 6. Italy 7. Poland 7. Italy 7. USA 7. Kazakhstan 8. Bulgaria 8. Poland 8. Hungary 8. France 9. Hungary 9. France 9. Poland 9. United Kingdom 10. Belarus 10. Switzerland 10. Bulgaria 10. Sweden 11. Ireland 11. United Kingdom 11. Spain 11. Belarus 12. Slovakia 12. Austria 12. Slovakia 12. China 13. Czechia 13. Uzbekistan 13. Egypt 13. Austria 14. Moldova 14. Hungary 14. Romania 14. Czechia 15. India 15. Czechia 15. Taivan 15. 16. Netherlands Hungary Source: www.ukrstat.gov.ua; WIIW, Handbook of Statistics, Countries in Transition 2001. Table 11. Trade turnover of neighbouring applicant countries with Ukraine, million USD Country 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Poland Exports 188 186 283 745 982 1150 1086 703 798 1003 Imports 163 201 206 290 418 391 377 338 475 449 Turnover 351 387 489 1035 1400 1541 1463 1041 1273 1452 Balance 25-15 77 455 564 759 709 365 323 554 Hungary Exports 199 159 185 317 234 250 220 128 166 209
Imports 155 141 219 347 292 285 226 215 235 295 Turnover 354 300 404 664 525 535 446 343 400 504 Balance 44 18-34 -30-58 -35-6 -87-69 -86 Slovakia Exports 131 119 122 177 270 229 136 147 Imports 142 121 189 241 251 181 145 189 273 240 311 418 521 410 281 336 Turnover Balance -11-2 -67-64 19 48-9 -42 Source: national statistics b. Hungarian official attitude towards Ukraine as a foreign trade partner During the past few years Hungarian officials often stated that mutual turnover had reached its practical limits - on somewhat more than 500 million USD, and new opportunities originating from the situation, that Ukraine had become a new independent neighbour of Hungary, had thus exhausted. The economic recovery in Ukraine may bring new impetus to the mutual turnover as well. It can be already seen from the latest trade statistics, yearly growth regarding both exports and imports exceeded 20% in 2001 and in first 9 months of 2002. At the same time there is a discussion in Hungary on the judgement of present level of mutual turnover. There are other opinions according to which present trade links are on extremely low level and below opportunities, which are about twice above present trade flows. Some official estimates draw the attention to the fact that turnover in the Soviet time was about six times higher than present level. 2 Having in mind the bad condition of Ukrainian economy the low percentage of solvent customers -, the higher rate of mutual trade turnover as compared to Ukrainian GDP growth in the past years, one can arrive to that realistic conclusion that explosion in Hungarian-Ukrainian trade turnover can be expected only under radically changed circumstances. One element of this might be a steady improvement of Ukrainian economic performance, including all those hampering circumstances mentioned above regarding general business climate. A second impetus might be brought by either Hungarian EU-membership, or more by a closer EU-Ukrainian economic relationship, providing Ukraine with a free-trade agreement with the EU. It is also worth mentioning that since 1993 Ukraine initiated to starting negotiations on free trade agreement with Hungary several times, but Hungarian authorities showed no signs of interest in the subject. Having in mind proceedings in EU-accession negotiating the time for concluding such type of bilateral agreement is over. One can find Hungarian officers, trade 2 Representative of the Hungarian Ministry of Foreign Affairs, that covers the field of foreign economic relations as well, cited a figure of 3 billion dollar for former Hungarian-Ukrainian mutual turnover in the Soviet era. (Conference on Hungarian-Ukrainian trade and Hungarian investments in Ukraine, Nov. 20, 2002, Budapest)
representatives sharing the definite opinion according to which it was a mistake on part of the then competent Hungarian ministry not to conclude the bilateral free trade agreement years ago, even if it could not have been fulfilled completely. The earliest possibility for free trade between Hungary and Ukraine is the time of the same regime between the EU and Ukraine. According to official statements Hungary is in favour of Ukrainian associated status which is strategic aim of Ukraine at the moment. This means that Hungary will be most probably a supporter of Ukrainian ambitions within the EU. Another key issue having important consequences on both bilateral and EU-Ukrainian economic relations - is Ukraine s future WTO-membership. Being among Ukraine s major trading partners Hungary is also an important negotiating partner for Ukraine within the WTO. One main field of negotiations is the topic of customs protection. The level of Ukrainian customs protection is rather high, and Hungary has asked for significant up to 50% - tariff reduction regarding numerous Hungarian