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15 November, 2013  ▪  Ulrich Krökel

Great Opportunities, Great Flaws

A failed Association Agreement: German economy is striving towards investing in Ukraine, but faces many obstacles

Berlin. Rainer Lindner is a very busy and influential man. Serving as Executive Director of the Committee on Eastern European Economic Relations (CEEER), Lindner may have to break off his conversation to take a call from a minister. His word also carries a lot of weight with the government. The CEEER represents German economic interests in Eastern Europe. So, when Lindner strongly promotes “an increase of German activity in Ukraine”, it means something. 

If all goes well during the final stages of the Association Agreement and FTA negotiations, his wish will soon come true. “This step is even more important, than Ukraine joining the WTO five years ago,” Lindner said recently. First of all, he sees “great possibilities” for trade between Germany and Ukraine, when customs barriers and import bans are removed, and standards are put in place. Germany was a key investor in Ukraine last year bringing in USD 6.6bn. And “Ukraine with a population of 46 million is a big potential in the market,” Lindner adds.

However, when German politicians and business-leaders speak about Ukraine, they often stress the world “potential”. Particularly loved is the following sentence: “Ukraine hides in itself a lot of potential,” as stated in an interview by former European Commissioner Günter Verheugen who works with Lindner in the elected leadership of the German-Ukrainian Forum (DUF). “Ukraine is potentially a very rich country,” which he would be most happy to see as a member of the EU. However, the CEEER sees “the level of German trade with Ukraine as below average compared to the neighbouring EU member-states, such as Poland and Romania.”

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According to the CEEER, an FTA would cause “a significant impact” on the German-Ukrainian economic relations. However, the situation is somewhat more complicated than that. There are approximately four hundred German companies currently present in Ukraine.  Leoni Wiring Systems and the Metro Group are among them. The latter of the two is one of the biggest investors in Ukraine. It has up to 30 big stores in Ukraine and employs nearly seven thousand people.

German business sees good opportunities in agricultural sector, as well as in engineering and the manufacturing of industrial equipment, with an estimated growth rate of 7% annually until 2025. However, there are obstacles which keep German companies from leaping to the east. One of the greatest concerns, in Rainer Lindner's opinion, is “corruption, legal instability and the lack of effective management.” This may be based on the controversial antitrust proceedings taken against the Metro Group to put it under pressure. In the worst case scenario, a business can face an immense fine. “This is not acceptable,” Lindner claims. This leaves and impression that the government measures are designed to reduce the competitive pressure from Western firms on Ukrainian companies.

Dirk Stratmann heads the office of John Deere, an agricultural equipment manufacturer, which supplies German equipment to Eastern Europe. He also insists on such conditions. Made in Germany “is an important argument to buy the product”, he says, but “the factors limiting work are bureaucracy and highhandedness of the government. This is a system of old education, limited number of specialists and the lack of infrastructure.”

Stratmann's opinion regarding the Association Agreement, its signing virtually disrupted by now, does not sound like a ground-breaking moment. His conservative prediction is that, “German companies, particularly mid-sized ones, would seriously consider the Ukrainian market,” he explains. However, he is sceptical about direct investment: “The general demand for agricultural machinery is still too low to locate Western production here. Plants in Western Europe with current production capabilities can easily produce the volumes needed.”

Stratmann's skepticism is substantial despite the fact that, in theory, agricultural businesses should see a lot of potential in Ukraine with its fertile black soils and the image of “Europe’s breadbasket”.  “The agricultural potential of Ukraine is still far from exhausted, and there are still many years for very good growth,” Stratmann explains. This makes Ukraine a potential target for suppliers of seeds and chemical products for protecting plants, not just producers of agricultural machinery.

“Ukraine’s location is an obvious advantage,” comments Gerlinde Sauer, head of CEEER's agricultural sector. However, Sauer also mentions “corruption and the lack of legal guarantee” as one of the main problems, which make business negotiations unpredictable in Ukraine. If the Association Agreement is eventually signed somewhere between 2014 and 2015, the outcome will depend on the implementation of things envisaged by it. Therefore, the German economy still has serious doubts about it.

If cooperation between Germany and Ukraine depended solely on bilateral relations between Kyiv and Brussels, the potential would probably be good or very good, regardless of the warnings. However, there is a third player in the game, whose “chess moves” in Lindner’s words unpredictable - and that is Russia.

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Lindner is very familiar with the interests of Moscow. President Vladimir Putin would love to integrate Ukraine into the Customs Union with Russia, Belarus and Kazakhstan. Lindner is not sure what the Kremlin will do, if Kyiv and Brussels reach an agreement in the end.

It is clear that the trade war, which has reared its ugly head a few times, will  have a negative influence on Ukraine's development and the possibilities of German investors will suffer. The dependence of Ukraine on Russian energy supplies is vital. The country consumes three times more natural gas then its neighbour Poland, and is much less productive economically. Therefore, Lindner warns those responsible in Berlin and Brussels not to add fuel to the fire for geo-strategic reasons. “Above all, German policy must immediately soften its influence on both parties and become an intermediary in the dubious case between Moscow and Kyiv,” he said. 

However, at this time it seems that German European politicians are particularly more reliant on hostile polices towards Russia. Elmar Brok, Chair of the European Parliament Committee on Foreign Affairs, has recently criticized “Moscow's attempts of blackmail.” Russia broke international law. “Energy prices cannot fluctuate based on politics,” Brok stated. The same holds true regarding the anti-monopoly process against Metro. No matter where you look from, one thing is clear: the lack of legal guarantees in Ukraine and beyond it in the former Soviet Union is a key impediment for investment. 


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