Summary

• Accounting for more than one-tenth of the Central and Eastern Europe (CEE) market, the 46-million-strong Ukraine presents a sizable market for Hong Kong-type products.
• In spite of some recent slackening, Ukraine is Hong Kong’s second largest non-EU market in CEE, behind only Russia, demonstrating a compound annual growth of 38% in 2004-2008.
• Aggravated by external economic weaknesses, Ukraine is not immune to economic recession and is indeed one of the worst-hit under the current global crisis, given its reliance on commodities and heavy industries.
• Despite transient challenges, Hong Kong companies should take note of the country’s long-term potential stemming from the sizable consumer base, phased-in trade liberalisation and upcoming co-hosting of Euro 2012 football tournament.

The 46-million-strong Ukraine, with a middle class of some 4.6 million, accounts for more than one-tenth of the 400-million Central and Eastern Europe (CEE) market. Such a sizable consumer base, coupled with the rising purchasing power as a result of strong economic growth averaging 6.4% in the past five years, greatly boosts the appetite for good and services, both domestic and imported, in the country.

So far, Ukraine is Hong Kong’s second largest non-EU market in the CEE region, behind only Russia, demonstrating a compound annual growth rate (CAGR) of 38% during 2004-2008. Despite this, Ukraine, given its market size, is still very much uncharted territory to most Hong Kong suppliers, although sales growth had been fairly firm in recent years before the current economic crisis.

Under the guise of the current global economic crisis, Ukraine is beyond doubt one of the worst-hit economies, resulting in a record GDP contraction forecast of as high as 15% in 2009. Both external and internal factors have aggravated the uncertainty of Ukraine's economic trend, creating great pressure on the nation’s continued economic growth which has been on a fast track in the past decade.

Plummeting commodity prices, high default risks and continuing political tussles within the government have earned the country dubious labels from the international market on its economic future, while the fast-depreciating currency has significantly affected the country’s repayment ability and, in turn, dented the demand for imported goods.

While the country may not provide any immediate solutions to Hong Kong’s struggling exports, the country’s long-term potential stemming from its sizable consumer base, phased-in trade liberalisation upon 2008’s WTO entry and the upcoming joint-hosting of Euro 2012 football tournament with Poland is poised to offer Hong Kong companies unrivalled opportunities in the foreseeable future.

Although a middle class of just 10% of the total population or 4.6 million may seem thin and incomparable to Western European countries, the existence of a sizable shadow economy in Ukraine (i.e. some 30%-60% of the economy depending on the sector) suggests that the actual purchasing power of Ukrainian consumers is far higher than the officially reported statistics.

Ukraine, with a heavy reliance on commodities such as coal and steel and industries like transport equipment manufacturing, lacks a broad production base of light consumer goods. Local production of many consumer items such as electronics, toys and games, giftware, fashion products, watches and clocks is largely falling short of the domestic demand, leaving a big gap for imports to fill.

Given the common political background, goods of China origin had long been recognised for good and reliable quality in Ukraine until the 2007 Chinese export recalls and 2008 milk scandal. While Ukrainians are not hostile to Chinese products, more thorough tests have been demanded, especially for children’s items, giving Hong Kong an opportunity to highlight its role in quality control and third-party testing.

Judging from market size, income level, degree of urbanisation and a cluster of well-known local and foreign businesses, Kyiv¹, the capital city of Ukraine, possesses the greatest potential among over 460 cities for Hong Kong companies to get off to a good start in Ukraine. Aside from being the largest and most urbanised city, Kyiv offers the most concentrated consumer mass and therefore a lucrative market for Hong Kong-type products.

Despite a positive portrayal, Ukraine is not immune to the current global economic crisis and indeed is one of the worst-hit economies, suffering particularly hard from the fading out of growth at the European level. Coupled with its non-EU status and cumbersome visa application process, Hong Kong companies should adopt a more long-sighted approach in developing the lucrative yet challenging Ukrainian market.

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¹ Most people will be more used to the Russian version, Kiev, yet the Ukrainian version, Kyiv, is generally preferred in Ukraine.