export product. Is worth mentioning that while Ukrainian average tariff protection was at the level of 10.2% in 2000 showing an increasing tendency from the 6.7% level in the early nineties, - weighted average tariff protection on Hungarian products is around 17%. Respecting Hungarian anxiety on potential future language problems of Hungarian ethnic minorities in Ukraine, in the services schedule Ukraine has been obliged to enable Hungarian participation in school-founding and distribution of media products. Most difficult negotiations Hungary had on transit prices of pipeline-using, with the aim of excluding any discrimination. Generally most awkward issues of Ukrainian negotiations included the protection of intellectual properties, customs and other border-related issues, privatisation process and sanitary animal health and plant protection regulation. Since it is a strong Hungarian interest to have Ukraine as a stable market economy in Hungarian neighbourhood, and as Hungarian officials think WTO-membership to be means towards this aim, Ukraine enjoys Hungarian support in her WTO-accession process. To Hungarian officers opinion the date of accession now is a question of political will on part of the WTO-members, which is basely determined by recent inside Ukrainian political proceedings. Anyhow, according to them comparing with Russia Ukraine is closer to the membership. 3 2. Investment links As general features of capital movements within Central-East-Europe are valid for the Hungarian-Ukrainian capital relations as well, they are worth mentioning here: 1. The size of capital investments among the countries of the region is rather marginal in a comparison with West-European firms due to the undercapitalised economic situation characteristic for most of firms. There are only a few exemptions from this like Hungarian oil-and gas company, the MOL. 3 Statement of representative of the Hungarian Ministry of Foreign Affairs on the mentioned conference.
2. Contrary to the amounts of invested capital the number of enterprises with Central- East-European capital in the region is extremely high, which is a sign of high interest in the region. The investment activity is especially intensive in connection with those neighbouring counties and territories where the affected minority is significant. 3. A relatively considerable part of all capital is invested in the trading sector to facilitate simple trade links instead of the producing sectors. As general economic situation in Hungary showed the first signs of improvement some strengthened Hungarian firms began to turn abroad, to neighbouring countries as well. In 1997 the amount of Hungarian direct investments into Ukraine was almost 9 times as much as in 1996, it amounted to nearly 5 million USD. This meant a 1.3% share in total Hungarian investments in the respective year. As it was mentioned beforehand Hungarian investments targeted mostly Transcarpathia. Since then a declining tendency in Hungarian investments into Ukrainian economy (see Table.12.) is a sign of loosing interest on part of Hungarian business circles. Now the stock of all Hungarian investments into the Ukrainian economy is estimated at an amount of 53 million USD, which is about 1.1 % of total Ukrainian FDI stock. Table12. Hungarian investments in Ukraine and Russia, 1999-2002 (in million euro, flow data) Hungarian investments 1999 2000 2001 2002 January-June In Ukraine, million euro 1.2 2.2 0.8 0.15 In Ukraine, % in total 0.5 0.4 0.2 0.26 In Russia, Million euro 3.4 11.1 18.0 3.4 In Russia, % in total 1.4 1.8 5.0 5.7 Total Hungarian investments abroad 236.4 621.3 358.1 59.6 Source: Hungarian National Bank As far as Ukrainian investments into Hungarian economy are concerned they are of marginal importance both in the context of overall foreign direct investments in Hungary both regarding total FDI-flows out of Ukraine. A problem in measuring Ukrainian investments and their tendency is caused by the fact that Hungarian statistical registration until 1996 treated the Soviet successor states together when registering the origin of invested foreign capital into Hungary. The first available data for 1997 indicate that Ukrainian investments were modest
