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Mar 22, 2013

Future industrial giants emerging in economy

Kyiv Post

Ukraine’s relatively new industrial kids on the block are beginning to eclipse the dominance of traditional giants like steel, coal, and chemicals.

Agriculture and food, information technology and retail are altering Ukraine’s economy in ways that are beginning to transform and add value to other industries as well. Driven by innovation, technology and rising consumption, the paths they’re blazing are putting Ukraine back on the global radar.

Alone, agriculture and food comprised an estimated 25.6 percent of the nation’s merchandise exports in 2012, according to Dragon Capital, a leading investment bank in Kyiv. That’s 15 percent more than in 2001, when Ukraine started to capitalize on its static global competitive advantages.

Steel still leads, comprising 27.5 percent of exports in 2012, the State Statistics Service reported. Nearly $19 billion in steel was exported last year, said the State Statistics Service, with agricultural products and goods at $18 billion.

In five years, however, Ukraine could export up to $30 billion agriculture-related products, said Alex Lissitsa, president of the Ukrainian Agribusiness Club.

Meanwhile, steel together with mining overall has failed to modernize fast enough, and has concentrated capital expenditures on cost-cutting measures like moving to pulverized coal fuel technology and less on efficiency amid dropping global steel prices.

"(The) numbers show that the share of heavy industry in the economy is shrinking," said Rime Minister Mykola Azarov at a press conference in Kyiv on March 19. "Thus what we’re witnessing now is the de-industrialization of the economy... The big industrial companies did not modernize and did not invest enough money into modernization."

And although agriculture went from occupying 14.4 percent of GDP in 2001, according to Dragon Capital, to 7.9 percent in 2012, the sector’s added-value products have boosted other areas of the economy.

One particular area poised for massive growth is dairy, according to an Organization for Economic Cooperation and Development report.

"Ukrainian dairy has huge potential to meet surging consumption of a diversified basket of processed dairy products, shifting the sector towards higher value-added dairy production," reads the OECD report.

French giant Danone’s presence here should come to no surprise.

Instructively, large modern Ukrainian dairy farms have milk yields of 2.9 tons per cow, compared with the 3.5 tons in Russia, and the OECD average of 4.8 tons because of lack of cattle breeding skills, low level of private investment and the high level of taxation inputs.

Overall, the United Nations Food and Agricultural Organization says that by 2019. Ukraine is projected to grow at least 29 percent in overall agricultural production, "as new technologies continue to be introduced, more people are trained and employed in agriculture, and the land is used to its full extent"

Lissitsa told the Kyiv Post that innovation for fanners is a survival necessity: "We are actually competing with the U.S., Argentina and Brazil (where there are two yields a year), we must be very competitive and innovate because (our) farmers (hardly) get state subsidies, we must introduce precision farming and exporting is the only way to be profitable."

Indeed, the country’s top poultry and egg producers, both leading blue chips listed on the London Stock Exchange, will soon start selling in the European Union after regulators sanctioned exports of poultry products.

Separately, if current trends persist, information technology will also surpass steel and chemicals export volumes in just two to three years. According to the State Agency of Science, Innovations and Information, Ukrainian software exports could match the volume of steel and iron volumes by 2015-2016.

Ukraine’s IT market is not only one of the fastest growing sectors, but also the most dynamic IT market in the world, with growth at about 30-50 percent each year," said Andrey Kolodyuk, managing director of AVentures Capital, an IT private equity fund.

To illustrate, the IT market has a total capacity of $2.2 billion, according to IDC, a global market intelligence firm. The IT outsourcing industry alone generates $1 billion in revenue, all of which is exported.

As a complimentary sector, e-commerce is also growing annually at about 25-30 percent. According to market researcher GfK Ukraine, roughly 2 million people, or 4 percent of the population older than 16 years, made online purchases in the third quarter of 2012. This is twice the amount that made online purchases in 2010.

"E-commerce involves all industries, from financial companies and ending with trading companies," said Kolodyuk. "We see that e-commerce is transforming other industries, because every offline company is moving to this sector and if the company doesn’t in the near future, it will disappear from the market completely."

As for the heavily applied IT-technology telecommunications services market, total business income in this sector was $6.5 billion in 2012, the state statistics service reported.

Historically, retail sales in Ukraine have averaged 9.85 percent growth since 2007. Last year, according to the state statistics service, retail trade turnover reached $100 billion, $16 billion more than in 2011. The sector ranks third in foreign investment inflows.

According to a study by GT Partners Ukraine, in 2012 Ukrainian retailers opened 430 outlets in 2012, 300 of which by the seven largest networks in the country.

According to GfK Ukraine deputy managing director Hlib Vyshlinsky, retail growth should continue in the next few years driven by rising household income and consumer confidence remarkably steadfast in an atmosphere of perpetual political instability.

He said retail space isn’t meeting demand and foresees more shopping centers and big box stores opening in the coming years, especially in smaller towns and regions, in turn driving down rental costs.

Kyiv-based Retail Group holding, a managing company of food store chains, plans by the end of this year to open 15 new convenient stores in Kyiv and the oblast. Meanwhile another grocer, Novus, has plans to open eight supermarkets this year.

Kyiv Post editor Mark Rachkevych can be reached at rachkevych@kyivpost.com. Staff writer Svitlana Tuchynska contributed to this article.

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