Ukraine’s crisis is now for weeks a topic the medias will not stop talking about. However, if the events in Kiev and the annexation of Crimea challenge political relations to be maintained with Ukraine, recent events also raise questions regarding the future of the trade with the country. As a matter of fact, Ukraine is an important economic partner for a large number of members of the European Union and its relations with Russia already affect all sectors, including the metallurgy and machinery building sectors.
Overview on the economic relations with the outside
Ukraine and Russia have always maintained a very close relationship ever since the proclamation of the independence of Ukraine in 1991. Russia is the main economic partner of Ukraine and is bringing its financial support in order to cope with the crisis, therefore, the current conflict between both countries frighten their (often shared) economic partners, which on one hand are torn on the position to be taken on a political level, and on another hand do not know how to both manage this conflict and preserve the already established economic relations.
Administratively speaking, after the annexation of the Crimea on this friday the 21st of March, also raises the question of laws and standards to be respected, which are likely to follow the Russian model and therefore should involve some changes within factories and manufactures. Among Ukraine’s partners can be mentioned Serbia and Germany, who are very much concerned about the future of their factories. Indeed, in Serbia are a lot of Russian energy companies to be found, while a large number of major German companies such as BASF, like 400 other German firms, have a subsidiary on the Ukrainian territory. For the record, BASF has also closed its offices following the recent events, and asked its employees to work at home. Therefore, the current climate is not necessarily conducive to smooth operations in factories and foreign companies, which already saw their productivity drop and thus intend to leave the country.
German machinery and politics do not mix
Among the most successful industries in Ukraine can be mentioned steel work and machinery building, which are industries that were implemented by Russia as Ukraine was still a satellite state under the yoke of the Soviet Union. The drop on productivity of factories operating in Ukraine, including those specializing in metallurgy, can be explained by the decline of the demand for steel. Indeed, Ukraine produces each year around 6.4 million tons of steel production that analysts foresee to be halved by next year, as buyers are disturbed by the controversy hovering over the country, and therefore think twice before purchasing ukrainian steel.
Some months ago, companies could purchase raw materials on-site , but it is now no longer the case, which is depriving Ukraine of one of its major assets. Besides, Germans are afraid of sanctions that Russia could establish if Germany was to take position against the country. And for good reason : factories are often supplied with shale gas, gas that Germany buys from the Russians for decades, thus, an embargo would be highly unwelcome.
In addition, Russia is the fourth largest importer of German machinery, which explains the rather tense economic climate. Expected sanctions could also affect exports to Ukraine in terms of machinery, exports reaching 80 million euros of machines, a large part of which being machine tools, as heavy industry and steel are the main strengths of Ukraine.
Therefore, manufacturers such as DMG Mori are in a bind: for instance, the famous brand machine tool is currently building a factory in Ukraine that should be finished by 2015 … The manufacturer, but also the Crimea crisis, could not have had a worse timing.