amounting to only 0.48 million USD, and their share in total foreign direct investments of newly established enterprises was only 0.1, while Ukrainian share in the number of newly established enterprises was more than 2%. According to a recent Hungarian survey of major companies with foreign capital the share of Ukrainian FDI in total foreign paid-in capital was as low as 0.09% in 2000. Anyhow FDI outflows from Ukraine generally target developed market economies and well-known tax-paradises, while neighbouring Central-European countries are of marginal interest for Ukrainian investing companies. 3. Expectable impacts of Hungarian accession on bilateral economic relation While trying to make a balance on possible advantages and disadvantages, or make a costs and benefits analyse on expectable impacts of Hungary s EU-accession on Ukraine one can arrive at the general conclusion: there will be much room for the development of bilateral economic relations. The following factors may contribute to this development. 1. Since both CEFTA-membership and bilateral agreement on free trade are to be excluded on the eve of Hungary s EU-accession, Hungarian EU-membership can bring only more favourable conditions for mutual trade based on principles laid down in the Agreement on Partnership and Cooperation (PCA) between Ukraine and the EU. PCA offers the possibility of a future free trade area. Beside this EU provides GSP customs tariffs to the CIS-countries, including Ukraine. GSP-system is more favourable than MFN-treatment granted to Ukraine by Hungary at present. 2. The average level of Hungarian customs tariff will be decreased due to the lower tariff protection within the EU, which Hungary will have to take over. While there will be a general reduction in the level of tariffs there might occur unfavourable changes in bilateral trade in product breakdown. On Ukrainian company side there will be both losers and winners. 3. General impetus including unified and predictable transit regulations, more civilised working at border points and customs offices, more effective and unified legal and institutional background may create easier to follow circumstances for both Hungarian and Ukrainian economic partners. 4. Hungarian entrepreneurs more possibilities for engagement in international tendering might represent another source of bilateral trade growth. 5. The importance of CIS-markets in general, and Ukrainian market in particular might increase to a great extent due to the fact that small and medium-sized companies are -and most probably in the future will be less integrated into EU-markets as compared to large companies.
6. A long term impact of Hungarian accession might be an increased interest on part of Hungarian companies toward investing in foreign countries including Ukraine as a general consequence of their strengthened position. Ukraine may be a main recipient country in this respect thanks to her cheap but skilled labour force and geographical proximity. Anyhow there exist other issues where negative or uncertain impacts on Ukrainian companies can be expected. 1. After Hungary s accession it will be a necessity for Hungary to imply the import protection system of the EU, which is not only a question of tariffs, but implementation of antidumping procedure in import protection instead of the widely used by Hungary quantitative restrictions. This may increase the antidumping incentives against Ukrainian suppliers. 2. Implementation of the EU s preferential trade system means not only the favourable impacts of the GSP-system for Ukraine, but incorporates a more keen competition for Ukrainian suppliers of certain products on the new-members markets due to the fact that the number of countries with easier than normal access (MFNtreatment) into EU-markets is much higher in the EU s preferential system than for example in the Hungarian one. 3. The balance of possible harms and benefits coming from impacts of the CAP (Common Agriculture Policy) is among the most difficult ones to predict. It will largely depend on specific terms granted to the new member-states. Generally a higher level of import protection against Ukrainian agricultural products as compared to the previous import protection in candidate countries, including Hungary, can be expected. 4. Effects of implementation of the EU s common standardisation system will be most probably negative for Ukrainian companies, which will face the necessity to apply these norms and standards on the markets of now candidate countries as well. Conclusion Despite the facts that Hungary is one of the most open economies in Central-East-Europe and Ukraine is a neighbouring country of her bilateral economic relations are on relatively low level regarding both foreign trade and investment activities. Beside Hungarian reorientation toward West-Europe main reasons of this phenomenon are the following: poor economic performance of Ukraine, lack of clear legislation, high level of risks, Hungarian fears of Ukrainian corruption etc. Anyhow there is a vivid interest toward Ukrainian economy on part of Hungarian business. Lasting prosperity in Ukraine may exert positive impacts on bilateral relations in the future. Hungary s EU-membership may bring new opportunities in case the issue of the Schengen-border is tackled in a most appropriate way.