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“We can cope with the political turmoil, but we need the EU”

9 April 2014

Ukraine’s construction industry is coping with the political turmoil and fears of a Russian invasion – what it’s really struggling with is the effects of the cancelled European free trade agreement, sources have told GCR.

The Ukrainian head of an American multidisciplinary firm, speaking on condition of anonymity, told GCR that the effect of the political crisis was relatively superficial compared with the collapse of the European free trade deal in November.

“It’s not a couple of shots and everyone stops now, it’s more fundamental,” he said. “The political situation is difficult, and there are challenges, but it’s not a disaster. Most projects were put on hold last year after the non-signing of the EU association agreement. That had a bigger effect rather than some revolution or protests.”

The source said that former president Yanukovych’s decision to suspend the agreement came as an unpleasant surprise to Ukrainian firms that were hoping to bid for work in Europe, and for European investors hoping to take advantage of the protections offered by the agreements.

“Local companies expected to have access to European markets,” he said. “Both sides had expectations. This would have opened the EU’s market to Ukrainian firms, and made it easier for European investors to do business in the country.

“It would have also have led to the Ukraine adopting the EU’s laws, norms and regulations, including those on public sector procurement.”

Igor Morus, president of Kharkiv-based contractor Construction Group International, told GCR that the biggest problem now was a lack of finance. He said investors were concerned about sanctions.

On-site relations between Russian and Ukrainian personnel have not been affected, he added.

The source at the American firm said: “There are no problems with Russian clients. We’ve worked before for Russian clients and we do now. On a professional level there are no problems. We don’t work in the Crimea, though.”

He said in the immediate future, smaller projects would be largely unaffected by the crisis, and that firms would learn to adapt to the new conditions.

Russian activists have set up barricades outside the town hall of Donetsk in the east of the Ukraine. This picture was taken on 9 April, the day after militants seized government buildings and called for a union with Russia (Getty Images)

“We assess the risks but there are no big changes being planned,” he said. “My feeling is that people are not planning big projects, but small and mid-sized projects are going ahead. We will learn how to live with how it is.”

He added, in reference to Russian president Vladimir Putin: “We now know the real face of our friend, and we will live with that.”

Background

The country’s construction industry was hit hard by the financial crisis of 2008, with output declining 40% in a single year.

It has struggled to recover in the following years. Although there was a brief uptick in 2011, it contracted by 8% in 2012 and by a further 16% in 2013, according to Polish business consultancy PMR.

The civil engineering sector has been particularly hard hit, falling by more than 20% in 2013 as a result of declining government expenditure.

The Kyiv School of Economics predicted that, in the medium term, the Deep and Comprehensive Free Trade Agreement (DCFTA), which had been the subject of negotiations since February 2008, would lead to an increase in the country’s exports of 40%, and a growth in GDP of 8-10% a year.

This contrasts with a current account deficit that is presently running at $13bn a year.

A further benefit would have been that the Ukrainian public sector would have had to conform to European standards of transparency, and that all contractors would have had to conform to the norms of European competition law.

The Ukraine was due to sign an Association Agreement, including the DCFTA, on 29 November last year but with eight days to go President Viktor Yanukovych issued a decree suspending the Ukraine’s application and proposing instead the creation of a three-way trade commission between the EU, the Ukraine and Russia.

This decision triggered the popular protests that eventually toppled the Yanukovych regime in February and led to the annexation of Crimea.