Changes in Ukraine’s trade structure since the invasion
Russia’s full-scale war has had a strong negative impact on Ukraine’s external trade. Exports have declined by 35% and imports by 26% yoy. Furthermore, the trade structure has changed. Geographically, the EU has increased its share as the dominant partner with a current share of 60% in total goods trade, featuring a boom in trade with bordering countries. Türkiye’s role has also recently increased, while China’s importance has dropped. The changes in product composition have been most pronounced in exports with the growing role of agri- food products – currently 69% of goods exports – and a sharp decline in metals. The EU’s suspension of tariff rate quotas and the ‘grain deal’ have contributed to this development. On the import side, the importance of fuels has increased, responding to demolished domestic production and storage capacities.
Yet other structural changes have occurred in transportation. Russia’s Black Sea blockade has increased the role of rail and road shipments. That imposes physical restrictions on volumes and boosts prices, undermining Ukraine’s export competitiveness. The early decision on the prolongation of trade support measures by the EU and other partners would help to improve Ukraine’s export perspectives in 2023. Further efforts are also required in developing land transportation capacities and unblocking the Black Sea ports. Due to the EU’s increasing role as a trade partner, the continuous implementation of the Association Agreement should remain in focus as it paves the way towards further economic integration.
Exports and imports decline
Russia’s full-scale war has a devastating impact on Ukraine’s trade in goods.
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After eleven months, the reduction in goods exports amounted to about 35% yoy, while imports dropped by 26% yoy. Both exports and imports featured a sharp drop in March 2022 and partial recovery afterwards, but at different paces. While imports came close to previous years’ levels in June – supported by import tax exemptions till end of June, exports lagged behind. However, the development has worsened due to Russia’s targeted missile attacks on critical energy infrastructure and continuing logistical backlogs, which remain the critical factor for trade.
EU’s share has strongly increased
In the first eight months of 2022, the trade volume between the EU and Ukraine remained on the level of the same period last year while the one with China fell by 45%. This development has strengthened the role of the EU as Ukraine’s main trade partner. Changes were most vivid in exports where the share surged from about 40% in January to 81% in April. Later in the year, the share has moderated to about two thirds of exports as Türkiye’s importance has started to increase. At the same time, exports to China sharply diminished, and exports to Russia unsurprisingly were stopped.
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In imports, the geographic reorientation has been less pronounced.
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The EU’s share increased from 40% at the beginning of the year to 55% in May and has stabilised ever since. The shares of China and Türkiye have been close to the levels before the full-scale war. The blockade of seaports and the dependency on rail transport has been boosting Ukraine’s trade primarily with bordering EU countries. Ukraine’s exports to Poland, the key export destination, increased by 32% yoy in the first eight months of 2022. Exports to Romania surged by 122%, making it the second largest partner within the EU ahead of Germany. Exports to Hungary grew by 47%, to Slovakia by 51%. Imports from most bordering EU countries also increased, including by 2% from Poland, 55% from Romania and 205% from Bulgaria.
Trade structure by goods: focus on agri-food goods
The product composition of trade has also changed, especially for exports. Despite the reduction in both value and volumes compared to 2021, the relative importance of agri-food exports further surged, reaching 69% of goods exports in October 2022. Simultaneously, metals exports fell to 9% compared to 21% in January.
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The war’s impact on production capacities, peculiarities of logistics and the access to key markets jointly define the structural changes. While metals manufacturing is facing major demolishing of production assets, for example due to destructions in and occupation of Mariupol, the much more spatially dispersed agriculture and food production could maintain capacities. The July grain deal between Ukraine, the UN, Türkiye, and Russia partly unblocked some Black Sea ports for shipments of cereals, while exports of metals and iron ores remain blocked. Finally, the EU decision to temporarily abolish tariff rate quotas applied on imports from Ukraine within the Deep Comprehensive Free Trade Agreement (DCFTA) boosted Ukraine’s shipments of agri-food products to the EU. Noteworthily, the temporary removal of safeguard measures on Ukraine’s iron and steel products on the EU market did not push the recovery of metals exports highlighting that physical constraints related to production and logistics play a much higher role in Ukraine’s trade compared to policy-defined stimulus or restrictions. For imports, the major changes have been related to the increased role of mineral fuels, as Ukraine has to compensate lost production and storage capacities amid high demand. The Black Sea ports blockade has resulted in major shifts in trade transport modes. In 2021, about 38% of Ukraine’s trade by volume occurred by sea, followed by 35% by rail and 19% by road. In the first nine months of 2022, trade shifted to rail (47%) and roads (24%), while the importance of shipments by sea was reduced to 21%. Ukraine’s exports are thus facing physical restrictions on volumes and increased prices that undermine competitiveness.
Outlook
The full-scale war results in multiple structural changes in Ukraine’s foreign trade. The role of the EU as the main trading partner has further increased as logistics constraints have fostered trade reorientation, primarily to Romania and Poland as the EU countries bordering Ukraine. The war’s impact on production capacities, challenges in logistics and the access to key markets jointly define the shift towards agri-food products for exports and towards mineral fuels for imports. An early decision on a prolongation of trade support measures by the EU and other partners would help to improve Ukraine’s export perspectives in 2023. Further efforts to develop land transportation capacities have to focus on unblocking seaports. The continuous implementation of the Association Agreement should remain in focus as it paves the way towards further economic integration with the EU before eventual membership.
