Ukraine: the fallout for the Polish economy

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How badly could the current crisis in Poland’s eastern neighbor affect businesses here?

by Remi Adekoya

The beginning of the 21st century was a golden era for Polish exports to Russia and Ukraine. In 2013, Poland exported goods worth €8.1 billion to Russia, a 6.1 percent increase in comparison with the previous year. Between 2000 and 2012 Poland’s exports to the Russian Federation increased tenfold in terms of value. Meanwhile, Polish exports to Ukraine last year were worth €4.3 billion, representing a healthy 5.2 percent increase year-on-year. In comparison, back in 2000, Polish exports to Ukraine amounted to a mere half a billion euros.

But while Russia accounts for a significant 14 percent of Poland’s total trade volume and Ukraine accounts for “just” 5 percent, it is the latter country which Polish businesses have poured more money into in recent years.
In addition to the thousands of Polish firms which currently export their products to Ukraine, there are over 2,000 Polish companies operating in Ukraine itself. These firms have invested some PLN 2.7 billion in the country over the past 25 years, according to Tomasz Starzyk from Bisnode D&B Polska, a business intelligence firm. Meanwhile, Polish companies have made investments worth PLN 1.8 billion in the much larger Russian economy over the same period.
Additionally, there are 11 Ukrainian firms listed on a special index on the Warsaw Stock Exchange and these firms have attracted almost PLN 3 billion in Polish capital. So how bad could the fallout from the current political turmoil in Ukraine be for Polish firms and for the Polish economy in general?

Already feeling the pinch
The negative consequences of the turmoil in Ukraine are already being felt by Polish exporters. The Ukrainian Hryvna and the Russian Ruble have depreciated in recent weeks rendering Polish products more expensive and thus less competitive in those countries.

In January and February alone, the value of Polish exports to Ukraine dropped by over PLN 2 billion compared to the same period last year. Piotr Soroczyński, chief economist at the Export Credit Insurance Corporation (KUKE), said that the unstable currency situation is also creating “payment problems” for Polish exporters.
Aleksandra Małozięć from Śnieżka, a Polish paint producer which has a 24 percent share in the Ukrainian market, confirmed that one of the biggest problems for firms like hers is the weakening of the country’s currency. “For manufacturers like us this means price increases. Of course, we expect to see a further decline in paint sales on the Ukrainian market,” she said.

€4.3 billion
was the value of polish goods exported to ukraine in 2013, a 5.2 percent increase year-on-year

But as Soroczyński observed, currency fluctuations are not the biggest problem. “What is most important is that in the current state of heightened tension and with the possibility of a civil war, the last thing Ukrainians are thinking of now is buying new TV sets or electronics or other such products,” he said.
“Right now, people are concentrating on stacking up on food and the basic essentials and that’s it. Companies producing other products can forget about Ukraine for now,” he added.

Possible scenarios
Crédit Agricole analysts have laid out two possible negative scenarios for Polish firms doing business in or with Ukraine. The first assumes an economic collapse in the country which would lead to it “halving its imports from Poland.”

The second scenario takes into consideration an escalation of the military tensions in the Crimean Penisula and in eastern Ukraine. This could mean further sanctions imposed on Russia by the West which would in turn trigger tit-for-tat sanctions from Moscow leveled against the US and European Union countries, including Poland.
Any of these scenarios would mean bad news for the Polish economy.

Then there is the issue of the numerous Ukrainians who have formed the habit of shopping in Poland’s eastern cities, leaving quite a bit of money behind in the process. Ukrainians are said to spend roughly PLN 4 billion a year buying building materials, electronic equipment, food, car parts and cleaning products in Poland. They will likely spend less this year.

Due to all these factors, PKO BP analysts have estimated that a recession in Ukraine could mean a reduction in Polish GDP growth by anywhere between 0.2 to 0.5 percent in 2014 while a recession in Russia (or Russian sanctions on EU products) could have an even worse effect.

Political economics
Of course, when it comes to Russia, politics will play a big part in determining the eventual economic damage Poland could suffer as a result of the current crisis.

In his now-famous press conference in March, while addressing the issue of Russian military intervention in the Crimean Peninsula, President Vladimir Putin accused Poland and Lithuania of “training” the protesters in Ukraine’s Maidan Square who ended up toppling his ally former Ukrainian president Viktor Yanukovych. It is unlikely Putin will not want to somehow punish Poland for this.

“Due to our support for the present Ukrainian government, it is very possible that there could be repercussions from the Russian government such as the blocking of certain Polish products, especially agricultural, from coming into Russia,” said Soroczyński.

This has, in fact, already started happening.

Poland’s meat industry has reported huge losses because of Russia’s January decision to ban imports of all pork products from the European Union following reports of African swine fever in Lithuania.
The Polish Association of Meat Producers, Exporters and Importers has sent a letter to Prime Minister Donald Tusk urging him to help them resolve the issue. Producers believe they could be losing up to PLN 70 million a month as a result of the ban.

Andrzej Szczęśniak, an energy expert, is also very worried about the effects of possible western sanctions on Russia in response to the country’s aggression on Ukraine. “I am worried about possible US sanctions on Russia involving, for example, crude oil. Poland would pay a huge price for that because 95 percent of our crude oil imports are from Russia,” said Szczęśniak.

And so an eventual ban on crude-oil imports from Russia would mean Poland having to buy the resource on the world market (where prices would have risen because of the ban on Russian oil).
Moreover, Polish refineries are built to process Russian crude, so bringing in other varieties would mean an immediate rise in costs and higher prices for petrol in Poland with all the negative consequences that would entail.

Should be fine, sometime later
We shouldn’t kid ourselves, there will definitely be some short-term pain for the Polish economy as a result of the current crisis in Ukraine. The only questions are how much pain, and for how long?
However, despite the negative winds blowing from the east, the Polish economy should still do significantly better this year than in 2013, when it expanded by 1.6 percent.

KUKE forecasts that despite the crisis on Poland’s eastern border, the country’s exports, which came in at roughly €155 billion in 2013, should still grow by over 9 percent this year. The moderate economic recovery currently being experienced in the developed world should also help the Polish economy.

Furthermore, while one can hardly envy the Ukrainians today, their long-term future is by no means doomed.
“We believe that the reforms announced by the government will in the long run, improve the economic situation in Ukraine” said Małozięć.

Through his aggressive actions and rhetoric, Mr Putin has succeeded in pushing Ukraine into the arms of the West. If the nation’s leaders are able to reform the country and introduce Western standards in their institutions and economy, then taking into consideration the human and natural wealth Ukraine possesses, there is every chance that in a few years time Polish companies will once again be doing brisk business in Ukraine. And hopefully in Russia as well.

 

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